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
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RIVERSOURCE GOVERNMENT INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 671-1947
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Date of fiscal year end: 5/31
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Date of reporting period: 11/30
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Semiannual Report
RIVERSOURCE [LOGO](SM)
INVESTMENTS
RIVERSOURCE(SM)
SHORT DURATION U.S. GOVERNMENT FUND
SEMIANNUAL REPORT FOR
THE PERIOD ENDED
NOV. 30, 2006
> 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.
TABLE OF CONTENTS
Fund Snapshot ........................................................... 3
Performance Summary ..................................................... 5
Questions & Answers with Portfolio Management ........................... 7
Investments in Securities ............................................... 10
Financial Statements .................................................... 17
Notes to Financial Statements ........................................... 20
Fund Expenses Example ................................................... 36
Proxy Voting ............................................................ 38
[LOGO]
DALBAR RATED
2006
FOR COMMUNICATION
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.
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2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
FUND SNAPSHOT AT NOV. 30, 2006
FUND OVERVIEW
RiverSource Short Duration U.S. Government Fund is a conservative fund with
modest risk to principal for investors seeking a higher return than a money
market fund. The Fund's high quality portfolio invests in bonds issued or
backed by the U.S. government and federal agencies. The Fund's short-term
portfolio with a target duration of one to three years makes the Fund less
volatile when interest rates fluctuate.
SECTOR BREAKDOWN
Percentage of portfolio assets
Mortgage-Backed* 53.2%
U.S. Government Obligations & Agencies 39.0%
Cash & Cash Equivalents** 5.9% [PIE CHART]
Commercial Mortgage-Backed 1.6%
Asset-Backed 0.3%
* Of the 53.2%, 2.6% is due to forward commitment mortgage-backed
securities activity. Short-term securities are held as collateral for
these commitments.
** Of the 5.9%, 3.0% is due to security lending activity and 2.9% is the
Fund's cash equivalent position.
QUALITY BREAKDOWN
Percentage of bond portfolio assets
AAA bonds 100.0% [PIE CHART]
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, 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 credit
risk, interest rate risk, and prepayment and extension risk. See the Fund's
prospectus for information on these and other risks associated with the Fund.
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 Short Duration U.S. Government Fund are not insured
or guaranteed by the U.S. government.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 3
FUND SNAPSHOT AT NOV. 30, 2006
STYLE MATRIX
[chart] Shading within the style matrix indicates areas in which the Fund
generally invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM QUALITY
LOW
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.
SEC YIELDS
AT NOV. 30, 2006 AT DEC. 29, 2006(1)
Class A 3.09% 3.48%
Class B 2.50% 2.90%
Class C 2.50% 2.90%
Class I 3.60% 4.01%
Class W(2) -- 3.45%
Class Y(3) 3.44% 3.84%
(1) Last business day of the period.
(2) Inception date Dec. 1, 2006.
(3) Effective Dec. 11, 2006, Class Y was renamed Class R4.
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public
offering price (POP) per share on the last day of the period, and converting
the results to yearly figures. See Average Annual Total Returns on page 6 for
additional performance information.
PORTFOLIO MANAGERS*
YEARS IN INDUSTRY
Jamie Jackson, CFA 18
Scott Kirby 27
* The Fund is managed by a team of portfolio managers led by Jamie Jackson
and Scott Kirby.
FUND FACTS
TICKER SYMBOL INCEPTION DATE
Class A IFINX 8/19/85
Class B ISHOX 3/20/95
Class C AXFCX 6/26/00
Class I AGMIX 3/4/04
Class Y(4) IDFYX 3/20/95
Total net assets $913.8 million
Number of holdings 159
Weighted average life(1) 3.1 years
Effective duration(2) 1.8 years
Weighted average bond rating(3) AAA
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before
its maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the
levels of interest rates from two years out to 30 years). Positive
duration means that as rates rise, the price decreases, and negative
duration means that as rates rise, the price increases.
(3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of
the underlying bonds in the portfolio.
(4) Effective Dec. 11, 2006, Class Y was renamed Class R4.
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4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
PERFORMANCE SUMMARY
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PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2006
RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +3.61%
Lehman Brothers 1-3 Year Government Index(1) (unmanaged) +3.17%
Lipper Short U.S. Government Funds Index(2) +3.08%
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.
(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.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 5
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS
AT NOV. 30, 2006
SINCE
Without sales charge 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
Class A (inception 8/19/85) +3.61% +4.42% +2.22% +2.56% +4.11% +6.20%
Class B (inception 3/20/95) +3.23% +3.64% +1.46% +1.79% +3.34% +4.00%
Class C (inception 6/26/00) +3.01% +3.43% +1.39% +1.75% N/A +3.16%
Class I (inception 3/4/04) +3.58% +4.57% N/A N/A N/A +2.30%
Class Y (inception 3/20/95) +3.70% +4.60% +2.41% +2.73% +4.27% +4.95%
With sales charge
Class A (inception 8/19/85) -1.30% -0.54% +0.58% +1.56% +3.61% +5.96%
Class B (inception 3/20/95) -1.77% -1.36% +0.18% +1.42% +3.34% +4.00%
Class C (inception 6/26/00) +2.01% +2.43% +1.39% +1.75% N/A +3.16%
AT DEC. 31, 2006
SINCE
Without sales charge 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
Class A (inception 8/19/85) +3.46% +3.95% +2.02% +2.59% +4.15% +6.17%
Class B (inception 3/20/95) +3.08% +3.18% +1.27% +1.83% +3.37% +3.96%
Class C (inception 6/26/00) +3.08% +3.18% +1.27% +1.83% N/A +3.14%
Class I (inception 3/4/04) +3.43% +4.09% N/A N/A N/A +2.21%
Class Y (inception 3/20/95) +3.34% +4.13% +2.21% +2.77% +4.30% +4.91%
With sales charge
Class A (inception 8/19/85) -1.45% -0.99% +0.38% +1.60% +3.64% +5.93%
Class B (inception 3/20/95) -1.92% -1.82% -0.01% +1.46% +3.37% +3.96%
Class C (inception 6/26/00) +2.08% +2.18% +1.27% +1.83% N/A +3.14%
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 Y shares. These share classes are
available to institutional investors only.
* Not annualized
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6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT
Below, Portfolio Managers Jamie Jackson and Scott Kirby discuss the Fund's
positioning and results for the six months ended Nov. 30, 2006.
The 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
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 organization. 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.
Q: How did RiverSource Short Duration U.S. Government Fund perform for the
first half of the fiscal year?
A: RiverSource Short Duration U.S. Government Fund's Class A shares
(excluding sales charge) rose 3.61% for the six months ended Nov. 30,
2006. The Fund outperformed the Lehman Brothers 1-3 Year Government
Index (Lehman Index), which gained 3.17%. The Fund also outperformed the
Lipper Short U.S. Government Funds Index, representing the Fund's peer
group, which advanced 3.08% during the same time frame.
THE PRIMARY CONTRIBUTOR TO THE FUND'S RELATIVE OUTPERFORMANCE WAS ITS
COMPARATIVELY LONGER DURATION POSITIONING THAN THE LEHMAN INDEX, AS
RATES DECLINED SIGNIFICANTLY OVER THE SEMIANNUAL PERIOD.
Q: What factors most significantly affected performance during the
semiannual period?
A: Returns for the Fund and its Lehman Index were positive. For the
semiannual period overall, interest rates moved significantly lower
across the spectrum of maturities, or yield curve. The Federal Reserve
Board (the Fed) raised interest rates one more time during the period,
on June 29, bringing the targeted federal funds rate, an interest rate
that affects short-term rates, to 5.25%. Then, in early August, the Fed
observed its first pause in its two-year tightening cycle, noting that
economic growth appeared to be moderating somewhat and inflation
pressures -- though elevated -- were expected to recede over the balance
of the year and into 2007. The fixed income market rallied in response.
The Fed stayed
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 7
QUESTIONS & ANSWERS
on hold through the remainder of the reporting period, and yields
continued to fall. Not only did the fixed income market rally with the
Fed's extended pause, but rates also declined in reaction to a
decelerating economy, led by a slowing housing market.
The primary contributor to the Fund's relative outperformance was its
comparatively longer duration positioning than the Lehman Index, as
rates declined significantly over the semiannual period. Duration is a
measure of the Fund's sensitivity to changes in interest rates.
Also, while yields moved lower across the spectrum of maturities, or
yield curve, during the six-month period, they fell more so at the
longer end than at the shorter end, causing a further flattening of the
yield curve. We had prudently positioned the portfolio for just such a
yield curve flattening scenario.
The Fund's performance further benefited from its sizable allocation to
non-Treasury sectors, as high-quality mortgage-backed securities and, to
a lesser degree, agencies, outperformed U.S. Treasuries during the
semiannual period. Tactical allocation within mortgage-backed securities
also helped, that is, adding to and reducing the Fund's position within
mortgages at opportune times.
The primary detractor from the Fund's relative results was its exposure
to Treasury Inflation Protected Securities, or TIPS. TIPS underperformed
nominal Treasury securities, or non-inflation protected Treasury
securities, during the period, given inflation data reports that were
less than market expectations. Such muted inflation was due primarily to
an unanticipated drop in energy prices. The TIPS in the Fund's portfolio
mature in January 2007.
Q: What changes did you make to the Fund and how is it currently
positioned?
A: We maintained a longer duration than the Lehman Index throughout the
semiannual period. However, as U.S. Treasury rates fell, we began to
reduce the Fund's duration a bit, moving closer in duration to the
Lehman Index. We felt a somewhat more defensive position was then
warranted. After rates peaked in July and then rallied through the
remainder of the period, we also took this opportunity to sell some of
the Fund's non-Treasury sector holdings, taking profits following this
run of strong performance. We increased the Fund's exposure to
Treasuries.
We also reduced the Fund's exposure to the longer end of the 1-3 year
portion of the yield curve, as the yield curve actually inverted in the
last months of the semiannual period, meaning that shorter-term yields
grew higher than longer-term yields.
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8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
The portfolio turnover rate of 104% during the semiannual period can be
attributed primarily to rolling-maturity mortgage securities, processing
of prepayments and opportunistic changes we made at the margin in
response to valuations or market developments.
U.S. INTEREST RATES ACROSS THE RANGE OF MATURITIES, OR YIELD CURVE, HAVE
DECLINED TO LEVELS THAT APPEAR TOO LOW, AND THE YIELD CURVE ITSELF HAS
BECOME TOO FLAT GIVEN OUR ECONOMIC VIEW.
Q: What is the Fund's tactical view and strategy for the months ahead?
A: U.S. interest rates across the range of maturities, or yield curve, have
declined to levels that appear too low, and the yield curve itself has
become too flat given our economic view. Although recent data shows
inflationary pressures easing, we believe the most likely scenario is
for inflation to be nudged higher but also for a modest economic
slowdown to become apparent at the end of 2006 in what we would
characterize as a "soft landing." We thus believe the Fed is likely to
maintain its pause, with the targeted federal funds rate at its current
5.25%, for an extended period of time. We further believe that the fixed
income market has gotten ahead of itself and that rates will likely move
higher and the yield curve steepen over the months ahead.
Based on this view, we intend to maintain the Fund's current duration
positioning for the near term and its more conservative allocation
strategy, with somewhat more of a balance between the non-Treasury
sectors and U.S. Treasuries. When rates move higher, when the yield
curve steepens, and when valuations move toward what we consider to be
fair value, then we intend to shift just a bit from our current
conservative posture to a somewhat more aggressive strategy, lengthening
duration and adding to the non-Treasury sectors again. 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.
INVESTMENT TERM
SOFT LANDING: A term used to describe a rate of economic growth high
enough to avoid recession but slow enough to avoid high inflation.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 9
INVESTMENTS IN SECURITIES
NOV. 30, 2006 (UNAUDITED)
(Percentages represent value of investments compared to net assets)
BONDS (100.5%)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
U.S. GOVERNMENT OBLIGATIONS & AGENCIES (41.7%)
Federal Farm Credit Bank
10-10-08 4.25% $ 6,015,000 $ 5,958,176
Federal Home Loan Bank
10-19-07 4.13 35,000,000 34,712,685
01-18-08 4.63 13,400,000 13,349,750
02-08-08 4.63 13,510,000 13,459,972
02-13-08 5.25 13,730,000 13,778,247
11-21-08 4.63 6,500,000 6,478,797
Federal Home Loan Mtge Corp
01-30-07 3.00 10,950,000 10,910,273
08-17-07 4.00 16,890,000 16,756,890
11-02-07 3.25 21,000,000 20,660,661
06-15-08 3.88 4,010,000 3,951,173
10-15-08 5.13 24,390,000 24,533,267
Federal Natl Mtge Assn
03-02-07 3.00 16,000,000 15,911,440
10-15-08 4.50 10,615,000 10,557,615
U.S. Treasury
09-30-07 4.00 15,520,000 15,400,574
11-30-07 4.25 39,901,000 39,657,844
02-15-08 3.38 34,750,000(b,l) 34,185,313
10-31-11 4.63 26,110,000(b) 26,307,862
08-15-16 4.88 2,785,000 2,872,574
11-15-16 4.63 14,435,000 14,624,459
11-15-18 9.00 4,090,000 5,748,687
U.S. Treasury Inflation-Indexed Bond
01-15-07 3.38 51,234,400(o) 50,857,826
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Total 380,674,085
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ASSET-BACKED (0.4%)
Capital Auto Receivables Asset Trust
Series 2006-SN1A Cl A4B
03-20-10 5.43 3,250,000(d,n) 3,250,000
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COMMERCIAL MORTGAGE-BACKED (1.7%)(f)
Federal Home Loan Mtge Corp
Multifamily Structured Pass-Through Ctfs
Series K001 Cl A2
04-25-16 5.65 7,950,056 8,114,137
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
COMMERCIAL MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #360800
01-01-09 5.74% $ 3,106,704 $ 3,129,732
Federal Natl Mtge Assn #381990
10-01-09 7.11 4,184,606 4,406,570
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Total 15,650,439
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MORTGAGE-BACKED (56.7%)(f,g)
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 1,963,219 2,050,687
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00 6,892,121 6,929,764
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00 5,700,063(d) 5,959,002
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-OA5 Cl 2A2
04-25-46 5.62 3,335,827(k) 3,337,525
Federal Home Loan Mtge Corp #1G1067
07-01-36 5.70 7,177,513(k) 7,236,082
Federal Home Loan Mtge Corp #1G2496
09-01-36 6.21 2,978,882(k) 3,016,565
Federal Home Loan Mtge Corp #A18107
01-01-34 5.50 3,661,155 3,654,800
Federal Home Loan Mtge Corp #B16408
09-01-19 5.50 1,420,109 1,428,882
Federal Home Loan Mtge Corp #B16409
09-01-19 5.50 2,103,879 2,116,876
Federal Home Loan Mtge Corp #C00351
07-01-24 8.00 322,202 340,017
Federal Home Loan Mtge Corp #C00385
01-01-25 9.00 526,682 570,404
Federal Home Loan Mtge Corp #C80329
08-01-25 8.00 90,671 95,671
See accompanying notes to investments in securities.
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10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #D54959
07-01-24 8.00% $ 44,825 $ 47,304
Federal Home Loan Mtge Corp #E00398
10-01-10 7.00 542,639 555,305
Federal Home Loan Mtge Corp #E81240
06-01-15 7.50 4,965,072 5,157,672
Federal Home Loan Mtge Corp #E90650
07-01-12 5.50 314,421 316,828
Federal Home Loan Mtge Corp #E92454
11-01-17 5.00 3,816,107 3,787,560
Federal Home Loan Mtge Corp #E93465
11-01-17 5.50 6,414,819 6,461,423
Federal Home Loan Mtge Corp #G00363
06-01-25 8.00 407,843 430,332
Federal Home Loan Mtge Corp #G00501
05-01-26 9.00 758,957 821,606
Federal Home Loan Mtge Corp #G10669
03-01-12 7.50 2,485,064 2,573,716
Federal Home Loan Mtge Corp #G11243
04-01-17 6.50 17,260,947 17,699,620
Federal Home Loan Mtge Corp #G12100
11-01-13 5.00 4,547,100 4,520,949
Federal Home Loan Mtge Corp #M30074
09-01-09 6.50 144,869 146,824
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 11 Cl B
01-01-20 20.00 8,072(i) 1,701
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2564 Cl IX
12-15-12 20.00 4,453,087(i) 102,103
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2590 Cl BI
02-15-14 2.28 5,294,985(i) 221,793
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2783 Cl MI
03-15-25 20.00 7,185,102(i) 365,865
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2471 Cl SI
03-15-32 9.05% $ 1,824,591(h,i) $ 158,877
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2882 Cl XS
11-15-19 3.86 8,206,868(h,i) 652,221
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Series 2617 Cl HD
06-15-16 7.00 8,993,245 9,333,797
Federal Natl Mtge Assn
12-01-36 6.00 6,600,000(e) 6,668,046
12-01-36 6.50 25,000,000(e) 25,507,800
Federal Natl Mtge Assn #124528
10-01-07 7.50 94,638 94,890
Federal Natl Mtge Assn #125032
11-01-21 8.00 166,974 176,358
Federal Natl Mtge Assn #190129
11-01-23 6.00 1,224,576 1,243,005
Federal Natl Mtge Assn #190353
08-01-34 5.00 7,662,460 7,499,871
Federal Natl Mtge Assn #190764
09-01-07 8.50 2,744 2,743
Federal Natl Mtge Assn #190785
05-01-09 7.50 484,318 485,607
Federal Natl Mtge Assn #190988
06-01-24 9.00 357,880 381,031
Federal Natl Mtge Assn #254384
06-01-17 7.00 499,011 513,560
Federal Natl Mtge Assn #254454
08-01-17 7.00 835,613 859,975
Federal Natl Mtge Assn #254723
05-01-23 5.50 11,027,465 11,068,463
Federal Natl Mtge Assn #254748
04-01-13 5.50 8,600,484 8,663,645
Federal Natl Mtge Assn #254757
05-01-13 5.00 11,435,127 11,343,768
Federal Natl Mtge Assn #254774
05-01-13 5.50 2,718,904 2,742,994
Federal Natl Mtge Assn #255501
09-01-14 6.00 1,099,470 1,125,028
See accompanying notes to investments in securities.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 11
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #303885
05-01-26 7.50% $ 584,907 $ 611,925
Federal Natl Mtge Assn #313007
07-01-11 7.50 374,788 384,026
Federal Natl Mtge Assn #313428
12-01-08 7.50 162,123 162,554
Federal Natl Mtge Assn #336512
02-01-26 6.00 66,131 67,209
Federal Natl Mtge Assn #357485
02-01-34 5.50 15,723,271 15,700,244
Federal Natl Mtge Assn #407327
01-01-14 5.50 584,973 590,224
Federal Natl Mtge Assn #456374
12-01-13 5.50 1,095,112 1,104,942
Federal Natl Mtge Assn #508402
08-01-14 6.50 315,420 323,269
Federal Natl Mtge Assn #545818
07-01-17 6.00 18,665,597 19,039,532
Federal Natl Mtge Assn #545864
08-01-17 5.50 14,535,969 14,659,191
Federal Natl Mtge Assn #545910
08-01-17 6.00 2,825,600 2,882,125
Federal Natl Mtge Assn #555063
11-01-17 5.50 10,620,962 10,708,398
Federal Natl Mtge Assn #555367
03-01-33 6.00 12,286,437 12,459,530
Federal Natl Mtge Assn #579485
04-01-31 6.50 2,806,604 2,895,906
Federal Natl Mtge Assn #593829
12-01-28 7.00 1,834,990 1,898,876
Federal Natl Mtge Assn #601416
11-01-31 6.50 1,115,567 1,150,802
Federal Natl Mtge Assn #630993
09-01-31 7.50 2,643,832 2,765,473
Federal Natl Mtge Assn #648040
06-01-32 6.50 2,710,491 2,778,825
Federal Natl Mtge Assn #648349
06-01-17 6.00 9,251,912 9,436,983
Federal Natl Mtge Assn #651284
07-01-17 6.00 1,969,497 2,008,505
Federal Natl Mtge Assn #662866
11-01-17 6.00 1,312,472 1,344,171
Federal Natl Mtge Assn #665752
09-01-32 6.50 1,541,436 1,580,298
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #670782
11-01-12 5.00% $ 596,729 $ 591,955
Federal Natl Mtge Assn #670830
12-01-12 5.00 712,052 709,579
Federal Natl Mtge Assn #671415
01-01-10 5.00 540,980 540,202
Federal Natl Mtge Assn #678938
02-01-18 5.50 3,112,654 3,137,924
Federal Natl Mtge Assn #678940
02-01-18 5.50 2,763,918 2,785,997
Federal Natl Mtge Assn #678944
01-01-18 5.50 1,311,296 1,322,087
Federal Natl Mtge Assn #686227
02-01-18 5.50 3,865,684 3,896,457
Federal Natl Mtge Assn #695838
04-01-18 5.50 5,017,115 5,056,807
Federal Natl Mtge Assn #696837
04-01-18 5.50 4,018,964 4,050,614
Federal Natl Mtge Assn #703440
05-01-18 5.50 994,534 1,002,311
Federal Natl Mtge Assn #704610
06-01-33 5.50 12,905,216 12,886,317
Federal Natl Mtge Assn #709527
06-01-18 5.50 467,600 471,365
Federal Natl Mtge Assn #712602
06-01-13 5.00 1,499,002 1,487,026
Federal Natl Mtge Assn #722325
07-01-33 4.97 5,894,648(k) 5,762,148
Federal Natl Mtge Assn #722589
08-01-33 7.00 397,221(k) 404,305
Federal Natl Mtge Assn #725232
03-01-34 5.00 11,459,542 11,222,903
Federal Natl Mtge Assn #725425
04-01-34 5.50 11,134,663 11,119,582
Federal Natl Mtge Assn #725431
08-01-15 5.50 11,642,205 11,746,716
Federal Natl Mtge Assn #725737
08-01-34 4.54 4,362,153(k) 4,335,718
Federal Natl Mtge Assn #725773
09-01-34 5.50 9,448,459 9,429,769
Federal Natl Mtge Assn #730632
08-01-33 4.11 2,317,148(k) 2,265,953
Federal Natl Mtge Assn #739243
09-01-33 6.00 3,471,646 3,527,717
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #739331
09-01-33 6.00% $ 1,843,231 $ 1,867,299
Federal Natl Mtge Assn #743524
11-01-33 5.00 3,563,981 3,490,385
Federal Natl Mtge Assn #745802
07-01-36 6.00 8,800,620 8,896,403
Federal Natl Mtge Assn #753508
11-01-33 5.00 3,874,095 3,794,095
Federal Natl Mtge Assn #791447
10-01-34 6.00 5,574,312 5,642,419
Federal Natl Mtge Assn #797046
07-01-34 5.50 3,676,984 3,669,711
Federal Natl Mtge Assn #799769
11-01-34 5.05 4,911,103(k) 4,887,285
Federal Natl Mtge Assn #801344
10-01-34 5.07 5,582,647(k) 5,583,764
Federal Natl Mtge Assn #815463
02-01-35 5.50 2,841,225 2,835,605
Federal Natl Mtge Assn #832641
09-01-35 6.00 7,727,515 7,813,161
Federal Natl Mtge Assn #845070
12-01-35 5.09 2,720,247(k) 2,717,306
Federal Natl Mtge Assn #849082
01-01-36 5.84 3,248,919(k) 3,286,837
Federal Natl Mtge Assn #849170
01-01-36 5.97 4,526,954(k) 4,606,420
Federal Natl Mtge Assn #878661
02-01-36 5.50 9,411,674 9,333,369
Federal Natl Mtge Assn #883267
07-01-36 6.50 4,876,856 5,000,956
Federal Natl Mtge Assn #886461
08-01-36 6.19 2,943,972(k) 2,993,725
Federal Natl Mtge Assn #887096
07-01-36 5.81 5,634,219(k) 5,697,686
Federal Natl Mtge Assn #887403
07-01-36 7.00 3,453,412 3,565,500
Federal Natl Mtge Assn #900197
10-01-36 5.98 3,399,453(k) 3,434,093
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 163 Cl 2
07-25-22 20.00 747,776(i) 118,558
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-24 Cl PI
12-25-12 20.00% $ 3,308,358(i) $ 69,619
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-26 Cl MI
03-25-23 12.58 2,111,118(i) 350,126
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-71 Cl IM
12-25-31 14.12 2,549,175(i) 381,139
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-81 Cl LI
11-25-13 10.08 7,882,981(i) 363,955
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 36 Cl 2
08-01-18 13.85 5,733(i) 1,234
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 367 Cl 2
01-25-36 8.85 3,288,302(i) 703,902
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 70 Cl 2
01-15-20 20.00 245,695(i) 47,892
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2002-18 Cl SE
02-25-32 11.00 3,731,370(h,i) 328,140
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 13
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Principal Only
Series G-15 Cl A
06-25-21 4.50% $ 36,685(j) $ 32,120
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-133 Cl GB
12-25-26 8.00 2,567,083 2,731,146
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-94 Cl QB
07-25-23 5.50 12,293,975 12,254,481
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-W11 Cl A1
06-25-33 8.00 309,084(k) 310,556
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2004-60 Cl PA
04-25-34 5.50 4,029,003 4,069,829
Govt Natl Mtge Assn #615740
08-15-13 6.00 1,159,618 1,184,666
Govt Natl Mtge Assn #781507
09-15-14 6.00 5,569,999 5,689,375
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-62 Cl IC
03-20-29 0.00 3,668,842(i) 221,536
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Series 2006-32 Cl A
01-16-30 5.08 9,702,323 9,713,230
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-4 Cl 3A
06-19-34 2.98 4,653,257(k) 4,625,380
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 6,543,382 6,225,374
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50% $ 5,140,223 $ 5,088,821
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2006-AR6 Cl 5A1
03-25-36 5.11 4,135,186(k) 4,106,295
---------------
Total 518,508,408
- -----------------------------------------------------------------------------
TOTAL BONDS
(Cost: $921,499,162) $ 918,082,932
- -----------------------------------------------------------------------------
MONEY MARKET FUND (1.2%)(c)
SHARES VALUE(a)
RiverSource Short-Term
Cash Fund 11,059,292(m) $ 11,059,292
- -----------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost: $11,059,292) $ 11,059,292
- -----------------------------------------------------------------------------
SHORT-TERM SECURITIES (5.0%)(c)
ISSUER EFFECTIVE AMOUNT VALUE(a)
YIELD PAYABLE AT
MATURITY
U.S. GOVERNMENT AGENCIES
Federal Home Loan Bank Disc Nts
12-01-06 5.18% $ 46,000,000 $ 45,993,381
- -----------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $46,000,000) $ 45,993,381
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $978,558,454)(p) $ 975,135,605
=============================================================================
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
NOTES TO INVESTMENTS IN SECURITIES
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2006, 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
3.2% of net assets. See Note 6 to the financial statements. 3.0% 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 Nov. 30, 2006, the value of these securities
amounted to $9,209,002 or 1.0% of net assets.
(e) At Nov. 30, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$32,185,815.
(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) Comparable securities are held to satisfy future delivery requirements
of the following open forward sale commitments at Nov. 30, 2006:
PRINCIPAL SETTLEMENT PROCEEDS
SECURITY AMOUNT DATE RECEIVABLE VALUE
-----------------------------------------------------------------------------
Federal Natl Mtge Assn
12-01-21 5.50% $18,500,000 12-18-06 $18,494,219 $18,598,272
(h) 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 Nov. 30, 2006. At Nov.
30, 2006, the value of inverse floaters represented 0.1% of net assets.
(i) 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 Nov. 30,
2006.
(j) 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 Nov. 30, 2006.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2006.
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 15
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
(l) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Treasury Note, March 2007, 2-year $ 130,000,000
U.S. Treasury Note, March 2007, 5-year 14,900,000
SALE CONTRACTS
U.S. Long Bond, March 2007, 20-year 10,900,000
U.S. Treasury Note, Dec. 2006, 10-year 63,300,000
(m) Affiliated Money Market Fund - See Note 7 to the financial statements.
(n) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Nov. 30, 2006.
(o) 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.
(p) At Nov. 30, 2006, the cost of securities for federal income tax purposes
was approximately $978,558,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 3,934,000
Unrealized depreciation (7,356,000)
-----------------------------------------------------------------------
Net unrealized depreciation $(3,422,000)
-----------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOV. 30, 2006 (UNAUDITED)
ASSETS
Investments in securities, at value (Note 1)*
Unaffiliated issuers (identified cost $967,499,162) $ 964,076,313
Affiliated money market fund (identified cost $11,059,292) (Note 7) 11,059,292
- ------------------------------------------------------------------------------------------------------------
Total investments in securities (identified cost $978,558,454) 975,135,605
Cash in bank on demand deposit 809,291
Capital shares receivable 128,671
Accrued interest receivable 5,529,172
Receivable for investment securities sold 35,714,264
- ------------------------------------------------------------------------------------------------------------
Total assets 1,017,317,003
- ------------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends payable to shareholders 452,820
Capital shares payable 235,741
Payable for investment securities purchased 53,972,823
Payable upon return of securities loaned (Note 6) 29,281,250
Accrued investment management services fee 12,015
Accrued distribution fee 188,449
Accrued service fee 47
Accrued transfer agency fee 2,124
Accrued administrative services fee 1,696
Other accrued expenses 787,104
Forward sale commitments, at value (proceeds receivable $18,494,219) (Note 1) 18,598,272
- ------------------------------------------------------------------------------------------------------------
Total liabilities 103,532,341
- ------------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 913,784,662
============================================================================================================
REPRESENTED BY
Capital stock -- $.01 par value (Note 1) $ 1,925,526
Additional paid-in capital 1,141,659,854
Excess of distributions over net investment income (1,778,458)
Accumulated net realized gain (loss) (Note 9) (223,623,977)
Unrealized appreciation (depreciation) on investments (Note 5) (4,398,283)
- ------------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $ 913,784,662
============================================================================================================
Net assets applicable to outstanding shares: Class A $ 586,638,848
Class B $ 255,431,374
Class C $ 11,663,167
Class I $ 43,020,484
Class Y $ 17,030,789
Net asset value per share of outstanding capital stock: Class A shares 123,632,895 $ 4.75
Class B shares 53,818,439 $ 4.75
Class C shares 2,458,022 $ 4.74
Class I shares 9,054,770 $ 4.75
Class Y shares 3,588,445 $ 4.75
- ------------------------------------------------------------------------------------------------------------
* Including securities on loan, at value (Note 6) $ 28,790,770
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 17
STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOV. 30, 2006 (UNAUDITED)
INVESTMENT INCOME
Income:
Interest $ 23,509,741
Income distributions from affiliated money market fund (Note 7) 95,695
Fee income from securities lending (Note 6) 64,161
- ------------------------------------------------------------------------------------------------------
Total income 23,669,597
- ------------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 2,373,895
Distribution fee
Class A 781,951
Class B 1,437,030
Class C 65,403
Transfer agency fee 825,364
Incremental transfer agency fee
Class A 49,800
Class B 40,821
Class C 2,226
Service fee -- Class Y 9,284
Administrative services fees and expenses 333,875
Compensation of board members 10,805
Custodian fees 67,740
Printing and postage 65,965
Registration fees 32,825
Audit fees 22,500
Other 30,317
- ------------------------------------------------------------------------------------------------------
Total expenses 6,149,801
Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (712,893)
- ------------------------------------------------------------------------------------------------------
5,436,908
Earnings and bank fee credits on cash balances (Note 2) (58,771)
- ------------------------------------------------------------------------------------------------------
Total net expenses 5,378,137
- ------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 18,291,460
- ------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions (Note 3) (1,680,520)
Futures contracts (825,339)
Payment from affiliate (Note 2) 262,748
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (2,243,111)
Net change in unrealized appreciation (depreciation) on investments 16,501,168
- ------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 14,258,057
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 32,549,517
======================================================================================================
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
STATEMENTS OF CHANGES IN NET ASSETS
NOV. 30, 2006
SIX MONTHS ENDED MAY 31, 2006
(UNAUDITED) YEAR ENDED
OPERATIONS AND DISTRIBUTIONS
Investment income (loss) -- net $ 18,291,460 $ 39,876,174
Net realized gain (loss) on investments (2,243,111) (9,828,156)
Net change in unrealized appreciation (depreciation) on investments 16,501,168 (19,214,087)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 32,549,517 10,833,931
- ----------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (12,900,171) (25,344,232)
Class B (4,798,276) (11,112,963)
Class C (219,572) (475,216)
Class I (1,000,865) (1,917,196)
Class Y (399,276) (1,202,674)
- ----------------------------------------------------------------------------------------------------------
Total distributions (19,318,160) (40,052,281)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Proceeds from sales
Class A shares (Note 2) 78,874,740 152,023,244
Class B shares 21,003,772 57,560,792
Class C shares 925,493 2,800,362
Class I shares 9,861,074 40,699,356
Class Y shares 1,251,163 8,191,458
Reinvestment of distributions at net asset value
Class A shares 11,731,748 22,725,811
Class B shares 4,472,941 10,224,074
Class C shares 208,092 442,952
Class I shares 1,017,252 1,887,079
Class Y shares 401,638 1,156,490
Payments for redemptions
Class A shares (153,303,959) (410,945,903)
Class B shares (Note 2) (112,153,068) (307,798,780)
Class C shares (Note 2) (4,169,189) (11,908,336)
Class I shares (30,841,712) (10,310,796)
Class Y shares (3,451,634) (89,611,333)
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (174,171,649) (532,863,530)
- ----------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (160,940,292) (562,081,880)
Net assets at beginning of period 1,074,724,954 1,636,806,834
- ----------------------------------------------------------------------------------------------------------
Net assets at end of period $ 913,784,662 $ 1,074,724,954
==========================================================================================================
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 19
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to Nov. 30, 2006)
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 and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o 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.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
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 account-based to asset-based, and
adopting a plan administration services agreement. These changes are effective
Dec. 11, 2006.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase those shares. At Nov. 30, 2006, Ameriprise Financial,
Inc. (Ameriprise Financial) and the affiliated funds-of-funds owned 100% of
Class I shares, which represents 4.71% of the Fund's net assets.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fees and service fee (class specific
expenses) 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.
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20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL 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.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the Board.
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 Nov. 30, 2006, the Fund has entered into outstanding
when-issued securities of $32,185,815.
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.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 21
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 Portfolio 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.
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22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
Unsettled forward sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. If the forward sale commitment is closed
through the acquisition of an offsetting purchase commitment, the Fund
realizes a gain or loss. If the Fund delivers securities under the commitment,
the Fund realizes a gain or a loss from the sale of the securities based upon
the market price established at the date the commitment was entered into.
Forward sale commitments outstanding at period end are listed in the "Notes to
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.
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.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 23
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 Financial Accounting Standards Board (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.
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24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
2. EXPENSES AND SALES CHARGES
Under an Investment Management Services Agreement with 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.
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 include, among other things, certain expenses of the Fund or
the Board (including its independent members) equal to $19,378 that are paid
by the Fund through Board Services Corporation, an entity that provides
services to the Board and the Fund pursuant to a separate agreement. These
expenses include: Fund boardroom expense, Board Services Corporation office
expense, Board Services Corporation employee compensation, including employee
health and retirement benefits, Board Services Corporation audit and legal
fees, Fund legal fees, certain taxes, filing fees and certain other expenses.
Compensation of board members includes compensation as well as retirement
benefits. Certain other aspects of the 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.
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:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
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 will pay the Transfer Agent an annual asset-based fee at a rate of 0.05%
of the Fund's average daily net assets for this service attributable to Class
R4 shares.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 25
Class I currently pays 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. (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 up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B and Class C shares.
Beginning 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.
Under the current Shareholder Service Agreement, the Fund pays the Distributor
a fee for service provided to shareholders by the Distributor and other
servicing agents with respect to those shares. The fee is 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
$304,817 for Class A, $196,970 for Class B and $1,654 for Class C for the six
months ended Nov. 30, 2006.
For the six months ended Nov. 30, 2006, the Investment Manager and its
affiliates waived certain fees and expenses to 0.89% for Class A, 1.64% for
Class B, 1.64% for Class C, 0.54% for Class I and 0.72% for Class Y. Of these
waived fees and expenses, the transfer agency fees waived for Class A, Class
B, Class C and Class Y were $284,949, $148,707, $7,140 and $6,965,
respectively, and the management fees waived at the Fund level were $265,132.
In addition, the Investment Manager and its affiliates have agreed to waive
certain fees and expenses until May 31, 2007, unless sooner terminated at the
discretion of the Board, such that net expenses will not exceed 0.89% for
Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I and 0.72% for
Class Y of the Fund's average daily net assets.
During the six months ended Nov. 30, 2006, the Fund's custodian and transfer
agency fees were reduced by $58,771 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.
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26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $1,055,602,736 and $1,275,019,528, respectively, for
the six months ended Nov. 30, 2006. Realized gains and losses are determined
on an identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
SIX MONTHS ENDED NOV. 30, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- --------------------------------------------------------------------------------------------------
Sold 16,800,772 4,462,847 196,471 2,088,458 265,508
Issued for reinvested
distributions 2,488,356 948,975 44,140 215,684 85,183
Redeemed (32,533,255) (23,864,034) (885,056) (6,572,113) (730,344)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) (13,244,127) (18,452,212) (644,445) (4,267,971) (379,653)
- --------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- --------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------
5. INTEREST RATE FUTURES CONTRACTS
At Nov. 30, 2006, investments in securities valued at $349,231 were pledged as
collateral to cover initial margin deposits on 799 open purchase contracts and
742 open sale contracts. The notional market value of the open purchase
contracts at Nov. 30, 2006 was $149,067,281 with a net unrealized gain of
$262,938. The notional market value of the open sale contracts at Nov. 30,
2006 was $81,533,113 with a net unrealized loss of $1,134,319. See "Summary of
significant accounting policies" and "Notes to investments in securities."
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
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 27
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 Nov. 30, 2006, securities valued at $28,790,770
were on loan to brokers. For collateral, the Fund received $29,281,250 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 $64,161 for the six months ended
Nov. 30, 2006. 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.
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
outstanding during the six months ended Nov. 30, 2006.
9. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$216,881,168 at May 31, 2006, that if not offset by capital gains will expire
as follows:
2008 2009 2013 2014 2015
$35,174,077 $117,356,906 $36,267,962 $20,469,203 $7,612,993
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.
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28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL 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 our motion to
dismiss the complaint, the Court dismissed one of plaintiffs' four claims and
granted plaintiffs limited discovery. Discovery is currently set to end in
March 2007.
In December 2005, without admitting or denying the allegations, American
Express Financial Corporation (AEFC, which is now known as Ameriprise
Financial, Inc. (Ameriprise Financial)), 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.
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
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 29
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.
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.
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30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
11. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating
the Fund's results.
CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .09 .15 .12 .11 .15
Net gains (losses) (both realized
and unrealized) .08 (.10) (.03) (.12) .09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .17 .05 .09 (.01) .24
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.16) (.12) (.11) (.15)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.75 $ 4.68 $ 4.79 $ 4.82 $ 4.94
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 587 $ 641 $ 894 $ 1,188 $ 1,728
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) .89%(c),(d) .89%(d) .93%(d) .97% .95%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.91%(c) 3.27% 2.49% 2.19% 2.90%
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 104% 194% 169% 125% 218%
- -------------------------------------------------------------------------------------------------------------------
Total return(e) 3.61%(f) 1.00% 1.92% (.24%) 4.90%
- -------------------------------------------------------------------------------------------------------------------
(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) Adjusted to an annual basis.
(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 1.04% for the six months ended Nov. 30, 2006
and 1.06% and 1.01% for the years ended May 31, 2006 and 2005,
respectively.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 31
CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .07 .12 .08 .07 .11
Net gains (losses) (both realized
and unrealized) .08 (.11) (.03) (.12) .09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .15 .01 .05 (.05) .20
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.12) (.08) (.07) (.11)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.75 $ 4.68 $ 4.79 $ 4.82 $ 4.94
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 255 $ 338 $ 588 $ 963 $ 1,578
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) 1.64%(c),(d) 1.64%(d) 1.68%(d) 1.72% 1.71%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.15%(c) 2.50% 1.73% 1.44% 2.15%
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 104% 194% 169% 125% 218%
- -------------------------------------------------------------------------------------------------------------------
Total return(e) 3.23%(f) .26% 1.16% (.99%) 4.11%
- -------------------------------------------------------------------------------------------------------------------
(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) Adjusted to an annual basis.
(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 1.80% for the six months ended Nov. 30, 2006
and 1.82% and 1.76% for the years ended May 31, 2006 and 2005,
respectively.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .07 .12 .08 .07 .11
Net gains (losses) (both realized
and unrealized) .07 (.11) (.03) (.12) .09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .14 .01 .05 (.05) .20
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.12) (.08) (.07) (.11)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.74 $ 4.68 $ 4.79 $ 4.82 $ 4.94
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 12 $ 15 $ 24 $ 38 $ 58
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) 1.64%(c),(d) 1.64%(d) 1.68%(d) 1.73% 1.72%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.16%(c) 2.51% 1.73% 1.44% 2.10%
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 104% 194% 169% 125% 218%
- -------------------------------------------------------------------------------------------------------------------
Total return(e) 3.01%(f) .26% 1.16% (.99%) 4.11%
- -------------------------------------------------------------------------------------------------------------------
(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) Adjusted to an annual basis.
(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% for the six months ended Nov. 30, 2006
and 1.83% and 1.77% for the years ended May 31, 2006 and 2005,
respectively.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 33
CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 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) .10 .17 .14 .03
Net gains (losses) (both realized
and unrealized) .07 (.10) (.04) (.07)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .17 .07 .10 (.04)
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.11) (.17) (.14) (.03)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.75 $ 4.69 $ 4.79 $ 4.83
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 43 $ 62 $ 31 $ 4
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(c) .54%(d),(e) .58%(e) .57% .63%(d)
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.26%(d) 3.66% 2.98% 2.74%(d)
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 104% 194% 194% 169%
- ----------------------------------------------------------------------------------------------------
Total return(f) 3.58%(g) 1.56% 2.06% (.87%)(g)
- ----------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Inception date is March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(d) Adjusted to an annual basis.
(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 I would have been 0.59% for the six months ended Nov. 30, 2006 and
0.62% for the year ended May 31, 2006.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
CLASS Y*
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .10 .16 .13 .12 .15
Net gains (losses) (both realized
and unrealized) .07 (.11) (.03) (.12) .09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .17 .05 .10 -- .24
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.16) (.13) (.12) (.15)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.75 $ 4.68 $ 4.79 $ 4.82 $ 4.94
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 17 $ 19 $ 100 $ 115 $ 164
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) .72%(c),(d) .72%(d) .76%(d) .81% .79%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.08%(c) 3.27% 2.66% 2.35% 3.12%
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 104% 194% 169% 125% 218%
- -------------------------------------------------------------------------------------------------------------------
Total return(e) 3.70%(f) 1.19% 2.10% (.08%) 5.07%
- -------------------------------------------------------------------------------------------------------------------
* 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) Adjusted to an annual basis.
(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 Y would have been 0.85% for the six months ended Nov. 30, 2006
and 0.88% and 0.84% for the years ended May 31, 2006 and 2005,
respectively.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 35
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, including management fees; distribution and service (12b-1) fees; and
other Fund 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.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the six months ended Nov. 30, 2006.
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.
- ------------------------------------------------------------------------------
36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
JUNE 1, 2006 NOV. 30, 2006 THE PERIOD(a) EXPENSE RATIO
Class A
Actual(b) $1,000 $1,036.10 $ 4.54 .89%
Hypothetical
(5% return before expenses) $1,000 $1,020.61 $ 4.51 .89%
Class B
Actual(b) $1,000 $1,032.30 $ 8.36 1.64%
Hypothetical
(5% return before expenses) $1,000 $1,016.85 $ 8.29 1.64%
Class C
Actual(b) $1,000 $1,030.10 $ 8.35 1.64%
Hypothetical
(5% return before expenses) $1,000 $1,016.85 $ 8.29 1.64%
Class I
Actual(b) $1,000 $1,035.80 $ 2.76 .54%
Hypothetical
(5% return before expenses) $1,000 $1,022.36 $ 2.74 .54%
Class Y
Actual(b) $1,000 $1,037.00 $ 3.68(c) .72%
Hypothetical
(5% return before expenses) $1,000 $1,021.46 $ 3.65(c) .72%
(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 183/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Nov. 30, 2006:
+3.61% for Class A, +3.23% for Class B, +3.01% for Class C, +3.58% for
Class I and +3.70% for Class Y.
(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 account-based to
asset-based, and adopting a plan administration services agreement. In
addition, the investment manager and its affiliates have contractually
agreed to waive certain fees and to absorb certain expenses until May
31, 2007, unless sooner terminated at the discretion of the Fund's
Board, such that net expenses will not exceed 0.72% for Class R4. Any
amounts waived will not be reimbursed by the Fund. These changes are
effective Dec. 11, 2006. If these changes had been in place for the
six-month period ended Nov. 30, 2006, the actual and hypothetical
expenses paid would have been the same as those presented in the table
above.
- ------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT 37
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are 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 during
the 12-month period ended June 30, 2006 is available without charge by
visiting riversource.com/funds; or searching the website of the SEC at
www.sec.gov.
- ------------------------------------------------------------------------------
38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND - 2006 SEMIANNUAL REPORT
RIVERSOURCE(SM) SHORT DURATION U.S. GOVERNMENT FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
RIVERSOURCE [LOGO](SM) This report must be accompanied or preceded by the
INVESTMENTS Fund's current prospectus. RiverSource(SM) mutual
funds are distributed by RiverSource Distributors,
Inc. and Ameriprise Financial Services, Inc., Members
NASD, and managed by RiverSource Investments, LLC.
These companies are part of Ameriprise Financial,
Inc.
S-6442 X (1/07)
Semiannual Report
RIVERSOURCE [LOGO](SM)
INVESTMENTS
RIVERSOURCE(SM)
U.S. GOVERNMENT MORTGAGE FUND
- ------------------------------------------------------------------------------
SEMIANNUAL REPORT FOR
THE PERIOD ENDED
NOV. 30, 2006
> 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.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Fund Snapshot ........................................................... 3
Performance Summary ..................................................... 5
Questions & Answers
with Portfolio Management ............................................. 7
Investments in Securities ............................................... 12
Financial Statements .................................................... 20
Notes to Financial Statements ........................................... 23
Fund Expenses Example ................................................... 38
Proxy Voting ............................................................ 40
[LOGO]
DALBAR RATED
2006
FOR COMMUNICATION
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 -- 2006 SEMIANNUAL REPORT
FUND SNAPSHOT AT NOV. 30, 2006
FUND OVERVIEW
RiverSource U.S. Government Mortgage Fund invests in mortgage-backed bonds
issued or backed by the U.S. government and federal agencies such as
Government National Mortgage Association (GNMA or Ginnie Mae), Federal
National Mortgage Association (FNMA or Fannie Mae), and Federal Home Loan
Mortgage Corporation (FHLMC or Freddie Mac). The Fund's focus on high quality
bonds in its portfolio reduces credit risk.
SECTOR BREAKDOWN
Percentage of portfolio assets
Asset-Backed 0.3%
U.S. Government Obligations & Agencies 0.8%
Cash & Cash Equivalents 2.0% [PIE CHART]
Commercial Mortgage-Backed 2.6%
Mortgage-Backed(1) 94.3%
(1) Of the 94.3%, 15.4% 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
Non-rated bonds 0.2%
BBB bonds 0.1%
A bonds 0.2% [PIE CHART]
AAA bonds 99.5%
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 credit
risk, interest rate risk, and prepayment and extension risk. See the Fund's
prospectus for information on these and other risks associated with the Fund.
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 -- 2006 SEMIANNUAL REPORT 3
FUND SNAPSHOT AT NOV. 30, 2006
STYLE MATRIX
[chart] Shading within the style matrix indicates areas in which the Fund
generally invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM QUALITY
LOW
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.
SEC YIELDS
AT NOV. 30, 2006 AT DEC. 29, 2006(1)
Class A 4.32% 4.10%
Class B 3.79% 3.55%
Class C 3.79% 3.55%
Class I 4.90% 4.67%
Class Y(2) 4.73% 4.49%
(1) Last business day of the period.
(2) Effective Dec. 11, 2006, Class Y was renamed Class R4.
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public
offering price (POP) per share on the last day of the period, and converting
the results to yearly figures. See Average Annual Total Returns on page 6 for
additional performance information.
PORTFOLIO MANAGER
YEARS IN INDUSTRY
Scott Kirby* 27
* The Fund is managed by a team of investment professionals led by Scott
Kirby.
FUND FACTS
TICKER SYMBOL INCEPTION DATE
Class A AUGAX 2/14/02
Class B AUGBX 2/14/02
Class C AUGCX 2/14/02
Class I -- 3/4/04
Class Y(4) RSGYX 2/14/02
Total net assets $241.3 million
Number of holdings 205
Weighted average life(1) 6.4 years
Effective duration(2) 3.0 years
Weighted average bond rating(3) AAA
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before
its maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the
levels of interest rates from two years out to 30 years). Positive
duration means that as rates rise, the price decreases, and negative
duration means that as rates rise, the price increases.
(3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of
the underlying bonds in the portfolio.
(4) Effective Dec. 11, 2006, Class Y was renamed Class R4.
- ------------------------------------------------------------------------------
4 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
PERFORMANCE SUMMARY
PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2006
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +5.09%
Lehman Brothers Mortgage-Backed Securities Index(1) (unmanaged) +5.78%
Lipper U.S. Mortgage Funds Index(2) +5.42%
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.
(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.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 5
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS
AT NOV. 30, 2006
SINCE
Without sales charge 6 MONTHS* 1 YEAR 3 YEARS INCEPTION
Class A (inception 2/14/02) +5.09% +5.48% +3.93% +4.35%
Class B (inception 2/14/02) +4.48% +4.69% +3.15% +3.58%
Class C (inception 2/14/02) +4.48% +4.49% +3.16% +3.57%
Class I (inception 3/4/04) +5.07% +5.60% N/A +3.67%
Class Y (inception 2/14/02) +4.97% +5.46% +4.04% +4.49%
With sales charge
Class A (inception 2/14/02) +0.10% +0.47% +2.26% +3.29%
Class B (inception 2/14/02) -0.52% -0.31% +1.91% +3.21%
Class C (inception 2/14/02) +3.48% +3.49% +3.16% +3.57%
AT DEC. 31, 2006
SINCE
Without sales charge 6 MONTHS* 1 YEAR 3 YEARS INCEPTION
Class A (inception 2/14/02) +4.73% +4.34% +3.53% +4.23%
Class B (inception 2/14/02) +4.13% +3.57% +2.77% +3.46%
Class C (inception 2/14/02) +4.13% +3.57% +2.77% +3.46%
Class I (inception 3/4/04) +4.71% +4.70% N/A +3.51%
Class Y (inception 2/14/02) +4.63% +4.54% +3.65% +4.37%
With sales charge
Class A (inception 2/14/02) -0.24% -0.62% +1.87% +3.20%
Class B (inception 2/14/02) -0.87% -1.42% +1.51% +3.10%
Class C (inception 2/14/02) +3.13% +2.57% +2.77% +3.46%
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 Y shares. These share classes are
available to institutional investors only.
* Not annualized
- ------------------------------------------------------------------------------
6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby discusses the Fund's positioning and
results for the six months ended Nov. 30, 2006.
The 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
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 organization. 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.
Q: How did RiverSource U.S. Government Mortgage Fund perform for the first
half of the fiscal year?
A: RiverSource U.S. Government Mortgage Fund's Class A shares (excluding
sales charge) rose 5.09% for the six months ended Nov. 30, 2006. The
Fund underperformed the Lehman Brothers Mortgage-Backed Securities Index
(Lehman Index), which gained 5.78%. The Fund also underperformed the
Lipper U.S. Mortgage Funds Index, representing the Fund's peer group,
which advanced 5.42% during the same time frame.
Q: What factors most significantly affected performance during the
semiannual period?
A: Overall, the mortgage market performed quite well, as rates moved
significantly lower during the six-month period. The Federal Reserve
Board (the Fed) raised interest rates one more time during the period,
on June 29, bringing the targeted federal funds rate, an interest rate
that affects short-term rates, to 5.25%. Then, in early August, the Fed
observed its first pause in its two-year tightening cycle, noting that
economic growth appeared to be moderating somewhat and inflation
pressures -- though elevated -- were expected to recede over the balance
of the year and into 2007. The fixed income market rallied in response.
The Fed stayed on hold through the remainder of the reporting period,
and yields continued to fall.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 7
QUESTIONS & ANSWERS
The Fund produced solid absolute returns. However, on a relative basis,
the Fund underperformed for several reasons. First, we anticipated that
rates, after falling in August, would have stabilized or even risen and
positioned the Fund accordingly. That is, the Fund had a comparatively
shorter duration than that of the Lehman Index. However this position
detracted from relative results, as rates instead continued to decline.
Duration is a measure of the Fund's sensitivity to changes in interest
rates.
Our issue selection during the period was also based on our anticipation
of rising rates. The Fund had significant positions, for example, in
premium coupon securities, hybrid adjustable-rate mortgages (ARMs) and
well-structured collateralized mortgage obligations (CMOs), which
historically perform well in a rising rate environment, and more modest
exposure to lower coupon mortgage-backed securities and pass-through
mortgages, which did, in fact, perform well as rates declined. Each
mortgage sub-sector outperformed U.S. Treasuries over the six months,
but the more defensive securities where the Fund was focused lagged the
Lehman Index. Our issue selection strategy, therefore, hurt the Fund's
relative results during the period. On the positive side, many of the
Fund's long-held specified pools of mortgages helped its results during
the period, as interest rates declined and refinancing activity picked
up somewhat.
EACH MORTGAGE SUB-SECTOR OUTPERFORMED U.S. TREASURIES OVER THE SIX
MONTHS, BUT THE MORE DEFENSIVE SECURITIES WHERE THE FUND WAS FOCUSED
LAGGED THE LEHMAN INDEX.
- ------------------------------------------------------------------------------
8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
Finally, given the dramatic flatness of the U.S. Treasury yield curve at
the start of the period, we expected the yield curve to subsequently
steepen. We had thus incorporated a yield curve flattening bias into the
Fund's positioning. Instead, while rates declined across the spectrum of
maturities, or yield curve, the U.S. Treasury yield curve flattened even
further, i.e., the difference in yields between short- and long-term
maturities narrowed even more, in part due to a powerful technical flow
of overseas buying. Indeed, the U.S. Treasury yield curve actually
inverted in the last months of the period, meaning short-term yields
were higher than long-term yields.
Detracting from the Fund's results relative to its Lipper peer group was
the Fund's more conservative risk profile and its inherent bias toward
higher quality issues, namely securities issued by government mortgage
agencies and those rated AAA. During the semiannual period, lower
quality issues outperformed higher quality issues.
Q: What changes did you make to the Fund and how is it currently
positioned?
A: We purchased some commercial mortgage-backed securities (CMBS) during
the period to add some interest rate sensitivity to the portfolio. For
the period, CMBS, like mortgage-backed securities, outperformed U.S.
Treasuries, but underperformed certain other mortgage sub-sectors, such
as the lower coupon mortgage-backed securities and pass-through
mortgages. Other than that, we made no significant changes to the Fund
during the period.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 9
QUESTIONS & ANSWERS
We maintained our overall defensive positioning. We continued to
emphasize those securities issued by government mortgage agencies,
including Ginnie Mae, Fannie Mae and Freddie Mac. We maintained our
focus on higher coupon mortgage securities and emphasized investment in
more seasoned pools of mortgages. We kept the Fund's duration shorter
than the Lehman Index throughout. The portfolio turnover rate of 127%
during the semiannual period can be attributed primarily to
rolling-maturity mortgage securities, processing of prepayments and
opportunistic changes we made at the margin in response to valuations or
market developments.
U.S. INTEREST RATES ACROSS THE RANGE OF MATURITIES, OR YIELD CURVE, HAVE
DECLINED TO LEVELS THAT APPEAR TOO LOW, AND THE YIELD CURVE ITSELF HAS
BECOME TOO FLAT GIVEN OUR ECONOMIC VIEW.
Q: What is the Fund's tactical view and strategy for the months ahead?
A: U.S. interest rates across the range of maturities, or yield curve, have
declined to levels that appear too low, and the yield curve itself has
become too flat given our economic view. Although recent data shows
inflationary pressures easing, we believe the most likely scenario is
for inflation to be nudged higher but also for a modest economic
slowdown to become apparent at the end of 2006 in what we would
characterize as a "soft landing." We thus believe the Fed is likely to
maintain its pause, with the targeted federal funds rate at its current
5.25%, for an extended period of time. We further believe that the fixed
income market, including the mortgage-backed securities market, has
gotten ahead of itself and that rates will likely move higher and the
yield curve steepen over the months ahead.
INVESTMENT TERM
SOFT LANDING: A term used to describe a rate of economic growth high
enough to avoid a recession but slow enough to avoid high inflation.
- ------------------------------------------------------------------------------
10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
Based on this view, we intend to maintain the Fund's current short
duration positioning for the near term. Our security selection strategy
within the mortgage sector continues to be one based on rising rates,
when prepayments will inevitably subside and housing turnover slow. When
rates move higher, when the yield curve steepens, and when valuations
within the mortgage sector move toward what we consider to be fair
value, then we intend to shift just a bit from our current conservative
posture to a somewhat more aggressive strategy within the mortgage
sector, lengthening duration 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.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 11
INVESTMENTS IN SECURITIES
NOV. 30, 2006 (UNAUDITED)
(Percentages represent value of investments compared to net assets)
BONDS (116.4%)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
U.S. GOVERNMENT OBLIGATIONS & AGENCIES (1.0%)
U.S. Treasury Inflation-Indexed Bond
01-15-07 3.38% $ 2,395,208(k) $ 2,377,603
- -----------------------------------------------------------------------------------------
ASSET-BACKED (0.3%)
Residential Asset Securities
Series 2006-KS1 Cl A2
02-25-36 5.46 830,000(j) 830,519
- -----------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED (3.0%)(f)
Federal Natl Mtge Assn #387549
08-01-15 4.81 4,915,642 4,869,681
Federal Natl Mtge Assn #462236
07-01-16 5.45 2,395,286 2,462,761
-----------
Total 7,332,442
- -----------------------------------------------------------------------------------------
MORTGAGE-BACKED (112.1%)(f)
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2005-12 Cl 2A1
03-25-36 5.71 762,219(c) 768,164
American Home Mtge Assets
Collateralized Mtge Obligation
Series 2006-2 Cl 2A2
09-25-46 5.55 1,523,432(c) 1,515,311
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 1A1
01-25-34 6.00 629,863 627,923
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 4A1
01-25-19 4.75 329,984 321,528
Bank of America Funding
Collateralized Mtge Obligation
Series 2006-2N Cl N1
11-25-46 7.25 226,047(d) 224,077
ChaseFlex Trust
Collateralized Mtge Obligation
Series 2005-2 Cl 2A2
06-25-35 6.50 667,028 677,867
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 2A3
11-25-35 5.50% $ 568,815 $ 573,111
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 484,569 506,159
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00 1,790,161 1,799,939
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-HYB1 Cl 6A1
03-25-35 5.16 1,240,567(c) 1,232,897
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00 596,814(d) 623,926
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-HYB1 Cl 1A1
03-20-36 5.39 558,140(c) 557,895
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-12 Cl 3A1
01-25-36 7.00 866,580 890,429
Downey Savings & Loan Assn Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR5 Cl X1
08-19-45 6.38 5,399,271(g) 68,335
Federal Home Loan Mtge Corp
12-01-36 5.50 8,000,000(b) 7,972,495
12-01-36 6.00 4,400,000(b) 4,446,727
12-01-36 6.50 2,500,000(b) 2,550,780
Federal Home Loan Mtge Corp #1G2496
09-01-36 6.21 1,723,320(c) 1,745,120
Federal Home Loan Mtge Corp #555140
03-01-10 8.00 128,260 129,959
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #555300
10-01-17 8.00% $ 315,876 $ 325,399
Federal Home Loan Mtge Corp #A10892
07-01-33 6.00 643,903 654,089
Federal Home Loan Mtge Corp #A15111
10-01-33 6.00 1,010,092 1,023,708
Federal Home Loan Mtge Corp #A21059
04-01-34 6.50 569,680 582,153
Federal Home Loan Mtge Corp #A25174
08-01-34 6.50 613,362 626,791
Federal Home Loan Mtge Corp #C53098
06-01-31 8.00 361,646 380,584
Federal Home Loan Mtge Corp #C53878
12-01-30 5.50 1,077,986 1,080,105
Federal Home Loan Mtge Corp #C68876
07-01-32 7.00 133,890 138,003
Federal Home Loan Mtge Corp #C69665
08-01-32 6.50 2,848,320 2,920,939
Federal Home Loan Mtge Corp #C79930
06-01-33 5.50 1,674,031 1,672,254
Federal Home Loan Mtge Corp #D95232
03-01-22 6.50 415,904 427,359
Federal Home Loan Mtge Corp #D95371
04-01-22 6.50 407,864 419,843
Federal Home Loan Mtge Corp #E00285
01-01-09 7.00 91,877 92,612
Federal Home Loan Mtge Corp #E81240
06-01-15 7.50 983,111 1,021,247
Federal Home Loan Mtge Corp #E88036
02-01-17 6.50 1,425,747 1,463,091
Federal Home Loan Mtge Corp #E88468
12-01-16 6.50 320,481 329,709
Federal Home Loan Mtge Corp #E89232
04-01-17 7.00 706,423 727,657
Federal Home Loan Mtge Corp #E92454
11-01-17 5.00 1,934,573 1,920,101
Federal Home Loan Mtge Corp #E93685
01-01-18 5.50 1,384,209 1,394,266
Federal Home Loan Mtge Corp #E99684
10-01-18 5.00 446,536 443,267
Federal Home Loan Mtge Corp #G01169
01-01-30 5.50 1,770,818 1,775,324
Federal Home Loan Mtge Corp #G01535
04-01-33 6.00 2,261,212 2,300,362
Federal Home Loan Mtge Corp #G12101
11-01-18 5.00 928,438 921,510
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2590 Cl BI
02-15-14 2.28% $ 658,838(g) $ 27,597
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2639 Cl UI
03-15-22 9.71 1,392,610(g) 210,205
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2718 Cl IA
10-15-22 20.00 770,943(g) 29,281
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2795 Cl IY
07-15-17 15.06 605,484(g) 57,906
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2824 Cl EI
09-15-20 11.47 3,584,383(g) 369,635
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2471 Cl SI
03-15-32 9.05 350,866(e,g) 30,552
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2882 Cl XS
11-15-19 3.86 1,231,030(e,g) 97,833
Federal Natl Mtge Assn
12-01-21 5.50 400,000(b) 402,125
12-01-36 5.00 6,000,000(b) 5,861,249
12-01-36 5.50 4,000,000(b) 3,985,000
12-01-36 6.00 19,000,000(b) 19,195,889
Federal Natl Mtge Assn #13481
05-01-08 7.75 58,278 58,894
Federal Natl Mtge Assn #190353
08-01-34 5.00 1,800,678 1,762,470
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 13
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #252409
03-01-29 6.50% $ 1,709,932 $ 1,765,757
Federal Natl Mtge Assn #254793
07-01-33 5.00 2,579,301 2,526,039
Federal Natl Mtge Assn #254916
09-01-23 5.50 2,173,541 2,181,622
Federal Natl Mtge Assn #313470
08-01-10 7.50 285,845 290,833
Federal Natl Mtge Assn #323362
11-01-28 6.00 3,216,165 3,269,176
Federal Natl Mtge Assn #323715
05-01-29 6.00 572,469 581,905
Federal Natl Mtge Assn #344909
04-01-25 8.00 859,382 911,182
Federal Natl Mtge Assn #357514
03-01-34 5.50 2,677,566 2,673,645
Federal Natl Mtge Assn #426860
10-01-09 8.50 19,445 19,431
Federal Natl Mtge Assn #483691
12-01-28 7.00 1,245,208 1,300,846
Federal Natl Mtge Assn #487757
09-01-28 7.50 991,943 1,037,438
Federal Natl Mtge Assn #514704
01-01-29 6.00 945,348 960,930
Federal Natl Mtge Assn #545008
06-01-31 7.00 1,766,122 1,831,321
Federal Natl Mtge Assn #545339
11-01-31 6.50 301,151 310,325
Federal Natl Mtge Assn #545818
07-01-17 6.00 3,354,159 3,421,355
Federal Natl Mtge Assn #545864
08-01-17 5.50 1,793,821 1,809,027
Federal Natl Mtge Assn #555063
11-01-17 5.50 1,316,119 1,326,954
Federal Natl Mtge Assn #555458
05-01-33 5.50 1,840,073 1,837,791
Federal Natl Mtge Assn #555528
04-01-33 6.00 2,519,102 2,554,591
Federal Natl Mtge Assn #555734
07-01-23 5.00 816,001 804,805
Federal Natl Mtge Assn #555740
08-01-18 4.50 4,231,137 4,128,994
Federal Natl Mtge Assn #581418
06-01-31 7.00 1,059,019 1,094,459
Federal Natl Mtge Assn #583088
06-01-29 6.00 3,338,013 3,402,052
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #592270
01-01-32 6.50% $ 809,814 $ 835,554
Federal Natl Mtge Assn #596505
08-01-16 6.50 226,314 232,582
Federal Natl Mtge Assn #601416
11-01-31 6.50 414,798 427,899
Federal Natl Mtge Assn #624979
01-01-32 6.00 905,208 920,122
Federal Natl Mtge Assn #626670
03-01-32 7.00 732,322 762,188
Federal Natl Mtge Assn #627426
03-01-17 6.50 611,576 628,349
Federal Natl Mtge Assn #630992
09-01-31 7.00 2,119,493 2,213,454
Federal Natl Mtge Assn #630993
09-01-31 7.50 2,052,537 2,146,973
Federal Natl Mtge Assn #631388
05-01-32 6.50 2,121,551 2,188,084
Federal Natl Mtge Assn #632412
12-01-17 5.50 1,460,343 1,472,307
Federal Natl Mtge Assn #632856
03-01-17 6.00 653,268 666,306
Federal Natl Mtge Assn #633674
06-01-32 6.50 996,366 1,030,949
Federal Natl Mtge Assn #635231
04-01-32 7.00 405,716 419,512
Federal Natl Mtge Assn #635908
04-01-32 6.50 1,600,789 1,649,263
Federal Natl Mtge Assn #636812
04-01-32 7.00 153,969 159,550
Federal Natl Mtge Assn #640200
10-01-31 9.50 104,221 115,080
Federal Natl Mtge Assn #640207
03-01-17 7.00 42,867 43,829
Federal Natl Mtge Assn #640208
04-01-17 7.50 79,441 81,990
Federal Natl Mtge Assn #644805
05-01-32 7.00 1,184,388 1,227,279
Federal Natl Mtge Assn #645053
05-01-32 7.00 783,230 807,135
Federal Natl Mtge Assn #646189
05-01-32 6.50 436,079 447,073
Federal Natl Mtge Assn #654071
09-01-22 6.50 691,567 710,419
Federal Natl Mtge Assn #654685
11-01-22 6.00 598,777 609,560
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #655635
08-01-32 6.50% $ 977,778 $ 1,006,111
Federal Natl Mtge Assn #656514
09-01-17 6.50 1,328,727 1,364,149
Federal Natl Mtge Assn #660186
11-01-32 6.00 2,691,682 2,737,661
Federal Natl Mtge Assn #663651
10-01-17 5.50 662,414 667,723
Federal Natl Mtge Assn #663667
11-01-17 5.50 518,074 522,065
Federal Natl Mtge Assn #665752
09-01-32 6.50 1,443,303 1,479,690
Federal Natl Mtge Assn #667302
01-01-33 7.00 738,982 761,917
Federal Natl Mtge Assn #667604
10-01-32 5.50 595,079 594,416
Federal Natl Mtge Assn #670382
09-01-32 6.00 1,401,264 1,421,005
Federal Natl Mtge Assn #676683
12-01-32 6.00 1,396,975 1,416,656
Federal Natl Mtge Assn #677089
01-01-33 5.50 728,776 727,963
Federal Natl Mtge Assn #677294
01-01-33 6.00 1,734,183 1,758,615
Federal Natl Mtge Assn #681080
02-01-18 5.00 1,080,453 1,073,010
Federal Natl Mtge Assn #682229
03-01-33 5.50 2,576,703 2,573,829
Federal Natl Mtge Assn #684585
02-01-33 5.50 1,784,468 1,784,267
Federal Natl Mtge Assn #684843
02-01-18 5.50 2,030,062 2,046,247
Federal Natl Mtge Assn #684853
03-01-33 6.50 314,415 322,689
Federal Natl Mtge Assn #688002
03-01-33 5.50 1,789,959 1,790,458
Federal Natl Mtge Assn #689026
05-01-33 5.50 448,639 448,247
Federal Natl Mtge Assn #689093
07-01-28 5.50 1,131,001 1,133,487
Federal Natl Mtge Assn #694628
04-01-33 5.50 2,336,978 2,337,905
Federal Natl Mtge Assn #694795
04-01-33 5.50 2,933,359 2,934,178
Federal Natl Mtge Assn #695220
04-01-33 5.50 1,708,115 1,705,614
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #695460
04-01-18 5.50% $ 2,664,560 $ 2,685,772
Federal Natl Mtge Assn #697145
03-01-23 5.50 1,255,743 1,257,149
Federal Natl Mtge Assn #699424
04-01-33 5.50 1,888,688 1,889,292
Federal Natl Mtge Assn #701101
04-01-33 6.00 2,331,113 2,361,552
Federal Natl Mtge Assn #704610
06-01-33 5.50 2,492,120 2,488,470
Federal Natl Mtge Assn #705655
05-01-33 5.00 816,892 800,023
Federal Natl Mtge Assn #708503
05-01-33 6.00 285,778 289,859
Federal Natl Mtge Assn #708504
05-01-33 6.00 763,957 776,208
Federal Natl Mtge Assn #710780
05-01-33 6.00 322,419 326,629
Federal Natl Mtge Assn #711206
05-01-33 5.50 1,449,930 1,447,806
Federal Natl Mtge Assn #711239
07-01-33 5.50 659,054 658,089
Federal Natl Mtge Assn #711501
05-01-33 5.50 978,508 979,364
Federal Natl Mtge Assn #720006
07-01-33 5.50 2,409,768(h) 2,406,239
Federal Natl Mtge Assn #720378
06-01-18 4.50 1,845,400 1,800,799
Federal Natl Mtge Assn #723771
08-01-28 5.50 1,086,335 1,088,723
Federal Natl Mtge Assn #725232
03-01-34 5.00 1,923,566 1,883,844
Federal Natl Mtge Assn #725424
04-01-34 5.50 2,028,663(b) 2,025,692
Federal Natl Mtge Assn #725425
04-01-34 5.50 3,198,971 3,194,638
Federal Natl Mtge Assn #725684
05-01-18 6.00 979,724 998,783
Federal Natl Mtge Assn #725719
07-01-33 4.85 596,824(c) 584,625
Federal Natl Mtge Assn #725773
09-01-34 5.50 2,378,405 2,373,701
Federal Natl Mtge Assn #726940
08-01-23 5.50 1,505,595 1,508,715
Federal Natl Mtge Assn #730153
08-01-33 5.50 907,336 906,007
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 15
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #733367
08-01-23 5.50% $ 1,275,912 $ 1,278,580
Federal Natl Mtge Assn #735057
01-01-19 4.50 6,725,722 6,563,168
Federal Natl Mtge Assn #743524
11-01-33 5.00 2,168,089 2,123,318
Federal Natl Mtge Assn #743579
11-01-33 5.50 1,855,109 1,852,393
Federal Natl Mtge Assn #745802
07-01-36 6.00 2,444,617 2,471,223
Federal Natl Mtge Assn #747339
10-01-23 5.50 1,450,373 1,452,965
Federal Natl Mtge Assn #747536
11-01-33 5.00 2,032,868 1,990,889
Federal Natl Mtge Assn #750932
10-01-18 4.50 972,017 948,524
Federal Natl Mtge Assn #753507
12-01-18 5.00 1,263,699 1,255,150
Federal Natl Mtge Assn #753940
12-01-18 5.00 1,224,411 1,215,976
Federal Natl Mtge Assn #759342
01-01-34 6.50 516,146 530,544
Federal Natl Mtge Assn #761141
12-01-18 5.00 1,739,114 1,727,133
Federal Natl Mtge Assn #765760
02-01-19 5.00 1,142,918 1,135,044
Federal Natl Mtge Assn #766641
03-01-34 5.00 3,368,425 3,296,951
Federal Natl Mtge Assn #776962
04-01-29 5.00 1,482,281 1,450,063
Federal Natl Mtge Assn #779676
06-01-34 5.00 3,122,152 3,055,903
Federal Natl Mtge Assn #845070
12-01-35 5.09 591,989(c) 591,349
Federal Natl Mtge Assn #878661
02-01-36 5.50 2,341,328 2,321,848
Federal Natl Mtge Assn #881629
02-01-36 5.50 1,497,884 1,485,422
Federal Natl Mtge Assn #886020
07-01-36 6.50 1,278,109 1,310,630
Federal Natl Mtge Assn #886291
07-01-36 7.00 969,627 1,001,096
Federal Natl Mtge Assn #900197
10-01-36 5.98 1,849,702(c) 1,868,551
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-119 Cl GI
12-25-33 8.21% $ 552,863(g) $ 128,195
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-24 Cl PI
12-25-12 20.00 405,105(g) 8,525
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-71 Cl IM
12-25-31 14.12 566,483(g) 84,698
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2004-84 Cl GI
12-25-22 12.17 255,218(g) 32,881
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2005-70 Cl YJ
08-25-35 19.37 3,718,983(g) 390,040
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 367 Cl 2
01-25-36 8.85 1,730,685(g) 370,475
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-133 Cl GB
12-25-26 8.00 366,726 390,164
Govt Natl Mtge Assn #518371
02-15-30 7.00 122,498 126,773
Govt Natl Mtge Assn #528344
03-15-30 7.00 380,438 393,716
Govt Natl Mtge Assn #556293
12-15-31 6.50 459,982 474,468
Govt Natl Mtge Assn #583182
02-15-32 6.50 678,309 699,516
Govt Natl Mtge Assn #595256
12-15-32 6.00 406,545 413,733
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Govt Natl Mtge Assn #619613
09-15-33 5.00% $ 1,715,718 $ 1,690,060
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2006-9 Cl 2AB2
11-19-36 5.60 1,893,857(c) 1,893,857
Harborview Nim
Collateralized Mtge Obligation
Series 2006-7A Cl N1
09-19-36 6.41 431,162(d) 429,006
Harborview Nim
Collateralized Mtge Obligation
Series 2006-8A Cl N1
07-21-36 6.41 253,505(d) 252,554
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR8 Cl AX1
04-25-35 4.50 11,341,644(g) 108,100
IndyMac Index Nim
Collateralized Mtge Obligation
Series 2006-AR6 Cl N1
06-25-46 6.65 239,281(d) 238,682
Lehman XS Net Interest Margin Nts
Collateralized Mtge Obligation
Series 2006-AR8 Cl A1
10-28-46 6.25 404,483(d) 402,840
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-2 Cl 4A1
02-25-19 5.00 502,332 494,014
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-7 Cl 8A1
08-25-19 5.00 437,150 426,034
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-8 Cl 7A1
09-25-19 5.00 592,976 578,157
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2005-3 Cl 1A2
04-25-35 5.50 1,537,000 1,509,780
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Sequoia Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-1 Cl A2
02-25-36 6.12% $ 774,621 $ 789,811
Structured Adjustable Rate Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-15 Cl 4A1
07-25-35 5.52 1,232,519(c) 1,228,282
Structured Asset Securities
Collateralized Mtge Obligation
Series 2003-33H Cl 1A1
10-25-33 5.50 1,245,856 1,231,847
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB2 Cl 6A
07-25-19 4.50 726,881 692,950
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR14 Cl 2A1
12-25-35 5.30 460,128(c) 459,012
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR17 Cl A1C1
12-25-45 5.51 223,749(c) 223,810
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 2,336,922 2,223,348
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50 856,704 848,137
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2006-AR6 Cl 5A1
03-25-36 5.11 1,003,918(c) 996,904
------------
Total 270,294,556
- ------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $282,326,361) $280,835,120
- ------------------------------------------------------------------------------------------
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 17
MONEY MARKET FUND (1.1%)
SHARES VALUE(a)
RiverSource Short-Term
Cash Fund 2,643,642(i) $ 2,643,642
- -------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost: $2,643,642) $ 2,643,642
- -------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES (1.2%)
ISSUER EFFECTIVE AMOUNT VALUE(a)
YIELD PAYABLE AT
MATURITY
U.S. GOVERNMENT AGENCIES
Federal Home Loan Bank Disc Nt
12-01-06 5.18% $ 3,000,000 $ 2,999,568
- ------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $3,000,000) $ 2,999,568
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $287,970,003)(l) $286,478,330
==========================================================================================
NOTES TO INVESTMENTS IN SECURITIES
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$46,218,711.
(c) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2006.
(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 Nov. 30, 2006, the value of these securities
amounted to $2,171,085 or 0.9% 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 Nov. 30, 2006. At Nov.
30, 2006, the value of inverse floaters represented 0.1% of net assets.
(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 Nov. 30,
2006.
- ------------------------------------------------------------------------------
18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
(h) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Long Bond, March 2007, 20-year $ 6,600,000
SALE CONTRACTS
U.S. Treasury Note, Dec. 2006, 2-year 9,400,000
U.S. Treasury Note, Dec. 2006, 10-year 18,400,000
U.S. Treasury Note, March 2007, 2-year 1,400,000
U.S. Treasury Note, March 2007, 5-year 3,000,000
(i) Affiliated Money Market Fund -- See Note 6 to the financial statements.
(j) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Nov. 30, 2006.
(k) 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.
(l) At Nov. 30, 2006, the cost of securities for federal income tax purposes
was approximately $287,970,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 1,269,000
Unrealized depreciation (2,761,000)
------------------------------------------------------------------------
Net unrealized depreciation $(1,492,000)
------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's
Public Reference Room in Washington, DC (information on the operations
of the Public Reference Room may be obtained by calling 1-800-SEC-0330);
and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form
N-Q, can be found at riversource.com/funds.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 19
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOV. 30, 2006 (UNAUDITED)
ASSETS
Investments in securities, at value (Note 1)
Unaffiliated issuers (identified cost $285,326,361) $ 283,834,688
Affiliated money market fund (identified cost $2,643,642) (Note 6) 2,643,642
- ------------------------------------------------------------------------------------------------------
Total investments in securities (identified cost $287,970,003) 286,478,330
Capital shares receivable 12,816
Accrued interest receivable 1,269,275
Receivable for investment securities sold 22,188,881
- ------------------------------------------------------------------------------------------------------
Total assets 309,949,302
- ------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends payable to shareholders 123,967
Capital shares payable 45,874
Payable for investment securities purchased 22,160,635
Payable for securities purchased on a forward-commitment basis (Note 1) 46,218,711
Accrued investment management services fee 3,170
Accrued distribution fee 39,292
Accrued service fee 105
Accrued transfer agency fee 132
Accrued administrative services fee 462
Other accrued expenses 84,050
- ------------------------------------------------------------------------------------------------------
Total liabilities 68,676,398
- ------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 241,272,904
======================================================================================================
REPRESENTED BY
Capital stock -- $.01 par value (Note 1) $ 478,027
Additional paid-in capital 244,123,340
Excess of distributions over net investment income (55,588)
Accumulated net realized gain (loss) (Note 8) (1,563,778)
Unrealized appreciation (depreciation) on investments (Note 5) (1,709,097)
- ------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $ 241,272,904
======================================================================================================
Net assets applicable to outstanding shares: Class A $ 120,673,096
Class B $ 52,912,609
Class C $ 5,582,103
Class I $ 23,602,997
Class Y $ 38,502,099
Net asset value per share of outstanding capital stock: Class A shares 23,905,898 $ 5.05
Class B shares 10,478,668 $ 5.05
Class C shares 1,105,319 $ 5.05
Class I shares 4,680,779 $ 5.04
Class Y shares 7,632,019 $ 5.04
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOV. 30, 2006 (UNAUDITED)
INVESTMENT INCOME
Income:
Interest $ 6,373,989
Income distributions from affiliated money market fund (Note 6) 30,524
- -------------------------------------------------------------------------------------------------
Total income 6,404,513
- -------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 575,175
Distribution fee
Class A 154,518
Class B 286,713
Class C 30,714
Transfer agency fee 343,839
Incremental transfer agency fee
Class A 11,031
Class B 9,483
Class C 979
Service fee -- Class Y 18,155
Administrative services fees and expenses 83,880
Compensation of board members 6,387
Custodian fees 32,990
Printing and postage 41,535
Registration fees 29,075
Audit fees 11,750
Other 11,565
- -------------------------------------------------------------------------------------------------
Total expenses 1,647,789
Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (404,357)
- -------------------------------------------------------------------------------------------------
1,243,432
Earnings and bank fee credits on cash balances (Note 2) (10,377)
- -------------------------------------------------------------------------------------------------
Total net expenses 1,233,055
- -------------------------------------------------------------------------------------------------
Investment income (loss) -- net 5,171,458
- -------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions (Note 3) 394,129
Futures contracts 194,954
Payment from affiliate (Note 2) 6,038
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 595,121
Net change in unrealized appreciation (depreciation) on investments 5,594,404
- -------------------------------------------------------------------------------------------------
Net gain (loss) on investments 6,189,525
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,360,983
=================================================================================================
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 21
STATEMENTS OF CHANGES IN NET ASSETS
NOV. 30, 2006 MAY 31, 2006
SIX MONTHS ENDED YEAR ENDED
(UNAUDITED)
OPERATIONS AND DISTRIBUTIONS
Investment income (loss) -- net $ 5,171,458 $ 9,995,067
Net realized gain (loss) on investments 595,121 (1,546,011)
Net change in unrealized appreciation (depreciation) on investments 5,594,404 (8,342,100)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,360,983 106,956
- -----------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (2,913,680) (5,735,409)
Class B (1,134,117) (2,557,549)
Class C (121,830) (274,662)
Class I (411,740) (22,389)
Class Y (887,851) (1,002,420)
Net realized gain
Class A -- (240,137)
Class B -- (129,909)
Class C -- (13,809)
Class I -- (16)
Class Y -- (56,235)
- -----------------------------------------------------------------------------------------------------
Total distributions (5,469,218) (10,032,535)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Proceeds from sales
Class A shares (Note 2) 17,775,571 37,325,046
Class B shares 5,551,465 13,027,075
Class C shares 229,020 872,372
Class I shares 19,215,698 6,177,343
Class Y shares 3,747,029 35,864,407
Reinvestment of distributions at net asset value
Class A shares 2,636,534 5,347,437
Class B shares 1,041,113 2,476,785
Class C shares 110,956 264,470
Class I shares 403,222 17,221
Class Y shares 892,967 1,032,159
Payments for redemptions
Class A shares (29,111,518) (70,083,963)
Class B shares (Note 2) (19,548,582) (45,885,010)
Class C shares (Note 2) (1,646,328) (4,632,367)
Class I shares (2,600,000) (621)
Class Y shares (1,672,900) (1,208,975)
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (2,975,753) (19,406,621)
- -----------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 2,916,012 (29,332,200)
Net assets at beginning of period 238,356,892 267,689,092
- -----------------------------------------------------------------------------------------------------
Net assets at end of period $ 241,272,904 $ 238,356,892
=====================================================================================================
Undistributed (excess of distributions over) net investment income $ (55,588) $ 242,172
- -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS
(Unaudited as to Nov. 30, 2006)
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 and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o 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.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
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 account-based to asset-based, and
adopting a plan administration services agreement. These changes are effective
Dec. 11, 2006.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase the shares. At Nov. 30, 2006, Ameriprise Financial, Inc.
(Ameriprise Financial), IDS Life Insurance Company and the affiliated
funds-of-funds owned 100% of Class I shares, which represents 9.78% of the
Fund's net assets.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fees and service fee (class specific
expenses) 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 U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 23
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.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the Board.
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 Nov. 30, 2006, the Fund has entered into outstanding
when-issued securities of $44,204,707 and other forward-commitments of
$2,014,004.
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.
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.
- ------------------------------------------------------------------------------
24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
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.
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."
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 25
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.
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 Financial Accounting Standards Board (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.
- ------------------------------------------------------------------------------
26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
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 include among other things, certain expenses of the Fund or the
Board (including its independent members) equal to $3,737 that are paid by the
Fund through Board Services Corporation, an entity that provides services to
the Board and the Fund pursuant to a separate agreement. These expenses
include: Fund boardroom expense, Board Services Corporation office expense,
Board Services Corporation employee compensation, including employee health
and retirement benefits, Board Services Corporation audit and legal fees, Fund
legal fees, certain taxes, filing fees and certain other expenses.
Compensation of board members includes compensation as well as retirement
benefits. Certain other aspects of the 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.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 27
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:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as
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
will pay the Transfer Agent an annual asset-based fee at a rate of 0.05% of
the Fund's average daily net assets for this service attributable to Class R4
shares.
Class I currently pays 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 terminated.
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. (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 up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B and Class C shares.
Beginning 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.
Under the current Shareholder Service Agreement, the Fund pays the Distributor
a fee for service provided to shareholders by the Distributor and other
servicing agents with respect to those shares. The fee is 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
$88,588 for Class A, $42,874 for Class B and $724 for Class C for the six
months ended Nov. 30, 2006.
- ------------------------------------------------------------------------------
28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
For the six months ended Nov. 30, 2006, the Investment Manager and its
affiliates waived certain fees and expenses to 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 Y. Of these
waived fees and expenses, the transfer agency fees waived for Class A, Class
B, Class C and Class Y were $141,591, $69,986, $7,461 and $40,035,
respectively, and the management fees waived at the Fund level were $145,284.
In addition, the Investment Manager and its affiliates have agreed to waive
certain fees and expenses until May 31, 2007, unless sooner terminated at the
discretion of the Board, such that net expenses will 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 Y of the Fund's average daily net assets.
During the six months ended Nov. 30, 2006, the Fund's custodian and transfer
agency fees were reduced by $10,377 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
assets value and total return.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $358,553,074 and $337,624,051, respectively, for six
months ended Nov. 30, 2006. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
SIX MONTHS ENDED NOV. 30, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- --------------------------------------------------------------------------------------------
Sold 3,577,476 1,115,885 46,030 3,864,210 752,552
Issued for reinvested
distributions 529,605 209,167 22,291 80,786 179,352
Redeemed (5,855,336) (3,937,937) (331,133) (518,962) (337,790)
- --------------------------------------------------------------------------------------------
Net increase (decrease) (1,748,255) (2,612,885) (262,812) 3,426,034 594,114
- --------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- --------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 29
5. INTEREST RATE FUTURES CONTRACTS
At Nov. 30, 2006, investments in securities included securities valued at
$349,487 that were pledged as collateral to cover initial margin deposits on
66 open purchase contracts and 268 open sale contracts. The notional market
value of the open purchase contracts at Nov. 30, 2006 was $7,548,750 with a
net unrealized gain of $61,162. The notional market value of the open sale
contracts at Nov. 30, 2006 was $34,310,251 with a net unrealized loss of
$278,586. See "Summary of significant accounting policies" and "Notes to
investments in securities."
6. AFFILIATED MONEY MARKET FUND
The Fund may invest its daily cash balance in RiverSource Short-Term Cash
Fund, a money market fund established for the exclusive use of the RiverSource
funds and other institutional clients of RiverSource Investments.
7. 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
outstanding during the six months ended Nov. 30, 2006.
8. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$1,999,586 at May 31, 2006, that if not offset by capital gains will expire as
follows:
2014 2015
$545,026 $1,454,560
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.
- ------------------------------------------------------------------------------
30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
9. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In June 2004, an action captioned John E. Gallus et al. v. American Express
Financial Corp. and American Express Financial Advisors Inc., was filed in the
United States District Court for the District of Arizona. The plaintiffs
allege that they are investors in several American Express Company mutual
funds and they purport to bring the action derivatively on behalf of those
funds under the Investment Company Act of 1940. The plaintiffs allege that
fees allegedly paid to the defendants by the funds for investment advisory and
administrative services are excessive. The plaintiffs seek remedies including
restitution and rescission of investment advisory and distribution agreements.
The plaintiffs voluntarily agreed to transfer this case to the United States
District Court for the District of Minnesota. In response to our motion to
dismiss the complaint, the Court dismissed one of plaintiffs' four claims and
granted plaintiffs limited discovery. Discovery is currently set to end in
March 2007.
In December 2005, without admitting or denying the allegations, American
Express Financial Corporation (AEFC, which is now known as Ameriprise
Financial, Inc. (Ameriprise Financial)), 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.
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
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 31
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.
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.
- ------------------------------------------------------------------------------
32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
10. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating
the Fund's results.
CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .11 .21 .19 .16 .19
Net gains (losses) (both realized
and unrealized) .14 (.20) .10 (.09) .16
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .25 .01 .29 .07 .35
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.20) (.20) (.16) (.20)
Tax return of capital -- -- -- (.01) --
Distributions from realized gains -- (.01) -- (.06) (.02)
- ---------------------------------------------------------------------------------------------------------
Total distributions (.12) (.21) (.20) (.23) (.22)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.05 $ 4.92 $ 5.12 $ 5.03 $ 5.19
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 121 $ 126 $ 159 $ 177 $ 251
- ---------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b),(c) .89% (d) .89% .95% .98% .99%
- ---------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.47% (d) 4.08% 3.67% 3.11% 3.31%
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 127% 178% 137% 163% 227%
- ---------------------------------------------------------------------------------------------------------
Total return(e) 5.09% (f) .12% 5.78% 1.27% 6.93%
- ---------------------------------------------------------------------------------------------------------
(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) 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 1.24% for the six months ended Nov. 30, 2006
and 1.19%, 1.10%, 1.05% and 1.06% for the years ended May 31, 2006,
2005, 2004 and 2003, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 33
CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .09 .17 .15 .12 .15
Net gains (losses) (both realized
and unrealized) .13 (.19) .09 (.09) .16
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .22 (.02) .24 .03 .31
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.16) (.16) (.12) (.16)
Tax return of capital -- -- -- (.01) --
Distributions from realized gains -- (.01) -- (.06) (.02)
- ----------------------------------------------------------------------------------------------------------
Total distributions (.10) (.17) (.16) (.19) (.18)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.05 $ 4.93 $ 5.12 $ 5.04 $ 5.20
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 53 $ 64 $ 98 $ 129 $ 200
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily
net assets(b),(c) 1.64%(d) 1.64% 1.69% 1.74% 1.75%
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.71%(d) 3.31% 2.90% 2.35% 2.49%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 127% 178% 137% 163% 227%
- ----------------------------------------------------------------------------------------------------------
Total return(e) 4.48%(f) (.42%) 4.78% .52% 6.12%
- ----------------------------------------------------------------------------------------------------------
(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) 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 2.01% for the six months ended Nov. 30, 2006
and 1.95%, 1.86%, 1.80% and 1.82% for the years ended May 31, 2006,
2005, 2004 and 2003, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .09 .17 .15 .12 .15
Net gains (losses) (both realized
and unrealized) .13 (.19) .09 (.09) .16
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .22 (.02) .24 .03 .31
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.16) (.16) (.12) (.16)
Tax return of capital -- -- -- (.01) --
Distributions from realized gains -- (.01) -- (.06) (.02)
- ----------------------------------------------------------------------------------------------------------
Total distributions (.10) (.17) (.16) (.19) (.18)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.05 $ 4.93 $ 5.12 $ 5.04 $ 5.20
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 6 $ 7 $ 11 $ 15 $ 22
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b),(c) 1.64%(d) 1.64% 1.70% 1.74% 1.75%
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.72%(d) 3.31% 2.90% 2.36% 2.50%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 127% 178% 137% 163% 227%
- ----------------------------------------------------------------------------------------------------------
Total return(e) 4.48%(f) (.43%) 4.79% .52% 6.12%
- ----------------------------------------------------------------------------------------------------------
(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) 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 2.01% for the six months ended Nov. 30, 2006
and 1.95%, 1.85%, 1.80% and 1.82% for the years ended May 31, 2006,
2005, 2004 and 2003, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 35
CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 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) .12 .22 .20 .05
Net gains (losses) (both realized
and unrealized) .13 (.19) .09 (.11)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .25 .03 .29 (.06)
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.13) (.21) (.21) (.06)
Distributions from realized gains -- (.01) -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (.13) (.22) (.21) (.06)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.04 $ 4.92 $ 5.11 $ 5.03
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 24 $ 6 $ -- $ --
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(c) .54%(d),(e) .54%(d) .62%(d) .64%(e)
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.81%(e) 4.99% 3.99% 3.39%(e)
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 127% 178% 137% 163%
- ----------------------------------------------------------------------------------------------------------
Total return(f) 5.07%(g) .59% 5.92% (1.38%)(g)
- ----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Inception date is March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(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 I would have been 0.66% for the six months ended Nov. 30, 2006
and 0.73% and 0.66% for the years ended May 31, 2006 and 2005,
respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
CLASS Y*
PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(g) 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) .12 .21 .20 .17 .19
Net gains (losses) (both realized
and unrealized) .12 (.19) .08 (.09) .16
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .24 .02 .28 .08 .35
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.20) (.20) (.17) (.20)
Tax return of capital -- -- -- (.01) --
Distributions from realized gains -- (.01) -- (.06) (.02)
- ----------------------------------------------------------------------------------------------------------
Total distributions (.12) (.21) (.20) (.24) (.22)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.04 $ 4.92 $ 5.11 $ 5.03 $ 5.19
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $ 39 $ 35 $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b),(c) .71%(d) .71% .77% .81% .80%
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.64%(d) 4.40% 3.99% 3.29% 3.68%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 127% 178% 137% 163% 227%
- ----------------------------------------------------------------------------------------------------------
Total return(e) 4.97%(f) .49% 5.75% 1.45% 7.10%
- ----------------------------------------------------------------------------------------------------------
* 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) 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 Y would have been 1.05% for the six months ended Nov. 30, 2006
and 1.04%, 0.94%, 0.87% and 0.88% for the years ended May 31, 2006,
2005, 2004 and 2003, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2006 (Unaudited).
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 37
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, including management fees; distribution and service (12b-1) fees; and
other Fund 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.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the six months ended Nov. 30, 2006.
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.
- ------------------------------------------------------------------------------
38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
JUNE 1, 2006 NOV. 30, 2006 THE PERIOD(a) EXPENSE RATIO
Class A
Actual(b) $ 1,000 $ 1,050.90 $ 4.58 .89%
Hypothetical
(5% return before expenses) $ 1,000 $ 1,020.61 $ 4.51 .89%
Class B
Actual(b) $ 1,000 $ 1,044.80 $ 8.41 1.64%
Hypothetical
(5% return before expenses) $ 1,000 $ 1,016.85 $ 8.29 1.64%
Class C
Actual(b) $ 1,000 $ 1,044.80 $ 8.41 1.64%
Hypothetical
(5% return before expenses) $ 1,000 $ 1,016.85 $ 8.29 1.64%
Class I
Actual(b) $ 1,000 $ 1,050.70 $ 2.78 .54%
Hypothetical
(5% return before expenses) $ 1,000 $ 1,022.36 $ 2.74 .54%
Class Y
Actual(b) $ 1,000 $ 1,049.70 $ 3.65(c) .71%
Hypothetical
(5% return before expenses) $ 1,000 $ 1,021.51 $ 3.60(c) .71%
(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 183/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Nov. 30, 2006:
+5.09% for Class A, +4.48% for Class B, +4.48% for Class C, +5.07% for
Class I and +4.97% for Class Y.
(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 account-based to
asset-based, and adopting a plan administration services agreement. In
addition, the investment manager and its affiliates have contractually
agreed to waive certain fees and to absorb certain expenses until May
31, 2007, unless sooner terminated at the discretion of the Fund's
Board, such that net expenses will not exceed 0.71% for Class R4. These
changes are effective Dec. 11, 2006. Any amounts waived will not be
reimbursed by the Fund. If these changes had been in place for the
six-month period ended Nov. 30, 2006, the actual and hypothetical
expenses paid for Class Y would have been the same as those presented in
the table above.
- ------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT 39
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are 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 during
the 12-month period ended June 30, 2006 is available without charge by
visiting riversource.com/funds; or searching the website of the SEC at
www.sec.gov.
- ------------------------------------------------------------------------------
40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2006 SEMIANNUAL REPORT
RIVERSOURCE(SM) U.S. GOVERNMENT MORTGAGE FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
riversource.com/funds
This report must be accompanied or preceded by the
Fund's current prospectus. RiverSource(SM) mutual
RIVERSOURCE [LOGO](SM) funds are distributed by RiverSource Distributors,
INVESTMENTS Inc. and Ameriprise Financial Services, Inc., Members
NASD, and managed by RiverSource Investments, LLC.
These companies are part of Ameriprise Financial, Inc.
S-6256 F (1/07)
Item 2. Code of Ethics. Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert. Not applicable for semi-annual
reports.
Item 4. Principal Accountant Fees and Services. Not applicable for
semi-annual reports.
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) Not applicable for semi-annual reports.
(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 Febuary 2, 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 February 2, 2007
By /s/ Jeffrey P. Fox
-----------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date February 2, 2007