<PAGE>
PAGE 1
AMERICAN
EXPRESS
Financial
Direct
Strategist Income Fund, Inc.
1997 Annual Report
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
<PAGE>
PAGE 2
Table of contents
From the portfolio managers......................................1
The Fund's long-term performance.................................7
Independent auditors, report (Strategist Income Fund)...........11
Financial statements (Strategist Income Fund)...................12
Notes to financial statements (Strategist Income Fund)..........15
Independent auditor's report (Government Income Portfolio)......22
Financial statements (Government Income Portfolio)..............23
Notes to financial statements (Government Income Portfolio).....26
Investments in securities (Government Income Portfolio).........31
Independent auditor's report (High Yield Portfolio).............39
Financial statements (High Yield Portfolio).....................40
Notes to financial statements (High Yield Portfolio)............43
Investments in securities (High Yield Portfolio)................48
Independent auditor's report (Quality Income Portfolio).........73
Financial statements (Quality Income portfolio).................74
Notes to financial statements (Quality Income Portfolio ).......77
Investments in securities (Quality Income Portfolio)............82
<PAGE>
Page 3
From the portfolio manager
Picture of Jim Snyder, Portfolio manager
It was an up-and-down year in the bond market over the 12 months of
the Fund's fiscal year. While this presented a challenging
environment, Strategist Government Income Fund was able to make
timely portfolio shifts to take advantage of trends in the market.
As a result for fiscal year (ending on May 31, 1997), the Fund
delivered a total return of 7.6%.
The period began after a sharp drop-off in the bond market had
begun. But by mid-1996, bonds began to react positively to news of
moderate economic growth and continued low inflation. Interest
rates headed lower, while bond prices, which move in the opposite
direction of interest rates, responded by rising steadily through
the fall.
There was little positive news in the bond market after that point.
Although inflation data did not appear to show any serious
acceleration in the cost of living, a pickup in the country's
economic growth drove interest rates higher for several months.
Bond investors are concerned that a fast-growing economy will fuel
inflation, forcing the Federal Reserve to boost interest rates.
While no serious threat materialized, the market maintained its
negative stance. Except for a brief reversal in April, bond prices
suffered a decline for much of the rest of the Fund's fiscal year.
Bright Spots
The Fund's exposure to mortgage-backed and U.S. Treasury securities
provided the greatest boon to the Fund. In fact, much of the gain
from the treasury market came through the use of options. That
gain was offset, however, by losses in futures contracts. For a
time, mortgage-backed securities made up close to 90% of the
portfolio. However, I reduced that exposure to about 50% of the
Fund's assets as the period progressed, because there seemed to be
little potential for additional price appreciation from that
segment of the market. Instead, I focused more assets on
intermediate-term Treasury bonds and reduced the portfolio's
duration. The shorter the duration, the less that swings in
interest rates will affect the value of the portfolio.
Strategist Income Fund, Inc.<PAGE>
Page 4
I'm entering the current fiscal year with the same approach.
Interest rates run the risk of rising modestly in the early months
of the period, so I will maintain a relatively defensive posture in
the portfolio. The emphasis will be on generating investment
income, as price appreciation will be elusive if interest rates
rise. As the investment environment improves, I'll position the
portfolio more aggressively.
<PAGE>
Page 5
From the portfolio manager
picture of Jack Utter, Portfolio manager
A healthy economy and positive news on the inflation front helped
Strategist High Yield Fund enjoy a productive period during the
past fiscal year that provided shareholders with a total return of
11.4% (ending on May 31, 1997).
For several years, high-yield bonds, which are bonds with lower
grades based on judgments of independent bond rating agencies, have
been outperforming the bond market as a whole. That was the case
again during the past 12 months, although to a somewhat lesser
extent than was the case in previous years. One of the most
important elements supporting this trend is a favorable economy. A
strong economy typically is bullish for high-yield bonds. That's
because these bonds are more susceptible to default. However,
defaults are less common in a strong economy, as companies are
better able to make principal and interest payments on a timely
basis.
Individual selection supports performance
Much of the Fund's performance was derived from a focus on "B-
rated" bonds. These bonds are considered a step in quality below
"BB" bonds, which are the most credit-worthy bonds in the high-
yield category. "B" bonds provide a slightly higher yield as a
tradeoff for higher credit risk.
The Fund benefited from our solid internal research, which helped
us identify higher-yielding "B" bonds while experiencing few credit
problems. In a credit sensitive sector like the high-yield bond
market, the experience and ability of our investment analysts has
made a big difference for the Fund.
Fund performance benefited from strong returns in the
telecommunications and media sectors of the bond market. These
represent two of the largest concentrations in the Fund, and both
provided above-average returns, particularly in the early part of
the Fund's fiscal year.
About 5% of the Fund is devoted to bonds from emerging market
countries such as Indonesia, Venezuela, Mexico, Brazil, Argentina
and Russia. Although representing only a small piece of the Fund,
the consistently high returns of these bonds fueled the Fund's
performance.
Strategist Income Fund, Inc.
<PAGE>
Page 6
Outlook remains positive
At the time of this writing (July 1997), the economy is still
moving in a favorable direction for high-yield bonds, Growth is
solid, inflation is under control and demand for low-grade bonds
remain strong. Those factors indicate that this Fund remains well
positioned for the coming months. However, given my concern about
the possibility of rising interest rates over the next 12 months, I
have structured the portfolio a bit more defensively. As a result,
I anticipate a reasonably good return in the months ahead.
<PAGE>
Page 7
From the portfolio manager
picture of Ray Goodner, Portfolio Manager
A choppy bond market over the past twelve months made for a
challenging environment. But in the fiscal year for Strategist
Quality Income Fund (ending on May 31, 1997), we delivered a total
return of 8.3%.
The year started quietly in the summer of 1996, with little
dramatic movement in the bond market. Things turned positive in
the fall, as interest rates began to drop amid reports of
moderating economic growth and ongoing low inflation. This decline
in interest rates resulted in rising values for bonds, which gave
the Fund a solid boost.
A change in direction
After November, the bond market began to shift. Reports surfaced
that the economy was growing at a faster pace than expected. Many
investors in the bond market became jittery about the prospect that
a fast-growing economy would soon result in accelerated inflation.
This despite the fact that all available data showed inflation
remaining in check. In the first quarter of 1997, the bond market
continued to lose value as interest rates steadily increased. In
late March, things began to turn around again. The bond market was
encouraged by reports that Congress and the president would join
forces to balance the federal budget. Bonds made a moderate
comeback in the spring.
Positioning for the market
I structured the Fund to take advantage of the market's movement.
In the fall of 1996, the portfolio was designed with a longer
duration. This strategy makes the Fund more sensitive to interest
rate moves. This is especially advantageous in periods when
interest rates are declining, because lower interest rates mean
higher bond prices. Over the winter, I structured a more defensive
posture for the Fund. I shortened the porfolio's duration to limit
the impact of rising interest rates. In addition, I purchased
future contracts to provide some protection against downside risk.
Cash levels were also kept higher than normal to mitigate the
effect of a negative bond market.
Strategist Income Fund, Inc.
<PAGE>
Page 8
The portfoio's mix includes a large concentration in U.S. treasury
and government agency bonds. Bonds from U.S. companies make up the
next largest holding, followed by foreign government bonds. I
expect few changes to that structure in the coming year until the
threat of higher interest rates has diminished.
<PAGE>
Page 9
The Fund's long-term performance
<TABLE><CAPTION>
<S>
How your $10,000 has grown in Strategist Government Income Fund
<C> <C> <C>
$10,759
Merrill Lynch Strategist
1-5 Year Lehman Aggregate Government
Government Index Bond Index Fund
$10,000
6/10/96 6/30/96 7/31/96 8/31/96 9/30/96 10/31/96 11/30/96 12/31/96 1/31/97 2/28/97 3/31/97 4/30/97 5/31/97
</TABLE>
Average annual total return
(as of May 31, 1997)
1 year 5 years 10 years
+7.59% +6.16% +7.65%
Assumes: Holding period from 6/10/96 to 5/31/97. Returns do not
reflect taxes payable on distributions. Reinvestment of all income
and capital gain distributions for the Fund, with a value of $719.
Also see "Performance" in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared
to two widely cited performance indexes, the Lehman Aggregate Bond
Index and the Merrill Lynch 1 to 5 year Government Index. Your
investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. This
was a period of widely fluctuating security prices. Past
performance is no guarantee of future results.
On June 10, 1996, IDS Federal Income Fund (the predecessor fund)
converted to a master\feeder structure and transferred all of its
assets to Government Income Portfolio. The performance information
in the total return table represents performance of the
corresponding predecessor fund prior to March 20, 1995 and Class A
shares of the corresponding predecessor fund from March 20, 1995
through June 10, 1996, adjusted to reflect the absence of sales
charges on shares of the Fund. The historical performance has not
been adjusted for any difference between the estimated aggregate
fees and expenses of the Fund and historical fees and expenses of
the predecessor fund.
Lehman Aggregate Bond Index is made up of an unmanaged
representative list of government and corporate bonds as well as
asset-backed securities and mortgage backed securities. The index
is frequently used as a general measure of bond market performance.
Strategist Income Fund, Inc. <PAGE>
Page 10
However, the securities used to create the index may not be
representative of the debt securities held in the Portfolio.
Merrill Lynch 1 to 5 year Government Index is made up of an
unmanaged representative list of government bonds. The index is
frequently used as a general measure of bond market performance.
However, the securities used to create the index may not be
representative of the debt securities held in the Portfolio.
<PAGE>
Page 11
<TABLE><CAPTION>
<S>
How your $10,000 has grown in Strategist High Yield Fund
<C>
$11,140
Strategist
High Yield
<C> Fund
Lehman Aggregate
Bond Index
$10,000
6/10/96 6/30/96 7/31/96 8/31/96 9/30/96 10/31/96 11/30/96 12/31/96 1/31/97 2/28/97 3/31/97 4/30/97 5/31/97
</TABLE>
Average annual total return
(as of May 31, 1997)
1 year 5 years 10 years
+11.40% +11.18% +9.80%
Assumes: Holding period from 6/10/96 to 5/31/97. Returns do not
reflect taxes payable on distributions. Reinvestment of all income
and capital gain distributions for the Fund, with a value of $908.
Also see "Performance" in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared
to a widely cited performance measure, the Lehman Aggregate Bond
Index. Your investment and retun values fluctuate so that your
shares, when redeemed, may be worth more or less than the original
cost. This was a period of widely fluctuating security prices.
Past performance is no guarantee of future results.
On June 10, 1996 IDS Extra Income Fund (the predecessor fund)
converted to a master\feeder structure and transferred all of its
assets to High Yield Portfolio. The performance information in the
total return table represents Performance of the corresponding
predecessor fund prior to March 20, 1995 and Class A shares of the
corresponding predecessor fund from March 20, 1995 through June 10,
1996, adjusted to reflect the absence of sales charges on shares of
the Fund. The historical performance has not been adjusted for any
difference between the estimated aggregate fees and expenses of the
Fund and historical fees and expenses of the predecessor fund.
Lehman Aggregate Bond Index is made up of an unmanaged
representative list of government and corporate bonds as well as
asset-backed securities and mortgage-backed securities. The index
is frequently used as a general measure of bond market performance.
However, the securities used to create the index may not be
representative of the debt securities held in the Portfolio.
Strategist Income Fund, Inc.
<PAGE>
Page 12
<TABLE><CAPTION>
<S>
How your $10,000 has grown in Strategist Quality Income Fund
<C> <C>
$10,831
Strategist
Lehman Aggregate Quality Income
Bond Index Fund
6/10/96 6/30/96 7/31/96 8/31/96 9/30/96 10/31/96 11/30/96 12/31/96 1/31/97 2/28/97 3/31/97 4/30/97 5/31/97
</TABLE>
Assumes: Holding period from 6/10/96 to 5/31/97. Returns do not
reflect taxes payable on distributions. Reinvestment of all income
and capital gain distributions for the Fund, with a value of $607.
Also see "Performance" in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared
to a widely cited performance measure, the Lehman Aggregate Bond
Index. Your investment and return values fluctuate so that your
shares, when redeemed, may be worth more or less than the original
cost. This was a period of widely fluctuating security prices.
Past performance is no guarantee of future results.
On June 10, 1996 IDS Selective Fund (the predecessor fund)
converted to a master/feeder structure and transferred all of its
assets to Quality Income Portfolio. The performance information in
the total return table represents performance of the corresponding
predecessor fund prior to March 20, 1995 and Class A shares of the
corresponding predecessor fund from March 20, 1995 through June 10,
1996, adjusted to reflect the absence of sales charges on shares of
the Fund. The historical performance has not been adjusted for any
difference between the estimated aggregate fees and expenses of the
Fund and historical fees and expenses of the predecessor fund.
Lehman Aggregate Bond Index is made up of an unmanaged
representative list of government and corporate bonds as well as
asset-backed securities and mortgage-backed securities. The index
is frequently used as a general measure of bond market performance.
However, the securities used to create the index may not be
representative of the debt securities held in the Portfolio.
<PAGE>
Page 13
The financial statements contained in Post-Effective Amendment #2
to Registration Statement No. 33-60323 filed on or about July 30,
1997, are incorporated herein by reference.
<PAGE>
Page 14
American Express Service Corporation, Distributor
