N-CSRS 1 gei.txt GEI INVESTMENTS FUNDS - CERTIFICATION OF SHAREHOLDER REPORT FOR THE PERIOD ENDING 30TH JUNE, 2006 OMB APPROVAL OMB Number: 3235-0570 Expires: SEPT. 30, 2007 Estimated average burden hours per response: 19.4 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 811-04041 ----------------------------------------------------------------- GE INVESTMENTS FUNDS, INC. ------------------------------------------------------------------ (Exact name of registrant as specified in charter) 3001, SUMMER STREET,STAMFORD, CONNECTICUT, 06905 ------------------------------------------------------------------- (Address of principal executive offices) (Zip code) GE ASSET MANAGEMENT INC,3001, SUMMER STREET,STAMFORD,CONNECTICUT, 06905 ------------------------------------------------------------------ (Name and address of agent for service) Registrant"s telephone number, including area code: 800-242-0134 ---------------------------- Date of fiscal year end: 12/31 --------------------------- Date of reporting period: : 06/30/06 ------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. GE Investments Funds, Inc. U.S. Equity Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. U.S. Equity Fund Contents ----------------------------------------------------------------------------- NOTES TO PERFORMANCE................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS............................. 2 NOTES TO SCHEDULE OF INVESTMENTS....................................... 9 FINANCIAL STATEMENTS Financial Highlights.............................................. 10 Statement of Assets and Liabilities............................... 11 Statement of Operations........................................... 12 Statements of Changes in Net Assets............................... 13 Notes to Financial Statements..................................... 14 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL.......................... 18 ADDITIONAL INFORMATION................................................. 21 INVESTMENT TEAM........................................................ 24 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. The performance data for the periods through December 12, 1997, reflect the prior performance and expense ratios of the Variable Investment Trust GE U.S. Equity Portfolio, the assets of which were transferred to the GE Investments U.S. Equity Fund, Inc. pursuant to an exemptive order granted by the Securities and Exchange Commission permitting a substitution of funds that occurred on December 12, 1997. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Standard & Poor's ("S&P") 500 Composite Price Index of stocks (S&P 500) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The S&P 500 is a market capitalization-weighted index of stocks of 500 large U.S. companies, which is widely used as a measure of large-cap stock market performance. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 U.S. Equity Fund -------------------------------------------------------------------------------- THE U.S. EQUITY FUND IS MANAGED BY A TEAM OF PORTFOLIO MANAGERS THAT INCLUDES RICHARD L. SANDERSON, PAUL C. REINHARDT, STEPHEN V. GELHAUS, AND CHRISTOPHER D. BROWN (PICTURED BELOW FROM TOP LEFT TO BOTTOM RIGHT). EACH OF THE FOREGOING PORTFOLIO MANAGERS CO-MANAGES ONE OF THREE SUB-PORTFOLIOS, WHICH COMPRISE THE FUND. RICHARD L. SANDERSON IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A PORTFOLIO MANAGER OF THE U.S. EQUITY FUND SINCE SEPTEMBER 1997. MR. SANDERSON JOINED GE ASSET MANAGEMENT IN OCTOBER 1995 AS VICE PRESIDENT -- DOMESTIC EQUITIES. PAUL C. REINHARDT IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A PORTFOLIO MANAGER FOR THE U.S. EQUITY FUND SINCE JANUARY 2001. MR. REINHARDT JOINED GE ASSET MANAGEMENT IN 1982 AS AN EQUITY ANALYST AND HAS BEEN A PORTFOLIO MANAGER SINCE 1987. STEPHEN V. GELHAUS IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A MEMBER OF THE PORTFOLIO MANAGEMENT TEAM FOR THE U.S. EQUITY FUND SINCE JANUARY 2002. MR. GELHAUS JOINED GE ASSET MANAGEMENT IN JUNE 1991 AND WAS A RESEARCH ANALYST IN THE U.S. EQUITY DEPARTMENT FROM 1995 THROUGH 2001. CHRISTOPHER D. BROWN IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS SERVED ON THE PORTFOLIO MANAGEMENT TEAM FOR THE U.S. EQUITY FUND SINCE DECEMBER 1998. MR. BROWN JOINED GE ASSET MANAGEMENT IN 1985 AS A MANAGER OF FUNDS ACCOUNTING. HE BECAME A U.S. EQUITY ANALYST IN 1989, A VICE PRESIDENT AND PORTFOLIO MANAGER IN 1992, AND A SENIOR VICE PRESIDENT IN 1996. Q. HOW DID THE U.S. EQUITY FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the U.S. Equity Fund returned 3.35%. The S&P 500 Index, the Fund's benchmark, returned 2.70% and the Fund's Lipper peer group of 222 Large-Cap Core funds returned an average of 1.25% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. The U.S. stock market began the year on a bullish note, however volatility rose by the end of the period, upsetting all global financial markets. The S&P 500 rallied through April as investors anticipated an end to the Federal Reserve's tightening campaign. By May 10th, the Dow Jones Industrials were up more than 8% for the year, less than 100 points short of the record. However as growth persisted and inflationary data mounted, Federal Reserve members became more [PHOTO OMITTED] 2 Q&A hawkish in their public comments. At the same time, central bankers around the world tightened monetary policy, reducing appetite for risk. Investors began to worry about the sustainability of the global expansion, given the inflation and liquidity concerns. For most of May and June riskier asset classes--from developing country stocks to industrial commodities to Florida condos--came under pressure. U.S. equities swooned amid the uncertainty, and the Dow gave back half of the year's gains. Technology and health care were hit the hardest in this environment, and were the only sectors posting negative returns year-to-date. In fact, health care dropped to a 12-month low in the last week of June, while consumer staples registered a new high. This contrasting performance between two defensive sectors highlighted the importance of careful stock selection in a volatile market. Value continued to lead growth as the Russell 1000 Value Index gained 6.6% year-to-date, while the Russell 1000 Growth Index lost -0.9%. Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. Strong stock selection within information technology was the primary contributor to Fund performance over the past six months as many of the higher quality names that held performance back last year performed well in the first half of 2006. For example, Oracle (18.7%) rallied on synergies from recent acquisitions, Intuit (13.6%) had a strong TurboTax season, and electronic components manufacturer Molex (17.4%) surged in a favorable business environment. In a reversal from last year, not owning Apple (-20.3%) helped portfolio returns. In addition, First Data Corp. (5.0%) also boosted performance as the technology services company announced a spin-off of its Western Union business. All of these positives more than offset the drag from Microsoft (-10.3%), which has been suffering a competitive assault from Google; however, we remained invested in light of upcoming major new product introductions. Within energy, positive stock selection in the oilfield services area helped our holdings to return 18.6% versus 13.7% for the benchmark. In a positive environment for industrials stocks, Dover (22.6%), Eaton (13.5%), Textron (20.8%) and Deere (23.8%) led our holdings to outpace the benchmark sectors by almost 2%. On the other hand, financials, telecommunications services and consumer discretionary detracted from performance year-to-date, but not enough to offset the aforementioned positives. Within financials, American International Group's (-13.0%) international business suffered in the second quarter, while Freddie Mac (-11.4%) languished amidst uncertain operating conditions for GSE's. Underweighting real estate investment trusts hurt relative performance, as REITs rose over 14% since the beginning of the year. And underweighting commercial banks also hurt, despite particular strength in our SunTrust (6.8%) holding. Telecom lagged the index due to our lack of exposure to traditional telecom services companies, which rallied close to 20% during the period. The Bells have benefited from restructuring initiatives and heightened M&A activity. BellSouth has risen 36.2% so far this year on their announced combination with AT&T (16.9%)--both of which we do not own. Despite renewed strength within the media stocks, the consumer discretionary sector as a whole has lagged as investors expressed caution on the consumer. In this environment, holdings such as Carnival (-21.1%), Home Depot (-10.9%) and Target (-10.8%) have held back returns. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND OVER THE PERIOD? A. We have remained steadfastly committed to investing in high quality large-cap stocks with predictable and steady earnings growth, and that discipline served us well during the period. As energy prices have soared and interest rates have risen, we have increased our exposure to the less cyclical health care sector. Valuation compression in the markets has also given us the opportunity to increase our exposure to information technology, a sector with above-average earnings growth. Given a more financially challenged consumer, we have been cautious on consumer-related sectors, and favor companies with sustainable growth prospects (e.g., within specialty retail and consumer staples), or where valuations have been compressed (e.g., media). We have remained underweight in financials in this environment. We did take some profits in industrials during the period. 3 U.S. Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ---------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ---------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,033.47 3.24 ---------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,021.44 3.16 ----------------------------------------------------------------------------------------------------------------------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.63% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). ** ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 3.35%. 4 U.S. Equity Fund -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT [LINE CHART OMITTED, PLOT POINTS FOLLOWS] GEI U.S. Equity S&P 500 Index 6/96 $ 10000.00 $ 10000.00 12/96 11084.58 11172.20 12/97 14646.54 14891.40 12/98 18075.52 19164.94 12/99 21619.56 23202.58 12/00 21492.00 21071.78 12/01 19670.97 18561.71 12/02 15881.79 14459.22 12/03 19578.38 18613.09 12/04 21177.22 20638.45 12/05 21708.53 21653.55 6/06/ 22435.12 22238.88 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 SIX ONE FIVE TEN MONTHS YEAR YEAR YEAR -------------------------------------------------------------- U.S. Equity Fund 3.35% 7.22% 1.95% 8.42% -------------------------------------------------------------- S&P 500 Index 2.70% 8.63% 2.49% 8.32% -------------------------------------------------------------- Lipper peer group average* 1.25% 7.82% 1.55% 6.57% -------------------------------------------------------------- Inception date 1/3/95 ============================================================== U.S. Equity Fund (ending value $22,435) S&P 500 Index (ending value $22,239) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital by investing at least 80% of its net assets in equity securities of issuers that are tied economically to the U.S. under normal market conditions. TOP TEN HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value ============================================================== Exxon Mobil Corp. 3.45% -------------------------------------------------------------- Microsoft Corp. 2.87% -------------------------------------------------------------- Bank of America Corp. 2.74% -------------------------------------------------------------- First Data Corp. 2.57% -------------------------------------------------------------- Pfizer Inc. 2.54% -------------------------------------------------------------- PepsiCo, Inc. 2.52% -------------------------------------------------------------- Industrial Select Sector SPDR Fund 2.25% -------------------------------------------------------------- American International Group, Inc. 2.09% -------------------------------------------------------------- The Coca-Cola Co. 1.89% -------------------------------------------------------------- Wyeth 1.70% ============================================================== PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value ======================================== Market Value of $99,865 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Financials 16.8% Information Technology 16.1% Healthcare 13.0% Consumer Discretionary 10.6% Industrials 10.2% Consumer Staples 9.5% Energy 8.8% Short-Term 7.0% Materials 3.3% Utilities 2.5% Telecommunication Services 2.2% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR, FIVE-YEAR AND TEN-YEAR PERIODS INDICATED IN THE LARGE-CAP CORE FUNDS PEER GROUP CONSISTING OF 222, 220, 147 AND 60 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 U.S. EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- U.S. EQUITY FUND NUMBER OF SHARES VALUE COMMON STOCK -- 94.7%+ CONSUMER DISCRETIONARY -- 11.1% Autozone, Inc.................. 3,901 $ 344,068(a,e) Bed Bath & Beyond, Inc......... 16,658 552,546(a) Cablevision Systems Corp. (Class A) 9,67120 7,443 Carnival Corp.................. 14,506 605,480 CBS Corp....................... 8,941 241,854 Comcast Corp. (Class A)........ 45,203 1,481,754(a) Federated Department Stores Inc. 5,319 194,675 Koninklijke Philips Electronics N.V. ADR......... 10,936 340,547 Liberty Global, Inc. (Series A) 2,878 61,877(a,e) Liberty Global, Inc. (Series C) 28,507 586,389(a) Liberty Media Holding Corp - Capital (Series A)........... 5,410 453,196(a) Liberty Media Holding Corp - Interactive (Series A)....... 27,048 466,848(a) News Corp. (Class A)........... 16,118 309,143 Omnicom Group, Inc............. 12,576 1,120,396 Ross Stores, Inc............... 9,107 255,451 Staples, Inc................... 6,286 152,876 Starwood Hotels & Resorts Worldwide, Inc............... 4,030 243,170 Target Corp.................... 16,668 814,565 The Home Depot, Inc............ 29,496 1,055,662 Time Warner, Inc............... 32,236 557,683 Viacom Inc. (Class B).......... 13,781 493,911(a) 10,539,534 CONSUMER STAPLES -- 10.0% Alberto-Culver Co.............. 8,140 396,581(a) Altria Group, Inc.............. 820 60,213 Clorox Co...................... 19,324 1,178,184 Colgate-Palmolive Co........... 20,710 1,240,529 Diageo PLC ADR................. 2,619 176,913(e) General Mills, Inc............. 7,334 378,874 Kellogg Co..................... 17,266 836,192(e) Kimberly-Clark Corp............ 5,400 333,180 PepsiCo, Inc................... 41,964 2,519,519(d) Procter & Gamble Co............ 6,524 362,734 Sara Lee Corp.................. 8,046 128,897 The Coca-Cola Co............... 43,969 1,891,546 9,503,362 ENERGY -- 9.3% EnCana Corp.................... 3,536 186,135 EOG Resources, Inc............. 10,477 726,475 Exxon Mobil Corp............... 56,220 3,449,097(d) NUMBER OF SHARES VALUE Halliburton Co................. 14,626 $ 1,085,395 Hess Corp...................... 14,303 755,914 Occidental Petroleum Corp...... 8,402 861,625 Schlumberger Ltd............... 17,730 1,154,400 Transocean Inc................. 7,328 588,585(a) 8,807,626 FINANCIALS -- 17.1% AFLAC Incorporated............. 9,429 437,034 Allstate Corp.................. 14,587 798,347 American Express Co............ 5,077 270,198 American International Group, Inc. 35,380 2,089,189 Bank of America Corp........... 56,958 2,739,680 Berkshire Hathaway, Inc. (Class B) 123 374,289(a,e) BlackRock Inc. (Class A)....... 1,289 179,390(e) Chubb Corp..................... 8,865 442,364 Citigroup, Inc................. 20,551 991,380 Everest Re Group, Ltd.......... 2,257 195,389 Federal Home Loan Mortgage Corp................ 13,056 744,323 Federal National Mortgage Assoc. 16,682 802,404 HCC Insurance Holdings, Inc.... 6,286 185,060 Mellon Financial Corp.......... 28,179 970,203 Merrill Lynch & Company, Inc... 8,488 590,425 Metlife, Inc................... 19,745 1,011,141 Morgan Stanley................. 6,838 432,230 Prudential Financial, Inc...... 3,345 259,907(e) State Street Corp.............. 17,963 1,043,471(c) SunTrust Banks, Inc............ 15,079 1,149,925 The Bank of New York Company, Inc. 3,868 124,550 US Bancorp..................... 10,345 319,454 Wells Fargo & Co............... 1,179 79,087 16,229,440 HEALTHCARE -- 13.6% Abbott Laboratories............ 25,386 1,107,083(d) Advanced Medical Optics, Inc... 2,498 126,649(a,e) Aetna, Inc..................... 20,773 829,466 Amgen, Inc..................... 22,043 1,437,865(a) Baxter International, Inc...... 15,715 577,683 Eli Lilly & Co................. 5,319 293,981 Gilead Sciences, Inc........... 3,385 200,257(a) GlaxoSmithKline PLC ADR........ 8,295 462,861 Johnson & Johnson.............. 26,497 1,587,700 LIncare Holdings Inc........... 12,250 463,540(a,e) Medco Health Solutions, Inc.... 7,817 447,758(a) Medtronic Inc.................. 5,591 262,330 Novartis AG ADR................ 5,561 299,849 Pfizer Inc..................... 108,220 2,539,923 Quest Diagnostics Inc.......... 3,143 188,329 Thermo Electron Corp........... 2,176 78,858(a) UnitedHealth Group Incorporated 7,556 338,358 Wyeth.......................... 38,200 1,696,462 12,938,952 See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 6 U.S. EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE INDUSTRIALS -- 8.4% ABB Ltd. ADR................... 21,760 $ 282,010 Burlington Northern Santa Fe Corp. 2,908 230,459 Cooper Industries Ltd.......... 2,821 262,127 Corinthian Colleges, Inc....... 7,459 107,111(a,e) CSX Corp....................... 3,062 215,687 Deere & Co..................... 6,286 524,818 Dover Corp..................... 27,981 1,383,101(d) Eaton Corp..................... 12,584 948,834 General Dynamics Corp.......... 4,755 311,262 Honeywell International Inc.... 1,451 58,475 ITT Industries, Inc............ 2,579 127,661 Northrop Grumman Corp.......... 7,092 454,314 Rockwell Collins, Inc.......... 2,015 112,578 Southwest Airlines Co.......... 25,789 422,166 Textron Inc.................... 5,835 537,870 3M Co.......................... 1,612 130,201 Tyco International Ltd......... 25,762 708,455 United Technologies Corp....... 15,033 953,393 Waste Management, Inc.......... 5,883 211,082 7,981,604 INFORMATION TECHNOLOGY -- 16.9% Activision, Inc................ 9,671 110,056(a) Adobe Systems Incorporated..... 8,172 248,102(a) Analog Devices, Inc............ 29,351 943,341 Applied Materials, Inc......... 5,641 91,835(d) Automatic Data Processing, Inc. 11,086 502,750 Checkfree Corp................. 2,418 119,836(a) Cisco Systems, Inc............. 68,341 1,334,700(a) Dell, Inc...................... 11,283 275,418(a) eBay, Inc...................... 12,421 363,811(a) EMC Corporation................ 24,588 269,730(a) Fidelity National Information Services, Inc................ 4,513 159,760 First Data Corp................ 56,978 2,566,289 Hewlett-Packard Co............. 6,352 201,231 Intel Corp..................... 32,236 610,872 International Business Machines Corp................ 10,477 804,843 Intuit Inc..................... 8,865 535,357(a) Linear Technology Corp......... 6,915 231,583 Microchip Technology Inc....... 7,092 237,937 Microsoft Corp................. 122,909 2,863,780 Molex, Inc. (Class A).......... 25,467 731,667 Oracle Corp.................... 107,992 1,564,804(a) Sun Microsystems, Inc.......... 30,104 124,932(a) Texas Instruments Incorporated. 12,411 375,929 Xerox Corp..................... 11,283 156,947(a) Yahoo! Inc..................... 20,309 670,197(a) 16,095,707 MATERIALS -- 3.4% Air Products & Chemicals, Inc.. 6,286 401,801(e) Barrick Gold Corp.............. 21,051 623,110 Dow Chemical Co................ 4,674 182,426 NUMBER OF SHARES VALUE Freeport-McMoRan Copper & Gold Inc. (Class B).......... 10,362 $ 574,158 Monsanto Co.................... 13,599 1,144,900 Praxair, Inc................... 4,191 226,314 Weyerhaeuser Co................ 1,531 95,305(e) 3,248,014 TELECOMMUNICATION SERVICES -- 2.3% Alltel Corp.................... 11,031 704,109 Sprint Corporation............. 25,509 509,925 Verizon Communications Inc..... 17,327 580,281(d) Vodafone Group PLC ADR......... 20,830 443,679 2,237,994 UTILITIES -- 2.6% American Electric Power Company, Inc................. 4,835 165,599 Constellation Energy Group, Inc. 7,253 395,434 Dominion Resources, Inc........ 7,253 542,452 Duke Energy Corp............... 9,671 284,037 Entergy Corp................... 3,788 268,001 FirstEnergy Corp............... 2,418 131,080 PG&E Corp...................... 6,791 266,750(e) PPL Corp....................... 5,885 190,086 Southern Co.................... 6,317 202,460(e) 2,445,899 TOTAL COMMON STOCK (COST $84,038,433)........... 90,028,132 -------------------------------------------------------------------------------- EXCHANGE TRADED FUNDS -- 2.9% -------------------------------------------------------------------------------- Financial Select Sector SPDR Fund.................... 17,383 561,123(g) Industrial Select Sector SPDR Fund.................... 66,472 2,246,754(g) TOTAL EXCHANGE TRADED FUNDS (COST $2,251,453)............ 2,807,877 TOTAL INVESTMENTS IN SECURITIES (COST $86,289,886)........... 92,836,009 -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 7.4% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.3% GEI Short Term Investment Fund 6.93%........................ 4,087,911 4,087,911(b,f) See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 7 U.S. EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 3.1% State Street Navigator Securities Lending Prime Portfolio 5.25%........................ 2,941,221 $ 2,941,221(b,c) TOTAL SHORT-TERM INVESTMENTS (COST $7,029,132)............ 7,029,132 TOTAL INVESTMENTS (COST $93,319,018)........... 99,865,141 LIABILITIES IN EXCESS OF OTHER ASSETS, NET-- (5.0)%................. (4,777,322) ------------ NET ASSETS-- 100.0% ........... $95,087,819 =========== -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- The GEI U.S. Equity had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE DEPRECIATION -------------------------------------------------------------------------------- S&P 500 Index Futures September 2006 2 $641,250 $(1,545) See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 8 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (e) All or a portion of the security is out on loan. (f) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. (g) Sponsored by SSgA Funds Management, Inc., an affiliate of State Street Bank & Trust Co., the Fund's custodian and accounting agent. + Percentages are based on net assets as of June 30, 2006. Abbreviations: ADR American Depository Receipt SPDR Standard & Poors Depository Receipts TBA To Be Announced 9
Financial Highlights Selected data based on a share outstanding throughout the periods indicated ------------------------------------------------------------------------------------------------------------------------------------ U.S. EQUITY FUND 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 1/3/95 Net asset value, beginning of period......... $34.06 $33.61 $31.48 $25.75 $32.21 $35.56 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income..................... 0.20 0.39 0.44 0.26 0.24 0.23 Net realized and unrealized gains/(losses) on investments.......... 0.94 0.46 2.13 5.73 (6.45) (3.24) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS 1.14 0.85 2.57 5.99 (6.21) (3.01) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income..................... -- 0.40 0.44 0.26 0.25 0.22 Net realized gains........................ -- -- -- -- -- 0.12 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS.......................... -- 0.40 0.44 0.26 0.25 0.34 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD............... $35.20 $34.06 $33.61 $31.48 $25.75 $32.21 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A)............................. 3.35% 2.51% 8.17% 23.28% (19.26)% (8.47)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $95,088 $98,883 $112,545 $114,123 $102,112 $115,578 Ratios to average net assets: Net investment income*................. 1.14% 1.06% 1.30% 0.95% 0.87% 0.78% Expenses*.............................. 0.63% 0.63% 0.63% 0.61% 0.58% 0.58% Portfolio turnover rate................... 24% 40% 30% 39% 37% 48%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 10
Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ U.S. EQUITY FUND ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments in securities, at market* (cost $86,289,886)............................................... $ 92,836,009 Short-term Investments (at amortized cost) ............................................................ 2,941,221 Short-term affiliated investments (at amortized cost).................................................. 4,087,911 Receivable for investments sold........................................................................ 736,952 Income receivables .................................................................................... 112,447 Receivable for fund shares sold........................................................................ 1,746 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS....................................................................................... 100,716,286 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Payable upon return of securities loaned............................................................... 2,941,221 Payable for investments purchased ..................................................................... 2,594,325 Payable for fund shares redeemed....................................................................... 45,867 Payable to GEAM........................................................................................ 45,519 Variation margin payable............................................................................... 1,535 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES.................................................................................. 5,628,467 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS................................................................................................ $ 95,087,819 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Capital paid in ....................................................................................... 93,867,796 Undistributed (distribution in excess of) net investment income ....................................... 547,786 Accumulated net realized gain (loss)................................................................... (5,872,340) Net unrealized appreciation/(depreciation) on: Investments......................................................................................... 6,546,123 Futures............................................................................................. (1,545) Foreign currency related transactions............................................................... (1) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS................................................................................................ $ 95,087,819 ------------------------------------------------------------------------------------------------------------------------------------ Shares outstanding ($0.01 par value; unlimited shares authorized)......................................... 2,701,327 Net asset value per share................................................................................. $35.20
* Includes $2,882,992 of securities on loan See Notes to Financial Statements. 11
Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) ------------------------------------------------------------------------------------------------------------- U.S. EQUITY FUND ------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ....................................................................... $ 815,231 Interest* ...................................................................... 2,159 Interest from affliated investments ............................................ 35,162 Less: Foreign taxes withheld ................................................... (2,586) ------------------------------------------------------------------------------------------------------------- TOTAL INCOME ..................................................................... 849,966 ------------------------------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ............................................... 265,499 Custody and accounting expenses ................................................ 22,655 Professional fees .............................................................. 7,491 Trustee's fees ................................................................. 1,437 Registration expenses .......................................................... 361 Transfer agent ................................................................. 108 Other expenses ................................................................. 4,629 ------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES ................................................................... 302,180 ------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ..................................................... 547,786 ------------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................................. 4,903,379 Futures ..................................................................... 16,135 INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................................. (2,094,336) Futures ..................................................................... (22,270) ------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ......................... 2,802,908 ------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................. $3,350,694 -------------------------------------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $2,159. See Notes to Financial Statements. 12
Statements of Changes in Net Assets ------------------------------------------------------------------------------------------------------------------------------------ U.S. EQUITY FUND ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss)..................................................... $ 547,786 $ 1,112,245 Net realized gain (loss) on investments, futures, written options, foreign currency transactions and swaps......................................... 4,919,514 7,703,126 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options, foreign currency translation.......... (2,116,606) (6,433,765) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from operations........................................... 3,350,694 2,381,606 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................. -- (1,138,355) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS................................................................. -- (1,138,355) ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from operations and distributions................. 3,350,694 1,243,251 ------------------------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares...................................................... 3,674,543 2,289,141 Value of distributions reinvested................................................. -- 1,138,344 Cost of shares redeemed........................................................... (10,820,319) (18,333,312) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from share transactions................................... (7,145,776) (14,905,827) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS............................................. (3,795,082) (13,662,576) NET ASSETS Beginning of period................................................................. 98,882,901 112,545,477 ------------------------------------------------------------------------------------------------------------------------------------ End of period....................................................................... $95,087,819 $ 98,882,901 ------------------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD......... $ 547,786 $ -- ------------------------------------------------------------------------------------------------------------------------------------ CHANGES IN PORTFOLIO SHARES Shares sold....................................................................... 104,347 68,648 Issued for distributions reinvested............................................... -- 33,178 Shares redeemed................................................................... (306,283) (547,125) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in fund shares................................................. (201,936) (445,299) ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, (the "Fund") S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. 15 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Net Tax Cost of Gross Tax Gross Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ----------------------------------------------------------------------------------------------------------------- $96,740,321 $9,481,006 $(6,356,186) $3,124,820
As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires -------------------------------------------------------------------------------- $2,267,542 12/31/10 5,082,284 12/31/11 During the year ended December 31, 2005, the Fund utilized approximately $6,678,063 of capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund had no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Ordinary Long-Term Income Capital Gains Total -------------------------------------------------------------------------------- $1,138,355 $-- $1,138,355 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income 16 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .55%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $694 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each Fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales -------------------------------------------------------------------------------- $22,966,173 $30,932,144 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* -------------------------------------------------------------------------------- $2,882,992 $2,946,332 * COLLATERAL OF $2,941,221 INCREASED BY $5,111 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as 19 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 20 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 21 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 22 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 23 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J. Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 24 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at HTTP://WWW.GEFUNDS.COM; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at HTTP://WWW.GEFUNDS.COM; and (ii) on the Commission's website at HTTP://WWW.SEC.GOV. [GE LOGO OMITTED] GE Investments Funds, Inc. S&P 500 Index Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. S&P 500 Index Fund Contents ----------------------------------------------------------------------------- NOTES TO PERFORMANCE................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS............................. 2 NOTES TO SCHEDULE OF INVESTMENTS....................................... 12 FINANCIAL STATEMENTS Financial Highlights.............................................. 13 Statement of Assets and Liabilities............................... 14 Statement of Operations........................................... 15 Statements of Changes in Net Assets............................... 16 Notes to Financial Statements..................................... 17 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL.......................... 21 ADDITIONAL INFORMATION................................................. 24 INVESTMENT TEAM........................................................ 27 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Standard & Poor's ("S&P") 500 Composite Price Index of stocks (S&P 500) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The S&P 500 is a market capitalization-weighted index of stocks of 500 large U.S. companies, which is widely used as a measure of large-cap stock market performance. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. The S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation or warranty, express or implied, to the investors of the Fund or any member of the public regarding the advisability of investing in the securities generally or in this Fund particularly or the ability of the S&P 500 Index Fund to track general stock market performance. 1 S&P 500 Index Fund ----------------------------------------------------------------------------- SSGA FUNDS MANAGEMENT, INC. ("SSGA FM") IS THE SUB- ADVISER FOR THE S&P 500 INDEX FUND. SSGA IS ONE OF THE STATE STREET GLOBAL ADVISORS COMPANIES, WHICH CONSTITUTE THE INVESTMENT MANAGEMENT BUSINESS OF STATE STREET CORPORATION. STATE STREET GLOBAL ADVISORS HAS BEEN IN THE BUSINESS OF PROVIDING INVESTMENT ADVISORY SERVICES SINCE 1978. SSGA FM WAS FORMED IN MAY 2001 AS A RESULT OF A CHANGE IN FEDERAL LAW. THE FUND IS MANAGED BY A TEAM OF PORTFOLIO MANAGERS COMPOSED OF THE FOLLOWING MEMBERS: KARL SCHNEIDER AND MICHAEL FEEHILY. KARL SCHNEIDER, LEAD PORTFOLIO MANAGER FOR THE FUND, IS A PRINCIPAL OF STATE STREET GLOBAL ADVISORS, SSGA FM AND A PORTFOLIO MANAGER WITHIN THE GLOBAL STRUCTURED PRODUCTS GROUP. HE JOINED STATE STREET IN 1996 AND CURRENTLY MANAGES THE FIRM'S COMMINGLED WILSHIRE 5000, WILSHIRE 4500, AND RUSSELL 2000 FUNDS, AS WELL AS OTHER COMMINGLED AND SEPARATELY MANAGED DOMESTIC AND INTERNATIONAL FUNDS. PRIOR TO JOINING THE GLOBAL STRUCTURED PRODUCTS GROUP, KARL WORKED AS A PORTFOLIO MANAGER IN SSGA'S CURRENCY MANAGEMENT GROUP, MANAGING BOTH ACTIVE CURRENCY SELECTION AND TRADITIONAL PASSIVE HEDGING OVERLAY PORTFOLIOS. PRIOR TO THIS, HE WORKED AS AN ANALYST IN STATE STREET'S PROCESS ENGINEERING DIVISION WHERE HE BOTH ASSISTED AND LED A NUMBER OF INTERNAL CONSULTING ENGAGEMENTS AIMED AT IMPROVING OPERATIONAL EFFICIENCIES WITHIN THE CUSTODY BANK. MICHAEL FEEHILY, CFA, IS A PRINCIPAL OF STATE STREET GLOBAL ADVISORS, SSGA FM AND HEAD OF THE U.S. EQUITY TEAM WITHIN THE GLOBAL STRUCTURED PRODUCTS GROUP. MIKE IS RESPONSIBLE FOR OVERSEEING THE MANAGEMENT OF ALL U.S. EQUITY INDEX FUNDS FOR STATE STREET GLOBAL ADVISORS. HE ALSO SERVES AS PORTFOLIO MANAGER FOR SEVERAL MUTUAL FUNDS, IN ADDITION TO SEVERAL OTHER COMMINGLED AND SEPARATELY MANAGED PRODUCTS. MIKE JOINED SSGA IN 1997, INITIALLY WORKING IN THE PERFORMANCE AND ANALYTICS GROUP. PRECEDING THIS, HE WAS PART OF THE GLOBAL OPERATIONS DEPARTMENT OF STATE STREET CORPORATION WHERE HE HELPED TO DEVELOP PRIVATE EDGE, A PROPRIETARY APPLICATION USED TO ANALYZE VENTURE CAPITAL, REAL ESTATE, AND OTHER PRIVATE INVESTMENTS. MIKE HAS BEEN WORKING IN THE INVESTMENT MANAGEMENT FIELD SINCE 1992. Q. HOW DID THE S&P 500 INDEX PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the S&P 500 Index Fund returned 2.53%. The S&P 500 Index, the Fund's benchmark, returned 2.70% and the Fund's Lipper peer group of 55 of the S&P 500 Index Objective funds returned an average of 2.54% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. Although global equity markets began the year on a positive note and finished the second quarter with an appealing upturn, their fluctuations during May and June sorely tested investor nerve. A heady mix of hawkish wording from the Fed and troublesome inflation data brought steady equity selling in May, driving volatility measures to levels not seen since 2004. When the statement accompanying the June 29 Fed decision, which lifted short-term rates to 5.25%, appeared distinctly more dovish than a jittery consensus had feared, the first half of 2006 was able to end with a vigorous rally in both share prices and sentiment. Q. WHAT INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND IMPACTED PERFORMANCE? A. We are utilizing a full replication strategy to manage the GE Investments S&P 500 Fund. With this strategy, all 500 constituents of the S&P 500 Index are owned by the Fund in the approximate capitalization weight of the Index. Cash is generally held to less than 5% of the total portfolio value, and is equitized using S&P 500 Index futures contracts. This methodology has provided consistent tracking. Q. WHICH STOCKS/SECTORS HAVE YOU LIKED? A. By utilizing a passive, full replication investment style, the Fund owns the same stocks and sectors in approximately the same weights as the S&P 500 Index. As of June 30th, 2006, the four largest sectors in the S&P 500 Index were financials (21.4%), information technology (14.9%), health care (12.3%) and industrials (11.7%). 2 Q&A Q. WHY DID THE FUND UNDERPERFORM ITS BENCHMARK? A. The Fund slightly underperformed its benchmark due to the investment of Fund cash flows and Fund fees and expenses. Q. DID THE WEIGHTINGS/COUNTRY ALLOCATION OF THE FUND CHANGE? A. By utilizing a passive, full replication investment style, the Fund owns the same stocks and sectors in approximately the same weights as the S&P 500 Index. Q. WHICH STOCKS/SECTORS HAVE PERFORMED WELL? WHICH HAVE NOT PERFORMED WELL? A. The top five returning stocks for the last six months were Allegheny Technologies (92%), Archer Daniels Midland (68%), Nucor Corp (65%), Ciena Corp (61%), and Officemax Inc (61%). The bottom five returning stocks for the first half of 2006 were Dana Corp (-62%), KB Home (-36%), Goodyear Tire and Rubber (-36%), St Jude Medical (-35%), and Radio Shack Corp (-33%). The highest returning sectors for the last six months were energy (13%) and telecommunication services (12%) while the lowest returning sectors were information technology (-6%) and health care (-4%). Q. WHAT WERE THE MAJOR BUYS AND SELLS FOR THE PERIOD AND WHY? A. For the 2nd quarter of 2006, there were six index changes announced by Standard & Poors that impacted the Fund. The additions to the S&P 500 were SanDisk Corp (Apr 19), Legg Mason (Apr 21), Embarq Corp (May 17), Juniper Networks (Jun 1), Commerce Bancorp (Jun 5), and Consol Energy (June 27). The deletions for the quarter were Chiron Corp (Apr 19), Guidant Co (Apr 21), Applied Micro Circuits (May 17), Albertsons (Jun 1), Engelhard Corp (Jun 5), and Knight-Ridder (Jun 27). Not all the deletions were sold from the fund, however, as some companies were removed from the index as the result of a merger or acquisition. 3 S&P 500 Index Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ------------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,025.28 2.04 ------------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,022.55 2.01 -------------------------------------------------------------------------------------------------------------------------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.40% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). ** ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 2.53%. 4 S&P 500 Index Fund -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT [LINE CHART OMITTED, PLOT POINTS ARE AS FOLLOWS] S&P 500 INDEX S&P 500 INDEX 6/96 $10000.00 $10000.00 12/96 11338.39 11172.20 12/97 14776.95 14891.40 12/98 18950.19 19164.94 12/99 22856.06 23202.58 12/00 20701.66 21071.78 12/01 18162.38 18561.71 12/02 14100.05 14459.22 12/03 18086.61 18613.09 12/04 19978.71 20638.45 12/05 20879.11 21653.55 6/06 21407.01 22238.88 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- SIX ONE FIVE TEN MONTHS YEAR YEAR YEAR -------------------------------------------------------------------------------- S&P 500 Index Fund 2.53% 8.22% 2.13% 7.91% -------------------------------------------------------------------------------- S&P 500 Index 2.70% 8.63% 2.49% 8.32% -------------------------------------------------------------------------------- Lipper peer group average* 2.54% 8.25% 2.10% 8.00% -------------------------------------------------------------------------------- Inception date 4/15/85 -------------------------------------------------------------------------------- S&P 500 Index Fund (ending value $21,407) S&P 500 Index (ending value $22,239) INVESTMENT PROFILE A fund designed for investors who seek growth of capital and accumulation of income that corresponds to the investment return of the Standard & Poor's 500 Composite Stock Index by investing at least 80% of its net assets in equity securities of companies contained in that Index. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Exxon Mobil Corp. 3.18% -------------------------------------------------------------------------------- General Electric Co. 2.93% -------------------------------------------------------------------------------- Citigroup, Inc. 2.05% -------------------------------------------------------------------------------- Bank of America Corp. 1.88% -------------------------------------------------------------------------------- Microsoft Corp. 1.75% -------------------------------------------------------------------------------- Procter & Gamble Co. 1.56% -------------------------------------------------------------------------------- Johnson & Johnson 1.52% -------------------------------------------------------------------------------- Pfizer Inc. 1.48% -------------------------------------------------------------------------------- American International Group, Inc. 1.32% -------------------------------------------------------------------------------- Altria Group, Inc. 1.32% -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value Market Value of $491,240 (in thousands) [PIE CHART OMITTED, PLOT POINTS ARE AS FOLLOWS] Financials 21.1% Information Technology 14.6% Healthcare 12.1% Industrials 11.5% Consumer Discretionary 10.0% Energy 10.0% Consumer Staples 9.5% Utilities 3.4% Telecommunication Services 3.3% Materials 3.0% Short-Term 1.5% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR, FIVE-YEAR, AND TEN-YEAR PERIODS INDICATED IN THE S&P 500 INDEX OBJECTIVE FUNDS PEER GROUP CONSISTING OF 55, 54, 46 AND 18 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. ** GENERAL ELECTRIC CO. IS THE PARENT COMPANY OF GE ASSET MANAGEMENT INCORPORATED, THE FUND'S INVESTMENT ADVISER. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- S&P 500 INDEX FUND -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCK -- 98.5%+ CONSUMER DISCRETIONARY -- 10.0% Amazon.Com, Inc................ 13,000 $ 502,840(a) Apollo Group, Inc. (Class A)... 6,000 310,020(a) Autonation, Inc................ 5,772 123,752(a) Autozone, Inc.................. 2,244 197,921(a) Bed Bath & Beyond, Inc......... 12,200 404,674(a) Best Buy Company, Inc.......... 17,200 943,248 Big Lots, Inc.................. 4,400 75,152(a) Black & Decker Corp............ 3,107 262,417 Brunswick Corp................. 4,068 135,261 Carnival Corp.................. 18,400 768,016 CBS Corp....................... 32,513 879,477 Centex Corp.................... 5,220 262,566 Circuit City Stores, Inc....... 6,126 166,750 Clear Channel Communications, Inc. ...................... 21,700 671,615 a) Coach, Inc..................... 15,800 472,420(a) Comcast Corp. (Class A)........ 88,839 2,908,589(a) Cooper Tire & Rubber Co........ 2,923 32,562 D.R. Horton, Inc............... 11,100 264,402 Darden Restaurants, Inc........ 5,329 209,963 Dillard's, Inc. (Class A)...... 2,295 73,096 Dollar General Corp............ 13,191 184,410 Dow Jones & Company, Inc....... 2,442 85,494 Eastman Kodak Co............... 11,875 282,387 Family Dollar Stores, Inc...... 6,200 151,466 Federated Department Stores Inc. ....................... 22,630 828,258 Ford Motor Co.................. 76,699 531,524 Fortune Brands, Inc............ 6,141 436,072 Gannett Company, Inc........... 9,908 554,154 General Motors Corp............ 23,747 707,423 Genuine Parts Co............... 7,496 312,283 Goodyear Tire & Rubber Co...... 6,419 71,251(a) H&R Block, Inc................. 13,508 322,301 Harley-Davidson, Inc........... 11,600 636,724 Harman International Industries Inc.............. 2,800 239,036 Harrah's Entertainment, Inc.... 7,835 557,695 Hasbro, Inc.................... 7,896 142,997 Hilton Hotels Corp............. 13,588 384,269 International Game Technology.. 14,600 553,924 Interpublic Group of Companies, Inc.............. 16,830 140,530(a) J.C. Penney Company, Inc....... 9,787 660,720 Johnson Controls, Inc.......... 8,282 680,946 Jones Apparel Group, Inc....... 5,000 158,950 KB Home........................ 3,460 158,641 Kohl's Corp.................... 14,500 857,240(a) Leggett & Platt Incorporated... 8,000 199,840 Lennar Corp. (Class A)......... 5,900 261,783 Limited Brands................. 15,088 386,102 Liz Claiborne Inc.............. 4,430 164,176 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- Lowe's Companies, Inc.......... 32,728 $ 1,985,608 Marriott International Inc. (Class A) .................. 13,844 527,733 Mattel, Inc.................... 16,251 268,304 McDonald's Corp................ 52,234 1,755,062 McGraw-Hill Companies Inc...... 14,840 745,413 Meredith Corp.................. 1,998 98,981 New York Times Co. (Class A)... 6,088 149,400 Newell Rubbermaid Inc.......... 11,356 293,325 News Corp. (Class A)........... 99,100 1,900,738 Nike Inc. (Class B)............ 8,104 656,424 Nordstrom, Inc................. 8,984 327,916 Office Depot, Inc.............. 11,800 448,400(a) OfficeMax, Inc................. 3,023 123,187 Omnicom Group, Inc............. 7,100 632,539 Pulte Homes, Inc............... 8,988 258,765 RadioShack Corp................ 5,956 83,384 Sears Holdings Corp............ 4,019 622,302(a) Sherwin-Williams Co............ 4,663 221,399 Snap-On Incorporated........... 2,409 97,372 Stanley Works.................. 3,026 142,888 Staples, Inc................... 30,450 740,544 Starbucks Corp................. 32,500 1,227,200(a) Starwood Hotels & Resorts Worldwide, Inc.............. 9,300 561,162 Target Corp.................... 36,552 1,786,296 The E.W. Scripps Co. (Class A). 3,300 142,362 The Gap, Inc................... 22,518 391,813 The Home Depot, Inc............ 86,718 3,103,637 The Walt Disney Co............. 92,037 2,761,110 Tiffany & Co................... 6,400 211,328 Time Warner, Inc............... 179,714 3,109,052(d) TJX Companies, Inc............. 19,280 440,741 Tribune Co..................... 10,818 350,828 Univision Communications Inc. (Class A)................... 9,300 311,550(a) VF Corp........................ 3,702 251,440 Viacom Inc. (Class B).......... 30,113 1,079,250(a) Wendy's International, Inc..... 4,731 275,770 Whirlpool Corp................. 3,443 284,564 Yum! Brands, Inc............... 11,422 574,184 49,257,308 CONSUMER STAPLES -- 9.5% Alberto-Culver Co.............. 3,399 165,599(a) Altria Group, Inc.............. 88,079 6,467,641 Anheuser-Busch Companies, Inc.. 32,308 1,472,922(d) Archer-Daniels-Midland Co...... 27,486 1,134,622 Avon Products, Inc............. 19,028 589,868 Brown-Forman Corp. (Class B)... 3,458 247,074 Campbell Soup Co............... 7,976 295,989 Clorox Co...................... 6,384 389,232 Coca-Cola Enterprises, Inc..... 13,100 266,847 Colgate-Palmolive Co........... 21,672 1,298,153 ConAgra Foods, Inc............. 21,868 483,501 Constellation Brands, Inc. (Class A) .................. 8,000 200,000(a) Costco Wholesale Corp.......... 19,866 1,134,945 CVS Corp....................... 34,712 1,065,658 Dean Foods Co.................. 6,000 223,140(a) See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 6 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- General Mills, Inc............. 15,222 $ 786,369 HJ Heinz Co.................... 14,297 589,322 Kellogg Co..................... 10,490 508,031 Kimberly-Clark Corp............ 19,336 1,193,031 Kroger Co...................... 30,930 676,130 McCormick & Company, Inc....... 5,400 181,170 Molson Coors Brewing Co. (Class B) 2,265 153,748 Pepsi Bottling Group, Inc...... 5,400 173,610 PepsiCo, Inc................... 69,674 4,183,227 Procter & Gamble Co............ 137,945 7,669,742 Reynolds American Inc.......... 3,700 426,610 Safeway Inc.................... 18,800 488,800 Sara Lee Corp.................. 32,857 526,369 Supervalu Inc.................. 8,214 252,167 Sysco Corp..................... 26,544 811,185 The Coca-Cola Co............... 86,251 3,710,518(d) The Estee Lauder Companies Inc. (Class A)................... 4,900 189,483 The Hershey Co................. 7,384 406,637 Tyson Foods, Inc. (Class A).... 10,300 153,058 UST Inc........................ 6,679 301,824 Walgreen Co.................... 42,300 1,896,732 Wal-Mart Stores, Inc........... 105,424 5,078,274 Whole Foods Market, Inc........ 5,900 381,376 WM Wrigley Jr. Co.............. 9,585 434,776 46,607,380 ENERGY -- 10.0% Anadarko Petroleum Corp........ 19,656 937,395 Apache Corp.................... 13,748 938,301 Baker Hughes Incorporated...... 14,450 1,182,732 BJ Services Co................. 13,800 514,188 Chesapeake Energy Corp......... 15,400 465,850 Chevron Corporation............ 93,369 5,794,480 ConocoPhillips................. 69,388 4,546,996 Consol Energy, Inc............. 7,700 359,744 Devon Energy Corp.............. 18,492 1,117,102 El Paso Corp................... 27,282 409,230 EOG Resources, Inc............. 10,400 721,136 Exxon Mobil Corp............... 254,524 15,615,047(d) Halliburton Co................. 21,960 1,629,652 Hess Corp...................... 9,870 521,629(d) Kerr-McGee Corp................ 9,396 651,613 Kinder Morgan, Inc............. 4,400 439,516 Marathon Oil Corp.............. 15,121 1,259,579 Murphy Oil Corp................ 6,800 379,848 Nabors Industries Ltd.......... 13,400 452,786(a) National Oilwell Varco, Inc.... 7,600 481,232(a) Noble Corp..................... 5,800 431,636 Occidental Petroleum Corp...... 17,910 1,836,670 Rowan Companies, Inc........... 4,477 159,336 Schlumberger Ltd............... 49,508 3,223,466 Sunoco, Inc.................... 5,476 379,432 The Williams Companies, Inc.... 25,186 588,345 Transocean Inc................. 13,866 1,113,717(a) Valero Energy Corp............. 25,800 1,716,216 Weatherford International Ltd.. 14,800 734,376(a) XTO Energy, Inc................ 15,133 669,938 49,271,188 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- FINANCIALS -- 21.1% ACE Ltd........................ 13,600 $ 688,024 AFLAC Incorporated............. 21,000 973,350 Allstate Corp.................. 26,976 1,476,396(d) AMBAC Financial Group, Inc..... 4,500 364,950 American Express Co............ 52,122 2,773,933(d) American International Group, Inc. 109,609 6,472,411(d) Ameriprise Financial, Inc...... 10,104 451,346 AmSouth Bancorp................ 15,050 398,072 AON Corp....................... 13,536 471,324 Apartment Investment & Management Co. (Class A) (REIT) 4,300 186,835 Archstone-Smith Trust (REIT)... 8,800 447,656 Bank of America Corp........... 192,421 9,255,450 BB&T Corp...................... 22,400 931,616 Boston Properties, Inc. (REIT). 3,900 352,560 Capital One Financial Corp..... 12,600 1,076,670 Charles Schwab Corp............ 43,111 688,914 Chubb Corp..................... 16,894 843,011 Cincinnati Financial Corp...... 7,592 356,900 CIT Group, Inc................. 8,300 434,007 Citigroup, Inc................. 209,076 10,085,826(d) Comerica Incorporated.......... 6,856 356,443 Commerce Bancorp Inc........... 7,800 278,226 Compass Bancshares, Inc........ 5,100 283,560 Countrywide Financial Corp..... 25,598 974,772 E*Trade Financial Corp......... 17,400 397,068(a) Equity Office Properties Trust (REIT)................ 15,800 576,858 Equity Residential (REIT)...... 12,300 550,179 Federal Home Loan Mortgage Corp............... 29,365 1,674,099 Federal National Mortgage Assoc. ..................... 40,676 1,956,516 Federated Investors Inc. (Class B) .................. 3,600 113,400 Fifth Third Bancorp............ 23,116 854,136 First Horizon National Corp.... 5,000 201,000 Franklin Resources, Inc........ 6,500 564,265 Genworth Financial, Inc. (Class A) .................. 15,100 526,084 Golden West Financial Corp..... 10,930 811,006 Goldman Sachs Group, Inc....... 18,100 2,722,783 Huntington Bancshares Incorporated................ 9,934 234,244 Janus Capital Group, Inc....... 9,300 166,470 JPMorgan Chase & Co............ 145,976 6,130,992(d) Keycorp........................ 16,928 603,991 Kimco Realty Corp. (REIT)...... 8,800 321,112 Legg Mason, Inc................ 5,600 557,312 Lehman Brothers Holdings, Inc.. 22,800 1,485,420 Lincoln National Corp.......... 12,242 690,938 Loews Corp..................... 17,196 609,598 M&T Bank Corp.................. 3,400 400,928 Marsh & McLennan Companies, Inc.............. 23,308 626,752 Marshall & Ilsley Corp......... 9,300 425,382 MBIA Inc....................... 5,535 324,074 Mellon Financial Corp.......... 17,328 596,603 Merrill Lynch & Company, Inc... 38,634 2,687,381 Metlife, Inc................... 32,200 1,648,962 See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 7 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- MGIC Investment Corp........... 3,559 $ 231,335 Moody's Corp................... 10,384 565,513 Morgan Stanley................. 45,096 2,850,518 National City Corp............. 22,564 816,591 North Fork Bancorporation, Inc. ....................... 19,300 582,281 Northern Trust Corp............ 7,900 436,870 Plum Creek Timber Company, Inc (REIT)......... 7,600 269,800 Principal Financial Group...... 11,900 662,235 Progressive Corp............... 32,600 838,146 Prologis (REIT)................ 10,400 542,048 Prudential Financial, Inc...... 20,600 1,600,620 Public Storage, Inc. (REIT).... 3,600 273,240 Regions Financial Corp......... 18,982 628,684 Safeco Corp.................... 4,981 280,679 Simon Property Group, Inc. (REIT) 7,800 646,932 SLM Corp....................... 17,400 920,808 Sovereign Bancorp, Inc......... 15,750 319,883 State Street Corp.............. 13,800 801,642(c) SunTrust Banks, Inc............ 15,429 1,176,616 Synovus Financial Corp......... 13,550 362,869 T Rowe Price Group, Inc........ 11,400 431,034 The Bank of New York Company, Inc................ 32,410 1,043,602(d) The Bear Stearns Companies, Inc. ....................... 5,069 710,066 The Hartford Financial Services Group, Inc......... 12,604 1,066,298 The PNC Financial Services Group, Inc.................. 12,508 877,686 The St. Paul Travelers Companies, Inc.............. 29,099 1,297,233 Torchmark Corp................. 4,300 261,096 UnumProvident Corp............. 12,789 231,865 US Bancorp..................... 74,799 2,309,793 Vornado Realty Trust (REIT).... 5,000 487,750 Wachovia Corp.................. 67,711 3,661,811 Washington Mutual Inc.......... 40,681 1,854,240 Wells Fargo & Co............... 70,618 4,737,055 XL Capital Ltd................. 7,300 447,490 Zions Bancorporation........... 4,400 342,936 103,647,070 HEALTHCARE -- 12.1% Abbott Laboratories............ 64,596 2,817,032(d) Aetna, Inc..................... 24,008 958,639 Allergan, Inc.................. 6,452 692,042 AmerisourceBergen Corp......... 9,142 383,233 Amgen, Inc..................... 49,448 3,225,493(a,d) Applera Corp. - Applied Biosystems Group............ 8,200 265,270 Barr Pharmaceuticals, Inc...... 4,400 209,836(a) Bausch & Lomb Inc.............. 2,228 109,261 Baxter International, Inc...... 27,348 1,005,312 Becton Dickinson & Co.......... 10,670 652,257 Biogen Idec, Inc............... 14,400 667,152(a) Biomet, Inc.................... 10,415 325,885 Boston Scientific Corp......... 51,478 866,890(a) Bristol-Myers Squibb Co........ 82,108 2,123,313(d) NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- C.R. Bard, Inc................. 4,302 $ 315,165 Cardinal Health, Inc........... 17,701 1,138,705 Caremark Rx, Inc............... 18,470 921,099 Cigna Corp..................... 4,963 488,905 Coventry Health Care, Inc...... 6,800 373,592(a) Eli Lilly & Co................. 47,716 2,637,263 Express Scripts, Inc........... 6,200 444,788(a) Fisher Scientific International Inc ........................ 5,400 394,470(a) Forest Laboratories, Inc....... 14,100 545,529(a) Genzyme Corp................... 11,100 677,655(a) Gilead Sciences, Inc........... 19,400 1,147,704(a) HCA Inc........................ 17,200 742,180 Health Management Associates Inc. (Class A)... 10,600 208,926 Hospira, Inc................... 6,939 297,961(a) Humana Inc..................... 7,127 382,720(a) IMS Health Inc................. 8,757 235,125 Johnson & Johnson.............. 124,793 7,477,597 King Pharmaceuticals, Inc...... 10,333 175,661(a) Laboratory Corporation of America Holdings............ 5,200 323,596(a) Manor Care, Inc................ 3,037 142,496 McKesson Corp.................. 13,061 617,524 Medco Health Solutions, Inc.... 12,783 732,210(a) Medimmune, Inc................. 10,800 292,680(a) Medtronic Inc.................. 51,032 2,394,421 Merck & Company, Inc........... 92,150 3,357,025 Millipore Corp................. 2,245 141,413(a) Mylan Laboratories Inc......... 9,300 186,000 Patterson Companies, Inc....... 6,200 216,566(a) PerkinElmer, Inc............... 5,410 113,069 Pfizer Inc..................... 308,877 7,249,343 Quest Diagnostics Inc.......... 6,800 407,456 Schering-Plough Corp........... 62,958 1,198,091(d) St. Jude Medical, Inc.......... 15,092 489,283(a) Stryker Corp................... 12,200 513,742 Tenet Healthcare Corp.......... 19,295 134,679(a) Thermo Electron Corp........... 6,928 251,071(a) UnitedHealth Group Incorporated 56,976 2,551,385 Waters Corp.................... 4,700 208,680(a) Watson Pharmaceuticals, Inc.... 4,400 102,432(a) WellPoint, Inc................. 27,000 1,964,790(a) Wyeth.......................... 56,854 2,524,886(d) Zimmer Holdings, Inc........... 10,300 584,216(a) 59,603,714 INDUSTRIALS -- 11.5% Allied Waste Industries, Inc... 9,000 102,240(a) American Power Conversion Corp............. 7,000 136,430 American Standard Companies, Inc.............. 7,800 337,506 Avery Dennison Corp............ 4,655 270,269 Boeing Co...................... 33,616 2,753,487(d) Burlington Northern Santa Fe Corp............... 15,249 1,208,483 Caterpillar, Inc............... 28,132 2,095,271 Cendant Corp................... 42,446 691,445(d) See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 8 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- Cintas Corp.................... 5,600 $ 222,656 Cooper Industries Ltd.......... 3,771 350,401 CSX Corp....................... 9,138 643,681 Cummins, Inc................... 1,989 243,155 Danaher Corp................... 10,100 649,632 Deere & Co..................... 9,720 811,523 Dover Corp..................... 8,358 413,136 Eaton Corp..................... 6,400 482,560 Emerson Electric Co............ 17,474 1,464,496 Equifax, Inc................... 5,800 199,172 FedEx Corp..................... 12,760 1,491,134 Fluor Corp..................... 3,652 339,380 General Dynamics Corp.......... 17,064 1,117,009 General Electric Co............ 437,395 14,416,539(f) Goodrich Corp.................. 5,101 205,519 Honeywell International Inc.... 35,216 1,419,205 Illinois Tool Works Inc........ 17,394 826,215 Ingersoll-Rand Company Ltd. (Class A)................... 13,998 598,834 ITT Industries, Inc............ 7,826 387,387 L-3 Communications Holdings, Inc............... 5,300 399,726 Lockheed Martin Corp........... 14,752 1,058,308 Masco Corp..................... 16,390 485,800 Monster Worldwide, Inc......... 5,300 226,098(a) Navistar International Corp.... 2,795 68,785(a) Norfolk Southern Corp.......... 17,301 920,759 Northrop Grumman Corp.......... 14,322 917,467 Paccar Inc..................... 7,210 593,960 Pall Corp...................... 4,978 139,384 Parker Hannifin Corp........... 5,015 389,164 Pitney Bowes Inc............... 9,132 377,152 Raytheon Co.................... 18,824 838,986 Robert Half International Inc.. 7,400 310,800 Rockwell Automation, Inc....... 7,468 537,771 Rockwell Collins, Inc.......... 7,168 400,476 RR Donnelley & Sons Co......... 9,552 305,186 Ryder System, Inc.............. 2,431 142,043 Southwest Airlines Co.......... 30,649 501,724 Textron Inc.................... 5,468 504,040 3M Co.......................... 31,880 2,574,948 Tyco International Ltd......... 85,139 2,341,323 Union Pacific Corp............. 11,154 1,036,876 United Parcel Service Inc. (Class B) 45,500 3,746,015 United Technologies Corp....... 42,772 2,712,600 W.W. Grainger, Inc............. 3,082 231,859 Waste Management, Inc.......... 22,912 822,083 56,460,098 INFORMATION TECHNOLOGY -- 14.6% ADC Telecommunications, Inc.... 5,057 85,261(a) Adobe Systems Incorporated..... 25,584 776,730(a,d) Advanced Micro Devices, Inc.... 20,574 502,417(a,d) Affiliated Computer Services, Inc. Class A)............... 5,000 258,050(a) Agilent Technologies, Inc...... 18,385 580,231(a) Altera Corp.................... 14,900 261,495(a) NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- Analog Devices, Inc............ 15,600 $ 501,384 Andrew Corp.................... 6,356 56,314(a) Apple Computer, Inc............ 35,740 2,041,469(a) Applied Materials, Inc......... 65,300 1,063,084(d) Autodesk, Inc.................. 9,948 342,808(a) Automatic Data Processing, Inc. 24,518 1,111,891 Avaya, Inc..................... 16,801 191,867(a) BMC Software, Inc.............. 9,500 227,050(a) Broadcom Corp. (Class A)....... 18,650 560,433(a) CA, Inc........................ 19,281 396,225 Ciena Corp..................... 22,700 109,187(a) Cisco Systems, Inc............. 256,504 5,009,523(a,d) Citrix Systems, Inc............ 7,500 301,050(a) Computer Sciences Corp......... 8,082 391,492(a) Compuware Corp................. 17,100 114,570(a) Comverse Technology, Inc....... 8,500 168,045(a) Convergys Corp................. 5,900 115,050(a) Corning Incorporated........... 65,639 1,587,807(a) Dell, Inc...................... 96,248 2,349,414(a,d) eBay, Inc...................... 49,000 1,435,210(a) Electronic Arts, Inc........... 13,000 559,520(a) Electronic Data Systems Corp... 21,100 507,666 EMC Corporation................ 98,714 1,082,893(a) First Data Corp................ 32,460 1,461,998 Fiserv, Inc.................... 7,150 324,324(a) Freescale Semiconductor Inc. (Class B)................... 17,119 503,299(a) Gateway, Inc................... 11,200 21,280(a) Google, Inc. (Class A)......... 8,658 3,630,559(a) Hewlett-Packard Co............. 117,165 3,711,787 Intel Corp..................... 244,908 4,641,007 International Business Machines Corp............... 65,330 5,018,651 Intuit Inc..................... 7,300 440,847(a) Jabil Circuit, Inc............. 7,100 181,760 JDS Uniphase Corp.............. 70,000 177,100(a) Juniper Networks, Inc.......... 23,900 382,161(a) Kla-Tencor Corp................ 8,500 353,345 Lexmark International Inc. (Class A)................... 4,400 245,652(a) Linear Technology Corp......... 12,500 418,625 LSI Logic Corp................. 15,992 143,128(a) Lucent Technologies Inc........ 193,218 467,588(a,d) Maxim Integrated Products, Inc. 13,600 436,696 Micron Technology, Inc......... 30,754 463,155(a) Microsoft Corp................. 369,812 8,616,620(d) Molex, Inc..................... 5,850 196,385 Motorola, Inc.................. 103,650 2,088,548 National Semiconductor Corp.... 14,266 340,244 NCR Corp....................... 8,000 293,120(a) Network Appliance, Inc......... 15,700 554,210(a) Novell, Inc.................... 12,866 85,302(a) Novellus Systems, Inc.......... 5,100 125,970(a) Nvidia Corp.................... 14,600 310,834(a) Oracle Corp.................... 164,952 2,390,154(a) Parametric Technology Corp..... 4,202 53,407(a) Paychex, Inc................... 13,925 542,797 PMC - Sierra, Inc.............. 7,100 66,740(a) See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 9 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- QLogic Corp.................... 6,800 $ 117,232(a) QUALCOMM, Inc.................. 70,300 2,816,921 Sabre Holdings Corp. (Class A). 5,508 121,176 SanDisk Corp................... 8,000 407,840(a) Sanmina-SCI Corp............... 20,300 93,380(a) Solectron Corp................. 37,700 128,934(a) Sun Microsystems, Inc.......... 145,360 603,244(a) Symantec Corp.................. 43,845 681,351(a) Symbol Technologies, Inc....... 10,250 110,598 Tektronix, Inc................. 3,476 102,264 Tellabs, Inc................... 19,452 258,906(a) Teradyne, Inc.................. 8,000 111,440(a) Texas Instruments Incorporated. 66,036 2,000,230 Unisys Corp.................... 13,509 84,837(a) VeriSign Inc................... 10,400 240,968(a) Xerox Corp..................... 38,490 535,396(a) Xilinx, Inc.................... 14,700 332,955 Yahoo! Inc..................... 52,500 1,732,500(a) 71,855,601 MATERIALS -- 3.0% Air Products & Chemicals, Inc.. 9,532 609,285(d) Alcoa, Inc..................... 36,640 1,185,670(d) Allegheny Technologies Incorporated................ 3,851 266,643 Ashland, Inc................... 2,907 193,897 Ball Corp...................... 4,316 159,865 Bemis Co....................... 4,162 127,440 Dow Chemical Co................ 40,194 1,568,772 E.I. du Pont de Nemours and Co ......................... 39,113 1,627,101 Eastman Chemical Co............ 3,659 197,586 Ecolab Inc..................... 8,052 326,750 Freeport-McMoRan Copper & Gold Inc. (Class B)......... 7,784 431,311 Hercules Incorporated.......... 4,228 64,519(a) International Flavors & Fragrances Inc.............. 3,147 110,900 International Paper Co......... 20,575 664,573 Louisiana-Pacific Corp......... 4,422 96,842 MeadWestvaco Corp.............. 7,900 220,647 Monsanto Co.................... 11,358 956,230 Newmont Mining Corp............ 19,028 1,007,152 Nucor Corp..................... 13,236 718,053 Pactiv Corp.................... 5,548 137,313(a) Phelps Dodge Corp.............. 8,720 716,435 PPG Industries, Inc............ 7,037 464,442 Praxair, Inc................... 13,370 721,980 Rohm & Haas Co................. 5,914 296,410 Sealed Air Corp................ 3,557 185,249 Sigma-Aldrich Corp............. 2,691 195,474 Temple-Inland Inc.............. 4,552 195,144 United States Steel Corp....... 4,565 320,098 Vulcan Materials Co............ 4,200 327,600 Weyerhaeuser Co................ 10,360 644,910 14,738,291 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- TELECOMMUNICATION SERVICES -- 3.3% Alltel Corp.................... 16,194 $ 1,033,663 AT&T, Inc...................... 163,229 4,552,457 BellSouth Corp................. 75,998 2,751,128(d) CenturyTel, Inc................ 4,750 176,463 Citizens Communications Co..... 14,100 184,005 Embarq Corp.................... 6,370 261,106(a) Qwest Communications International Inc........... 65,548 530,283(a) Sprint Corporation............. 124,600 2,490,754 Verizon Communications Inc..... 122,786 4,112,103 16,091,962 UTILITIES -- 3.4% AES Corp....................... 27,500 507,375(a) Allegheny Energy, Inc.......... 6,600 244,662(a) Ameren Corp.................... 8,542 431,371 American Electric Power Company, Inc................ 16,725 572,831(d) Centerpoint Energy, Inc........ 13,818 172,725 CMS Energy Corp................ 8,600 111,284(a) Consolidated Edison, Inc....... 10,207 453,599 Constellation Energy Group, Inc. 7,503 409,064 Dominion Resources, Inc........ 14,718 1,100,759 DTE Energy Co.................. 7,766 316,387 Duke Energy Corp............... 52,554 1,543,511 Dynegy Inc. (Class A).......... 15,500 84,785(a) Edison International........... 13,542 528,138 Entergy Corp................... 8,847 625,925 Exelon Corp.................... 28,026 1,592,718 FirstEnergy Corp............... 13,920 754,603 FPL Group, Inc................. 17,362 718,440 KeySpan Corp................... 7,200 290,880 Nicor Inc...................... 2,043 84,785 NiSource Inc................... 11,615 253,672 Peoples Energy Corp............ 1,921 68,983 PG&E Corp...................... 14,254 559,897 Pinnacle West Capital Corp..... 4,000 159,640 PPL Corp....................... 16,044 518,221 Progress Energy, Inc........... 10,356 443,962 Public Service Enterprise Group Incorporated.......... 10,759 711,385 Sempra Energy.................. 11,175 508,239 Southern Co.................... 31,358 1,005,024 TECO Energy, Inc............... 8,600 128,484 TXU Corp....................... 19,672 1,176,189 Xcel Energy Inc................ 17,180 329,512 16,407,050 TOTAL INVESTMENTS IN SECURITIES (COST $472,079,740).......... 483,939,662 See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 10 S&P 500 INDEX FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.5% SHORT-TERM INVESTMENTS -- 1.2% GEI Short Term Investment Fund 6.93%........................ 5,813,592 $ 5,813,592(b,e) Money Market Obligations Trust 5.00%........................ 426 426(g) 5,814,018 PRINCIPAL AMOUNT ------------------------------------------- U.S. GOVERNMENT -- 0.3% U.S. Treasury Bills 4.70% 09/07/06............ $1,500,000 1,486,683 TOTAL SHORT-TERM INVESTMENTS (COST $7,300,701)............ 7,300,701 TOTAL INVESTMENTS (COST $479,380,441).......... 491,240,363 OTHER ASSETS AND LIABILITIES, NET -- 0.0%*................ 230,218 ------------ NET ASSETS -- 100.0% .......... $491,470,581 ============ -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- The GEI S&P 500 Index had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE APPRECIATION -------------------------------------------------------------------------------- S&P Mini 500 Index Futures September 2006 133 $8,508,010 $118,969 See Notes to Schedule of Investments on page 12 and Notes to Financial Statements. 11 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (e) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. (f) General Electric Co. is the parent company of GE Asset Management Incorporated, the Fund's investment adviser. (g) Managed by SSgA Funds Management, Inc., the Fund's sub-adviser. + Percentages are based on net assets as of June 30, 2006. * Less than 0.1% Abbreviations: REIT Real Estate Investment Trust TBA To Be Announced 12
Financial Highlights Selected data based on a share outstanding throughout the periods indicated ------------------------------------------------------------------------------------------------------------------------------------ S&P 500 INDEX FUND 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 4/15/85 Net asset value, beginning of period ........... $22.94 $22.30 $20.51 $16.18 $21.19 $24.71 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income ....................... 0.19 0.36 0.36 0.24 0.24 0.22 Net realized and unrealized gains/(losses) on investments ............ 0.39 0.65 1.79 4.33 (4.98) (3.25) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS . 0.58 1.01 2.15 4.57 (4.74) (3.03) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income ....................... -- 0.37 0.36 0.24 0.24 0.22 Net realized gains .......................... -- -- -- -- 0.03 0.27 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ............................ -- 0.37 0.36 0.24 0.27 0.49 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD ................. $23.52 $22.94 $22.30 $20.51 $16.18 $21.19 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A) ............................... 2.53% 4.51% 10.46% 28.27% (22.37)% (12.27)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) .... $491,471 $531,015 $601,008 $597,185 $449,173 $650,169 Ratios to average net assets: Net investment income* ................... 1.53% 1.47% 1.62% 1.41% 1.20% 0.99% Expenses* ................................ 0.40% 0.40% 0.40% 0.37% 0.40% 0.39% Portfolio turnover rate ..................... 3% 4% 5% 5% 11% 7%
NOTES TO FINANCIAL HIGHLIGHTS (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 13
Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ S&P 500 INDEX FUND ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments in securities, at market (cost $454,608,709)............................................... $469,523,123 Investments in affiliated securities, at market (cost $17,471,031)..................................... 14,416,539 Short-term Investments (at amortized cost) ............................................................ 1,487,109 Short-term affiliated investments (at amortized cost).................................................. 5,813,592 Income receivables .................................................................................... 576,269 Receivable for fund shares sold........................................................................ 31,352 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS....................................................................................... 491,847,984 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Payable for fund shares redeemed....................................................................... 198,053 Payable to GEAM........................................................................................ 158,070 Variation margin payable............................................................................... 21,280 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES.................................................................................. 377,403 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS................................................................................................ $491,470,581 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Capital paid in ....................................................................................... 486,774,393 Undistributed (distribution in excess of) net investment income ....................................... 3,949,261 Accumulated net realized gain (loss)................................................................... (11,231,964) Net unrealized appreciation/(depreciation) on: Investments......................................................................................... 11,859,922 Futures............................................................................................. 118,969 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS................................................................................................ $491,470,581 ------------------------------------------------------------------------------------------------------------------------------------ Shares outstanding ($0.01 par value; unlimited shares authorized)......................................... 20,895,464 Net asset value per share................................................................................. $23.52
See Notes to Financial Statements. 14
Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) ------------------------------------------------------------------------------------------------------------ S&P 500 INDEX FUND ------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME INCOME: Dividend ........................................................................ $ 4,601,945 Dividend from affliated investments ............................................. 228,347 Interest ........................................................................ 32,391 Interest from affliated investments ............................................. 116,370 ------------------------------------------------------------------------------------------------------------ TOTAL INCOME ...................................................................... 4,979,053 ------------------------------------------------------------------------------------------------------------ EXPENSES: Advisory and administrative fees ................................................ 906,322 Professional fees ............................................................... 39,904 Registration expenses ........................................................... 31,914 Custody and accounting expenses ................................................. 23,032 Trustee's fees .................................................................. 7,641 Transfer agent .................................................................. 89 Other expenses .................................................................. 20,890 ------------------------------------------------------------------------------------------------------------ TOTAL EXPENSES .................................................................... 1,029,792 ------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS)....................................................... 3,949,261 ------------------------------------------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments .................................................................. (1,068,810) Futures ...................................................................... (205,704) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments .................................................................. 10,854,002 Futures ...................................................................... 200,951 ------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .......................... 9,780,439 ------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................... $13,729,700 ------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 15
Statements of Changes in Net Assets ------------------------------------------------------------------------------------------------------------------------------------ S&P 500 INDEX FUND ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss)..................................................... $ 3,949,261 $ 8,198,211 Net realized gain (loss) on investments, futures, written options, foreign currency transactions and swaps......................................... (1,274,514) 1,726,089 Net increase (decrease) in unrealized appreciation on investments, futures, written options and foreign currency translation................................ 11,054,953 13,384,710 ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from operations........................................... 13,729,700 23,309,010 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................. -- (8,404,383) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS................................................................. -- (8,404,383) ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from operations and distributions................. 13,729,700 14,904,627 ------------------------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares...................................................... 3,442,097 12,229,014 Value of distributions reinvested................................................. -- 8,404,349 Cost of shares redeemed........................................................... (56,716,202) (105,531,086) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from share transactions.................................. (53,274,105) (84,897,723) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS............................................. (39,544,405) (69,993,096) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS Beginning of period................................................................. 531,014,986 601,008,082 ------------------------------------------------------------------------------------------------------------------------------------ End of period....................................................................... $491,470,581 $531,014,986 ------------------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ........ $ 3,949,261 $ -- ------------------------------------------------------------------------------------------------------------------------------------ CHANGES IN PORTFOLIO SHARES Shares sold....................................................................... 145,678 551,685 Issued for distributions reinvested............................................... -- 363,510 Shares redeemed................................................................... (2,398,073) (4,723,549) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in fund shares................................................. (2,252,395) (3,808,354) ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 16 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund (the "Fund"), Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 17 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. 18 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Net Tax Cost of Gross Tax Gross Tax Appreciation Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ----------------------------------------------------------------------------------------------------------------------- $485,277,416 $106,423,169 $(100,460,222) $5,962,947
As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires -------------------------------------------------------------------------------- $2,638,198 12/31/10 857,803 12/31/11 During the year ended December 31, 2005, the Fund utilized approximately $3,204,983 of capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund elected to defer losses incurred after October 31, 2005 as follows: Capital Currency -------------------------------------------------------------------------------- $646,456 $ -- The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Ordinary Long-Term Income Capital Gains Total -------------------------------------------------------------------------------- $8,404,383 $ -- $8,404,383 19 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures, distributions from Real Estate Investment Trusts (REITS), and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .35%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $3,731 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 4. SUB-ADVISORY FEES Pursuant to an investment sub-advisory agreement with GEAM, SSgA Funds Management, Inc. ("SSgA") is the Sub-Adviser to the S&P 500 Index Fund. SSgA is responsible for the day-to-day portfolio management of the assets of the Fund, including the responsibility for making decisions to buy, sell or hold a particular security, under the general supervision of GEAM and the Board. For its services, GEAM pays SSgA monthly sub-advisory fees which are calculated as a percentage of the average daily net assets of the Fund. 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales -------------------------------------------------------------------------------- $14,182,555 $64,762,408 20 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory and sub-advisory agreements with GE Asset Management Incorporated ("GEAM") and the Fund's sub-adviser at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory and sub-advisory agreements, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM and the sub-adviser. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). Before approving the Fund's advisory and sub-advisory agreements, the Board members reviewed the proposed continuance of the agreements with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuances. The independent Board members discussed the proposed continuances in a private session with their independent legal counsel at which no representatives of GEAM or the sub-adviser were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. Also in advance of the meeting, the Board members received from the sub-adviser a written response to a letter of inquiry prepared by GEAM at the Board's request, which included substantial exhibits and other materials related to the business of, and services provided by the sub-adviser. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members also had an opportunity to hear presentations by representatives of the sub-adviser. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning the sub-adviser's investment process. In reaching their determinations relating to continuance of the agreements, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM and the sub-adviser, and the Board members, including the independent members, concurred that GEAM and the sub-adviser provide high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services specifically, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used in overseeing the sub-adviser's activities and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In connection with their consideration of the services provided by the sub-adviser, the Board members focused on the sub-adviser's favorable attributes, including its substantial experience managing funds of this type, its 21 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- investment philosophy and discipline, its high caliber investment and trading personnel, its systems and other resources, and its favorable history and reputation. In light of the foregoing, the Board members, including the independent members, concluded that the services provided by GEAM and the sub-adviser were of a high quality and had benefited the Fund. INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management and representatives of the sub-adviser about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel and the investment strategy employed with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM and the sub-adviser. The Board members reviewed the information they had requested from GEAM and the sub-adviser concerning their profitability from the fees and services they provide to the Fund and the financial condition of GEAM and the sub-adviser for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members reviewed the assumptions and cost allocation methods used by the sub-adviser in preparing its profitability data. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM and the sub-adviser should be entitled to earn a reasonable level of profits for the services they provide to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM and the sub-adviser from their relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Funds of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and 22 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM and the sub-adviser about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. The Board members reviewed comparative fee information with respect to any comparable mutual fund client accounts managed by the sub-adviser and with respect to any other client accounts managed by the sub-adviser in a similar style to that of the Fund. The Board members, including the independent members, concluded that, based on this information, the sub-advisory fees were reasonable in light of the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM and the sub-adviser, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders, and that renewal of the sub-advisory agreement was in the best interest of the shareholders of the Fund. 23 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 24 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 25 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 26 Investment Team INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J. Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 27 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at HTTP://WWW.GEFUNDS.COM; and (iii) on the Commission's website at HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at HTTP://WWW.GEFUNDS.COM; and (ii) on the Commission's website at HTTP://WWW.SEC.GOV. [GE LOGO OMITTED] GE Investments Funds, Inc. PREMIER GROWTH EQUITY FUND Semi-Annual Report JUNE 30, 2006 [GE logo omitted] GE Investments Funds, Inc. Premier Growth Equity Fund -------------------------------------------------------------------------------- Contents NOTES TO PERFORMANCE ...................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ................................ 2 NOTES TO SCHEDULE OF INVESTMENTS .......................................... 7 FINANCIAL STATEMENTS Financial Highlights ................................................. 8 Statement of Assets and Liabilities .................................. 9 Statement of Operations .............................................. 10 Statements of Changes in Net Assets .................................. 11 Notes to Financial Statements ........................................ 12 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL ............................. 16 ADDITIONAL INFORMATION .................................................... 19 INVESTMENT TEAM ........................................................... 22 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Standard & Poor's ("S&P") 500 Composite Price Index of stocks (S&P 500) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The S&P 500 is a market capitalization-weighted index of stocks of 500 large U.S. companies, which is widely used as a measure of large-cap stock market performance. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. Lipper is an independent mutual fund rating service. 1 Premier Growth Equity Fund -------------------------------------------------------------------------------- DAVID B. CARLSON IS A DIRECTOR AND EXECUTIVE VICE PRESIDENT OF GE ASSET MANAGEMENT. HE MANAGES THE OVERALL U.S. EQUITY INVESTMENTS FOR GE ASSET MANAGEMENT. MR. CARLSON IS PORTFOLIO MANAGER FOR THE PREMIER GROWTH EQUITY FUND AND HAS SERVED IN THAT CAPACITY SINCE THE FUND'S COMMENCEMENT. MR. CARLSON JOINED GE ASSET MANAGEMENT IN 1982 AS A SECURITIES ANALYST FOR INVESTMENT OPERATIONS. HE BECAME A VICE PRESIDENT FOR MUTUAL FUND PORTFOLIOS IN 1987, A SENIOR VICE PRESIDENT IN 1989 AND A DIRECTOR AND EXECUTIVE VICE PRESIDENT IN 2003. Q. HOW DID THE PREMIER GROWTH FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Premier Growth Fund returned -1.20%. The S&P 500 Index, the Fund's benchmark, returned 2.70% and the Fund's Lipper peer group of 199 Large-Cap Growth Funds returned an average of -2.44% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. The U.S. stock market began the year on a bullish note, however volatility rose by the end of the period, upsetting all global financial markets. The S&P 500 rallied through April as investors anticipated an end to the Federal Reserve's tightening campaign. By May 10, the Dow Jones Industrials were up more than 8% for the year, less than 100 points short of the record. However as growth persisted and inflationary data mounted, Federal Reserve members became more hawkish in their public comments. At the same time, central bankers around the world tightened monetary policy, reducing appetite for risk. Investors began to worry about the sustainability of the global expansion, given the inflation and liquidity concerns. For most of May and June riskier asset classes--from developing country stocks to industrial commodities to Florida condos--came under pressure. U.S. equities swooned amid the uncertainty, and the Dow gave back half of the year's gains. Technology and health care were hit the hardest in this environment, and were the only sectors posting negative returns year-to-date. In fact, health care dropped to a 12-month low in the last week of June, while consumer staples registered a new high. This contrasting performance between two defensive sectors highlighted the importance of careful stock selection in a volatile market. Value continued to lead growth as the Russell 1000 Value Index gained 6.6% year-to-date, while the Russell 1000 Growth Index lost -0.9%. Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. For the six-month period ending June 30, 2006, the Fund underperformed the benchmark. The areas detracting most from performance included health care, consumer discretionary, telecom and information technology. The negative impact from health care was attributable to both an overweight position and security selection within the sector. The health care equipment and supply industry detracted most from performance as our overweight position in orthopedic device maker Zimmer and cardiac device maker Medtronic declined during the period. After rallying strongly during the second half of 2005, Amgen has declined in 2006. The company is facing [Photo of David B. Carlson omitted] 2 Q&A increased competition for Enbrel, a drug used for arthritis and skin disease, and, potentially, from Swiss drug maker Roche, which is trying to market its anemia drug in the U.S. Amgen has filed to block the sale of Roche's Cera drug based on patent infringement. Consumer discretionary holdings also hurt performance despite strong returns from Comcast, Liberty Global and Liberty Media Holdings Corp. - Capital. Holdings offsetting these gains from the media industry were specialty retailers Bed Bath & Beyond and Home Depot. Carnival also declined as softness in Caribbean cruise bookings continued and surging fuel costs impacted profits during the period. In addition, the underperformance in telecom was driven by a lack of exposure to diversified telecom services, an industry that returned 13.8% during the period. The Bells have benefited from restructuring initiatives and heightened M&A activity in the space. BellSouth has risen 36.2% so far this year on their announced combination with AT&T--both of which we did not own during the period. Within information technology a large overweight negatively impacted performance. Despite strong performance from Inuit and Yahoo, a number of companies in the portfolio sector declined. The main detractors in this sector were eBay, Analog Devices, Dell and Microsoft. On the other hand, sectors that contributed positively to performance during the period included energy, industrials, and materials. Despite an underweight position in the energy sector, the second best performing sector within the S&P 500 for the period, our holdings concentrated in the oil services sector returned 28.5%. Strength in oil services giant Schlumberger was the main driver of this positive performance. Within industrials, strong returns from Dover, our sole holding in the sector, was more than enough to offset an underweight position in the group. Dover, a diversified machinery company, has seen strength in many of its business components and the shares have responded positively to the company exceeding analyst earnings expectations in early 2006 coupled with providing positive earnings guidance for the remainder of 2006. Monsanto, our sole holding in the materials sector, continues to exceed earnings guidance as the company is experiencing very strong demand for its genetically modified seed traits. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND OVER THE PERIOD? A. The Fund held 35 high quality growth companies at the end of the period. During the period there were no significant changes to the Fund's composition or positioning. In early 2006, Intel was eliminated based on a disappointing fourth quarter earnings report, increased competition from AMD, and the possibility of slowing personal computer unit growth in 2006. In addition, within the energy sector, we eliminated our position in Baker Hughes in favor of Transocean. The transaction was based on more favorable valuation and business fundamentals. The philosophy of the Premier Growth Equity strategy remains unchanged, despite the challenging environment for growth investors. We continue to focus on fundamental, bottom-up stock selection to identify high-quality companies that have the ability to produce double-digit earnings growth for the foreseeable future. We believe that the aggregate portfolio is well positioned for the rest of 2006 and beyond. 3 Premier Growth Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ------------------------------------------------------------------------------------------------------------------------------------ ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ------------------------------------------------------------------------------------------------------------------------------------ Actual Fund Return** 1,000.00 987.97 3.59 ------------------------------------------------------------------------------------------------------------------------------------ Hypothetical 5% Return (2.5% for the period) 1,000.00 1,021.05 3.56 ------------------------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.71% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). **ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS (1.20)%. 4 Premier Growth Equity Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [Line chart omitted -- plot points are as follows:] Premier Growth Equity Fund S&P 500 Index 12/12/97 $10,000.00 $10,000.00 12/97 10,345.74 10,168.40 12/98 14,125.24 13,086.53 12/99 19,247.20 15,843.58 12/00 18,240.70 14,388.59 12/01 16,573.75 12,674.62 12/02 13,090.75 9,873.29 12/03 16,875.83 12,709.71 12/04 18,062.45 14,092.69 12/05 18,295.86 14,785.84 6/06 18,075.78 15,185.53
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 ---------------------------------------------------------------------------------------------------------------------- SIX ONE FIVE SINCE MONTHS YEAR YEAR INCEPTION ---------------------------------------------------------------------------------------------------------------------- Premier Growth Equity Fund -1.20% 3.06% 1.03% 7.17% ---------------------------------------------------------------------------------------------------------------------- S&P 500 Index 2.70% 8.63% 2.49% 4.99% ---------------------------------------------------------------------------------------------------------------------- Lipper peer group average* -2.44% 6.19% -0.79% N/A ---------------------------------------------------------------------------------------------------------------------- Inception date 12/12/97 ----------------------------------------------------------------------------------------------------------------------
Premier Growth Equity Fund (ending value $18,076) S&P 500 Index (ending value $15,186) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital and future income rather than current income by investing at least 80% of its net assets in equity securities under normal market conditions. The Fund invests primarily in a limited number of large- and medium-sized companies that the portfolio manager believes have above-average growth histories and/or growth potential. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Dover Corp. 4.65% -------------------------------------------------------------------------------- First Data Corp. 4.54% -------------------------------------------------------------------------------- State Street Corp. 4.23% -------------------------------------------------------------------------------- Schlumberger Ltd. 4.13% -------------------------------------------------------------------------------- Intuit Inc. 4.10% -------------------------------------------------------------------------------- SLM Corp. 3.92% -------------------------------------------------------------------------------- Amgen, Inc. 3.73% -------------------------------------------------------------------------------- Molex, Inc. (Class A) 3.72% -------------------------------------------------------------------------------- Monsanto Co. 3.71% -------------------------------------------------------------------------------- AFLAC Incorporated 3.62% -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Market Value of $118,017 (in thousands) [Pie chart omitted -- plot points are as follows:] Information Technology 28.2% Healthcare 18.0% Consumer Discretionary 17.4% Financials 12.1% Short-Term 9.6% Energy 6.2% Industrials 4.2% Materials 3.4% Telecommunication Services 0.9% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR AND FIVE-YEAR PERIODS INDICATED IN THE LARGE-CAP GROWTH FUNDS PEER GROUP CONSISTING OF 199, 199 AND 117 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 PREMIER GROWTH EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PREMIER GROWTH EQUITY FUND -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCK -- 95.9%+ -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- 18.4% Bed Bath & Beyond, Inc. 92,970 $ 3,083,815 (a) Carnival Corp. 78,667 3,283,561 Comcast Corp. (Class A) 107,869 3,535,946(a,e) Liberty Global, Inc. (Series C) 177,298 3,647,020 (a) Liberty Media Holding Corp - Capital (Series A) 21,306 1,784,804 (a) Liberty Media Holding Corp - Interactive (Series A) 106,528 1,838,673 (a) The Home Depot, Inc. 92,374 3,306,065 (d) 20,479,884 ENERGY -- 6.6% Schlumberger Ltd. 67,642 4,404,171 Transocean Inc. 36,056 2,896,018 (a) 7,300,189 FINANCIALS -- 12.8% AFLAC Incorporated 83,435 3,867,212 (d) Federal National Mortgage Assoc. 35,758 1,719,960 SLM Corp. 78,965 4,178,828 State Street Corp. 77,773 4,517,834 (c) 14,283,834 HEALTHCARE -- 19.1% Amgen, Inc. 61,086 3,984,640 (a) Johnson & Johnson 64,066 3,838,835 LIncare Holdings Inc. 69,728 2,638,507 (a) Medtronic Inc. 70,919 3,327,519 (e) Pfizer Inc. 113,233 2,657,578 UnitedHealth Group Incorporated 57,510 2,575,298 Zimmer Holdings, Inc. 40,227 2,281,675 (a) 21,304,052 INDUSTRIALS -- 4.5% Dover Corp. 100,420 4,963,761 INFORMATION TECHNOLOGY -- 29.9% Analog Devices, Inc. 71,515 2,298,492 Cisco Systems, Inc. 157,930 3,084,373(a,d) Dell, Inc. 81,349 1,985,729 (a) eBay, Inc. 77,475 2,269,243(a,e) First Data Corp. 107,571 4,844,998 (d) Intuit Inc. 72,409 4,372,779(a,d,e) Linear Technology Corp. 55,424 1,856,150 (e) Microsoft Corp. 120,682 2,811,891 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- Molex, Inc. (Class A) 138,263 $ 3,972,296 Paychex, Inc. 32,778 1,277,686 QUALCOMM, Inc. 43,207 1,731,304 Yahoo! Inc. 85,818 2,831,994(a) 33,336,935 MATERIALS -- 3.6% Monsanto Co. 47,081 3,963,749 TELECOMMUNICATION SERVICES -- 1.0% Vodafone Group PLC ADR 50,657 1,078,994 TOTAL INVESTMENTS IN SECURITIES (COST $98,084,394) 106,711,398 -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 10.1% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.6% GEI Short Term Investment Fund 6.93% 1,787,450 1,787,450(b,f) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 8.5% State Street Navigator Securities Lending Prime Portfolio 5.25% 9,517,900 9,517,900(b,c) TOTAL SHORT-TERM INVESTMENTS (COST $11,305,350) 11,305,350 TOTAL INVESTMENTS (COST $109,389,744) 118,016,748 LIABILITIES IN EXCESS OF OTHER ASSETS, NET -- (6.0)% (6,668,016) ----------- NET ASSETS -- 100.0% $111,348,732 =========== -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- The GEI Premier Growth Equity had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE DEPRECIATION -------------------------------------------------------------------------------- S&P 500 Index Futures September 2006 2 $641,500 $(1,763) See Notes to Schedule of Investments on page 7 and Notes to Financial Statements. 6 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (e) All or a portion of the security is out on loan. (f) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. + Percentages are based on net assets as of June 30, 2006. Abbreviations: ADR American Depository Receipt TBA To Be Announced 7
Financial Highlights Selected data based on a share outstanding throughout the periods indicated ------------------------------------------------------------------------------------------------------------------------------------ PREMIER GROWTH EQUITY FUND 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 12/12/97 Net asset value, beginning of period ........... $75.65 $74.95 $70.46 $54.74 $69.34 $78.68 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income ....................... 0.13 0.24 0.47 0.11 0.03 0.06 Net realized and unrealized gains/(losses) on investments ............ (1.04) 0.73 4.48 15.72 (14.60) (7.24) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS . (0.91) 0.97 4.95 15.83 (14.57) (7.18) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income ....................... -- 0.27 0.46 0.11 0.03 0.07 Net realized gains .......................... -- -- -- -- -- 2.09 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ............................ -- 0.27 0.46 0.11 0.03 2.16 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD ................. $74.74 $75.65 $74.95 $70.46 $54.74 $69.34 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A) ............................... (1.20)% 1.29% 7.03% 28.91% (21.02)% (9.14)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) .... $111,349 $126,682 $137,801 $143,202 $87,569 $104,185 Ratios to average net assets: Net investment income* ................... 0.31% 0.30% 0.62% 0.20% 0.05% 0.10% Expenses* ................................ 0.71% 0.71% 0.71% 0.70% 0.67% 0.67% Portfolio turnover rate ..................... 12% 34% 22% 24% 25% 21%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 8
Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ PREMIER GROWTH EQUITY FUND ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments in securities, at market* (cost $98,084,394) ..................................... $106,711,398 Short-term Investments (at amortized cost) ......................................................... 9,517,900 Short-term affiliated investments (at amortized cost) .............................................. 1,787,450 Receivable for investments sold .................................................................... 3,078,557 Income receivables ................................................................................. 92,577 Receivable for fund shares sold .................................................................... 515 Variation margin receivable ........................................................................ 699 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS ................................................................................... 121,189,096 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Payable upon return of securities loaned ........................................................... 9,517,900 Payable for investments purchased .................................................................. 172,154 Payable for fund shares redeemed ................................................................... 86,221 Payable to GEAM .................................................................................... 64,089 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES .............................................................................. 9,840,364 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS ............................................................................................ $111,348,732 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Capital paid in .................................................................................... 106,782,712 Undistributed (distribution in excess of) net investment income .................................... 187,077 Accumulated net realized gain (loss) ............................................................... (4,246,298) Net unrealized appreciation/(depreciation) on: Investments .................................................................................... 8,627,004 Futures ........................................................................................ (1,763) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS ............................................................................................ $111,348,732 ------------------------------------------------------------------------------------------------------------------------------------ Shares outstanding ($0.01 par value; unlimited shares authorized) ..................................... 1,489,846 Net asset value per share ............................................................................. $74.74
* Includes $9,337,105 of securities on loan. See Notes to Financial Statements. 9
Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) ---------------------------------------------------------------------------------------------------------------------- PREMIER GROWTH EQUITY FUND ---------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ......................................................................... $ 548,984 Interest* ........................................................................ 2,443 Interest from affliated investments .............................................. 66,720 ---------------------------------------------------------------------------------------------------------------------- TOTAL INCOME ....................................................................... 618,147 ---------------------------------------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ................................................. 396,834 Custody and accounting expenses .................................................. 16,903 Professional fees ................................................................ 9,468 Trustee's fees ................................................................... 1,804 Registration expenses ............................................................ 388 Transfer agent ................................................................... 108 Other expenses ................................................................... 5,565 ---------------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES ..................................................................... 431,070 ---------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ....................................................... 187,077 ---------------------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................................... 4,503,618 Futures ....................................................................... (22,189) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................................... (5,698,448) Futures ....................................................................... (33,596) ---------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ........................... (1,250,615) ---------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................... $(1,063,538) ----------------------------------------------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $1,995. See Notes to Financial Statements. 10
Statements of Changes in Net Assets ------------------------------------------------------------------------------------------------------------------------------------ PREMIER GROWTH EQUITY FUND ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) .................................................... $ 187,077 $ 394,754 Net realized gain (loss) on investments, futures, written options, foreign currency transactions and swaps ........................................ 4,481,429 6,078,101 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options, foreign currency translation ......... (5,732,044) (4,777,882) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from operations .......................................... (1,063,538) 1,694,973 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................................ -- (454,489) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ................................................................ -- (454,489) ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from operations and distributions ................ (1,063,538) 1,240,484 ------------------------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares ..................................................... 1,679,618 15,512,338 Value of distributions reinvested ................................................ -- 454,492 Cost of shares redeemed .......................................................... (15,949,537) (28,325,838) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from share transactions .................................. (14,269,919) (12,359,008) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ............................................ (15,333,457) (11,118,524) NET ASSETS Beginning of period ................................................................ 126,682,189 137,800,713 ------------------------------------------------------------------------------------------------------------------------------------ End of period ...................................................................... $111,348,732 $126,682,189 ------------------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ........ $ 187,077 $ -- ------------------------------------------------------------------------------------------------------------------------------------ CHANGES IN PORTFOLIO SHARES Shares sold ...................................................................... 21,543 214,046 Issued for distributions reinvested .............................................. -- 5,954 Shares redeemed .................................................................. (206,174) (383,987) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in fund shares ................................................ (184,631) (163,987) ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 11 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund (the "Fund"), Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTION Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Net Tax Cost of Gross Tax Gross Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ---------------------------------------------------------------------------------------------------------------------- $114,735,622 $14,627,040 $(11,345,913) $3,281,127
As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires -------------------------------------------------------------------------------- $ 311,312 12/31/10 3,038,704 12/31/11 During the year ended December 31, 2005, the Fund utilized approximately $5,723,682 of capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund had no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Ordinary Long-Term Income Capital Gains Total -------------------------------------------------------------------------------- $454,489 $ -- $454,489 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .65%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $883 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales -------------------------------------------------------------------------------- $13,801,134 $30,936,790 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* -------------------------------------------------------------------------------- $9,337,105 $9,555,836 * COLLATERAL OF $9,517,900 INCREASED BY $37,936 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 15 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 18 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 19 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 20 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 21 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 22 [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at HTTP://WWW.GEFUNDS.COM; and (ii) on the Commission's website at HTTP://WWW.SEC.GOV. [GE logo omitted] GE Investments Funds, Inc. Value Equity Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. Value Equity Fund Contents -------------------------------------------------------------------------------- NOTES TO PERFORMANCE...................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS................................ 2 NOTES TO SCHEDULE OF INVESTMENTS.......................................... 8 FINANCIAL STATEMENTS Financial Highlights................................................. 9 Statement of Assets and Liabilities.................................. 10 Statement of Operations.............................................. 11 Statements of Changes in Net Assets.................................. 12 Notes to Financial Statements........................................ 13 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL............................. 17 ADDITIONAL INFORMATION.................................................... 20 INVESTMENT TEAM........................................................... 23 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Standard & Poor's ("S&P") 500 Composite Price Index of stocks (S&P 500) and Russell 1000 Value Index (Russell 1000 Value) are unmanaged indices and do not reflect the actual cost of investing in the instruments that comprise each index. The S&P 500 is an unmanaged, market capitalization-weighted index of stocks of 500 large U.S. companies, which is widely used as a measure of large-cap stock market performance. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Value Equity Fund -------------------------------------------------------------------------------- THE VALUE EQUITY FUND IS CO-MANAGED BY PAUL C. REINHARDT AND STEPHEN V. GELHAUS. MESSRS. REINHARDT AND GELHAUS BOTH MANAGE THE FUND AS A COLLABORATIVE TEAM. BOTH PORTFOLIO MANAGERS HAVE THE AUTHORITY TO INCREASE OR DECREASE EXISTING POSITIONS IN THE FUND; HOWEVER, MR. REINHARDT, AS LEAD MANAGER, IS VESTED WITH THE AUTHORITY TO PURCHASE SECURITIES THAT ARE NEW TO THE FUND OR TO DIVEST THE FUND OF ITS ENTIRE POSITION IN A SECURITY. MR. REINHARDT ALSO HAS VETO AUTHORITY OVER MR. GELHAUS' TRADE DECISIONS. PAUL REINHARDT (PICTURED BELOW) IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT AND LEAD PORTFOLIO MANAGER OF THE VALUE EQUITY FUND. HE HAS SERVED IN THIS CAPACITY SINCE APRIL 2002. MR. REINHARDT JOINED GE ASSET MANAGEMENT IN 1982 AS AN EQUITY ANALYST AND HAS BEEN A PORTFOLIO MANAGER SINCE 1987. STEPHEN V. GELHAUS IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A MEMBER OF THE PORTFOLIO MANAGEMENT TEAM FOR THE VALUE EQUITY FUND SINCE JANUARY 2002. MR. GELHAUS JOINED GE ASSET MANAGEMENT IN JUNE 1991 AND WAS A RESEARCH ANALYST IN THE U.S. EQUITY DEPARTMENT FROM 1995 THROUGH 2001 AND BECAME AN ASSOCIATE PORTFOLIO MANAGER FOR THE VALUE EQUITY FUND IN AUGUST 1999. Q. HOW DID THE VALUE EQUITY FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Value Equity Fund returned 3.80%. The S&P 500 Index, the Fund's benchmark, returned 2.70% and the Fund's Lipper peer group of 222 Large-Cap Core Funds returned an average of 1.25% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. The U.S. stock market began the year on a bullish note, however volatility rose by the end of the period, upsetting all global financial markets. The S&P 500 rallied through April as investors anticipated an end to the Federal Reserve's tightening campaign. By May 10, the Dow Jones Industrials were up more than 8% for the year, less than 100 points short of the record. However as growth persisted and inflationary data mounted, Federal Reserve members became more hawkish in their public comments. At the same time, central bankers around the world tightened monetary policy, reducing appetite for risk. Investors began to worry about the sustainability of the global expansion, given the inflation and liquidity concerns. For most of May and June riskier asset classes -- from developing country stocks to industrial commodities to Florida condos--came under pressure. U.S. equities swooned amid the uncertainty, and the Dow gave back half of the year's gains. Technology and health care were hit the hardest in this environment, and were the only sectors posting negative returns year-to-date. In fact, health care dropped to a 12-month low in the last week of June, while consumer staples registered a new high. This contrasting performance between two defensive sectors highlighted the importance of careful stock selection in a volatile market. Value continued to lead growth as the Russell 1000 Value Index gained 6.6% year-to-date, while the Russell 1000 Growth Index lost -0.9%. [PHOTO OMITTED] 2 Q&A Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. Strength among our information technology holdings had been a major contributor to the Fund's outperformance in the past six months. For example, avoiding poor performing Internet software and services stocks, including Ebay (-32.2%) and Yahoo (-15.8%) helped our returns. Within software, strength in Oracle (18.7%) more than offset a drag from Microsoft (-10.3%), which has been investing to battle competitive threats from Google. We have been encouraged about Microsoft's upcoming product refreshment cycle and have maintained our position. In a reversal from last year, avoiding Apple (-20.3%) had a positive impact. In addition, First Data Corp. (5.0%) rallied upon the announcement of its Western Union subsidiary spin-off, benefiting the Fund. Health care and industrials holdings also were key drivers of Fund performance, with our health care holdings returning 0.9% versus -3.8% for the sector benchmark, and our industrials holdings returning 10.0% vs. 7.1% for the benchmark. Avoiding carnage within the healthcare equipment space helped -- companies such as Medtronic (-18.2%) and Boston Scientific (-31.2%) declined on uncertainty surrounding the implantable cardiac device market. Underweighting biotechnology stocks was also useful as the industry pulled back -10.6%. Quest Diagnostics (16.8%) and GlaxoSmithKline (12.4%) have also added to our health care gains. Strength in industrials has reflected good growth in late cycle end markets, and sustained global economic development. Our electrical equipment holdings exhibited particular strength due to growing investment in power infrastructure -- ABB (34.1%) and Cooper Industries (28.4%) leveraged this secular trend. End-market demand has also been robust for machinery companies like Deere (23.8%) and Eaton (13.5%), benefiting the Fund. Areas of weakness year-to-date have been primarily within the telecommunications services, financials and utilities sectors. Underperformance in telecom was driven by a lack of exposure to diversified telecom services, an industry that returned 19.8% during the period. The Bells have benefited from restructuring initiatives and heightened M&A activity in the space. BellSouth has risen 36.2% so far this year on their announced combination with AT&T (16.9%) -- both of which the Fund did not own during the period. Within financials, Freddie Mac (-11.4%) declined amidst uncertain operating conditions for GSE's. Underweighting real estate investment trusts (8.5%) and commercial banks (5.9%) had also taken away from relative performance. The Fund has been cautious on financials, as we have worried about profit margins in an environment of higher financing costs. Underweighting utilities also hurt performance. Electric utilities and independent power producers have successfully passed the higher costs of production on to customers through price increases, in many cases, and being underrepresented in this area hurt -- especially as the market mood got defensive in the second half of the period. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND OVER THE PERIOD? A. Our process has remained consistent during the period, and we continue to employ a bottom-up relative value process to seek out underappreciated stocks with catalysts for growth or improving fundamentals. The portfolio has been positioned for a moderate slowdown in economic growth, given the current levels of interest rates and high energy prices. In the past six months, as we prepared ourselves for slowing growth, we increased our weighting in the steady-growth health care sector, initiating positions in Baxter, Quest Diagnostics, and Thermo Electron Corp., and adding to Pfizer and Johnson & Johnson. We also increased exposure to consumer staples, including initiating positions in Diageo and Alberto Culver, and adding to Pepsico. We have also opportunistically increased our exposure to utilities, initiating a position in Duke Energy, and increased our holdings in Dominion Resources. Within industrials, we took some profits and reduced our overweight. While financials and consumer discretionary remained among our largest underweights, given our concerns about the interest rate environment, during the period we reduced our holdings within energy, taking profits in Burlington Resources, one of last year's top performing stocks for the Fund. 3 Value Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ---------------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ---------------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,037.96 4.02 ---------------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,020.69 3.92 ----------------------------------------------------------------------------------------------------------------------------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.78% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). ** ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 3.80%. 4 Value Equity Fund CHANGE IN VALUE OF A $10,000 INVESTMENT [LINE CHART OMITTED, PLOT POINTS FOLLOWS] Value S&P 500 Equity Fund Index 4/28/00 $10000.00 $10000.00 6/00 9970.00 10035.00 12/00 9978.58 9154.99 6/01 9486.19 8542.89 12/01 9105.15 8064.45 6/02 8357.33 7003.61 12/02 7505.72 6282.05 6/03 8219.58 7021.98 12/03 9310.98 8086.77 6/04 9517.43 8364.94 12/04 10202.11 8966.72 6/05 10181.23 8894.16 12/05 10616.27 9407.74 6/06 11019.29 9662.05 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- SIX ONE FIVE SINCE MONTHS YEAR YEAR INCEPTION -------------------------------------------------------------------------------- Value Equity Fund 3.80% 8.23% 3.04% 1.58% -------------------------------------------------------------------------------- S&P 500 Index 2.70% 8.63% 2.49% -0.56% -------------------------------------------------------------------------------- Lipper peer group average* 1.25% 7.82% 1.55% N/A -------------------------------------------------------------------------------- Inception date 4/28/00 -------------------------------------------------------------------------------- Value Equity Fund (ending value $11,019) S&P 500 Index (ending value $9,662) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital and future income by investing at least 80% of its net assets in equity securities under normal market conditions. The Fund invests primarily in U.S. companies that the portfolio manager believes are undervalued by the market but have solid growth prospects. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Exxon Mobil Corp. 4.31% -------------------------------------------------------------------------------- Microsoft Corp. 2.91% -------------------------------------------------------------------------------- Bank of America Corp. 2.78% -------------------------------------------------------------------------------- PepsiCo, Inc. 2.60% -------------------------------------------------------------------------------- Pfizer Inc. 2.50% -------------------------------------------------------------------------------- Industrial Select Sector SPDR Fund 2.39% -------------------------------------------------------------------------------- International Business Machines Corp. 2.11% -------------------------------------------------------------------------------- First Data Corp. 2.02% -------------------------------------------------------------------------------- Oracle Corp. 2.02% -------------------------------------------------------------------------------- Clorox Co. 1.83% -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Market Value of $36,038 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Financials 18.3% Information Technology 14.3% Healthcare 13.8% Industrials 11.9% Consumer Staples 11.1% Consumer Discretionary 9.1% Energy 8.4% Utilities 4.5% Materials 4.2% Telecommunication Services 3.6% Short-Term 0.8% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR AND FIVE-YEAR PERIODS INDICATED IN THE LARGE-CAP CORE FUNDS PEER GROUP CONSISTING OF 222, 220 AND 147 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 VALUE EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- VALUE EQUITY FUND -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- COMMON STOCK -- 96.2%+ CONSUMER DISCRETIONARY -- 9.1% Autozone, Inc.................. 1,976 $ 174,283(a) Cablevision Systems Corp. (Class A)................... 9,121 195,645 Comcast Corp. (Class A)........ 4,180 137,020(a) Koninklijke Philips Electronics N.V. ADR........ 10,257 319,403 Liberty Global, Inc. (Series A) ................. 2,7145 8,351(a) Liberty Global, Inc. (Series C) ................. 3,640 74,875(a) News Corp. (Class A)........... 15,201 291,555 Omnicom Group, Inc............. 5,472 487,501 Ross Stores, Inc............... 8,589 240,921 Starwood Hotels & Resorts Worldwide, Inc.............. 3,800 229,292 Target Corp.................... 4,560 222,847 The Home Depot, Inc............ 2,204 78,881 Time Warner, Inc............... 30,402 525,955(d) Viacom Inc. (Class B).......... 6,916 247,869(a) 3,284,398 CONSUMER STAPLES -- 11.1% Alberto-Culver Co.............. 4,712 229,569(a) Altria Group, Inc.............. 774 56,835 Clorox Co...................... 10,793 658,049 Diageo PLC ADR................. 2,470 166,849 General Mills, Inc............. 6,917 357,332 Kellogg Co..................... 8,209 397,562 Kimberly-Clark Corp............ 5,092 314,176 PepsiCo, Inc................... 15,581 935,483 Procter & Gamble Co............ 6,309 350,780 The Coca-Cola Co............... 12,313 529,705 3,996,340 ENERGY -- 8.4% EnCana Corp.................... 3,420 180,029(e) Exxon Mobil Corp............... 25,310 1,552,769(d) Halliburton Co................. 2,888 214,319 Hess Corp...................... 5,928 313,295 Occidental Petroleum Corp...... 3,420 350,721 Schlumberger Ltd............... 3,420 222,676 Transocean Inc................. 2,432 195,338(a) 3,029,147 FINANCIALS -- 17.7% Allstate Corp.................. 9,273 507,511 American International Group, Inc. ....................... 8,057 475,766 Bank of America Corp........... 20,826 1,001,731(d) BlackRock Inc. (Class A)....... 1,216 169,231 NUMBER OF SHARES VALUE Chubb Corp..................... 8,361 $ 417,214 Citigroup, Inc................. 13,301 641,640 Federal Home Loan Mortgage Corp............... 7,981 454,997 Federal National Mortgage Assoc. ..................... 3,496 168,158 Mellon Financial Corp.......... 12,845 442,253 Merrill Lynch & Company, Inc... 4,332 301,334 Metlife, Inc................... 7,828 400,872 Morgan Stanley................. 6,613 418,008 Prudential Financial, Inc...... 3,154 245,066 State Street Corp.............. 3,496 203,083(c) SunTrust Banks, Inc............ 4,332 330,358 The Bank of New York Company, Inc................ 3,648 117,466 Wells Fargo & Co............... 1,140 76,471 6,371,159 HEALTHCARE -- 13.8% Abbott Laboratories............ 3,420 149,146 Aetna, Inc..................... 7,600 303,468 Amgen, Inc..................... 3,040 198,299(a) Baxter International, Inc...... 14,821 544,820 Eli Lilly & Co................. 5,016 277,234 GlaxoSmithKline PLC ADR........ 8,050 449,190 Johnson & Johnson.............. 9,121 546,530 Medco Health Solutions, Inc.... 7,372 422,268(a) Novartis AG ADR................ 5,244 282,757 Pfizer Inc..................... 38,383 900,849(d) Quest Diagnostics Inc.......... 2,964 177,603 Thermo Electron Corp........... 2,052 74,364(a) UnitedHealth Group Incorporated 2,128 95,292 Wyeth.......................... 12,465 553,571 4,975,391 INDUSTRIALS -- 9.6% ABB Ltd. ADR................... 20,522 265,965 Burlington Northern Santa Fe Corp............... 2,812 222,851 Cooper Industries Ltd.......... 2,660 247,167 Deere & Co..................... 5,928 494,929 Eaton Corp..................... 6,536 492,814 General Dynamics Corp.......... 4,484 293,523 Honeywell International Inc.... 1,368 55,130 ITT Industries, Inc............ 2,432 120,384 Northrop Grumman Corp.......... 6,688 428,433 Rockwell Collins, Inc.......... 1,900 106,153 Textron Inc.................... 1,634 150,622 3M Co.......................... 1,520 122,770 Tyco International Ltd......... 7,600 209,000 United Technologies Corp....... 2,204 139,778 Waste Management, Inc.......... 2,660 95,441 3,444,960 INFORMATION TECHNOLOGY -- 14.3% Analog Devices, Inc............ 12,161 390,855(d) Applied Materials, Inc......... 5,321 86,626 Cisco Systems, Inc............. 24,702 482,430(a,d) See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 6 VALUE EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- First Data Corp................ 16,189 $ 729,153 Hewlett-Packard Co............. 5,991 189,795 Intel Corp..................... 15,201 288,059 International Business Machines Corp............... 9,881 759,058 Microchip Technology Inc....... 2,660 89,243 Microsoft Corp................. 44,995 1,048,384(d) Oracle Corp.................... 50,164 726,876(a,d) Sun Microsystems, Inc.......... 28,391 117,823(a) Texas Instruments Incorporated. 3,344 101,290 Xerox Corp..................... 10,641 148,016(a) 5,157,608 MATERIALS -- 4.1% Air Products & Chemicals, Inc.. 5,928 378,918 Barrick Gold Corp.............. 12,921 382,462 Dow Chemical Co................ 4,408 172,044 Freeport-McMoRan Copper & Gold Inc. (Class B)......... 6,460 357,949 Monsanto Co.................... 1,368 115,172 Weyerhaeuser Co................ 1,444 89,889 1,496,434 TELECOMMUNICATION SERVICES -- 3.6% Alltel Corp.................... 6,080 388,086 Sprint Corporation............. 13,681 273,483 Verizon Communications Inc..... 16,341 547,260 Vodafone Group PLC ADR......... 4,561 97,149 1,305,978 UTILITIES -- 4.5% American Electric Power Company, Inc................. 4,560 156,180 Constellation Energy Group, Inc. 6,841 372,971 Dominion Resources, Inc........ 6,840 511,564 Duke Energy Corp............... 9,120 267,854 Entergy Corp................... 3,572 252,719 PG&E Corp...................... 1,140 44,779 1,606,067 TOTAL COMMON STOCK (COST $31,278,707)........... 34,667,482 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- EXCHANGE TRADED FUNDS -- 3.0% -------------------------------------------------------------------------------- Financial Select Sector SPDR Fund................... 6,611 $ 213,403(g) Industrial Select Sector SPDR Fund................... 25,489 861,528(d,g) TOTAL EXCHANGE TRADED FUNDS (COST $869,348) .............. 1,074,931 TOTAL INVESTMENTS IN SECURITIES (COST $32,148,055) ........... 35,742,413 -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.8% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.7% GEI Short Term Investment Fund 6.93%....................... 266,152 266,152(b,f) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 0.1% State Street Navigator Securities Lending Prime Portfolio 5.25%........................ 29,621 29,621(b,c) TOTAL SHORT-TERM INVESTMENTS (COST $295,773).............. 295,773 TOTAL INVESTMENTS (COST $32,443,828)........... 36,038,186 OTHER ASSETS AND LIABILITIES, NET -- 0.0%*................ 6,945 ----------- NET ASSETS -- 100.0% .......... $36,045,131 =========== See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 7 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (e) All or a portion of the security is out on loan. (f) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. (g) Sponsored by SSgA Funds Management, Inc., an affiliate of State Street Bank & Trust Co., the Fund's custodian and accounting agent. * Less than 0.1% + Percentages are based on net assets as of June 30, 2006. Abbreviations: ADR American Depository Receipt SPDR Standard & Poors Depository Receipts TBA To Be Announced 8
Financial Highlights Selected data based on a share outstanding throughout the periods indicated ------------------------------------------------------------------------------------------------------------------------------------ VALUE EQUITY FUND 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 4/28/00 Net asset value, beginning of period......... $10.01 $9.77 $9.02 $7.36 $9.01 $9.93 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income..................... 0.06 0.11 0.11 0.11 0.07 0.05 Net realized and unrealized gains/(losses) on investments.......... 0.32 0.29 0.75 1.66 (1.65) (0.92) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS ............................... 0.38 0.40 0.86 1.77 (1.58) (0.87) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income..................... -- 0.12 0.11 0.11 0.07 0.05 Net realized gains........................ -- 0.04 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS.......................... -- 0.16 0.11 0.11 0.07 0.05 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD............... $10.39 $10.01 $9.77 $9.02 $7.36 $9.01 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A)............................. 3.80% 4.06% 9.57% 24.05% (17.57)% (8.75)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $36,045 $37,115 $37,128 $29,989 $24,623 $18,202 Ratios to average net assets: Net investment income*................. 1.19% 1.13% 1.26% 1.16% 1.01% 0.76% Expenses*.............................. 0.78% 0.80% 0.80% 0.73% 0.74% 0.79% Portfolio turnover rate................... 24% 36% 53% 78% 76% 103%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 9
Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED) ----------------------------------------------------------------------------------------------------------------------------- VALUE EQUITY FUND ----------------------------------------------------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $32,148,055)............................................... $35,742,413 Short-term Investments (at amortized cost) ............................................................ 29,621 Short-term affiliated investments (at amortized cost).................................................. 266,152 Receivable for investments sold........................................................................ 318,873 Income receivables .................................................................................... 47,009 Receivable for fund shares sold........................................................................ 351 Variation margin receivable............................................................................ 5 ----------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS....................................................................................... 36,404,424 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned............................................................... 29,621 Payable for investments purchased ..................................................................... 304,590 Payable for fund shares redeemed....................................................................... 3,164 Payable to GEAM........................................................................................ 21,918 ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES.................................................................................. 359,293 ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS................................................................................................ $36,045,131 ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Capital paid in ....................................................................................... 30,131,392 Undistributed (distribution in excess of) net investment income ....................................... 219,380 Accumulated net realized gain (loss)................................................................... 2,100,001 Net unrealized appreciation/(depreciation) on: Investments......................................................................................... 3,594,358 ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS................................................................................................ $36,045,131 ----------------------------------------------------------------------------------------------------------------------------- Shares outstanding ($0.01 par value; unlimited shares authorized)......................................... 3,468,500 Net asset value per share................................................................................. $10.39
* Includes $28,741 of securities on loan. See Notes to Financial Statements. 10
Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) ----------------------------------------------------------------------------------------------------------- VALUE EQUITY FUND ----------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ......................................................................... $ 355,412 Interest* ........................................................................ 202 Interest from affliated investments .............................................. 10,579 Less: Foreign taxes withheld ..................................................... (2,391) ----------------------------------------------------------------------------------------------------------- TOTAL INCOME ....................................................................... 363,802 ----------------------------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ................................................. 121,176 Custody and accounting expenses .................................................. 17,687 Professional fees ................................................................ 2,694 Trustee's fees ................................................................... 522 Registration expenses ............................................................ 216 Transfer agent ................................................................... 104 Other expenses ................................................................... 2,023 ----------------------------------------------------------------------------------------------------------- TOTAL EXPENSES ..................................................................... 144,422 ----------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ........................................................... 219,380 ----------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................................... 2,062,813 Futures ....................................................................... (23,790) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................................... (854,178) Futures ....................................................................... 4,650 ----------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ........................... 1,189,495 ----------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................... $1,408,875 -----------------------------------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $202. See Notes to Financial Statements. 11
Statements of Changes in Net Assets --------------------------------------------------------------------------------------------------------------------------------- VALUE EQUITY FUND --------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss)..................................................... $ 219,380 $ 418,647 Net realized gain (loss) on investments, futures, written options, foreign currency transactions and swaps......................................... 2,039,023 1,719,665 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options, foreign currency translation.......... (849,528) (625,589) --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations.......................................... 1,408,875 1,512,723 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................. -- (436,545) Net realized gains................................................................ -- (139,602) --------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS................................................................. -- (576,147) --------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions................. 1,408,875 936,576 --------------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares...................................................... 496,084 2,384,068 Value of distributions reinvested................................................. -- 576,173 Cost of shares redeemed........................................................... (2,974,768) (3,910,331) --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions................................... (2,478,684) (950,090) --------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS............................................. (1,069,809) (13,514) NET ASSETS Beginning of period................................................................. 37,114,940 37,128,454 --------------------------------------------------------------------------------------------------------------------------------- End of period....................................................................... $36,045,131 $37,114,940 --------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD......... $ 219,380 $ -- --------------------------------------------------------------------------------------------------------------------------------- CHANGES IN PORTFOLIO SHARES Shares sold....................................................................... 47,392 244,856 Issued for distributions reinvested............................................... -- 57,103 Shares redeemed................................................................... (285,254) (397,704) --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in fund shares................................................. (237,862) (95,745) ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund (the "Fund"), Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Net Tax Cost of Gross Tax Gross Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments --------------------------------------------------------------------------------------------------------------------------- $32,797,914 $4,495,133 $(1,254,860) $3,240,273
As of December 31, 2005, the Fund has no capital loss carryovers. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. During the year ended December 31, 2005, the Fund utilized approximately $1,098,588 of capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund had no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Income Gains Total -------------------------------------------------------------------------------- $421,053 $155,094 $576,147 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All 15 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .65%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $252 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales -------------------------------------------------------------------------------- $8,691,353 $10,650,979 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* -------------------------------------------------------------------------------- $28,741 $29,348 * COLLATERAL OF $29,621 DECREASED BY $273 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 19 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 20 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 21 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 22 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J. Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 23 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at HTTP://WWW.GEFUNDS.COM; and (iii) on the Commission's website at HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at HTTP://WWW.GEFUNDS.COM; and (ii) on the Commission's website at HTTP://WWW.SEC.GOV. [GE LOGO OMITTED] GE Investments Funds, Inc. Mid-Cap Equity Fund Semi-Annual Report JUNE 30, 2006 [LOGO OMITTED] GE Investments Funds, Inc. Mid-Cap Equity Fund Contents ------------------------------------------------------------------------------- NOTES TO PERFORMANCE ................................................. 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ........................... 2 NOTES TO SCHEDULE OF INVESTMENTS ..................................... 8 FINANCIAL STATEMENTS Financial Highlights ............................................ 9 Statement of Assets and Liabilities ............................. 10 Statement of Operations ......................................... 11 Statements of Changes in Net Assets ............................. 12 Notes to Financial Statements ................................... 13 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL ........................ 17 ADDITIONAL INFORMATION ............................................... 20 INVESTMENT TEAM ...................................................... 23 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Russell Mid Cap Index (Russell Mid Cap) is an unmanaged index and does not reflect the actual cost of investing in the instruments that comprise each index. Russell Mid Cap is a market capitalization-weighted index of the smallest 800 companies included in the Russell 1000 Index that represent approximately 25% of the total market capitalization of the Russell 1000 Index. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Mid-Cap Equity Fund -------------------------------------------------------------------------------- DIANE M. WEHNER IS A VICE PRESIDENT OF GE ASSET MANAGEMENT AND PORTFOLIO MANAGER OF THE MID-CAP EQUITY FUND. SHE HAS SERVED IN THIS CAPACITY SINCE SEPTEMBER 2004. BEFORE JOINING GE ASSET MANAGEMENT, MS. WEHNER WAS A VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER FROM JANUARY 1997 TO JUNE 2001, AND ASSOCIATE PORTFOLIO MANAGER FROM MAY 1995 TO JANUARY 1997, WITH BENEFIT CAPITAL MANAGEMENT CORPORATION. MS. WEHNER HAS SERVED AS AN ANALYST/PORTFOLIO MANAGER IN THE INVESTMENT MANAGEMENT INDUSTRY SINCE 1985. Q. HOW DID THE MID-CAP EQUITY FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Mid-Cap Equity Fund returned 2.29%. The Russell Mid-Cap Index, the Fund's benchmark, returned 4.86% and the Fund's Lipper peer group of 84 Mid-Cap Core funds returned an average of 4.02% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. High oil prices continued to fuel stock price appreciation in the energy sector, and the Fund's overweight in energy continued to help performance. At the same time, however, higher oil prices and increased interest rates raised concerns about global economic growth, putting pressure on capital markets and negatively impacting our market-sensitive financials. Investors sought safety in high dividend paying stocks, such as those in the Real Estate Investment Trust (REIT) industry where the Fund had an underweight due to its growth bias. However, diverging trends within real estate had a net positive effect on the Fund during the six months ended June 30, 2006. Homebuilding stocks declined about 30%, on average, as interest rates moved higher and inventory of homes for sale increased. The Fund benefited due to our underweight in this sector. Conversely, commercial real estate stocks continued their uptrend, due to the ongoing recovery in the commercial real estate industry. While we were underweight in the REIT sector, the Fund participated in this appreciation through its investment in commercial real estate services firms. Stock option backdating came into the forefront of investor's minds during the first six months of 2006. Certain of the Fund's holdings, particularly in the technology sector, were negatively affected by announcements of SEC inquiries related to option pricing procedures. Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. While there was no particular theme within the information technology sector, the Fund was negatively affected by a few individual stocks that weighed on portfolio returns. Biometric fingerprint company Cogent, declined 34% as guidance fell below expectations due to the uncertain timing of new contract awards. Software companies Wind River and Activision fell 26% and 17%, respectively. Wind River fell due to an earnings miss. Activision's stock declined due to concerns about the timing and availability of next generation game consoles. Finally, communications equipment companies Juniper Networks and Comverse Technology fell 28% and 26%, respectively, over concerns on options pricing. [PHOTO OMITTED] 2 Q&A Within consumer staples, the Fund was negatively impacted by not owning Archer-Daniels-Midland, which rose 68%. Weight Watchers negatively impacted us, down 17%, due to weakness in its UK operations related to missteps in a new program launch. Within financials, asset managers Legg Mason and Calamos Asset Management, which declined 17% and 7%, respectively, detracted from Fund performance, as these asset managers suffered from negative fund flows and market volatility. On the positive side, real estate services company C.B. Richard Ellis, up 27%, continues to benefit from strong investment sales, as well as a strengthening commercial leasing market. Also, within the commercial real estate sector, information provider CoStar Group rose 39% due to excitement over the launch of its newest product. Finally, the Fund continued to benefit from our overweight in Energy as highlighted above, with Weatherford International, up 37%, GlobalSantaFe, up 21%, while Valero and Peabody Energy rose 29% and 36%, respectively. Within the Health Care sector, the Fund had strong stock selection with Amylin Pharmaceuticals up 24%, Thermo Electron up 20% and Advance Medical Optics up 21%. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND OVER THE PERIOD? A. The Fund's sector weightings did not change dramatically during the first half of 2006. We maintain our underweight in financial services as well as in consumer discretionary companies. We focus on investing in attractively valued companies with solid earnings prospects, strong market share and superior long-term fundamentals. With an emphasis on growth, we continue to look to invest in innovative companies that provide prospects for above-average earnings growth. Therefore healthcare and information technology companies represent a more meaningful percentage of the portfolio. 3 Mid-Cap Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees. JANUARY 1, 2006 - JUNE 30, 2006
--------------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* --------------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,022.89 3.59 --------------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,021.13 3.47 ---------------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.69% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). **ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 2.29%. 4 Mid-Cap Equity Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [LINE CHART OMITTED, PLOT POINTS FOLLOWS] MIDCAP RUSSELL EQUITY FUND MIDCAP INDEX 5/1/97 $10000.00 $10000.00 12/97 13255.63 12690.32 12/98 14141.95 13966.07 12/99 16583.39 16507.21 12/00 17957.86 17870.35 12/01 18016.39 16861.85 12/02 15536.50 14134.45 12/03 20653.98 19801.72 12/04 23963.34 23795.64 12/05 26776.52 26806.00 06/06 27389.51 28108.47 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- SIX ONE FIVE SINCE MONTHS YEAR YEAR INCEPTION -------------------------------------------------------------------------------- Mid-Cap Equity Fund 2.29% 10.79% 8.35% 11.62% -------------------------------------------------------------------------------- Russell MidCap Index 4.86% 13.68% 9.92% 11.93% -------------------------------------------------------------------------------- Lipper peer group average* 4.02% 12.44% 9.04% N/A -------------------------------------------------------------------------------- Inception date 5/1/97 -------------------------------------------------------------------------------- Mid-Cap Equity Fund (ending value $27,390) Russell MidCap Index (ending value $28,108) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital and future income by investing at least 80% of its net assets in equity securities of mid cap companies under normal market conditions. The Fund invests primarily in mid-cap companies that the portfolio manager believes are undervalued by the market and have above-average growth potential. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Amylin Pharmaceuticals, Inc. 1.58% -------------------------------------------------------------------------------- CB Richard Ellis Group, Inc. (Class A) 1.58% -------------------------------------------------------------------------------- Thermo Electron Corp. 1.50% -------------------------------------------------------------------------------- Harris Corp. 1.40% -------------------------------------------------------------------------------- Rockwell Collins, Inc. 1.38% -------------------------------------------------------------------------------- Michaels Stores, Inc. 1.33% -------------------------------------------------------------------------------- Legg Mason, Inc. 1.29% -------------------------------------------------------------------------------- MoneyGram International, Inc. 1.26% -------------------------------------------------------------------------------- GlobalSantaFe Corp. 1.24% -------------------------------------------------------------------------------- Barr Pharmaceuticals, Inc. 1.24% -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Market Value of $238,659 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Healthcare 15.8% Information Technology 15.0% Short-Term 14.0% Financials 12.8% Industrials 11.3% Consumer Discretionary 10.8% Energy 8.8% Materials 3.8% Utilities 3.4% Consumer Staples 3.1% Telecommunication Services 1.2% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR AND FIVE-YEAR PERIODS INDICATED IN THE MID-CAP CORE FUNDS PEER GROUP CONSISTING OF 84, 81 AND 48 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 MID-CAP EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- MID-CAP EQUITY FUND NUMBER OF SHARES VALUE COMMON STOCK -- 96.9%+ -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- 12.1% aQuantive, Inc. 25,310 $ 641,102(a,e) Bed Bath & Beyond, Inc. 64,194 2,129,315(a) Boyd Gaming Corp. 24,573 991,766(e) Cheesecake Factory 58,392 1,573,664(a) Chico's FAS, Inc. 36,339 980,426(a) Federated Department Stores Inc. 45,492 1,665,007 Getty Images, Inc. 28,828 1,830,866(a,e) Global Cash Access Holdings, Inc. 85,077 1,329,754(a) Life Time Fitness, Inc. 20,856 965,007(a,e) Michaels Stores, Inc. 76,934 3,172,758(d) Pulte Homes, Inc. 42,546 1,224,899(e) Regal Entertainment Group (Class A) 102,114 2,074,956(e) Starwood Hotels & Resorts Worldwide, Inc. 31,958 1,928,346 The E.W. Scripps Co. (Class A) 54,194 2,337,929 Univision Communications Inc. (Class A) 39,540 1,324,590(a) Williams-Sonoma, Inc. 43,733 1,489,109 25,659,494 CONSUMER STAPLES -- 3.5% Alberto-Culver Co. 48,690 2,372,177(a) Clorox Co. 16,677 1,016,797 Kroger Co. 59,674 1,304,474(d) The Hershey Co. 9,618 529,663 Weight Watchers International Inc. 53,801 2,199,923(e) 7,423,034 ENERGY -- 9.9% BJ Services Co. 61,599 2,295,179 Dresser-Rand Group, Inc. 74,325 1,745,151(a) EOG Resources, Inc. 30,583 2,120,625 GlobalSantaFe Corp. 51,108 2,951,487 Hess Corp. 47,378 2,503,927 Nexen, Inc. 35,233 1,992,074 Peabody Energy Corp. 44,226 2,465,599 Valero Energy Corp. 29,746 1,978,704 Weatherford International Ltd. 59,320 2,943,458(a) 20,996,204 FINANCIALS -- 14.4% Affiliated Managers Group 33,707 2,928,801(a,e) Calamos Asset Management Inc. (Class A) 76,011 2,203,559(e) NUMBER OF SHARES VALUE CB Richard Ellis Group, Inc. (Class A) 151,389 $ 3,769,586(a,d) CVB Financial Corp. 75,412 1,180,952(e) Everest Re Group, Ltd. 27,436 2,375,135 Greenhill & Company, Inc. 30,564 1,857,069(e) HCC Insurance Holdings, Inc. 67,394 1,984,079 Legg Mason, Inc. 30,858 3,070,988 M&T Bank Corp. 11,681 1,377,424 Maguire Properties, Inc. (REIT) 33,576 1,180,868 MBIA Inc. 14,987 877,489 North Fork Bancorporation, Inc. 75,958 2,291,653(d) The Hartford Financial Services Group, Inc. 23,618 1,998,083 Trammell Crow Co. (REIT) 36,250 1,274,912(a,e) Zions Bancorporation 28,197 2,197,674 30,568,272 HEALTHCARE -- 17.8% Advanced Medical Optics, Inc. 30,382 1,540,367(a,e) Alcon, Inc. 24,278 2,392,597 Amylin Pharmaceuticals, Inc. 76,409 3,772,312(a,e) Angiotech Pharmaceuticals, Inc. 145,866 1,713,925(a,e) Barr Pharmaceuticals, Inc. 61,815 2,947,957(a) Caremark Rx, Inc. 58,447 2,914,752 DENTSPLY International, Inc. 34,296 2,078,338 Gilead Sciences, Inc. 26,683 1,578,566(a) Henry Schein, Inc. 57,444 2,684,358(a) Kinetic Concepts, Inc. 19,466 859,424(a) Manor Care, Inc. 54,513 2,557,750 Martek Biosciences Corp. 45,531 1,318,122(a,e) Psychiatric Solutions Inc. 84,413 2,419,277(a,e) Quest Diagnostics Inc. 40,837 2,446,953 Smith & Nephew PLC ADR 40,488 1,560,003(e) Teva Pharmaceutical Industries Ltd. ADR 21,988 694,601 Thermo Electron Corp. 98,998 3,587,688(a,d) Vertex Pharmaceuticals, Inc. 15,260 560,195(a,e) 37,627,185 INDUSTRIALS -- 12.8% ChoicePoint, Inc. 38,053 1,589,474(a) Corinthian Colleges, Inc. 71,008 1,019,675(a,e) Corporate Executive Board Co. 12,944 1,296,989 CoStar Group, Inc. 31,467 1,882,671(a,e) Danaher Corp. 39,769 2,557,942 Dover Corp. 29,366 1,451,561 Eaton Corp. 31,467 2,372,612(d) Harsco Corp. 34,968 2,726,105 Hexcel Corp. 112,705 1,770,596(a,e) Joy Global, Inc. 21,607 1,125,509 MoneyGram International, Inc. 88,688 3,010,958 Rockwell Collins, Inc. 59,065 3,299,962 Stericycle, Inc. 32,666 2,126,557(a) Sunpower Corp. (Class A) 29,053 814,065(a,e) 27,044,676 See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 6 MID-CAP EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE INFORMATION TECHNOLOGY -- 16.9% Activision, Inc. 202,850 $ 2,308,433(a,d) Affiliated Computer Services, Inc. (Class A) 39,313 2,028,944(a) Analog Devices, Inc. 57,991 1,863,831(d) CDW Corp. 24,865 1,358,872 Cogent, Inc. 149,399 2,251,443(a,e) Comverse Technology, Inc. 105,697 2,089,630(a,d) DST Systems, Inc. 29,660 1,764,770(a) Fiserv, Inc. 22,992 1,042,917(a) Harris Corp. 80,299 3,333,211(d) Juniper Networks, Inc. 93,401 1,493,482(a) Linear Technology Corp. 87,390 2,926,691 Macrovision Corp. 57,533 1,238,110(a,e) Mettler Toledo International Inc. 25,305 1,532,724(a) Microchip Technology Inc. 48,871 1,639,622 Molex, Inc. (Class A) 78,747 2,262,401 NAVTEQ Corp. 32,292 1,442,807(a) Neustar, Inc. (Class A) 32,860 1,109,025(a) Symantec Corp. 85,509 1,328,810(a,e) Wind River Systems, Inc. 152,230 1,354,847(a,e) Xilinx, Inc. 62,915 1,425,025 35,795,595 MATERIALS -- 4.3% Cabot Corp. 26,969 930,970(e) Martin Marietta Materials, Inc. 25,614 2,334,716 Monsanto Co. 26,969 2,270,520 Praxair, Inc. 42,900 2,316,600 Sealed Air Corp. 24,768 1,289,917 9,142,723 TELECOMMUNICATION SERVICES -- 1.3% American Tower Corp. (Class A) 61,579 1,916,338(a) NII Holdings, Inc. (Class B) 15,714 885,955(a) 2,802,293 UTILITIES -- 3.9% Ameren Corp. 40,444 2,042,422 DTE Energy Co. 42,546 1,733,324 PPL Corp. 74,897 2,419,173 SCANA Corp. 51,903 2,002,418 8,197,337 TOTAL INVESTMENTS IN SECURITIES (COST $165,222,177) 205,256,813 NUMBER OF SHARES VALUE SHORT-TERM INVESTMENTS -- 15.8% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.6% GEI Short Term Investment Fund 6.93% 1,244,348 $ 1,244,348(b,f) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 15.2% State Street Navigator Securities Lending Prime Portfolio 5.25% 32,158,332 32,158,332(b,c) TOTAL SHORT-TERM INVESTMENTS (COST $33,402,680) 33,402,680 TOTAL INVESTMENTS (COST $198,624,857) 238,659,493 LIABILITIES IN EXCESS OF OTHER ASSETS, NET -- (12.7)% (26,973,581) ------------ NET ASSETS -- 100.0% $211,685,912 ============ -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- The GEI Mid-Cap Equity had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE APPRECIATION -------------------------------------------------------------------------------- S&P 400 Midcap Futures September 2006 4 $1,543,200 $39,230 See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 7 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (e) All or a portion of the security is out on loan. (f) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. + Percentages are based on net assets as of June 30, 2006. 8 Financial Highlights Selected data based on a share outstanding throughout the periods indicated -------------------------------------------------------------------------------- MID-CAP EQUITY FUND
6/30/06+ 12/31/05 12/31/04 ------------------------------------------------------------------------------------------------------------------- INCEPTION DATE -- -- -- Net asset value, beginning of period ...................... $19.22 $18.33 $17.48 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income .................................. 0.04 0.05 0.17 Net realized and unrealized gains/(losses) on investments ....................... 0.40 2.11 2.63 ------------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS ............ 0.44 2.16 2.80 ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income .................................. -- 0.06 0.14 Net realized gains ..................................... -- 1.21 1.81 ------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ....................................... -- 1.27 1.95 ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD ............................ $19.66 $19.22 $18.33 ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (A) .......................................... 2.29% 11.74% 16.02% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............... $211,686 $229,097 $239,831 Ratios to average net assets: Net investment income* .............................. 0.35% 0.24% 0.89% Expenses* ........................................... 0.69% 0.70% 0.70% Portfolio turnover rate ................................ 15% 27% 78%
12/31/03 12/31/02 12/31/01 -------------------------------------------------------------------------------------------------------------- INCEPTION DATE -- -- 5/1/97 Net asset value, beginning of period ...................... $13.30 $15.66 $16.31 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income .................................. 0.19 0.12 0.11 Net realized and unrealized gains/(losses) on investments ....................... 4.19 (2.28) (0.06) -------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS ............ 4.38 (2.16) 0.05 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income .................................. 0.18 0.12 0.11 Net realized gains ..................................... 0.02 0.08 0.59 -------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ....................................... 0.20 0.20 0.70 -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD ............................ $17.48 $13.30 $15.66 -------------------------------------------------------------------------------------------------------------- TOTAL RETURN (A) .......................................... 32.94% (13.76)% 0.33% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............... $226,929 $170,422 $179,044 Ratios to average net assets: Net investment income* .............................. 1.36% 0.82% 0.85% Expenses* ........................................... 0.69% 0.68% 0.68% Portfolio turnover rate ................................ 28% 37% 42%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 9 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
MID-CAP EQUITY FUND -------------------------------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $165,222,177) ........................ $205,256,813 Short-term Investments (at amortized cost) ....................................... 32,158,332 Short-term affiliated investments (at amortized cost) ............................ 1,244,348 Receivable for investments sold .................................................. 5,020,271 Income receivables ............................................................... 180,171 Receivable for fund shares sold .................................................. 97,182 Variation margin receivable ...................................................... 8,800 -------------------------------------------------------------------------------------------------------- TOTAL ASSETS ................................................................. 243,965,917 -------------------------------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned ......................................... 32,158,332 Payable for investments purchased ................................................ 1,131 Payable for fund shares redeemed ................................................. 2,070 Payable to GEAM .................................................................. 118,472 -------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES ............................................................ 32,280,005 -------------------------------------------------------------------------------------------------------- NET ASSETS .......................................................................... $211,685,912 -------------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Capital paid in .................................................................. 154,789,549 Undistributed (distribution in excess of) net investment income .................. 409,280 Accumulated net realized gain (loss) ............................................. 16,413,216 Net unrealized appreciation/(depreciation) on: Investments .................................................................. 40,034,636 Futures ...................................................................... 39,230 Foreign currency related transactions ........................................ 1 -------------------------------------------------------------------------------------------------------- NET ASSETS .......................................................................... $211,685,912 -------------------------------------------------------------------------------------------------------- Shares outstanding ($0.01 par value; unlimited shares authorized) ................... 10,766,107 Net asset value per share ........................................................... $19.66
* Includes $31,705,442 of securities on loan. See Notes to Financial Statements. 10 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
MID-CAP EQUITY FUND ------------------------------------------------------------------------------------------------------ INVESTMENT INCOME INCOME: Dividend ......................................................................... $1,012,466 Interest* ........................................................................ 56,736 Interest from affliated investments .............................................. 114,311 Less: Foreign taxes withheld ..................................................... (6,134) ------------------------------------------------------------------------------------------------------ TOTAL INCOME ....................................................................... 1,177,379 ------------------------------------------------------------------------------------------------------ EXPENSES: Advisory and administrative fees ................................................. 738,069 Professional fees ................................................................ 16,642 Custody and accounting expenses .................................................. 15,468 Trustee's fees ................................................................... 3,209 Registration expenses ............................................................ 711 Transfer agent ................................................................... 82 Other expenses ................................................................... 9,268 ------------------------------------------------------------------------------------------------------ TOTAL EXPENSES ..................................................................... 783,449 ------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) ....................................................... 393,930 ------------------------------------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................................... 14,080,591 Futures ....................................................................... (97,834) Foreign cu rrency transactions ................................................ (8) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................................... (8,459,697) Futures ....................................................................... (11,495) Foreign currency transactions ................................................. 1 ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments ........................... 5,511,558 ------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................... $5,905,488 ------------------------------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $56,736. See Notes to Financial Statements. 11 Statements of Changes in Net Assets
MID-CAP EQUITY FUND -------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) ................................................... $ 393,930 $ 563,287 Net realized gain (loss) on investments, futures, written options and foreign currency transactions ............................................. 13,982,749 14,923,721 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation .......................................................... (8,471,191) 9,684,992 -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations ......................................... 5,905,488 25,172,000 -------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ........................................................... -- (677,879) Net realized gains .............................................................. -- (13,537,932) -------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ............................................................... -- (14,215,811) -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions ............... 5,905,488 10,956,189 -------------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares .................................................... 859,285 2,208,712 Value of distributions reinvested ............................................... -- 14,215,740 Cost of shares redeemed ......................................................... (24,175,618) (38,115,372) -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions ................................. (23,316,333) (21,690,920) -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................................... (17,410,845) (10,734,731) NET ASSETS Beginning of period ............................................................... 229,096,757 239,831,488 -------------------------------------------------------------------------------------------------------------------------------- End of period ..................................................................... $211,685,912 $229,096,757 -------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD .......................................................................... $ 409,280 $ 15,350 -------------------------------------------------------------------------------------------------------------------------------- CHANGES IN PORTFOLIO SHARES Shares sold ..................................................................... 43,004 117,331 Issued for distributions reinvested ............................................. -- 735,424 Shares redeemed ................................................................. (1,198,697) (2,013,679) -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in fund shares ............................................... (1,155,693) (1,160,924) --------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund (the "Fund"), Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Cost of Gross Tax Gross Tax Net Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ------------------------------------------------------------------------------------------------------------------------ $199,101,554 $47,763,996 $(8,206,057) $39,557,939
As of December 31, 2005, the Fund has no capital loss carryovers. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund has no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Income Gains Total ----------------------------------------------------------------- $5,367,448 $8,848,363 $14,215,811 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures, distributions from Real Estate Investment Trusts (REITS), and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. 15 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .65%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $1,620 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales ------------------------------------------------------------------------ $34,010,507 $58,230,983 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* ----------------------------------------------------------------------- $31,705,442 $32,465,397 * COLLATERAL OF $32,158,332 INCREASED BY $307,065 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 19 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 20 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 21 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 22 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 23 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [LOGO OMITTED] GE Investments Funds, Inc. Small-Cap Equity Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. Small-Cap Equity Fund Contents -------------------------------------------------------------------- NOTES TO PERFORMANCE ............................................ 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ...................... 2 NOTES TO SCHEDULE OF INVESTMENTS ................................ 8 FINANCIAL STATEMENTS Financial Highlights ....................................... 9 Statement of Assets and Liabilities ........................ 10 Statement of Operations .................................... 11 Statements of Changes in Net Assets ........................ 12 Notes to Financial Statements .............................. 13 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL ................... 17 ADDITIONAL INFORMATION .......................................... 20 INVESTMENT TEAM ................................................. 23 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Russell 2000 Index (Russell 2000) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The Russell 2000 Index is a market capitalization-weighted index consisting of approximately 2,000 of the smallest U.S.-domiciled publicly traded common stocks that are included in the Russell 3000(R) Index. The Russell 3000 Index is comprised of the 3,000 largest U.S. domiciled companies. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. Lipper is an independent mutual fund rating service. 1 Small-Cap Equity Fund* -------------------------------------------------------------------------------- PALISADE CAPITAL MANAGEMENT, L.L.C. ("PALISADE") HAS A HISTORY OF MANAGING SMALL-CAP EQUITY PORTFOLIOS AND FOR SEVERAL YEARS HAS PROVIDED PENSION FUND SERVICES TO GE. PALISADE TRANSLATES ITS EXPERIENCE FROM VARIOUS INSTITUTIONAL AND PRIVATE ACCOUNTS TO MUTUAL FUND PORTFOLIOS IT SUB-ADVISES FOR GE ASSET MANAGEMENT. PALISADE HAS MANAGED THE SMALL-CAP EQUITY FUND SINCE ITS INCEPTION. SMALL-CAP EQUITY FUND IS MANAGED BY JACK FEILER, JEFFREY SCHWARTZ AND DENNISON T. ("DAN") VERU, MEMBERS OF PALISADE'S INVESTMENT POLICY COMMITTEE. JACK FEILER, PRESIDENT AND CHIEF INVESTMENT OFFICER, HAS DAY-TO-DAY RESPONSIBILITY FOR MANAGING THE SMALL-CAP EQUITY FUND. MR. FEILER HAS MORE THAN 33 YEARS OF INVESTMENT EXPERIENCE AND HAS SERVED AS THE PRINCIPAL SMALL-CAP PORTFOLIO MANAGER AT PALISADE SINCE THE COMMENCEMENT OF PALISADE'S OPERATIONS IN APRIL 1995. HE HAS SERVED AS A PORTFOLIO MANAGER OF THE SMALL-CAP EQUITY FUND SINCE ITS INCEPTION. PRIOR TO JOINING PALISADE, MR. FEILER WAS A SENIOR VICE PRESIDENT-INVESTMENTS AT SMITH BARNEY FROM 1990 TO 1995. JEFFREY SCHWARTZ, SENIOR PORTFOLIO MANAGER, JOINED PALISADE IN OCTOBER 2004. PRIOR TO JOINING PALISADE, MR. SCHWARTZ WAS VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF SAFECO ASSET MANAGEMENT FROM SEPTEMBER 2003 TO SEPTEMBER 2004. FROM JUNE 2001 TO AUGUST 2003, MR. SCHWARTZ FOUNDED NANTUCKET INVESTMENT RESEARCH IN FARMINGTON HILLS, MI, CONDUCTED INDEPENDENT INVESTMENT RESEARCH AND WAS A PRIVATE INVESTOR. FROM JUNE 1992 UNTIL MAY 2001, MR. SCHWARTZ WAS AT MUNDER CAPITAL MANAGEMENT, MOST RECENTLY AS A SENIOR PORTFOLIO MANAGER AND PRINCIPAL. DENNISON T. ("DAN") VERU IS AN EXECUTIVE VICE-PRESIDENT AND CO-INVESTMENT OFFICER OF PALISADE. SINCE JOINING PALISADE IN MARCH 2000, MR. VERU HAS BEEN A MEMBER OF THE INVESTMENT POLICY COMMITTEE. MR. VERU BECAME A PRINCIPAL OF PALISADE IN JULY 2004. PRIOR TO JOINING PALISADE, HE WAS PRESIDENT AND DIRECTOR OF RESEARCH OF AWAD ASSET MANAGEMENT, A DIVISION OF RAYMOND JAMES & ASSOCIATES. MR. VERU HAS BEEN A FREQUENT GUEST ON CNBC, CNN AND BLOOMBERG TELEVISION. PRIOR TO AWAD, MR. VERU WORKED WITH THE PALISADE TEAM FROM 1984 THROUGH 1992. Q. HOW DID THE SMALL-CAP EQUITY FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Small-Cap Equity Fund returned 5.19%. The Russell 2000 Index, the Fund's benchmark, returned 8.20% and the Funds Lipper peer group of 126 Small Cap Core funds returned an average of 6.47% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? A. Not surprisingly, the gains in the first quarter were offset by the second quarter's setbacks in equities. The first quarter's market performance leadership was attributable to lower-quality, higher-volatility companies. Despite this condition, the Fund achieved a positive return while remaining invested in companies with greater consistent earnings growth, higher return-on-invested-capital, and increasing free cash flow generation. In the highly volatile second quarter, such stocks declined more than the benchmark. Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. The Fund's holdings in the consumer discretionary and information technology sectors declined 14.9% and 5.6%, respectively, during the period and trailed their respective Index's sector return. Our positions in the materials, financial services, and industrials sectors gained 22.8%, 11.7%, and 20.3% respectively, and surpassed the respective returns achieved by the Index's sectors. Some core holdings in the Fund were trimmed as their returns approached high double and ---------------------- * EFFECTIVE JANUARY 3, 2006, THE NAME OF THE FUND WAS CHANGED FROM SMALL-CAP VALUE EQUITY FUND TO SMALL-CAP EQUITY FUND. THERE WAS NO CHANGE TO THE FUND'S INVESTMENT STRATEGY. 2 Q&A triple digits. The prices for these stocks declined greatly with the market's increased volatility in May and the Fund lagged its benchmark as a result. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND DURING THE PERIOD? A. The most significant changes in sector allocation include reductions in the consumer discretionary, health care, and information technology sectors and increases in the financial services and industrial sectors. Continued rate increases by the Federal Reserve to stem inflationary pressure impeded the buying power of most consumers in the last six months. We slightly scaled back our exposure to the health care sector. We added a few new stocks to the industrials sector but most of the increase in allocation was due to market appreciation. 3 Small-Cap Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ---------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ---------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,051.94 4.53 ---------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,020.36 4.27 ----------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.85% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). **ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 5.19%. 4 Small-Cap Equity Fund -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [LINE CHART OMITTED, PLOT POINTS FOLLOWS] SMALL-CAP RUSSELL 2000 EQUITY INDEX 4/28/00 $10000.00 $10000.00 6/00 9890.00 10240.84 12/00 11325.90 9650.02 6/01 12029.37 10312.23 12/01 12455.23 9896.45 6/02 12465.60 9432.91 12/02 10729.52 7876.43 6/03 11116.07 9287.89 12/03 13316.94 11601.44 6/04 14247.25 12385.21 12/04 15334.17 13727.92 6/05 15930.88 13554.49 12/05 16795.59 14348.21 6/06 17667.94 15525.13 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- SIX ONE FIVE SINCE MONTHS YEAR YEAR INCEPTION -------------------------------------------------------------- Small-Cap Equity Fund 5.19% 10.90% 7.99% 9.65% -------------------------------------------------------------- Russell 2000 Index 8.20% 14.54% 8.53% 7.39% -------------------------------------------------------------- Lipper peer group average* 6.47% 13.00% 8.13% N/A -------------------------------------------------------------- Inception date 4/28/00 -------------------------------------------------------------- Small-Cap Equity Fund (ending value $17,668) Russell 2000 Index (ending value $15,525) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital by investing at least 80% of its net assets in equity securities of small-cap companies under normal market conditions. The Fund invests primarily in small-cap companies that the portfolio managers believe are undervalued by the market but have solid growth prospects. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------- Genesee & Wyoming Inc. (Class A) 4.19% -------------------------------------------------------------- Micros Systems, Inc. 2.80% -------------------------------------------------------------- Oshkosh Truck Corp. 2.76% -------------------------------------------------------------- DRS Technologies, Inc. 2.65% -------------------------------------------------------------- Centene Corp. 2.64% -------------------------------------------------------------- Oil States International, Inc. 2.61% -------------------------------------------------------------- Manitowoc Co. 2.58% -------------------------------------------------------------- Harsco Corp. 2.52% -------------------------------------------------------------- Jones Lang LaSalle Inc. 2.50% -------------------------------------------------------------- Federal Realty Investment Trust (REIT) 2.43% -------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Market Value of $153,407 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Industrials 22.7% Financials 18.5% Short-Term 16.5% Information Technology 12.9% Healthcare 9.2% Consumer Discretionary 7.7% Energy 7.5% Materials 2.4% Consumer Staples 2.1% Utilities 0.5% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR AND FIVE-YEAR PERIODS INDICATED IN THE SMALL-CAP CORE FUNDS PEER GROUP CONSISTING OF 126, 125 AND 80 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 SMALL-CAP EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SMALL-CAP EQUITY FUND NUMBER OF SHARES VALUE COMMON STOCK -- 98.7%+ -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- 9.1% American Eagle Outfitters 49,700 $ 1,691,788 Arbitron, Inc. 43,900 1,682,687(d) Bright Horizons Family Solutions, Inc. 10,300 388,207(a,d) Brinker International, Inc. 31,200 1,132,560 Finish Line (Class A) 52,800 624,624(d) Interactive Data Corp. 96,900 1,946,721(a,d) Meritage Homes Corp. 7,800 368,550(a,d) Pool Corp. 27,900 1,217,277(d) RARE Hospitality International, Inc. 13,000 373,880(a) The Talbots, Inc. 40,200 741,690(d) Timberland Co. (Class A) 26,000 678,600(a,d) Triarc Companies, Inc. (Class B) 64,400 1,006,572(d) 11,853,156 CONSUMER STAPLES -- 2.5% Central European Distribution Corp. 54,900 1,381,284(a,d) Smithfield Foods, Inc. 62,800 1,810,524(a,d) 3,191,808 ENERGY -- 8.9% Chesapeake Energy Corp. 89,500 2,707,375(d) Dril-Quip Inc. 12,300 1,014,012(a,d) Hydril Co. 25,500 2,002,260(a) Oil States International, Inc. 97,600 3,345,728(a,d) St. Mary Land & Exploration Co. 60,700 2,443,175 11,512,550 FINANCIALS -- 21.9% American Equity Investment Life Holding Co. 41,700 444,522(d) BioMed Realty Trust, Inc. (REIT) 83,900 2,511,966 Cullen/Frost Bankers, Inc. 34,200 1,959,660(d) Federal Realty Investment Trust (REIT) 44,500 3,115,000 Global Cash Access Holdings, Inc. 74,800 1,169,124(a,d) HCC Insurance Holdings, Inc. 90,100 2,652,544 Hilb Rogal & Hobbs Co. 35,900 1,337,993 Jones Lang LaSalle Inc. 36,600 3,204,330(d) Omega Healthcare Investors, Inc. (REIT) 119,600 1,581,112 Raymond James Financial, Inc. 91,175 2,759,867(d) Sandy Spring Bancorp, Inc. 21,700 782,502(d) Sky Financial Group, Inc. 33,500 790,935 Sterling Bancorp 29,562 576,459 Trammell Crow Co. (REIT) 48,100 1,691,677(a,d) W Holding Company, Inc. 91,982 611,680(d) NUMBER OF SHARES VALUE Webster Financial Corp. 36,700 $ 1,741,048 Westamerica Bancorporation 29,900 1,464,203(d) 28,394,622 HEALTHCARE -- 10.9% Centene Corp. 143,600 3,378,908(a,d) Computer Programs and Systems, Inc. 58,300 2,329,668(d) Immunicon Corp. 70,600 367,826(a,d) KV Pharmaceutical Co. (Class A) 22,600 421,716(a,d) Medical Action Industries Inc. 43,500 960,915(a) Molina Healthcare, Inc. 9,900 376,695(a,d) Noven Pharmaceuticals Inc. 85,300 1,526,870(a,d) Salix Pharmaceuticals Ltd. 52,200 642,060(a,d) The Cooper Companies, Inc. 20,900 925,661(d) Thoratec Corp. 71,900 997,253(a,d) Varian, Inc. 53,800 2,233,238(a) 14,160,810 INDUSTRIALS -- 26.8% ADESA, Inc. 105,000 2,335,200 Comfort Systems USA, Inc. 83,600 1,194,644(d) DRS Technologies, Inc. 69,600 3,393,000(d) EDO Corp. 28,400 691,256(d) Genesee & Wyoming Inc. (Class A) 151,100 5,359,517(a,d) Harsco Corp. 41,300 3,219,748 Herman Miller Inc. 47,100 1,213,767 Manitowoc Co. 74,100 3,297,450(d) Mueller Industries, Inc. 47,200 1,559,016 NCI Building Systems, Inc. 3,300 175,461(a,d) Old Dominion Freight Line 27,000 1,014,930(a,d) Oshkosh Truck Corp. 74,300 3,530,736 Quanta Services, Inc. 88,500 1,533,705(a,d) RailAmerica, Inc. 36,600 382,836(a) Teledyne Technologies Inc. 61,700 2,021,292(a) TeleTech Holdings Inc. 137,000 1,734,420(a,d) Woodward Governor Co. 70,000 2,135,700(d) 34,792,678 INFORMATION TECHNOLOGY -- 15.2% Blackbaud, Inc. 122,500 2,780,750(d) Digital Insight Corp. 21,800 747,522(a) Intergraph Corp. 53,900 1,697,311(a) Itron, Inc. 14,600 865,196(a,d) Manhattan Associates, Inc. 43,000 872,470(a) Micros Systems, Inc. 82,200 3,590,496(a,d) Mobility Electronics, Inc. 130,700 948,882(a,d) MoneyGram International, Inc. 63,200 2,145,640 Parametric Technology Corp. 157,480 2,001,571(a,d) Photon Dynamics, Inc. 63,100 790,012(a,d) Plantronics, Inc. 28,400 630,764(d) Rudolph Technologies, Inc. 61,800 896,100(a,d) Semtech Corp. 66,200 956,590(a) TNS, Inc. 6,500 134,485(a,d) Websense, Inc. 32,600 669,604(a,d) 19,727,393 See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 6 SMALL-CAP EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE MATERIALS -- 2.8% Commercial Metals Co. 94,000 $ 2,415,800 Packaging Corporation of America 56,400 1,241,928 3,657,728 UTILITIES -- 0.6% IDACORP, Inc. 21,100 723,519(d) TOTAL INVESTMENTS IN SECURITIES (COST $104,018,279) 128,014,264 -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 19.6% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.3% GEI Short Term Investment Fund 6.93% 1,698,012 1,698,012(b,e) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 18.3% State Street Navigator Securities Lending Prime Portfolio 5.25% 23,694,930 23,694,930(b,c) TOTAL SHORT-TERM INVESTMENTS (COST $25,392,942) 25,392,942 TOTAL INVESTMENTS (COST $129,411,221) 153,407,206 LIABILITIES IN EXCESS OF OTHER ASSETS -- (18.3)% (23,778,880) ------------- NET ASSETS -- 100.0% $129,628,326 ============= See Notes to Schedule of Investments on page 8 and Notes to Financial Statements. 7 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Coupon amount represents effective yield. (c) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (d) All or a portion of the security is out on loan. (e) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. + Percentages are based on net assets as of June 30, 2006. Abbreviations: REIT Real Estate Investment Trust 8 Financial Highlights Selected data based on a share outstanding throughout the periods indicated -------------------------------------------------------------------------------- SMALL-CAP EQUITY FUND
6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 4/28/00 Net asset value, beginning of period .............. $14.44 $13.62 $12.74 $10.27 $12.01 $11.27 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income .......................... 0.02 0.02 0.08 0.02 0.03 0.04 Net realized and unrealized gains/(losses) on investments ............... 0.73 1.28 1.85 2.46 (1.69) 1.08 ------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS .... 0.75 1.30 1.93 2.48 (1.66) 1.12 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income .......................... -- 0.03 0.07 0.01 0.02 0.04 Net realized gains ............................. -- 0.45 0.98 -- 0.05 0.34 Return of capital .............................. -- -- -- -- 0.01 -- ------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ............................... -- 0.48 1.05 0.01 0.08 0.38 ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD .................... $15.19 $14.44 $13.62 $12.74 $10.27 $12.01 ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A) .................................. 5.19% 9.53% 15.15% 24.11% (13.86)% 9.97% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ....... $129,628 $128,142 $117,158 $86,330 $52,359 $32,787 Ratios to average net assets: Net investment income* ...................... 0.22% 0.11% 0.67% 0.17% 0.34% 0.56% Expenses* ................................... 0.85% 0.86% 0.88% 0.86% 0.84% 0.91% Portfolio turnover rate ........................ 18% 33% 101% 119% 108% 130%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 9 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
SMALL-CAP EQUITY FUND --------------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $104,018,279) ............. $128,014,264 Short-term Investments (at amortized cost) ............................ 23,694,930 Short-term affiliated investments (at amortized cost) ................. 1,698,012 Receivable for investments sold ....................................... 204,246 Income receivables .................................................... 124,829 Receivable for fund shares sold ....................................... 28,634 --------------------------------------------------------------------------------------- TOTAL ASSETS ...................................................... 153,764,915 --------------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned .............................. 23,694,930 Payable for investments purchased ..................................... 351,167 Payable for fund shares redeemed ...................................... 568 Payable to GEAM ....................................................... 89,924 --------------------------------------------------------------------------------------- TOTAL LIABILITIES ................................................. 24,136,589 --------------------------------------------------------------------------------------- NET ASSETS ............................................................... $129,628,326 --------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Capital paid in ....................................................... 99,098,333 Undistributed (distribution in excess of) net investment income ....... 164,179 Accumulated net realized gain (loss) .................................. 6,369,829 Net unrealized appreciation/(depreciation) on: Investments ....................................................... 23,995,985 --------------------------------------------------------------------------------------- NET ASSETS ............................................................... $129,628,326 --------------------------------------------------------------------------------------- Shares outstanding ($0.01 par value; unlimited shares authorized) ........ 8,532,318 Net asset value per share ................................................ $15.19
* Includes $23,232,276 of securities on loan. See Notes to Financial Statements. 10
Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) SMALL-CAP EQUITY FUND ------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ...................................................... $ 610,092 Interest* ..................................................... 44,155 Interest from affliated investments ........................... 72,429 Less: Foreign taxes withheld .................................. (1,012) ------------------------------------------------------------------------------- TOTAL INCOME .................................................... 725,664 ------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees .............................. 544,057 Custody and accounting expenses ............................... 15,164 Professional fees ............................................. 9,027 Trustee's fees ................................................ 1,758 Registration expenses ......................................... 1,274 Transfer agent ................................................ 82 Other expenses ................................................ 6,354 ------------------------------------------------------------------------------- TOTAL EXPENSES .................................................. 577,716 ------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) .................................... 147,948 ------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................ 5,796,371 INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................ 629,858 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ........ 6,426,229 ------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,574,177 -------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $44,065. See Notes to Financial Statements. 11 Statements of Changes in Net Assets
SMALL-CAP EQUITY FUND ------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) .................................................... $ 147,948 $ 130,009 Net realized gain (loss) on investments, futures, written options, foreign currency transactions and swaps ........................................ 5,796,371 4,386,615 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation ...... 629,858 6,257,422 ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from operations .......................................... 6,574,177 10,774,046 ------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................................ -- (232,361) Net realized gains ............................................................... -- (3,909,633) ------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ................................................................ -- (4,141,994) ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from operations and distributions ................ 6,574,177 6,632,052 ------------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares ..................................................... 6,624,825 18,002,125 Value of distributions reinvested ................................................ -- 4,142,073 Cost of shares redeemed .......................................................... (11,713,097) (17,792,113) ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from share transactions .................................. (5,088,272) 4,352,085 ------------------------------------------------------------------------------------------------------------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ............................................ 1,485,905 10,984,137 NET ASSETS Beginning of period ................................................................ 128,142,421 117,158,284 ------------------------------------------------------------------------------------------------------------------------ End of period ...................................................................... $129,628,326 $128,142,421 ------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ........ $ 164,179 $ 16,231 ------------------------------------------------------------------------------------------------------------------------ CHANGES IN PORTFOLIO SHARES Shares sold ...................................................................... 423,108 1,282,518 Issued for distributions reinvested .............................................. -- 284,483 Shares redeemed .................................................................. (765,137) (1,292,377) ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in fund shares ................................................ (342,029) 274,624 ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund (the "Fund"), International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Cost of Gross Tax Gross Tax Net Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments -------------------------------------------------------------------------------------------- $129,463,076 $29,919,376 $(5,975,246) $23,944,130
14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- As of December 31, 2005, the Fund has no capital loss carryovers. Capital loss carryovers are available to offset future realized capital gain to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund had no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Income Gains Total ----------------------------------------------------- $1,243,127 $2,898,867 $4,141,994 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) distributions from Real Estate Investment Trusts (REITS) and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .80%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $914 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by 15 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. SUB-ADVISORY FEES Pursuant to an investment sub-advisory agreement with GEAM, Palisade Capital Management, LLC ("Palisade") is the Sub-Adviser to the Small-Cap Equity Fund. Palisade is responsible for the day-to-day portfolio management of the assets of the Fund, including the responsibility for making decisions to buy, sell or hold a particular security, under the general supervision of GEAM and the Board. For their services, GEAM pays Palisade monthly sub-advisory fees which are calculated as a percentage of the average daily net assets of the Fund. 6. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales ------------------------------------------------------------ $23,594,036 $27,412,222 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* ------------------------------------------------------ $23,232,276 $23,858,220 * COLLATERAL OF $23,694,930 INCREASED BY $163,290 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory and sub-advisory agreements with GE Asset Management Incorporated ("GEAM") and the Fund's sub-adviser at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory and sub-advisory agreements, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM and the sub-adviser. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). Before approving the Fund's advisory and sub-advisory agreements, the Board members reviewed the proposed continuance of the agreements with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuances. The independent Board members discussed the proposed continuances in a private session with their independent legal counsel at which no representatives of GEAM or the sub-adviser were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. Also in advance of the meeting, the Board members received from the sub-adviser a written response to a letter of inquiry prepared by GEAM at the Board's request, which included substantial exhibits and other materials related to the business of, and services provided by the sub-adviser. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members also had an opportunity to hear presentations by representatives of the sub-adviser. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning the sub-adviser's investment process. In reaching their determinations relating to continuance of the agreements, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM and the sub-adviser, and the Board members, including the independent members, concurred that GEAM and the sub-adviser provide high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services specifically, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used in overseeing the sub-adviser's activities and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In connection with their consideration of the services provided by the sub-adviser, the Board members focused on the sub-adviser's favorable attributes relating to its investment philosophy and discipline, its high caliber 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- investment and trading personnel, its systems and other resources, including research capabilities, and its favorable history and reputation. In light of the foregoing, the Board members, including the independent members, concluded that the services provided by GEAM and the sub-adviser were of a high quality and had benefited the Fund. INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management and representatives of the sub-adviser about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of the sub-adviser's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM and the sub-adviser. The Board members reviewed the information they had requested from GEAM and the sub-adviser concerning their profitability from the fees and services they provide to the Fund and the financial condition of GEAM and the sub-adviser for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members reviewed the assumptions and cost allocation methods used by the sub-adviser in preparing its profitability data. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM and the sub-adviser should be entitled to earn a reasonable level of profits for the services they provide to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM and the sub-adviser from their relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Funds of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM and the sub-adviser about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. The Board members reviewed comparative fee information with respect to any comparable mutual fund client accounts managed by the sub-adviser and with respect to any other client accounts managed by the sub-adviser in a similar style to that of the Fund. The Board members, including the independent members, concluded that, based on this information, the sub-advisory fees were reasonable in light of the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM and the sub-adviser, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratios are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders, and that renewal of the sub-advisory agreement was in the best interest of the shareholders of the Fund. 19 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 20 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 21 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 22 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 23 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [GE LOGO OMITTED] GE Investments Funds, Inc. International Equity Fund Semi-Annual Report JUNE 30, 2006 [LOGO OMITTED] GE Investments Funds, Inc. International Equity Fund Contents -------------------------------------------------------------------------------- NOTES TO PERFORMANCE.................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS.............................. 2 NOTES TO SCHEDULE OF INVESTMENTS........................................ 9 FINANCIAL STATEMENTS Financial Highlights............................................... 10 Statement of Assets and Liabilities................................ 11 Statement of Operations............................................ 12 Statements of Changes in Net Assets................................ 13 Notes to Financial Statements...................................... 14 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL........................... 19 ADDITIONAL INFORMATION.................................................. 22 INVESTMENT TEAM......................................................... 25 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Morgan Stanley Capital International EAFE Index (MSCI EAFE) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The MSCI(R) EAFE(R) Index is a market capitalization-weighted index of equity securities of companies domiciled in various countries. The Index is designed to represent the performance of developed stock markets outside the U.S. and Canada and excludes certain market segments unavailable to U.S. based investors. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 International Equity Fund -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY FUND IS MANAGED BY A TEAM OF PORTFOLIO MANAGERS THAT INCLUDES BRIAN HOPKINSON, RALPH R. LAYMAN, JONATHAN L. PASSMORE, MICHAEL J. SOLECKI AND JUDITH A. STUDER. AS LEAD PORTFOLIO MANAGER FOR THE FUND, MR. LAYMAN (PICTURED BELOW) OVERSEES THE ENTIRE TEAM AND ASSIGNS A PORTION OF THE FUND TO EACH MANAGER, INCLUDING HIMSELF. RALPH R. LAYMAN IS A DIRECTOR AND EXECUTIVE VICE PRESIDENT OF GE ASSET MANAGEMENT. HE MANAGES THE OVERALL INTERNATIONAL EQUITY INVESTMENTS FOR GE ASSET MANAGEMENT. MR. LAYMAN HAS LED THE TEAM OF PORTFOLIO MANAGERS FOR THE FUND SINCE 1997. MR. LAYMAN JOINED GE ASSET MANAGEMENT IN 1991 AS SENIOR VICE PRESIDENT FOR INTERNATIONAL INVESTMENTS AND BECAME AN EXECUTIVE VICE PRESIDENT IN 1992. BRIAN HOPKINSON IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A PORTFOLIO MANAGER FOR THE FUND SINCE OCTOBER 1996. PRIOR TO JOINING GE ASSET MANAGEMENT, MR. HOPKINSON WORKED FOR FIDUCIARY TRUST INTERNATIONAL IN BOTH LONDON AND NEW YORK. JONATHAN L. PASSMORE IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS SERVED AS A PORTFOLIO MANAGER OF THE FUND SINCE JANUARY 2002. PRIOR TO JOINING GE ASSET MANAGEMENT IN JANUARY 2001, HE WAS WITH MERRILL LYNCH FOR SIX YEARS, MOST RECENTLY AS DIRECTOR, INTERNATIONAL EQUITY. MICHAEL J. SOLECKI IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS SERVED AS A PORTFOLIO MANAGER OF THE FUND SINCE SEPTEMBER 1997 HE JOINED GE ASSET MANAGEMENT IN 1990 AS AN INTERNATIONAL EQUITY ANALYST. HE BECAME A VICE PRESIDENT FOR INTERNATIONAL EQUITY PORTFOLIOS IN 1996 AND SENIOR VICE PRESIDENT IN 2000. JUDITH A. STUDER IS CHIEF INVESTMENT OFFICER, INVESTMENT STRATEGIES OF GE ASSET MANAGEMENT. SHE HAS SERVED AS A PORTFOLIO MANAGER OF THE FUND SINCE SEPTEMBER 1997. MS. STUDER JOINED GE ASSET MANAGEMENT IN AUGUST 1984. SHE BECAME SENIOR VICE PRESIDENT -- DOMESTIC EQUITIES IN 1991 AND SENIOR VICE PRESIDENT -- INTERNATIONAL EQUITIES IN 1995. Q. HOW DID THE INTERNATIONAL EQUITY FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the International Equity Fund returned 9.28%. The MSCI EAFE, the Fund's benchmark, returned 10.16% and the Fund's Lipper peer group of 137 International Core Funds returned an average of 8.95% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED FUND PERFORMANCE? A. Stocks moved higher early in the period driven by low interest rates, strong profitability and optimism over global growth prospects. However, inflation fears and an aggressive withdrawal of liquidity by the Bank of Japan triggered a sharp sell off in May and June, even while corporate conditions remained favorable. Q. WHAT WORLD EVENTS HAD A MAJOR IMPACT ON THE FINANCIAL MARKETS? A. The rise in commodity prices in recent quarters has been offset, largely, by rising productivity, keeping inflation subdued. However, growing concern at the world's central banks that prices might move unacceptably higher prompted rate increases around [PHOTO OMITTED] 2 Q&A the world in an apparent coordinated move. These actions led short-term investors, especially those who employ leverage, to aggressively cut long positions in stocks and commodities, regardless of fundamentals. Q. WHICH PARTICULAR STOCKS/SECTORS SIGNIFICANTLY CONTRIBUTED TO THE FUND PERFORMANCE? A. The IT and Financial sectors were the two sectors that contributed the most to the underperformance of the Fund during the last six months. Specifically, Japanese financials, such as Nomura Holdings and Acom, were under pressure as were certain industrials and technology companies including Chiyoda and Nidec. Pricing continues to be an issue, especially in technology where competition is fierce. Q. DID THE WEIGHTINGS/COUNTRY ALLOCATION OF THE FUND CHANGE? WHY? A. As a result of switches described below, the weights in telecom services and energy were slightly reduced. However, the weight remained the same in industrials while consumer staples was increased slightly. Holdings in Japan increased once again while the weight in the United Kingdom was reduced. Q. WHAT WERE THE MAJOR BUYS AND SELLS FOR THE PERIOD AND WHY? A. Holdings in integrated energy companies were trimmed in favor of oil service and equipment. Incumbent telecommunication service companies were reduced and replaced by stocks with significant opportunities in high growth emerging markets. A Japanese consumer finance company was sold for competitive reasons and new consumer-focused stocks added, reflecting the growing optimism about domestic growth in Japan. Niche holdings in specialty materials (carbon fiber) and fertilizers were added for their unique market opportunities. 3 International Equity Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees. JANUARY 1, 2006 - JUNE 30, 2006
----------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ----------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,092.82 6.34 ----------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,018.76 5.91 -----------------------------------------------------------------------------------------------------------------------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.18% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). ** ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 9.28%. 4 International Equity Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT [LINE CHART OMITTED, PLOT POINTS FOLLOWS] INTERNATIONAL EQUITY INDEX MSCI EAFE 6/96 $ 10000.00 $ 10000.00 12/96 10085.89 10146.19 12/97 11111.94 10326.24 12/98 13050.44 12390.85 12/99 17008.53 15732.02 12/00 14845.15 13503.22 12/01 11748.70 10584.65 12/02 8948.96 8897.45 12/03 12341.28 12330.60 12/04 14297.23 14827.20 12/05 16898.58 16834.14 06/06 18467.10 18544.78 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 SIX ONE FIVE TEN MONTHS YEAR YEAR YEAR -------------------------------------------------------------------- International Equity Fund 9.28% 30.23% 7.25% 6.33% -------------------------------------------------------------------- MSCI EAFE 10.16% 26.56% 10.04% 6.37% -------------------------------------------------------------------- Lipper peer group average* 8.95% 26.68% 9.25% 6.76% -------------------------------------------------------------------- Inception date 5/1/95 -------------------------------------------------------------------- International Equity Fund (ending value $18,467) MSCI EAFE (ending value $18,545) INVESTMENT PROFILE A fund designed for investors who seek long-term growth of capital by investing at least 80% of its net assets in equity securities under normal market conditions. The Fund invests primarily in developed and developing countries outside the United States. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value ---------------------------------------------------------------- BHP Billiton PLC 2.48% ---------------------------------------------------------------- Nomura Holdings, Inc. 2.04% ---------------------------------------------------------------- Roche Holding AG 2.01% ---------------------------------------------------------------- GlaxoSmithKline PLC 1.91% ---------------------------------------------------------------- BNP Paribas 1.88% ---------------------------------------------------------------- Mitsubishi UFJ Financial Group, Inc. 1.75% ---------------------------------------------------------------- Saipem S.p.A. 1.73% ---------------------------------------------------------------- Nestle S.A. (Regd.) 1.72% ---------------------------------------------------------------- UniCredito Italiano S.p.A. 1.71% ---------------------------------------------------------------- Nokia OYJ 1.69% ---------------------------------------------------------------- PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value Market Value of $81,717 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Continental Europe 37.9% Japan 17.7% United Kingdom 14.2% United States 13.9% Emerging Asia 4.5% Latin America 4.4% Pacific Rim 3.4% Canada 2.4% Emerging Europe 1.6% * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR, FIVE-YEAR, AND TEN-YEAR PERIODS INDICATED IN THE INTERNATIONAL CORE PEER GROUP CONSISTING OF 137, 137, 85 AND 40 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 INTERNATIONAL EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- INTERNATIONAL EQUITY FUND NUMBER OF SHARES VALUE COMMON STOCK -- 97.0%+ -------------------------------------------------------------------------------- ARGENTINA -- 0.7% Tenaris S.A. ADR............... 13,110 $ 530,824 BRAZIL -- 2.9% Cia Vale do Rio Doce ADR....... 45,712 1,098,917 Petroleo Brasileiro S.A. ADR... 12,086 964,946 2,063,863 CANADA -- 2.7% Canadian National Railway Co... 16,461 721,732(f) EnCana Corp.................... 4,736 250,321(f) Nortel Networks Corp........... 40,410 90,115(a) Potash Corp of Saskatchewan.... 10,086 866,994 1,929,162 CHINA -- 0.7% China Petroleum & Chemical Corp. 844,000 483,559 DENMARK -- 0.5% Group 4 Securicor PLC.......... 109,617 345,739 EGYPT -- 0.4% Orascom Construction Industries 9,506 289,061(a) FINLAND -- 1.9% Nokia OYJ...................... 67,540 1,378,306(a) FRANCE -- 9.5% Accor S.A...................... 1,170 71,196(f) AXA S.A........................ 20,206 662,962(f) BNP Paribas.................... 16,015 1,532,746(e,f) Carrefour S.A.................. 3,853 225,837(f) Credit Agricole S.A............ 19,716 749,993(f) France Telecom S.A............. 6,330 136,058(f) Lagardere S.C.A. (Regd.)....... 1,772 130,735(f) LVMH Moet Hennessy Louis Vuitton S.A............ 6,488 643,760(f) Renault S.A.................... 1,270 136,406(f) Sanofi-Aventis................. 4,317 421,171(f) Total S.A...................... 18,846 1,239,813(f) Veolia Environnement........... 17,684 913,737(f) 6,864,414 NUMBER OF SHARES VALUE GERMANY -- 5.3% Allianz AG (Regd.)............. 3,945 $ 623,069(a) BASF AG........................ 5,762 462,537 E.ON AG........................ 10,889 1,253,368 Linde AG....................... 6,393 492,508 Siemens AG (Regd.)............. 11,277 980,947 3,812,429 HONG KONG -- 1.5% Hongkong Land Holdings Ltd..... 83,999 307,436 Jardine Matheson Holdings Ltd.. 16,541 291,122 Sun Hung Kai Properties Ltd.... 48,930 498,938(f) 1,097,496 INDIA -- 0.7% ICICI Bank Ltd. ADR............ 21,225 501,971 ITALY -- 5.5% Banca Intesa S.p.A............. 104,112 609,702(f) Ente Nazionale Idrocarburi S.p.A. 18,565 546,689(f) Saipem S.p.A................... 62,269 1,416,444(f) UniCredito Italiano S.p.A...... 178,682 1,398,247 3,971,082 JAPAN -- 20.0% Asahi Glass Company Ltd........ 54,003 685,460(f) Bank of Yokohama Ltd........... 58,506 452,940(f) Chiyoda Corp................... 37,618 770,031(f) East Japan Railway Co.......... 95 706,382 Hoya Corp...................... 19,500 694,266 Komatsu Ltd.................... 34,811 692,779 Kubota Corp.................... 40,000 379,653 Mitsubishi Estate Company Ltd.. 55,982 1,190,012 Mitsubishi Heavy Industries Ltd. 30,000 129,642 Mitsubishi UFJ Financial Group, Inc................... 102 1,427,634 Mitsui Sumitomo Insurance Co. Ltd............ 70,000 879,937 Nidec Corp..................... 10,562 757,629(f) Nomura Holdings, Inc........... 88,999 1,669,972(f) Sekisui Chemical Company Ltd... 45,576 393,903 Seven & I Holdings Co. Ltd..... 16,000 527,665 Shiseido Company Ltd........... 24,523 481,600(f) SMC Corp....................... 2,571 364,121 Toray Industries Inc........... 118,999 1,033,688 Toyota Motor Corp.............. 23,397 1,225,981 14,463,295 MALAYSIA -- 0.3% Malaysia International Shipping Corp. BHD.................... 110,832 232,251 See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 6 INTERNATIONAL EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE MEXICO -- 1.0% America Movil S.A. de C.V. ADR (Series L)............... 21,858 $ 726,997 NETHERLANDS -- 2.8% ING Groep N.V.................. 20,261 796,113 Koninklijke Philips Electronics N.V............... 39,656 1,238,751 2,034,864 NORWAY -- 2.8% Orkla ASA...................... 2,757 127,823 Stolt Offshore S.A............. 69,096 1,052,108(a) Telenor ASA.................... 69,242 837,345 2,017,276 RUSSIA -- 0.7% LUKOIL ADR..................... 5,246 438,565(b) LUKOIL ADR..................... 668 55,578 494,143 SINGAPORE -- 2.4% CapitaLand Ltd................ 241,000 685,806 Singapore Telecommunications Ltd. ....................... 628,896 1,010,147 1,695,953 SOUTH KOREA -- 2.3% Kookmin Bank................... 4,030 331,338 Kookmin Bank ADR............... 7,279 604,594 Samsung Electronics Company Ltd.................. 30 19,068 Samsung Electronics Company Ltd. GDR............. 2,304 724,032(b) 1,679,032 SPAIN -- 1.7% Banco Santander Central Hispano S.A. (Regd.)........ 69,000 1,007,550(f) Telefonica S.A................. 13,238 220,387 Telefonica S.A. ADR............ 120 5,969 1,233,906 SWEDEN -- 2.2% Sandvik AB..................... 88,530 1,029,283 Telefonaktiebolaget LM Ericsson 158,744 524,486 1,553,769 SWITZERLAND -- 10.7% ABB Ltd. (Regd.)............... 80,059 1,039,133 Adecco S.A. (Regd.)............ 6,508 384,105 Credit Suisse Group (Regd.).... 20,003 1,116,902(e) NUMBER OF SHARES VALUE Holcim Ltd. (Regd.)............ 6,609 $ 505,521 Nestle S.A. (Regd.)............ 4,496 1,409,358(e) Novartis AG (Regd.)............ 20,822 1,125,238 Roche Holding AG............... 9,970 1,644,846 Swiss Reinsurance.............. 7,421 517,653 7,742,756 TAIWAN -- 1.0% Taiwan Semiconductor Manufacturing Company Ltd.... 420,121 757,793 TURKEY -- 0.7% Akbank TAS..................... 106,157 507,896 UNITED KINGDOM -- 16.1% BG Group PLC................... 46,150 616,703 BHP Billiton PLC............... 104,385 2,025,255(e) Brambles Industries PLC........ 27,985 222,566 Diageo PLC..................... 59,586 1,002,337 GlaxoSmithKline PLC............ 55,931 1,563,087(e) Group 4 Securicor PLC.......... 106,722 331,118 Lloyds TSB Group PLC........... 69,283 681,077 National Grid PLC.............. 4,796 51,895 Prudential PLC................. 67,110 758,393 Reed Elsevier PLC.............. 43,582 440,115 Rio Tinto PLC (Regd.).......... 17,830 942,826 Royal Bank of Scotland Group PLC.................... 35,310 1,161,169 Smiths Group PLC............... 31,844 524,773 Tesco PLC...................... 116,228 717,998 Vodafone Group PLC............. 269,761 575,024(e) 11,614,336 TOTAL COMMON STOCK (COST $53,369,108)........... 70,022,173 PREFERRED STOCK -- 0.4% Cia Vale do Rio Doce ADR (COST $275,372)............. 14,277 293,821 RIGHTS -- 0.0%* Linde AG (COST $0).................... 6,393 24,687(a) TOTAL INVESTMENTS IN SECURITIES (COST $53,644,480)........... 70,340,681 See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 7 INTERNATIONAL EQUITY FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE SHORT-TERM INVESTMENTS -- 15.7% SHORT-TERM INVESTMENTS -- 1.7% GEI Short Term Investment Fund 6.93%........................ 1,246,378 $ 1,246,378(c,g) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 14.0% State Street Navigator Securities Lending Prime Portfolio 5.25%........................ 10,130,227 10,130,227(c,d) TOTAL SHORT-TERM INVESTMENTS (COST $11,376,605)........... 11,376,605 TOTAL INVESTMENTS (COST $65,021,085)........... 81,717,286 LIABILITIES IN EXCESS OF OTHER ASSETS, NET -- (13.1)%..... (9,497,428) NET ASSETS -- 100.0% ........... $72,219,858 OTHER INFORMATION The GEI International Equity had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE APPRECIATION ------------------------------------------------------------------------ DJ EURO Stoxx 50 Index Futures September 2006 3 $ 140,472 $ 6,523 FTSE 100 Index Futures September 2006 1 107,736 3,138 ------- $ 9,661 ======= The GEI International Equity was invested in the following sectors at June 30, 2006 (unaudited): SECTOR PERCENTAGE (BASED ON MARKET VALUE) ------------------------------------------------------------ Financials 25.66% Short-Term 13.92% Industrials 12.18% Materials 9.48% Energy 9.29% Information Technology 6.05% Healthcare 5.82% Consumer Staples 5.34% Consumer Discretionary 5.24% Telecommunication Services 4.30% Utilities 2.72% ------ 100.00% ====== See Notes to Schedule of Investments on page 9 and Notes to Financial Statements. 8 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Pursuant to Rule 144A of the Securities Act of 1933, these securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2006, these securities amounted to $1,162,598 or 1.61% of net assets for the GE Investments International Equity Fund. These securities have been determined to be liquid using procedures established by the Board of Trustees. (c) Coupon amount represents effective yield. (d) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (e) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (f) All or a portion of the security is out on loan. (g) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. * Less than 0.1% + Percentages are based on net assets as of June 30, 2006. Abbreviations: ADR American Depository Receipt GDR Global Depository Receipt REGD. Registered 9 Financial Highlights Selected data based on a share outstanding throughout the periods indicated --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 -------------------------------------------------------------------------------------------------------------------------------- INCEPTION DATE -- -- -- -- -- 5/1/95 Net asset value, beginning of period......... $11.42 $9.76 $8.52 $6.23 $8.28 $10.61 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income..................... 0.13 0.13 0.11 0.07 0.07 0.09 Net realized and unrealized gains/(losses) on investments.......... 0.93 1.65 1.24 2.29 (2.04) (2.30) -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS................................. 1.06 1.78 1.35 2.36 (1.97) (2.21) -------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income..................... -- 0.12 0.11 0.07 0.08 0.08 Net realized gains........................ -- -- -- -- -- 0.04 -------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS.......................... -- 0.12 0.11 0.07 0.08 0.12 -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD............... $12.48 $11.42 $9.76 $8.52 $6.23 $8.28 -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (A)............................. 9.28% 18.19% 15.85% 37.91% (23.83)% (20.86)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $72,220 $65,450 $55,714 $45,198 $31,683 $42,119 Ratios to average net assets: Net investment income*................. 2.08% 1.19% 1.31% 1.13% 0.88% 0.99% Expenses*.............................. 1.18% 1.25% 1.15% 1.07% 1.09% 1.07% Portfolio turnover rate................... 18% 53% 38% 35% 42% 42%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 10 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
INTERNATIONAL EQUITY FUND ---------------------------------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $53,644,480)............................. $70,340,681 Short-term investments (at amortized cost) .......................................... 10,130,227 Short-term affiliated investments (at amortized cost)................................ 1,246,378 Restricted cash...................................................................... 124,335 Foreign cash (cost $84,496).......................................................... 85,398 Receivable for investments sold...................................................... 930,409 Income receivables .................................................................. 177,759 Receivable for fund shares sold...................................................... 42 Variation margin receivable.......................................................... 13,527 ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS..................................................................... 83,048,756 ---------------------------------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned............................................. 10,130,227 Payable for investments purchased ................................................... 528,089 Payable for fund shares redeemed..................................................... 105,977 Payable to GEAM...................................................................... 64,605 ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES................................................................ 10,828,898 ---------------------------------------------------------------------------------------------------------- NET ASSETS.............................................................................. $72,219,858 ---------------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Capital paid in ..................................................................... 58,265,941 Undistributed (distribution in excess of) net investment income ..................... 767,314 Accumulated net realized gain (loss)................................................. (3,530,604) Net unrealized appreciation/(depreciation) on: Investments....................................................................... 16,696,201 Futures........................................................................... 9,661 Foreign currency related transactions............................................. 11,345 ---------------------------------------------------------------------------------------------------------- NET ASSETS.............................................................................. $72,219,858 ---------------------------------------------------------------------------------------------------------- Shares outstanding ($0.01 par value; unlimited shares authorized)....................... 5,785,473 Net asset value per share............................................................... 12.48
* Includes $9,793,015 of securities on loan. See Notes to Financial Statements. 11 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INTERNATIONAL EQUITY FUND ---------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ........................................................................... $1,226,215 Interest* .......................................................................... 35,240 Interest from affliated investments ................................................ 38,974 Less: Foreign taxes withheld ....................................................... (139,361) ---------------------------------------------------------------------------------------------------------- TOTAL INCOME ......................................................................... 1,161,068 ---------------------------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ................................................... 357,609 Custody and accounting expenses .................................................... 53,865 Professional fees .................................................................. 4,581 Trustee's fees ..................................................................... 894 Registration expenses .............................................................. 347 Transfer agent ..................................................................... 30 Other expenses ..................................................................... 3,412 ---------------------------------------------------------------------------------------------------------- TOTAL EXPENSES ....................................................................... 420,738 ---------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ......................................................... 740,330 ---------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ..................................................................... 3,802,611 Futures ......................................................................... (157,690) Foreign currency transactions ................................................... (885) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ..................................................................... 1,684,412 Futures ......................................................................... (4,809) Foreign currency transactions ................................................... 12,837 ---------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ............................. 5,336,476 ---------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...................... $6,076,806 ----------------------------------------------------------------------------------------------------------
* Income attributable to security lending activity, net of rebate expenses, was $33,231. See Notes to Financial Statements. 12 Statements of Changes in Net Assets
INTERNATIONAL EQUITY FUND ---------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ---------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss)..................................................... $ 740,330 $ 713,463 Net realized gain (loss) on investments, futures, written options and foreign currency transactions............................................... 3,644,036 6,918,800 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation....... 1,692,440 2,825,088 ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations........................................... 6,076,806 10,457,351 ---------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................. -- (662,460) ---------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS................................................................. -- (662,460) ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions................. 6,076,806 9,794,891 ---------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares...................................................... 14,535,474 15,506,966 Value of distributions reinvested................................................. -- 662,453 Cost of shares redeemed........................................................... (13,842,636) (16,228,136) ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions.................................. 692,838 (58,717) ---------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS............................................. 6,769,644 9,736,174 NET ASSETS Beginning of period................................................................. 65,450,214 55,714,040 ---------------------------------------------------------------------------------------------------------------------------- End of period....................................................................... $ 72,219,858 $ 65,450,214 ---------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD......... $ 767,314 $ 26,984 ---------------------------------------------------------------------------------------------------------------------------- CHANGES IN PORTFOLIO SHARES Shares sold....................................................................... 1,174,022 1,576,351 Issued for distributions reinvested............................................... -- 57,505 Shares redeemed................................................................... (1,120,635) (1,607,573) ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in fund shares................................................. 53,387 26,283 ----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund (the "Fund"), Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The 15 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward foreign currency exchange contracts to facilitate transactions in foreign denominated securities and to manage the Fund's currency exposure. Forward foreign currency exchange contracts are valued at the mean between the bid and the offered forward rates as last quoted by a recognized dealer. The aggregate principal amounts of the contracts are not recorded in the Fund's financial statements. Such amounts appear under the caption forward foreign currency contracts in the Schedule of Investments. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (or liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains or losses on foreign currency related transactions. The Fund's risks in using these contracts include changes in the value of foreign currency or the possibility that the counterparties do not perform under the contracts' terms. When the Fund enters into a forward foreign currency exchange contract, it is required to segregate cash or liquid securities with its custodian in an amount equal to the value of the Fund's total assets committed to the consummation of the forward contract. If the value of the segregated securities declines, additional cash or securities is segregated so that the value of the account will equal the amount of the Fund's commitment with respect to the contract. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Cost of Gross Tax Gross Tax Net Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ------------------------------------------------------------------------------------------------------------------------ $65,082,617 $17,260,982 $(808,337) $16,452,645
As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires ---------------------------------------------------------------- $2,393,579 12/31/10 4,537,505 12/31/11 During the year ended December 31, 2005, the Fund utilized approximately $6,861,177 of capital loss carryovers. 16 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund elected to defer losses incurred after October 31, 2005 as follows: Capital Currency ----------------------------------------------------------------- $ -- $5,498 The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Ordinary Long-Term Income Capital Gains Total ------------------------------------------------------------------ $662,460 $ -- $662,460 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures, treatment of realized gains and losses on foreign currency contracts, and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund. The advisory and administrative fee is stated in the following schedule: Annualized based on average daily net assets -------------------------------------------------------------- Average Daily Advisory and Net Assets Administration of Fund Fees --------------------------------------------------------------- First $100 million 1.00% Next $100 million .95% Over $200 million .90% GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $468 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. 17 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales ----------------------------------------------------------------- $13,631,397 $12,542,277 SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* ----------------------------------------------------------------- $9,793,015 $10,293,803 * COLLATERAL OF $10,130,227 INCREASED BY $163,576 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 19 Advisory and Administrative Agreement Renewal (unaudited) INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Funds of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members reviewed the applicable advisory fee breakpoints for the Fund and concluded that no changes were needed. The Board members recognized the economies of scale benefits derived by the Fund as a result of this fee structure. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper 20 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 21 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 22 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 23 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 24 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J. Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 25 [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [LOGO OMITTED] GE Investments Funds, Inc. Total Return Fund Semi-Annual Report JUNE 30, 2006 [GE logo omitted] GE Investments Funds, Inc. Total Return Fund Contents ------------------------------------------------------------------------------- NOTES TO PERFORMANCE ....................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ................................. 2 NOTES TO SCHEDULE OF INVESTMENTS ........................................... 18 FINANCIAL STATEMENTS Financial Highlights .................................................. 19 Statement of Assets and Liabilities ................................... 20 Statement of Operations ............................................... 21 Statements of Changes in Net Assets ................................... 22 Notes to Financial Statements ......................................... 24 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL .............................. 30 ADDITIONAL INFORMATION ..................................................... 33 INVESTMENT TEAM ............................................................ 36 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Standard & Poor's ("S&P") 500 Composite Price Index of stocks (S&P 500) and Lehman Brothers Aggregate Bond Index (LB Aggregate) are unmanaged indices and do not reflect the actual cost of investing in the instruments that comprise each index. The S&P 500 is an unmanaged, market capitalization-weighted index of stocks of 500 large U.S. companies, which is widely used as a measure of large-cap stock market performance. The LB Aggregate Bond Index is a market value-weighted index of investment-grade debt issues, including government, corporate, asset-backed and mortgage-backed securities, with maturities of one year or more. The results shown for the foregoing indices assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Total Return Fund -------------------------------------------------------------------------------- THE TOTAL RETURN FUND IS MANAGED BY A TEAM OF PORTFOLIO MANAGERS THAT INCLUDES CHRISTOPHER D. BROWN, PAUL M. COLONNA, RALPH R. LAYMAN, JUDITH A. STUDER AND DIANE M. WEHNER. THE TEAM IS LED BY MS. STUDER WHO, AS A LEAD MEMBER OF THE TACTICAL ASSET ALLOCATION COMMITTEE, IS VESTED WITH OVERSIGHT AUTHORITY FOR DETERMINING ASSET ALLOCATIONS FOR THE FUND. EACH OF THE FOREGOING PORTFOLIO MANAGERS IS RESPONSIBLE FOR MANAGING ONE OF THREE SUB-PORTFOLIOS: U.S. EQUITY, INTERNATIONAL EQUITY AND FIXED INCOME. MR. BROWN AND MS. WEHNER MANAGE THE U.S. EQUITY PORTION, MR. LAYMAN AND MS. STUDER MANAGE THE INTERNATIONAL EQUITY PORTION AND MR. COLONNA MANAGES THE FIXED INCOME PORTION, EACH WITH A TEAM OF PORTFOLIO MANAGERS AND ANALYSTS. THE SUB-PORTFOLIOS UNDERLYING THIS FUND ARE MANAGED INDEPENDENTLY OF EACH OTHER AND THE PORTFOLIO MANAGERS HAVE FULL DISCRETION OVER THEIR PARTICULAR SUB-PORTFOLIO; HOWEVER, THE PORTFOLIO MANAGEMENT TEAM IS COLLABORATIVE TO ENSURE STRICT ADHERENCE TO THIS FUND'S OBJECTIVES. JUDITH A. STUDER IS CHIEF INVESTMENT OFFICER, INVESTMENT STRATEGIES OF GE ASSET MANAGEMENT. SHE HAS LED THE TEAM OF PORTFOLIO MANAGERS FOR THE TOTAL RETURN FUND SINCE JULY 2004. MS. STUDER JOINED GE ASSET MANAGEMENT IN AUGUST 1984. SHE BECAME SENIOR VICE PRESIDENT - DOMESTIC EQUITIES IN 1991 AND SENIOR VICE PRESIDENT - INTERNATIONAL EQUITIES IN 1995. CHRISTOPHER D. BROWN IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS SERVED ON THE PORTFOLIO MANAGEMENT TEAM FOR THE TOTAL RETURN FUND SINCE SEPTEMBER 2003. MR. BROWN JOINED GE ASSET MANAGEMENT IN 1985 AS A MANAGER OF FUNDS ACCOUNTING. HE BECAME A U.S. EQUITY ANALYST IN 1989, A VICE PRESIDENT AND PORTFOLIO MANAGER IN 1992, AND A SENIOR VICE PRESIDENT IN 1996. PAUL M. COLONNA IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. SINCE JANUARY 2005, HE HAS BEEN RESPONSIBLE FOR THE FIXED INCOME PORTION OF THE TOTAL RETURN FUND. PRIOR TO JOINING GE ASSET MANAGEMENT IN FEBRUARY 2000, MR. COLONNA WAS A SENIOR PORTFOLIO MANAGER WITH THE FEDERAL HOME LOAN MORTGAGE CORPORATION, OVERSEEING THE MORTGAGE INVESTMENT GROUP. RALPH R. LAYMAN IS A DIRECTOR AND EXECUTIVE VICE PRESIDENT OF GE ASSET MANAGEMENT. HE MANAGES THE OVERALL INTERNATIONAL EQUITY INVESTMENTS FOR GE ASSET MANAGEMENT. MR. LAYMAN HAS BEEN RESPONSIBLE FOR THE INTERNATIONAL EQUITY PORTION OF THE TOTAL RETURN FUND SINCE 1997. MR. LAYMAN JOINED GE ASSET MANAGEMENT IN 1991 AS SENIOR VICE PRESIDENT FOR INTERNATIONAL INVESTMENTS AND BECAME AND EXECUTIVE VICE PRESIDENT IN 1992. DIANE M. WEHNER IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. SHE HAS BEEN A PORTFOLIO MANAGER OF THE TOTAL RETURN FUND SINCE JANUARY 2006. BEFORE JOINING GE ASSET MANAGEMENT, MS. WEHNER WAS A VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER FROM JANUARY 1997 TO JUNE 2001, AND ASSOCIATE PORTFOLIO MANAGER FROM MAY 1995 TO JANUARY 1997, WITH BENEFIT CAPITAL MANAGEMENT CORPORATION. MS. WEHNER HAS SERVED AS AN ANALYST/PORTFOLIO MANAGER IN THE INVESTMENT MANAGEMENT INDUSTRY SINCE 1985. Q. HOW DID THE TOTAL RETURN FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Total Return Fund returned 2.93%. The Fund's broad-based benchmarks, the S&P 500 Index and the Lehman Brothers Aggregate Bond Index, returned 2.70% and -0.72%, respectively. The Fund's Lipper peer group of 114 Mixed-Asset Target Allocation Growth funds returned an average of 2.14% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED THE FUND'S PERFORMANCE? WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. The U.S. stock market began the year on a bullish note, however volatility rose by the end of the period, upsetting all global financial markets. The S&P 500 rallied through April as investors anticipated an [Photo of Judith A. Studer omitted] 2 -------------------------------------------------------------------------------- Q&A end to the Federal Reserve's tightening campaign. By May 10, the Dow Jones Industrials were up more than 8% for the year, less than 100 points short of the record. However as growth persisted and inflationary data mounted, Federal Reserve members became more hawkish in their public comments. At the same time, central bankers around the world tightened monetary policy, reducing appetite for risk. Investors began to worry about the sustainability of the global expansion, given the inflation and liquidity concerns. For most of May and June riskier asset classes--from developing country stocks to industrial commodities to Florida condos--came under pressure. U.S. equities swooned amid the uncertainty, and the Dow gave back half of the year's gains. Technology and health care were hit the hardest in this environment, and were the only sectors posting negative returns year-to-date. In fact, health care dropped to a 12-month low in the last week of June, while consumer staples registered a new high. This contrasting performance between two defensive sectors highlighted the importance of careful stock selection in a volatile market. Value continued to lead growth as the Russell 1000 Value Index gained 6.6% year-to-date, while the Russell 1000 Growth Index lost -0.9%. The US Equity allocation underperformed the benchmark during the year-to-date period ending June 30, 2006. The main drivers of the underperformance included financials, consumer discretionary, and telecommunications services. Within financials, AIG (-13.0%) suffered most of its losses in the second quarter; the decline, coupled with our overweight position in the insurance industry, was the main detractor in the sector. An underweight in commercial banks also hurt, despite particular strength in our SunTrust (6.8%) holding. In addition, many of our consumer discretionary holdings also hurt performance despite strong returns from Comcast (27.6%) and Liberty Media Holdings Corp. - Capital (14.0%). Holdings offsetting these gains from the media industry were specialty retailers Bed Bath & Beyond (-8.2%) and Home Depot (-10.9%). Carnival (-21.1%) also declined as softness in Caribbean cruise bookings continued and surging fuel costs impacted profits during the period. Underperformance in telecom was driven by a lack of exposure to diversified telecom services, an industry that returned 19.8% during the period. The Bells have benefited from restructuring initiatives and heightened M&A activity in the industry. BellSouth has risen (36.2%) so far this year on their announced combination with AT&T (16.9%)--both of which we did not own. Positive contributors to performance during the year-to-date period include information technology, energy, and health care. Within information technology, many of the higher quality names that inhibited performance last year led performance in the first half of 2006. For example, Oracle (18.7%) continued to successfully integrate acquisitions, Intuit (13.6%) had a strong TurboTax season, and electronic components manufacturer Molex (17.4%) surged among favorable business trends and an attractive pricing environment. In a reversal from last year, avoiding Apple (-20.3%) helped portfolio returns. In addition, technology services company First Data Corp. (5.0%) contributed to performance as it announced the spin-off of its Western Union subsidiary. All of these positives more than offset the drag from Microsoft (-10.3%), which disappointed many investors by announcing $2B in additional spending without providing many details as to the scope and return potential of the expenditures. Within energy, positive stock selection driven by Schlumberger (34.6%) and Halliburton (20.3%) enabled our holdings to return 17.9% versus 13.7% for the benchmark. The portfolio benefited from strong security selection in health care during the period. Avoiding the health care equipment and supply companies benefited performance, as did owning Abbott (12.1%) and not owning UnitedHealth (-27.9%). Amgen detracted from performance as the stock declined 17.3% during the period. The company is facing increased competition for Enbrel, a drug used for arthritis and skin disease, and, potentially, from Swiss drug maker Roche, which is trying to market its anemia drug in the U.S. Amgen has filed to block the sale of Roche's Cera drug based on patent infringement. During the first quarter of 2006, the Fund modified the composition of its U.S. Equity allocation. The portfolio managers have decided to incorporate mid-cap securities into the Fund, and during the period increased exposure to this area by almost 10%. The portfolio managers, following a process established by GE Asset Management's Asset Allocation Committee 3 Total Return Fund -------------------------------------------------------------------------------- Q&A to diversify holdings across asset classes, make decisions on the Fund's asset allocation. The Fund adjusts its weightings among asset classes based on their relative attractiveness. In the fixed income sector, individual security return was the largest positive contributor to Fund performance relative to the benchmark. Sector allocation also provided excess return. In particular, the Fund's exposure to high yield bonds added significantly to excess return as high yield, in general, returned over 3.0% for the period. However, the Fund's performance during the period was negatively affected by relative duration exposure. Economic growth in the U.S. slowed decidedly in the second quarter, after a very strong 5.6% growth rate in the first quarter. With the increase in interest rates across the yield curve, the primary focus has been the impact on the U.S. housing market, which has fueled much of our growth in recent years. Indeed, there is justified cause for concern about housing. Despite an increase in new home sales, month-over-month in May, sales volume of both new and existing homes are down from year-ago levels. Market participants fear that a significant decline in home prices and rising energy costs will force retrenchment by the American consumer. Despite a slowing in economic growth, inflation pressures did not appear to be receding. High prices at the gas pump plagued consumers. Housing costs, which make up a large component of consumer inflation statistics through owner equivalent rent levels, had risen. Commodity prices remained above year-ago levels despite falling off a bit most recently. Utilization rates were back above pre-2001 levels. The combination of slowing growth and rising inflation had investors playing the guessing game on future Fed moves. This game has always been a favorite pastime of bond investors, but with a new Fed chairman in the mix, the second quarter had been enjoyable to watch. In April, after a 25 basis point hike in fed funds to 4.75%, FOMC comments led market thinking toward a move in May to 5% and then pausing in June. The Fed did, in fact, raise rates again in May to 5%, but a more hawkish tone regarding inflation in its statement and subsequent comments by various Fed members, including the chairman, left many investors believing the committee would continue rate hikes in June and beyond. The committee did follow up in June with another hike of 25 basis points to 5.25% while reiterating that future rate decisions will be data dependant. In the international equity markets, stocks moved higher early in the period driven by low interest rates, strong profitability and optimism over global growth prospects. However, inflation fears and an aggressive withdrawal of liquidity by the Bank of Japan triggered a sharp sell off in May and June, even while corporate conditions remained favorable. The rise in commodity prices in recent quarters has been offset, largely, by rising productivity, keeping inflation subdued. However, growing concern at the world's central banks that prices might move unacceptably higher prompted rate increases around the world in an apparent coordinated move. These actions led short-term investors, especially those who employ leverage, to aggressively cut long positions in stocks and commodities, regardless of fundamentals. The IT and Financial sectors were the two sectors that contributed the most to the underperformance of the Fund during the last six months. Specifically, Japanese financials, such as Nomura Holdings and Acom, were under pressure as were certain industrials and technology companies including Chiyoda and Nidec. Pricing continues to be an issue, especially in technology where competition is fierce. As a result of switches described below, the weights in telecom services and energy were slightly reduced. However, the weight remained the same in industrials while consumer staples was increased slightly. Holdings in Japan increased once again while the weight in the United Kingdom was reduced. Holdings in integrated energy companies were trimmed in favor of oil service and equipment. Incumbent telecommunication service companies were reduced and replaced by stocks with significant opportunities in high growth emerging markets. A Japanese consumer finance company was sold for competitive reasons and new consumer-focused stocks added, reflecting the growing optimism about domestic growth in Japan. Niche holdings in specialty materials (carbon fiber) and fertilizers were added for their unique market opportunities. 4 Total Return Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees. JANUARY 1, 2006 - JUNE 30, 2006
------------------------------------------------------------------------------------------------------------------------------- Account value at the Account value at the Expenses paid beginning of the period ($) end of the period ($) during period ($)* ------------------------------------------------------------------------------------------------------------------------------- ACTUAL FUND RETURN** ------------------------------------------------------------------------------------------------------------------------------- Class 1 1,000.00 1,029.30 2.25 Class 2 1,000.00 970.05 0.93 Class 3 1,000.00 970.05 1.02 Class 4 1,000.00 968.88 1.26 ------------------------------------------------------------------------------------------------------------------------------- HYPOTHETICAL 5% RETURN (2.5% FOR THE PERIOD) ------------------------------------------------------------------------------------------------------------------------------- Class 1 1,000.00 1,022.36 2.21 Class 2 1,000.00 1,007.08 0.96 Class 3 1,000.00 1,007.22 1.04 Class 4 1,000.00 1,007.09 1.29 -------------------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.44% FOR CLASS 1, 0.57% FOR CLASS 2, 0.62% FOR CLASS 3, AND 0.77% FOR CLASS 4, (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 FOR CLASS 1 (TO REFLECT THE SIX-MONTH PERIOD) AND 61/365 FOR CLASS 2, CLASS 3 AND CLASS 4 (TO REFLECT THE TWO-MONTH PERIOD). **ACTUAL FUND RETURNS FOR THE RESPECTIVE PERIODS ENDED JUNE 30, 2006 WERE AS FOLLOWS: 2.93% FOR CLASS 1 SHARES, (2.99)% FOR CLASS 2 SHARES, (2.99)% FOR CLASS 3 SHARES, AND (3.11)% FOR CLASS 4 SHARES. 5 Total Return Fund -------------------------------------------------------------------------------- INVESTMENT PROFILE A fund designed for investors who seek the highest total return, composed of current income and capital appreciation, as is consistent with prudent investment risk by investing primarily in a combination of equity securities and investment grade debt securities. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value =================================================================== U.S. Treasury Notes, 4.88%, 04/30/08 - 05/31/11 4.42% ------------------------------------------------------------------- U.S. Treasury Notes, 5.13%, 05/15/16 2.48% ------------------------------------------------------------------- Exxon Mobil Corp. 1.45% ------------------------------------------------------------------- Federal National Mortgage Assoc., 6.00%, TBA 1.37% ------------------------------------------------------------------- First Data Corp. 1.34% ------------------------------------------------------------------- Microsoft Corp. 1.13% ------------------------------------------------------------------- American International Group, Inc. 1.07% ------------------------------------------------------------------- Wyeth 1.03% ------------------------------------------------------------------- Pfizer Inc. 0.97% ------------------------------------------------------------------- Bank of America Corp. 0.97% =================================================================== LIPPER PERFORMANCE COMPARISON Mixed-Asset Target Allocation Growth Funds Based on average annual total returns for the periods ended 6/30/06 Six One Five Ten Months Year Year Year ------ ---- ---- ---- Number of Funds in peer group: 114 113 67 44 -------------------------------------------------------------------------------- Peer group average annual total return: 2.14% 7.25% 3.97% 7.12% -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT CLASS 1 SHARES [Line chart omitted -- plot points are as follows:] Total S&P 500 LB Aggregate Return Fund Index Bond Index 6/96 $10,000.00 $10,000.00 $10,000.00 12/96 10,841.85 11,172.20 10,490.46 12/97 12,791.86 14,891.40 11,503.20 12/98 14,979.34 19,164.94 12,502.43 12/99 16,964.10 23,202.58 12,399.75 12/00 17,802.77 21,071.78 13,841.35 12/01 17,288.33 18,561.71 15,010.04 12/02 15,678.42 14,459.22 16,549.33 12/03 18,863.29 18,613.09 17,228.59 12/04 20,407.86 20,638.45 17,976.10 12/05 21,156.75 21,653.55 18,412.65 6/06 21,776.68 22,238.88 18,279.61 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006
Ending Value of a Six One Five Ten $10,000 Months Year Year Year Investment ------ ------ ----- ----- ---------- Total Return Fund 2.93% 8.13% 4.78% 8.09% $21,777 S&P 500 Index 2.70% 8.63% 2.49% 8.32% $22,239 LB Aggregate Bond Index -0.72% -0.81% 4.97% 6.22% $18,280 Inception date 7/1/85
CLASS 2 SHARES [Line chart omitted -- plot points are as follows:] Total S&P 500 LB Aggregate Return Fund Index Bond Index 05/01/06 $10,000.00 $10,000.00 $10,000.00 5/06 9,735.76 9,712.23 9,989.29 6/06 9,700.53 9,725.39 10,010.49 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 Ending Value of a Current Since $10,000 Month Inception Investment ------- --------- ---------- Total Return Fund -0.36% -2.99% $9,701 S&P 500 Index 0.14% -2.75% $9,725 LB Aggregate Bond Index 0.21% 0.10% $10,010 Inception date 5/1/06 CLASS 3 SHARES [Line chart omitted -- plot points are as follows:] Total S&P 500 LB Aggregate Return Fund Index Bond Index 05/01/06 $10,000.00 $10,000.00 $10,000.00 5/06 9,741.63 9,712.23 9,989.29 6/06 9,700.53 9,725.39 10,010.49 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 Ending Value of a Current Since $10,000 Month Inception Investment ------- --------- ---------- Total Return Fund -0.42% -2.99% $9,701 S&P 500 Index 0.14% -2.75% $9,725 LB Aggregate Bond Index 0.21% 0.10% $10,010 Inception date 5/1/06 CLASS 4 SHARES [Line chart omitted -- plot points are as follows:] Total S&P 500 LB Aggregate Return Fund Index Bond Index 05/01/06 $10,000.00 $10,000.00 $10,000.00 5/06 9,729.89 9,712.23 9,989.29 6/06 9,688.78 9,725.39 10,010.49 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 Ending Value of a Current Since $10,000 Month Inception Investment ------- --------- ---------- Total Return Fund -0.42% -3.11% $9,689 S&P 500 Index 0.14% -2.75% $9,725 LB Aggregate Bond Index 0.21% 0.10% $10,010 Inception date 5/1/06 SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPHS AND TABLES DO NOT REFLECT THE DEDUCTION OF TAXES. 6 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- TOTAL RETURN FUND Portfolio Composition as a % of the Market Value of $1,464,407 (in thousands) as of June 30, 2006 [Pie chart omitted -- plot points are as follows:] Domestic Equity 41.4% Foreign Equity 22.6% Bonds & Notes 21.1% Short Term & Others 14.9% -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE DOMESTIC EQUITY -- 45.0%+ -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- 6.9% aQuantive, Inc. 14,826 $ 375,543(a,j) Bed Bath & Beyond, Inc. 196,992 6,534,225(a) Boyd Gaming Corp. 14,394 580,942(j) Carnival Corp. 196,496 8,201,743(h) CBS Corp. 121,107 3,275,944(h) Cheesecake Factory 34,205 921,825(a) Chico's FAS, Inc. 21,287 574,323(a) Comcast Corp. (Class A) 414,822 13,597,865(a) Federated Department Stores Inc. 26,648 975,317 Getty Images, Inc. 16,887 1,072,493(a,j) Global Cash Access Holdings, Inc. 49,836 778,937(a) Liberty Global, Inc. (Series C) 207,413 4,266,485(a) Liberty Media Holding Corp - Capital (Series A) 73,274 6,138,163(a) Liberty Media Holding Corp - Interactive (Series A) 366,372 6,323,581(a) Life Time Fitness, Inc. 11,916 551,353(a,j) Michaels Stores, Inc. 45,067 1,858,563 Omnicom Group, Inc. 64,452 5,742,029 Pulte Homes, Inc. 24,923 717,533(j) Regal Entertainment Group (Class A) 59,817 1,215,481(j) Staples, Inc. 87,502 2,128,049 Starwood Hotels & Resorts Worldwide, Inc. 18,721 1,129,625 Target Corp. 74,232 3,627,718 The E.W. Scripps Co. (Class A) 31,746 1,369,522(j) The Home Depot, Inc. 367,884 13,166,568 Univision Communications Inc. (Class A) 23,162 775,927(a) Viacom Inc. (Class B) 87,331 3,129,943(a) Williams-Sonoma, Inc. 25,618 872,293 89,901,990 NUMBER OF SHARES VALUE CONSUMER STAPLES -- 3.8% Alberto-Culver Co. 28,522 $ 1,389,592(a) Clorox Co. 75,268 4,589,090 Colgate-Palmolive Co. 221,996 13,297,560(h) Kroger Co. 34,956 764,138 PepsiCo, Inc. 225,970 13,567,239 Sara Lee Corp. 108,990 1,746,020 The Coca-Cola Co. 308,935 13,290,384(h) The Hershey Co. 5,495 302,610 Weight Watchers International Inc. 31,516 1,288,689 50,235,322 ENERGY -- 4.4% BJ Services Co. 36,084 1,344,490 Dresser-Rand Group, Inc. 43,538 1,022,272(a) EOG Resources, Inc. 111,800 7,752,212 Exxon Mobil Corp. 346,051 21,230,229 GlobalSantaFe Corp. 29,938 1,728,920 Halliburton Co. 87,200 6,471,112 Hess Corp. 27,753 1,466,746 Peabody Energy Corp. 25,907 1,444,315 Schlumberger Ltd. 191,037 12,438,419 Valero Energy Corp. 17,425 1,159,111 Weatherford International Ltd. 34,749 1,724,245(a) 57,782,071 FINANCIALS -- 7.6% Affiliated Managers Group 19,745 1,715,643(a,j) AFLAC Incorporated 127,722 5,919,915(h) Alleghany Corp. 200 55,272(a) American International Group, Inc. 266,361 15,728,617(h) Bank of America Corp. 294,468 14,163,911(h) Berkshire Hathaway, Inc. (Class B) 1,642 4,996,606(a) Calamos Asset Management Inc. (Class A) 44,526 1,290,809(j) CB Richard Ellis Group, Inc. (Class A) 88,680 2,208,132(a) Citigroup, Inc. 87,331 4,212,847 CVB Financial Corp. 44,175 691,781(j) Everest Re Group, Ltd. 46,637 4,037,365 Federal National Mortgage Assoc. 175,755 8,453,816 Greenhill & Company, Inc. 17,904 1,087,847(j) HCC Insurance Holdings, Inc. 124,630 3,669,107 Legg Mason, Inc. 18,076 1,798,924 M&T Bank Corp. 6,843 806,927 Maguire Properties, Inc. (REIT) 19,668 691,724(j) MBIA Inc. 8,779 514,010 Mellon Financial Corp. 125,539 4,322,308 Metlife, Inc. 85,151 4,360,583 North Fork Bancorporation, Inc. 44,495 1,342,414 State Street Corp. 157,197 9,131,574(e) SunTrust Banks, Inc. 74,232 5,660,932 The Hartford Financial Services Group, Inc. 13,835 1,170,441 Trammell Crow Co. (REIT) 21,235 746,835(a) Zions Bancorporation 16,518 1,287,413 100,065,753 See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 7 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE HEALTHCARE -- 7.1% Abbott Laboratories 294,747 $ 12,853,917(h) Advanced Medical Optics, Inc. 51,638 2,618,047(a,j) Aetna, Inc. 121,176 4,838,558 Alcon, Inc. 14,222 1,401,578 Amgen, Inc. 174,665 11,393,398(a,h) Amylin Pharmaceuticals, Inc. 44,759 2,209,752(a,j) Barr Pharmaceuticals, Inc. 36,210 1,726,855(a) Caremark Rx, Inc. 34,237 1,707,399 DENTSPLY International, Inc. 20,090 1,217,454 Gilead Sciences, Inc. 15,631 924,730(a) Henry Schein, Inc. 33,650 1,572,465(a) Johnson & Johnson 122,250 7,325,220 Kinetic Concepts, Inc. 11,403 503,442(a) LIncare Holdings Inc. 165,930 6,278,791(a) Manor Care, Inc. 31,933 1,498,296 Martek Biosciences Corp. 26,672 772,154(a,j) Pfizer Inc. 608,252 14,275,674 Psychiatric Solutions Inc. 49,435 1,416,807(a) Quest Diagnostics Inc. 23,921 1,433,346 Thermo Electron Corp. 57,992 2,101,630(a) Vertex Pharmaceuticals, Inc. 8,939 328,151(a,j) Wyeth 338,415 15,029,010 93,426,674 INDUSTRIALS -- 3.7% ChoicePoint, Inc. 22,291 931,095(a) Corinthian Colleges, Inc. 142,625 2,048,095(a,j) Corporate Executive Board Co. 7,583 759,817 CoStar Group, Inc. 18,433 1,102,846(a,j) Danaher Corp. 23,301 1,498,720 Dover Corp. 274,830 13,584,847(h) Eaton Corp. 18,433 1,389,848 Harsco Corp. 20,483 1,596,855 Hexcel Corp. 65,974 1,036,452(a,j) Joy Global, Inc. 12,563 654,407 MoneyGram International, Inc. 51,952 1,763,770 Rockwell Collins, Inc. 34,599 1,933,046 Southwest Airlines Co. 349,330 5,718,532(j) Stericycle, Inc. 19,135 1,245,689(a) Sunpower Corp. (Class A) 17,019 476,872(a,j) Tyco International Ltd. 239,790 6,594,225 United Technologies Corp. 69,600 4,414,032 Waste Management, Inc. 41,481 1,488,338 48,237,486 INFORMATION TECHNOLOGY -- 9.9% Activision, Inc. 249,831 2,843,077(a) Affiliated Computer Services, Inc. (Class A) 23,029 1,188,527(a) Analog Devices, Inc. 139,859 4,495,068(h) Automatic Data Processing, Inc. 150,166 6,810,028(h) CDW Corp. 14,566 796,032 Checkfree Corp. 32,749 1,623,040(a) Cisco Systems, Inc. 570,942 11,150,497(a,h) Cogent, Inc. 87,516 1,318,866(a,j) Comverse Technology, Inc. 61,915 1,224,060(a) NUMBER OF SHARES VALUE Dell, Inc. 152,830 $ 3,730,580(a) DST Systems, Inc. 17,374 1,033,753(a) eBay, Inc. 53,622 1,570,588(a) EMC Corporation 333,060 3,653,668(a) Fidelity National Information Services, Inc. 61,132 2,164,073 First Data Corp. 436,657 19,667,031(h) Fiserv, Inc. 13,468 610,908(a) Harris Corp. 47,038 1,952,547 Intel Corp. 218,329 4,137,335 Intuit Inc. 120,066 7,250,786(a) Juniper Networks, Inc. 54,713 874,861(a) Linear Technology Corp. 51,191 1,714,387 Macrovision Corp. 33,702 725,267(a) Microchip Technology Inc. 28,628 960,469 Microsoft Corp. 707,131 16,476,152(h) Molex, Inc. (Class A) 391,287 11,241,675 NAVTEQ Corp. 18,916 845,167(a) Neustar, Inc. (Class A) 19,249 649,654(a,j) Oracle Corp. 742,317 10,756,173(a) Symantec Corp. 50,090 778,399(a) Wind River Systems, Inc. 89,174 793,649(a,j) Xilinx, Inc. 36,855 834,766 Yahoo! Inc. 174,668 5,764,044(a) 129,635,127 MATERIALS -- 1.1% Cabot Corp. 15,798 545,347 Martin Marietta Materials, Inc. 15,004 1,367,615 Monsanto Co. 129,330 10,888,293 Praxair, Inc. 25,130 1,357,020 Sealed Air Corp. 14,509 755,629 14,913,904 TELECOMMUNICATION SERVICES -- 0.1% American Tower Corp. (Class A) 36,042 1,121,627(a) NII Holdings, Inc. (Class B) 9,137 515,144(a) 1,636,771 UTILITIES -- 0.4% Ameren Corp. 23,691 1,196,396 DTE Energy Co. 24,923 1,015,363 PPL Corp. 43,873 1,417,098 SCANA Corp. 30,404 1,172,986 4,801,843 TOTAL DOMESTIC EQUITY (COST $579,513,266) 590,636,941 -------------------------------------------------------------------------------- FOREIGN EQUITY -- 25.2% -------------------------------------------------------------------------------- COMMON STOCK -- 24.9% CONSUMER DISCRETIONARY -- 1.5% Accor S.A. 4,875 296,648(j) Corp GEO S.A. de C.V. (Series B) 88,142 293,451(a) Dogan Yayin Holding 80,674 274,246(a) -------------------------------------------------------------------------------- See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 8 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE Gafisa S.A. 23,179 $ 252,755(a) Hyundai Motor Co. 3,000 254,875 Koninklijke Philips Electronics N.V. 165,197 5,160,327 Lagardere S.C.A. (Regd.) 7,402 546,105(j) LG Electronics Inc. 3,940 238,800 LVMH Moet Hennessy Louis Vuitton S.A. 27,022 2,681,210(j) Massmart Holdings Ltd. 21,275 140,208 Reed Elsevier PLC 181,651 1,834,411 Renault S.A. 5,293 568,503(j) Rossi Residencial S.A. 22,000 210,419 Sekisui Chemical Company Ltd. 189,563 1,638,352 Shenzhou International Group Holdings Ltd. 193,000 80,137 Toyota Motor Corp. 97,694 5,119,075 Weiqiao Textile Co. 143,000 183,192 19,772,714 CONSUMER STAPLES -- 1.6% Carrefour S.A. 16,058 941,212(j) Chaoda Modern Agriculture 704,000 439,603 Diageo PLC 248,355 4,177,743 Fomento Economico Mexicano S.A. de C.V. ADR (Series B) 3,921 328,266 IOI Corp. Bhd 113,000 439,761 Nestle S.A. (Regd.) 18,735 5,872,849 Seven & I Holdings Co. Ltd. 66,700 2,199,703 Shinsegae Company Ltd. 380 190,260 Shiseido Company Ltd. 105,603 2,073,908(j) Tesco PLC 484,426 2,992,540 Tiger Brands Ltd. 15,820 318,319 Uni-President Enterprises Corp. 481,000 418,946 20,393,110 ENERGY -- 2.9% BG Group PLC 192,419 2,571,295 CAT Oil AG 5,410 109,642(a) China Oilfield Services Ltd. (Series H) 360,000 183,082 China Petroleum & Chemical Corp. 4,256,000 2,438,419 China Shenhua Energy Company Ltd. 40,000 73,387 EnCana Corp. 19,739 1,043,304 Ente Nazionale Idrocarburi S.p.A. 77,560 2,283,933(j) LUKOIL ADR 34,831 2,897,939 Nexen, Inc. 20,639 1,166,929 OAO Gazprom ADR 34,317 1,443,030 PetroChina Company Ltd. 240,000 256,470 Petroleo Brasileiro S.A. ADR 68,815 5,494,190 Saipem S.p.A. 259,514 5,903,211(j) Sasol Ltd. 11,300 435,728 Sibir Energy PLC 28,693 256,457(a) Stolt Offshore S.A. 288,035 4,385,838(a,j) Tenaris S.A. ADR 61,718 2,498,961 Total S.A. 78,596 5,170,558(j) 38,612,373 NUMBER OF SHARES VALUE FINANCIALS -- 7.0% African Bank Investments Ltd. 54,200 $ 212,719 Akbank TAS 493,441 2,360,813 Aksigorta AS 60,814 167,684 Allianz AG (Regd.) 15,958 2,520,388(a,j) Amata Corp. (REIT) 434,100 170,659 AXA S.A. 84,218 2,763,205(j) Banca Intesa S.p.A. 426,710 2,498,906(j) Banco do Brasil S.A. 5,764 133,111 Banco Santander Central Hispano S.A. (Regd.) 283,307 4,136,900 Bank Hapoalim BM 37,037 157,606 Bank of Yokohama Ltd. 246,012 1,904,567(j) BNP Paribas 65,467 6,265,646(j) Capital Securities Corp. 847,000 325,699(a) CapitaLand Ltd. 1,003,000 2,854,207 China Vanke Company Ltd. 329,000 279,567(a) Chinatrust Financial Holding Co. 233,000 193,225 Credit Agricole S.A. 80,953 3,079,438(j) Credit Suisse Group (Regd.) 80,868 4,515,405(j) Hongkong Land Holdings Ltd. 351,999 1,288,316(j) Hung Poo Real Estate Development Corp. (REIT) 525,000 518,887(a) ICICI Bank Ltd. ADR 102,326 2,420,010 ING Groep N.V. 84,447 3,318,168 Jardine Matheson Holdings Ltd. 68,706 1,209,226 Kiatnakin Bank PLC 145,883 113,747 Kookmin Bank 59,611 4,901,083 Lloyds TSB Group PLC 284,470 2,796,442 Mitsubishi Estate Company Ltd. 231,982 4,931,254 Mitsubishi UFJ Financial Group, Inc. 419 5,864,497 Mitsui Sumitomo Insurance Co. Ltd. 294,000 3,695,735 Nomura Holdings, Inc. 370,798 6,957,632(j) Ping An Insurance Group Company of China Ltd. 111,500 337,357 Prudential PLC 279,715 3,160,990 Royal Bank of Scotland Group PLC 145,104 4,771,745 Samsung Fire & Marine Insurance Company Ltd. 2,730 366,897 Sanlam Ltd. 55,001 111,826 Shenzhen Investment Ltd. (REIT) 594,354 160,698 Siam Commercial Bank PCL 226,200 331,993 Standard Bank Group Ltd. 28,548 308,227 State Bank of India Ltd. GDR 6,384 255,360 Sun Hung Kai Properties Ltd. 202,476 2,064,645 Swiss Reinsurance 30,931 2,157,595(j) UniCredito Italiano S.p.A. 733,648 5,741,042(j) 92,323,117 HEALTHCARE -- 1.7% Angiotech Pharmaceuticals, Inc. 85,445 1,003,979(a) Gedeon Richter Rt 1,275 234,225 GlaxoSmithKline PLC 233,121 6,514,963 Hikma Pharmaceuticals PLC 35,320 217,046 See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 9 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE Novartis AG (Regd.) 86,732 $ 4,687,068 Roche Holding AG 41,556 6,855,892 Sanofi-Aventis 17,991 1,755,220(j) Smith & Nephew PLC ADR 23,717 913,816(j) Teva Pharmaceutical Industries Ltd. ADR 12,880 406,879 22,589,088 INDUSTRIALS -- 3.4% ABB Ltd. (Regd.) 323,877 4,203,791 Adecco S.A. (Regd.) 27,127 1,601,047 Asahi Glass Company Ltd. 224,005 2,843,295(j) Barloworld Ltd. 12,271 208,194 Brambles Industries PLC 116,628 927,550 Canadian National Railway Co. 68,610 3,008,204 Chiyoda Corp. 161,676 3,309,468(j) Doosan Heavy Industries and Construction Company Ltd. 6,830 247,657 East Japan Railway Co. 394 2,929,624 Empresas ICA Sociedad Controladora S.A. de C.V. 91,635 259,781(a) Enka Insaat ve Sanayi AS 54,663 399,176 Fraser and Neave Ltd. 60,000 151,769 Group 4 Securicor PLC 444,819 1,380,105 Group 4 Securicor PLC 456,888 1,441,052(j) Grupo Aeroportuario del Sureste S.A. de C.V. ADR (Series B) 3,021 101,475 Komatsu Ltd. 144,075 2,867,258 Korea Electric Terminal Company Ltd. 5,110 68,137 Kubota Corp. 164,000 1,556,576 Malaysia International Shipping Corp. BHD 509,182 1,067,003 Mitsubishi Heavy Industries Ltd. 126,000 544,495 Orascom Construction Industries 47,772 1,452,678(a) Orkla ASA 11,494 532,899 Sandvik AB 367,865 4,276,936(j) Shanghai Electric Group Company Ltd. 1,296,000 450,521 Siemens AG (Regd.) 47,000 4,088,367 SMC Corp. 10,845 1,535,936 Smiths Group PLC 132,726 2,187,257 United Tractors Tbk PT 435,000 253,590 Wan Hai Lines Ltd. 260,000 179,078 44,072,919 INFORMATION TECHNOLOGY -- 2.0% ASM Pacific Technology 37,500 182,262 Delta Electronics Inc. 134,579 382,409(a) HON HAI Precision Industry Company Ltd. 131,000 809,216(a) Hoya Corp. 81,200 2,890,994 MediaTek Inc. 49,000 454,026(a) Mettler Toledo International Inc. 14,823 897,829(a) Nidec Corp. 44,414 3,185,888(j) Nokia OYJ 281,545 5,745,559(a) NUMBER OF SHARES VALUE Nortel Networks Corp. 168,429 $ 375,599(a) Samsung Electro-Mechanics Company Ltd. 4,740 163,379 Samsung Electronics Company Ltd. 7,980 5,072,141 Taiwan Semiconductor Manufacturing Company Ltd. 1,851,125 3,338,966 Taiwan Semiconductor Manufacturing Company Ltd. ADR 18,018 165,402 Telefonaktiebolaget LM Ericsson 661,535 2,185,693 Unimicron Technology Corp. 254,000 331,062(a) 26,180,425 MATERIALS -- 2.4% BASF AG 23,200 1,862,348 BHP Billiton PLC 435,081 8,441,347 Cia Vale do Rio Doce ADR 128,517 3,089,549 Evraz Group S.A. GDR 10,587 264,146(b) Harmony Gold Mining Company Ltd. ADR 25,809 420,429(a) Holcim Ltd. (Regd.) 27,498 2,103,316(j) Israel Chemicals Ltd. 104,309 415,426 Linde AG 26,641 2,052,387 MMC Norilsk Nickel ADR 3,642 473,460 POSCO 1,990 533,841 Potash Corp of Saskatchewan 41,961 3,607,091 Rio Tinto PLC (Regd.) 74,314 3,929,623 Taiwan Fertilizer Company Ltd. 196,000 325,688(a) Toray Industries Inc. 498,998 4,334,558 Vedanta Resources PLC 7,514 189,423 32,042,632 TELECOMMUNICATION SERVICES -- 1.7% America Movil S.A. de C.V. ADR (Series L) 112,017 3,725,685 Egyptian Company for Mobile Services 6,043 135,456 France Telecom S.A. 26,384 567,100 MTN Group Ltd. 44,579 330,666 Orascom Telecom Holding SAE 3,479 143,875 Philippine Long Distance Telephone Co. 5,450 187,728 Singapore Telecommunications Ltd. 2,623,415 4,213,788 Telefonica S.A. 55,400 922,300 Telefonica S.A. ADR 496 24,671 Telekomunikasi Indonesia Tbk PT (Series B) 418,000 331,674 Telenor ASA 288,111 3,484,131(j) Telkom S.A. Ltd. 6,231 115,319(a) Vimpel-Communications OAO ADR 3,948 180,897(a) Vodafone Egypt Telecommunications SAE 17,524 249,660 Vodafone Group PLC 1,124,396 2,396,770 Vodafone Group PLC ADR 223,787 4,766,663 21,776,383 See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 10 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE UTILITIES -- 0.7% E.ON AG 44,051 $ 5,070,449(j) Korea Electric Power Corp. 5,200 192,664 National Grid PLC 20,112 217,606 Veolia Environnement 73,754 3,810,887(j) 9,291,606 TOTAL COMMON STOCK (COST $290,726,838) 327,054,367 PREFERRED STOCK -- 0.3% Cia Energetica de Minas Gerais 3,700,000 156,975 Cia Vale do Rio Doce 39,737 809,337 Cia Vale do Rio Doce ADR 129,629 2,667,765 Petroleo Brasileiro S.A. 8,800 175,573 Telemar Norte Leste S.A. 7,500 150,399 TOTAL PREFERRED STOCK (COST $3,153,112) 3,960,049 RIGHTS -- 0.0%* Linde AG (COST $0) 26,641 102,875(a) TOTAL FOREIGN EQUITY (COST $293,879,950) 331,117,291 PRINCIPAL AMOUNT VALUE -------------------------------------------------------------------------------- BONDS AND NOTES -- 20.0% -------------------------------------------------------------------------------- U.S. TREASURIES -- 8.1% U.S. Treasury Bonds 4.50% 02/15/36 $ 5,365,000 4,811,707 5.38% 02/15/31 185,000 188,267(j) 8.13% 08/15/19 - 08/15/21 540,000 688,428(h) U.S. Treasury Notes 4.88% 04/30/08 - 05/31/11 65,285,000 64,760,312(j) 5.13% 05/15/16 36,290,000 36,250,444(j) 106,699,158 FEDERAL AGENCIES -- 0.1% Federal Farm Credit Bank 3.75% 01/15/09 650,000 624,456(h) Federal Home Loan Mortgage Corp. 4.75% 12/08/10 335,000 325,005(h) 949,461 AGENCY MORTGAGE BACKED -- 4.8% Federal Home Loan Mortgage Corp. 4.50% 06/01/33 - 02/01/35 307,986 279,492 5.00% 07/01/35 - 10/01/35 9,959,517 9,309,763 5.50% 05/01/20 121,697 119,362 6.00% 04/01/17 - 05/01/35 859,640 854,598 PRINCIPAL AMOUNT VALUE 6.50% 01/01/27 - 12/01/34 $ 605,203 $ 610,030 7.00% 10/01/25 - 02/01/35 125,275 128,270 7.50% 11/01/09 - 09/01/33 64,025 66,076 8.00% 01/01/30 - 11/01/30 18,837 19,899 9.00% 10/01/25 1,011 1,094 4.50% TBA 25,000 22,664(c) Federal National Mortgage Assoc. 4.00% 05/01/19 - 06/01/19 296,010 273,355 4.50% 05/01/18 - 02/01/35 2,894,902 2,709,629 5.00% 06/01/20 - 08/01/35 5,729,163 5,373,673 5.50% 04/01/14 - 08/01/35 2,261,544 2,199,241 6.00% 09/01/19 - 08/01/35 5,477,282 5,396,612 6.50% 09/01/17 - 02/01/35 2,152,587 2,169,498 7.00% 04/01/17 - 05/01/35 326,843 334,777 7.50% 12/01/09 - 03/01/34 141,074 145,955 8.00% 12/01/11 - 11/01/33 59,397 61,948 8.50% 06/01/30 238 252 9.00% 06/01/09 - 12/01/22 33,828 35,380 4.50% TBA 270,000 244,603(c) 5.00% TBA 920,000 885,787(c) 5.50% TBA 4,160,000 3,994,898(c) 6.00% TBA 20,231,000 19,990,538(c) 6.50% TBA 3,959,000 3,978,795(c) Government National Mortgage Assoc. 4.50% 08/15/33 - 09/15/34 541,287 497,443 6.00% 04/15/27 - 06/15/35 590,707 586,620 6.50% 04/15/24 - 08/15/34 174,127 176,225 7.00% 03/15/12 - 06/15/34 64,213 65,665 8.00% 03/15/30 3,424 3,633 9.00% 11/15/16 - 12/15/21 24,959 27,056 5.50% TBA 2,140,000 2,073,793(c) 62,636,624 AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.5% Federal Home Loan Mortgage Corp. 1.45% 10/15/18 399,075 15,521(g,h,i) 1.95% 12/15/30 514,054 22,972(g,h,i) 3.33% 10/15/33 70,000 48,850(i) 4.11% 12/15/33 45,000 33,420(i) 4.50% 04/15/13 - 03/15/19 689,051 58,703(g) 4.50% 05/15/17 - 11/15/19 400,000 369,945 5.00% 01/15/11 - 08/01/35 6,364,497 1,454,488(g) 5.00% 05/15/20 - 02/15/35 2,165,000 1,942,997(h) 5.50% 04/15/17 - 06/15/33 266,938 43,449(g) 5.50% 10/15/34 301,443 297,753 7.50% 01/15/16 12,759 13,135 7.50% 07/15/27 7,857 1,714(g) 8.00% 02/01/23 - 07/01/24 5,611 1,247(g) 10.44% 09/25/43 531,895 7,075(d,g,i) Federal Home Loan Mortgage STRIPS 5.30% 08/01/27 1,267 1,020(d,f) Federal National Mortgage Assoc. 1.18% 12/25/42 307,819 6,926(g,i) 2.28% 09/25/42 310,292 20,072(g,i) 2.33% 04/25/17 - 10/25/17 230,831 11,781(g,i) 2.38% 08/25/16 93,467 3,963(g,i) See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 11 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE 3.56% 09/25/31 $ 60,537 $ 51,691 (i) 4.50% 05/25/18 159,290 16,178(g) 4.50% 12/25/19 100,000 88,453 4.75% 11/25/14 33,832 2,438(g) 5.00% 02/25/11 - 02/25/32 60,923 4,485(g) 5.00% 03/25/35 175,000 154,906 5.50% 07/25/34 - 02/25/35 555,208 548,117(h) 5.75% 02/25/35 425,000 421,512 6.00% 12/25/34 150,000 147,235 6.50% 12/25/34 184,141 185,742 8.00% 07/25/14 46,806 47,548 Federal National Mortgage Assoc. (Class 1) 5.27% 11/01/34 1,040,999 724,178(d,f) Federal National Mortgage Assoc. (Class S) 1.78% 02/25/31 93,489 3,599(g,i) Federal National Mortgage Assoc. REMIC 4.50% 11/25/13 169,240 7,415(g) 4.90% 03/25/31 99,478 92,625(i) 5.00% 10/25/22 129,593 22,786(g) Federal National Mortgage Assoc. REMIC (Class J) 1080.91% 03/25/22 14 208(g) Federal National Mortgage Assoc. REMIC (Class K) 1008.00% 05/25/22 6 202(g) Federal National Mortgage Assoc. STRIPS (Class 2) 7.50% 11/01/23 24,654 6,510(g) 8.00% 08/01/23 - 07/01/24 11,499 2,642(g) Vendee Mortgage Trust 16.44% 05/15/33 363,682 11,365(d,g,i) 6,894,866 ASSET BACKED -- 1.0% Bank One Issuance Trust 3.59% 05/17/10 20,000 19,545 Bear Stearns Asset Backed Securities Inc. (Class A) 5.69% 01/25/34 22,878 22,943(h,i) BMW Vehicle Owner Trust (Class B) 2.93% 03/25/09 28,000 27,886 Carmax Auto Owner Trust 4.35% 03/15/10 154,000 150,430 Citibank Credit Card Issuance Trust 4.45% 04/07/10 35,000 34,194 Countrywide Home Equity Loan Trust (Class A) 5.43% 07/15/27 58,123 58,124(h,i) Ford Credit Floorplan Master Owner Trust (Class A) 5.24% 07/15/09 2,000,000 1,998,560(i) GMAC Mortgage Corp. Loan Trust (Class A) 5.42% 06/25/34 500,000 500,173(h,i) PRINCIPAL AMOUNT VALUE Gracechurch Card Funding PLC (Class A) 5.23% 02/17/09 $2,000,000 $ 2,000,491(i) Honda Auto Receivables Owner Trust (Class A) 4.15% 10/15/10 138,000 134,344 Long Beach Mortgage Loan Trust 5.60% 09/25/35 1,500,000 1,503,452(h,i) Metris Master Trust (Class A) 5.42% 10/20/10 2,000,000 2,000,720(i) Mid-State Trust 7.54% 07/01/35 5,937 6,063(h) Peco Energy Transition Trust 6.52% 12/31/10 50,000 51,567 Residential Asset Mortgage Products, Inc. 5.56% 03/25/34 46,862 46,895(i) Residential Asset Securities Corp. 5.57% 07/25/32 - 01/25/36 3,018,815 3,026,787(i) Residential Asset Securities Corp. (Class A) 4.16% 07/25/30 326,357 321,322(i) SLM Student Loan Trust (Class A) 5.38% 06/15/18 427,113 427,424(i) Volkswagen Auto Lease Trust (Class A) 3.94% 10/20/10 103,000 101,046 Wells Fargo Home Equity Trust 3.97% 09/25/24 54,000 53,343(i) 12,485,309 CORPORATE NOTES -- 3.1% Abbey National PLC 7.95% 10/26/29 340,000 402,602(h) Abbott Laboratories 5.88% 05/15/16 660,000 653,936 Allegiance Corp. 7.00% 10/15/26 245,000 249,500(h) Allstate Life Global Funding Trusts 3.85% 01/25/08 130,000 126,453(h) Alltel Corp. 4.66% 05/17/07 455,000 451,648 Altria Group, Inc. 7.20% 02/01/07 100,000 100,505 American Electric Power Company, Inc. (Series D) 5.25% 06/01/15 790,000 739,732(h) American General Corp. 7.50% 08/11/10 750,000 793,490(h) Appalachian Power Co. (Series G) 3.60% 05/15/08 20,000 19,233(h) Appalachian Power Co. (Series K) 5.00% 06/01/17 135,000 120,911(h) Archer-Daniels-Midland Co. 7.00% 02/01/31 165,000 178,983(h) Assurant, Inc. 6.75% 02/15/34 145,000 142,387(h) See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 12 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE AT&T, Inc. 4.13% 09/15/09 $630,000 $ 598,950 5.63% 06/15/16 530,000 503,879 5.88% 08/15/12 165,000 163,458 BAC CAP TRUST V 5.63% 03/08/35 425,000 369,673(h) BellSouth Corp. 6.55% 06/15/34 510,000 485,214(h) BJ Services Co. 5.75% 06/01/11 430,000 425,850 British Telecommunications PLC 8.38% 12/15/10 170,000 186,555 Burlington Northern Santa Fe Corp. 8.13% 04/15/20 170,000 200,517(h) Campbell Soup Co. 5.50% 03/15/07 50,000 49,969(h) Capital One Bank 6.50% 06/13/13 25,000 25,504(h) Capital One Financial Corp. 8.75% 02/01/07 200,000 203,255(h) Carolina Power & Light Co. 5.15% 04/01/15 60,000 56,492(h) 5.70% 04/01/35 155,000 140,446(h) 6.13% 09/15/33 190,000 182,837(h) Citigroup, Inc. 5.00% 03/06/07 90,000 89,612(h) Comcast Cable Communications Holdings, Inc. 9.46% 11/15/22 865,000 1,068,338(h) Consolidated Natural Gas Co. 5.38% 11/01/06 175,000 174,745(h) Consumers Energy Co. 5.15% 02/15/17 55,000 49,919(h) 5.80% 09/15/35 165,000 148,006(h) Countrywide Home Loans, Inc. 5.63% 05/15/07 50,000 49,943(h) CSX Transportation, Inc. 9.75% 06/15/20 21,000 27,219(h) DaimlerChrysler NA Holding Corp. 4.05% 06/04/08 280,000 271,133(h) 4.75% 01/15/08 580,000 570,618(h) Detroit Edison Co. (Series B) 5.45% 02/15/35 400,000 342,100(h) Deutsche Telekom International Finance BV 3.88% 07/22/08 490,000 472,545(h) Dominion Resources, Inc. 5.69% 05/15/08 370,000 368,852(h,k) Dominion Resources, Inc. (Series B) 4.13% 02/15/08 90,000 87,906(h) Dominion Resources, Inc. (Series G) 3.66% 11/15/06 20,000 19,850(h,k) Duke Capital LLC 4.33% 11/16/06 230,000 228,994(h) 5.67% 08/15/14 295,000 283,473(h) 8.00% 10/01/19 225,000 253,816(h) El Paso Electric Co. 6.00% 05/15/35 365,000 328,423(h) PRINCIPAL AMOUNT VALUE Enterprise Products Operating LP 4.00% 10/15/07 $ 350,000 $ 340,543(h) EOP Operating LP 7.00% 07/15/11 415,000 431,731(h) EOP Operating LP (REIT) 7.75% 11/15/07 835,000 855,731(h) FirstEnergy Corp. (Series B) 6.45% 11/15/11 985,000 1,002,259(h) FPL Group Capital, Inc. (Series B) 5.55% 02/16/08 430,000 428,457(h) General Mills, Inc. 3.88% 11/30/07 50,000 48,747(h) Georgia Power Co. 4.88% 07/15/07 65,000 64,611(h) Goldman Sachs Group, Inc. 6.60% 01/15/12 1,000,000 1,029,844(h) Goodrich Corp. 7.10% 11/15/27 240,000 252,196(h) Greater Bay Bancorp 5.25% 03/31/08 175,000 172,894(h) Grupo Televisa S.A. 6.63% 03/18/25 285,000 266,161 GTE Corp. 6.94% 04/15/28 100,000 98,814(h) 7.51% 04/01/09 165,000 171,502(h) Halliburton Co. 8.75% 02/15/21 390,000 478,213(h) HSBC Bank USA NA 3.88% 09/15/09 920,000 872,139(h) HSBC Finance Corp. 6.50% 11/15/08 625,000 636,443(h) ING Capital Funding TR III 8.44% 12/29/49 455,000 496,149(h,i) ING Groep N.V. 5.78% 12/29/49 595,000 557,388(h,i) International Business Machines Corp. 3.80% 02/01/08 100,000 97,448(h) 4.75% 11/29/12 250,000 237,016(h) iStar Financial, Inc. 4.88% 01/15/09 305,000 297,857(h) 7.00% 03/15/08 400,000 406,349(h) Kansas Gas & Electric 5.65% 03/29/21 425,000 397,854(h) Kimco Realty Corp. (REIT) 4.82% 06/01/14 150,000 137,323(h) Kinder Morgan Energy Partners LP 5.13% 11/15/14 70,000 63,904(h) Laboratory Corp of America Holdings 5.63% 12/15/15 165,000 157,733(h) Lehman Brothers Holdings, Inc. 5.00% 01/14/11 1,150,000 1,113,785(h) Marsh & McLennan Companies, Inc. 5.15% 09/15/10 864,000 838,263(h) 5.19% 07/13/07 1,500,000 1,499,042(h,i) Merrill Lynch & Company, Inc. 6.05% 05/16/16 475,000 471,884 See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 13 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Midamerican Energy Holdings Co. 3.50% 05/15/08 $ 425,000 $ 409,448(h) Morgan Stanley 5.30% 03/01/13 500,000 481,263(h) Motorola, Inc. 4.61% 11/16/07 565,000 556,869(h) MUFG Capital Finance 1 Ltd. 6.35% 07/25/49 240,000 231,159(i) NB Capital Trust IV 8.25% 04/15/27 215,000 225,120(h) New Cingular Wireless Services Inc. 8.75% 03/01/31 500,000 609,788(h) News America, Inc. 7.25% 05/18/18 50,000 52,987(h) Nextel Communications, Inc. (Series E) 6.88% 10/31/13 335,000 340,139(h) Norfolk Southern Corp. 6.00% 04/30/08 20,000 20,088 Norfolk Southern Railway Co. 9.75% 06/15/20 64,000 83,653 Northeast Utilities (Series B) 3.30% 06/01/08 30,000 28,598 Northrop Grumman Corp. 4.08% 11/16/06 300,000 298,287 NorthWestern Corp. 5.88% 11/01/14 200,000 195,943 Ocean Energy, Inc. 4.38% 10/01/07 15,000 14,707 Pacific Bell 7.13% 03/15/26 55,000 56,639 Pacific Gas & Electric Co. 6.05% 03/01/34 305,000 287,972 Pemex Finance Ltd. 9.03% 02/15/11 19,000 20,243 Pemex Project Funding Master Trust 7.38% 12/15/14 1,305,000 1,357,761 8.63% 02/01/22 60,000 67,446 Pepco Holdings, Inc. 5.50% 08/15/07 305,000 304,904 5.86% 06/01/10 40,000 40,105(i) Procter & Gamble - Esop (Series A) 9.36% 01/01/21 180,000 218,636 Prudential Financial, Inc. 5.90% 03/17/36 260,000 237,158 Puget Energy, Inc. 3.36% 06/01/08 30,000 28,622 5.48% 06/01/35 130,000 112,912 Quest Diagnostics Inc. 6.75% 07/12/06 45,000 45,007 Reckson Operating Partnership LP (REIT) 5.88% 08/15/14 65,000 62,902 Residential Capital Corp. 6.13% 11/21/08 1,510,000 1,489,920 Safeco Capital Trust I (Series B) 8.07% 07/15/37 295,000 310,920 Simon Property Group LP (REIT) 4.88% 08/15/10 500,000 481,830 PRINCIPAL AMOUNT VALUE Smith International, Inc. 6.00% 06/15/16 $290,000 $ 287,423 Sprint Capital Corp. 6.00% 01/15/07 250,000 250,335 Standard Chartered Bank Hong Kong Ltd. 4.38% 12/03/14 40,000 38,061(i) Tampa Electric Co. 6.55% 05/15/36 125,000 124,240 Telefonos de Mexico S.A. de C.V. 4.50% 11/19/08 625,000 602,069 TELUS Corp. 7.50% 06/01/07 375,000 380,541 The Kroger Co. 6.80% 12/15/18 160,000 160,815(h) Thomson Corp. 5.50% 08/15/35 165,000 142,662 Time Warner Entertainment Co. 8.38% 03/15/23 - 07/15/33 745,000 839,032 Time Warner, Inc. 6.88% 05/01/12 25,000 25,815(h) TXU Electric Delivery Co. 5.00% 09/01/07 140,000 138,478 6.38% 05/01/12 580,000 586,017 Tyson Foods, Inc. 7.25% 10/01/06 102,000 102,306 8.25% 10/01/11 570,000 604,889 United Utilities PLC 6.45% 04/01/08 125,000 126,251 Valero Energy Corp. 3.50% 04/01/09 185,000 174,186 Verizon Pennsylvania Inc. 8.75% 08/15/31 165,000 187,143(h) Viacom, Inc. 5.63% 05/01/07 25,000 24,973 Wells Fargo & Co. 5.25% 12/01/07 90,000 89,557 Westar Energy, Inc. 7.13% 08/01/09 190,000 195,520 Weyerhaeuser Co. 6.13% 03/15/07 20,000 20,011 Wisconsin Electric Power 3.50% 12/01/07 70,000 68,084 40,169,185 NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.4% Banc of America Funding Corp. 5.75% 03/20/36 194,801 190,838(h,i) 5.88% 02/20/36 346,685 341,376(h,i) Banc of America Mortgage Securities (Class B) 5.33% 10/25/35 205,829 192,918(h,i) 5.39% 01/25/36 199,672 192,062(h,i) 5.57% 02/25/36 159,745 154,929(h,i) Bank of America Alternative Loan Trust 6.50% 07/25/35 265,781 265,385(h) See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 14 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Bear Stearns Commercial Mortgage Securities 5.58% 03/11/39 $1,000,000 $ 989,830(h,i) 6.02% 02/14/31 75,000 75,442(h) Bear Stearns Commercial Mortgage Securities (Class A) 5.63% 04/12/38 1,400,000 1,378,655(h,i) Countrywide Alternative Loan Trust 6.00% 03/25/36 160,000 134,261 Countrywide Alternative Loan Trust (Class B) 6.00% 05/25/36 89,885 78,260 Countrywide Home Loan Mortgage Pass Through Trust (Class M) 5.50% 12/25/35 168,758 158,229(h) Credit Suisse Mortgage Capital Certificates (Class C) 5.65% 02/25/36 114,511 107,731(h,i) Crusade Global Trust (Class A) 5.27% 01/17/34 3,411,773 3,416,912(h,i) CS First Boston Mortgage Securities Corp. 5.33% 10/25/35 169,017 155,739(h,i) 6.13% 04/15/37 50,000 50,793(h) DLJ Commercial Mortgage Corp. 6.24% 11/12/31 228,000 230,103(h) GMAC Commercial Mortgage Securities, Inc. 6.42% 05/15/35 465,141 470,502(h) 6.47% 04/15/34 400,000 410,147(h) GMAC Commercial Mortgage Securities, Inc. (Class X) 5.60% 12/10/41 3,843,135 93,645(d,h,i) Greenwich Capital Commercial Funding Corp. 5.12% 04/10/37 500,000 488,424(h) Impac CMB Trust 5.58% 04/25/35 616,532 617,845(h,i) Impac CMB Trust (Class A) 6.08% 12/25/33 141,968 142,007(h,i) Indymac INDA Mortgage Loan Trust 5.16% 01/25/36 99,941 94,901(h,i) Indymac INDA Mortgage Loan Trust (Class B) 5.16% 01/25/36 107,936 104,699(h,i) Indymac Index Mortgage Loan Trust 5.41% 06/25/35 318,337 309,098(h,i) JPMorgan Chase Commercial Mortgage Securities Corp. 6.47% 11/15/35 40,000 41,186(h) JPMorgan Mortgage Trust 5.41% 11/25/35 626,305 606,256(h,i) LB-UBS Commercial Mortgage Trust 4.06% 09/15/27 108,000 103,416(h,i) 4.51% 12/15/29 135,000 127,279(h) 5.53% 03/15/32 1,000,000 991,509(h) 5.58% 01/18/12 4,865,756 145,431(d,h,i) PRINCIPAL AMOUNT VALUE 5.66% 03/15/39 $1,000,000 $ 984,094(h,i) 5.72% 03/15/39 1,000,000 982,884(h,i) 6.23% 03/15/26 53,000 53,668(h) LB-UBS Commercial Mortgage Trust (Class A) 6.65% 11/15/27 704,000 730,200(h) Master Alternative Loans Trust 5.00% 08/25/18 64,541 10,105(g,h) 6.50% 08/25/34 - 05/25/35 585,662 584,477(h) Master Alternative Loans Trust (Class 3) 6.50% 01/25/35 134,594 134,594(h) Medallion Trust (Class A) 5.23% 08/22/36 2,154,504 2,157,679(h,i) Merrill Lynch Mortgage Trust (Class A) 5.80% 05/12/39 1,000,000 996,423 MLCC Mortgage Investors, Inc. 5.40% 02/25/36 164,989 160,071(h,i) Morgan Stanley Capital I 6.53% 03/15/31 285,092 289,323(h) 7.11% 04/15/33 73,000 75,545(h) Morgan Stanley Dean Witter Capital I 6.96% 10/15/33 16,935 17,083(h) 7.20% 10/15/33 50,000 52,207(h) MortgageIT Trust (Class A) 5.62% 08/25/35 3,211,960 3,216,995(h,i) Nomura Asset Securities Corp. (Class A) 6.59% 03/15/30 500,000 506,631(h) Opteum Mortgage Acceptance Corp. 5.62% 02/25/35 588,482 588,206(i) Residential Accredit Loans, Inc. 6.00% 01/25/36 249,217 236,069 6.05% 01/25/36 109,921 108,787(i) Residential Asset Securitization Trust 6.00% 01/25/46 74,721 63,723 Residential Asset Securitization Trust (Class A) 5.50% 05/25/35 1,448,975 1,449,752(h,i) Residential Funding Mortgage Security I 5.75% 01/25/36 232,194 218,248 Wachovia Bank Commercial Mortgage Trust 5.51% 03/15/45 1,200,000 1,186,278 5.68% 05/15/43 1,000,000 996,018 Washington Mutual Inc. 5.66% 01/25/45 298,253 298,621(i) Wells Fargo Mortgage Backed Securities Trust 5.00% 11/25/20 505,202 489,668 5.39% 08/25/35 474,594 454,283(i) 5.50% 01/25/36 - 03/25/36 1,687,273 1,563,057 31,464,497 See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 15 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE SOVEREIGN BONDS -- 0.0%* Province of Ontario 3.38% 01/15/08 $500,000 $ 484,477 TOTAL BONDS AND NOTES (COST $267,072,575) 261,783,577 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- EXCHANGE TRADED FUNDS -- 1.2% -------------------------------------------------------------------------------- Financial Select Sector SPDR Fund 96,470 3,114,052(j,m) Industrial Select Sector SPDR Fund 370,221 12,513,470(j,m) TOTAL EXCHANGE TRADED FUNDS (COST $13,396,679) 15,627,522 NUMBER OF CONTRACTS VALUE -------------------------------------------------------------------------------- PURCHASED OPTIONS -- 0.0%* -------------------------------------------------------------------------------- CALL OPTIONS Euro Dollar Futures (COST $3,421) 85 531 PRINCIPAL AMOUNT VALUE -------------------------------------------------------------------------------- SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 3.6% -------------------------------------------------------------------------------- ASSET BACKED -- 2.5% Bear Stearns Asset Backed Securities Inc. 5.54% 11/25/35 $5,000,000 5,008,215(h,i) Countrywide Asset-Backed Certificates (Class M) 6.02% 06/26/33 3,500,000 3,507,575(h,i) Discover Card Master Trust I (Class A) 5.23% 04/16/10 3,200,000 3,201,517(i) GSAMP Trust 5.43% 05/25/36 3,385,130 3,385,130(b,i) GSR Mortgage Loan Trust 5.52% 11/25/30 4,466,742 4,468,619(h,i) Indymac Residential Asset Backed Trust 5.44% 06/25/36 7,000,000 7,004,171(h,i) JPMorgan Mortgage Acquisition Corp. 5.43% 07/25/36 7,000,000 6,999,946(i) 33,575,173 PRINCIPAL AMOUNT VALUE CORPORATE NOTES -- 0.4% Countrywide Financial Corp. 5.56% 06/27/07 $5,000,000 $ 4,999,205(i) NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.7% JPMorgan Alternative Loan Trust 5.41% 08/25/36 4,000,000 4,000,000(i) Residential Accredit Loans, Inc. 5.39% 06/25/36 5,000,000 5,000,000(i) 9,000,000 TOTAL SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN (COST $47,566,165) 47,574,378 TOTAL INVESTMENTS IN SECURITIES (COST $1,201,432,056) 1,246,740,240 NUMBER OF SHARES VALUE -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 16.6% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 10.2% GEI Short Term Investment Fund 6.93% 134,211,734 134,211,734(d,l) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 6.4% GEI Short Term Investment Fund 6.93% 17,185,755 17,185,755(d,l) State Street Navigator Securities Lending Prime Portfolio 5.25% 66,269,174 66,269,174(d,e) 83,454,929 TOTAL SHORT-TERM INVESTMENTS (COST $217,666,663) 217,666,663 TOTAL INVESTMENTS (COST $1,419,098,719) 1,464,406,903 LIABILITIES IN EXCESS OF OTHER ASSETS, NET-- (11.6)% (152,584,698) ------------- NET ASSETS-- 100.0% $1,311,822,205 ============== See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 16 TOTAL RETURN FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- The GEI Total Return Fund had the following written option contracts open at June 30, 2006 (unaudited): EXPIRATION DATE/ NUMBER OF CALL OPTIONS STRIKE PRICE CONTRACTS VALUE -------------------------------------------------------------------------------- Euro Dollar Futures (Written Option Premium $829) July 06 / 95.00 85 $(531) The GEI Total Return Fund had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE APPRECIATION ------------------------------------------------------------- Euro Dollar Futures September 2006 40 $ 9,442,000 $ 1,890 U.S. Treasury Notes 5 Yr. Futures September 2006 20 2,068,125 (11,149) U.S. Treasury Notes 10 Yr. Futures September 2006 20 2,097,188 (14,743) S&P 500 Index Futures September 2006 114 36,462,900 599,148 -------- $575,146 ======== See Notes to Schedule of Investments on page 18 and Notes to Financial Statements. 17 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Non-income producing security. (b) Pursuant to Rule 144A of the Securities Act of 1933, these securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2006, these securities amounted to $3,649,276 or 0.28% of net assets for the GE Investments Total Return Fund. These securities have been determined to be liquid using procedures established by the Board of Trustees. (c) Settlement is on a delayed delivery or when-issued basis with final maturity to be announced (TBA) in the future. (d) Coupon amount represents effective yield. (e) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (f) Principal only securities represent the right to receive the monthly principal payments on an underlying pool of mortgages. No payments of interest on the pool are passed through to the "principal only" holder. (g) Interest only securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the "interest only" holding. (h) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (i) Variable or floating rate security. The stated rate represents the rate at June 30, 2006. (j) All or a portion of the security is out on loan. (k) Step coupon bond. Security becomes interest bearing at a future date. (l) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. (m) Sponsored by SSgA Funds Management, Inc., an affiliate of State Street Bank & Trust Co., the Fund's custodian and accounting agent. * Less than 0.1% + Percentages are based on net assets as of June 30, 2006. Abbreviations: ADR American Depository Receipt GDR Global Depository Receipt REGD. Registered REIT Real Estate Investment Trust REMIC Real Estate Mortgage Investment Conduit SPDR Standard & Poors Depository Receipts STRIPS Separate Trading of Registered Interest and Principal of Security TBA To Be Announced 18 Financial Highlights Selected data based on a share outstanding throughout the periods indicated -------------------------------------------------------------------------------- TOTAL RETURN FUND
------------------------------------------------------------------- CLASS 1 ------------------------------------------------------------------- 6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 ------------------------------------------------------------------- INCEPTION DATE ............................................ -- -- -- -- -- Net asset value, beginning of period ...................... $16.04 $15.97 $15.09 $12.68 $14.49 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income ................................... 0.20 0.23 0.20 0.16 0.31 Net realized and unrealized gains/(losses) on investments 0.27 0.36 1.04 2.41 (1.67) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS ............ 0.47 0.59 1.24 2.57 (1.36) ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income ................................... -- 0.23 0.20 0.16 0.32 Net realized gains ...................................... -- 0.29 0.16 -- 0.13 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ....................................... -- 0.52 0.36 0.16 0.45 ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD ............................ $16.51 $16.04 $15.97 $15.09 $12.68 =================================================================================================================================== TOTAL RETURN (A) .......................................... 2.93% 3.67% 8.19% 20.31% (9.31)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................ $1,236,196 $959,531 $515,506 $225,867 $112,747 Ratios to average net assets: Net investment income* ................................ 2.68% 1.89% 1.81% 1.58% 2.22% Net Expenses* ......................................... 0.44% 0.45% 0.49% 0.53% 0.54% Gross Expenses* ....................................... 0.46% 0.45% 0.49% 0.53% 0.54% Portfolio turnover rate ................................. 65% 146% 141% 115% 126%
--------- -------- -------- -------- CLASS 1 CLASS 2 CLASS 3 CLASS 4 --------- -------- -------- -------- 12/31/01 6/30/06+ 6/30/06+ 6/30/06+ --------- -------- -------- -------- INCEPTION DATE ............................................ 7/1/85 5/1/06 5/1/06 5/1/06 Net asset value, beginning of period ...................... $15.51 $17.03 $17.03 $ 17.03 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income ................................... 0.38 0.09 0.03 0.08 Net realized and unrealized gains/(losses) on investments (0.83) (0.60) (0.54) (0.61) ------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS ............ (0.45) (0.51) (0.51) (0.53) ------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income ................................... 0.38 -- -- -- Net realized gains ...................................... 0.19 -- -- -- ------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ....................................... 0.57 -- -- -- ------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD ............................ $14.49 $16.52 $16.52 $16.50 ============================================================================================================= TOTAL RETURN (A) .......................................... (2.89)% (2.99)% (2.99)% (3.11)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................ $130,757 $1 $75,624 $1 Ratios to average net assets: Net investment income* ................................ 2.54% 1.04% 0.89% 1.01% Net Expenses* ......................................... 0.53% 0.57% 0.62% 0.77% Gross Expenses* ....................................... 0.53% 0.62% 0.67% 0.82% Portfolio turnover rate ................................. 122% 65% 65% 65%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 19 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
TOTAL RETURN FUND ----------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $1,201,432,056) ... $1,246,740,240 Short-term Investments (at amortized cost) .................... 66,269,174 Short-term affiliated investments (at amortized cost) ......... 151,397,489 Foreign cash (cost $1,372,918) ................................ 1,373,691 Receivable for investments sold ............................... 6,860,747 Income receivables ............................................ 3,688,258 Receivable for fund shares sold ............................... 4,210,411 Variation margin receivable ................................... 16,250 ----------------------------------------------------------------------------------- TOTAL ASSETS .............................................. 1,480,556,260 ----------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned ...................... 131,029,307 Payable for investments purchased ............................. 36,843,321 Payable for fund shares redeemed .............................. 1,251 Payable to GEAM ............................................... 768,445 Variation margin payable ...................................... 91,200 Options written, at market (premium received $829) ............ 531 ----------------------------------------------------------------------------------- TOTAL LIABILITIES ......................................... 168,734,055 ----------------------------------------------------------------------------------- NET ASSETS ....................................................... $1,311,822,205 =================================================================================== NET ASSETS CONSIST OF: Capital paid in ............................................... 1,240,104,410 Undistributed (distribution in excess of) net investment income 14,232,353 Accumulated net realized gain (loss) .......................... 11,567,615 Net unrealized appreciation/(depreciation) on: Investments ............................................... 45,308,184 Futures ................................................... 575,146 Written options ........................................... 298 Foreign currency related transactions ..................... 34,199 ----------------------------------------------------------------------------------- NET ASSETS ....................................................... $1,311,822,205 =================================================================================== CLASS 1: NET ASSETS ....................................................... 1,236,195,929 Shares outstanding ($0.01 par value; unlimited shares authorized) 74,867,472 Net asset value per share ........................................ 16.51 CLASS 2: NET ASSETS ....................................................... 970.47 Shares outstanding ($0.01 par value; unlimited shares authorized) 58.75 Net asset value per share ........................................ 16.52 CLASS 3: NET ASSETS ....................................................... 75,624,336 Shares outstanding ($0.01 par value; unlimited shares authorized) 4,577,367 Net asset value per share ........................................ 16.52 CLASS 4: NET ASSETS ....................................................... 969.39 Shares outstanding ($0.01 par value; unlimited shares authorized) 58.75 Net asset value per share ........................................ 16.50
* Includes $127,971,695 of securities on loan. See Notes to Financial Statements. 20 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
TOTAL RETURN FUND ---------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend .................................................... $8,843,935 Interest* ................................................... 5,274,285 Interest from affliated investments ......................... 3,163,487 Less: Foreign taxes withheld ................................ (537,882) ----------------------------------------------------------------------------------- TOTAL INCOME .................................................. 16,743,825 ----------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ............................ 1,956,591 Distributors fees (Notes 4) Class 1 .................................................. 409,184 Class 2 .................................................. 1 Class 3 .................................................. 12,652 Class 4 .................................................. 1 Custody and accounting expenses ............................. 97,376 Professional fees ........................................... 82,728 Trustee's fees .............................................. 11,382 Registration expenses ....................................... 1,853 Transfer agent .............................................. 86 Other expenses .............................................. 36,643 ----------------------------------------------------------------------------------- TOTAL EXPENSES BEFORE WAIVER AND REIMBURSEMENT ................ 2,608,497 ----------------------------------------------------------------------------------- Less: Expenses waived or borne by the adviser ............... (117,657) Net expenses ................................................ 2,490,840 ----------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) .................................. 14,252,985 =================================================================================== NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments .............................................. 8,386,251 Futures .................................................. (157,237) Written options .......................................... (11,830) Foreign currency transactions ............................ (124,136) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments .............................................. 3,258,635 Futures .................................................. 767,759 Written options .......................................... 298 Foreign currency transactions ............................ 39,262 ----------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ...... 12,159,002 ----------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $26,411,987 ===================================================================================
* Income attributable to security lending, net of rebate expenses, for the Total Return Fund was $127,332 See Notes to Financial Statements. 21 Statements of Changes in Net Assets
TOTAL RETURN FUND ------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) ........................................... $ 14,252,985 $13,296,651 Net realized gain (loss) on investments, futures, written options and foreign currency transactions ..................................... 8,093,048 18,548,560 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation .................................................. 4,065,954 2,438,623 ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations ................................. 26,411,987 34,283,834 ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ................................................... -- (13,261,759) Net realized gains ...................................................... -- (16,598,435) Return of Capital ....................................................... -- -- ------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ....................................................... -- (29,860,194) ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions ....... 26,411,987 4,423,640 ------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares Class 1 ............................................................... 253,486,557 414,284,705 Class 2 ............................................................... 1,000 -- Class 3 ............................................................... 75,155,062 -- Class 4 ............................................................... 1,000 -- Value of distributions reinvested Class 1 ............................................................... -- 29,860,187 Class 2 ............................................................... -- -- Class 3 ............................................................... -- -- Class 4 ............................................................... -- -- Cost of shares redeemed Class 1 ............................................................... (2,763,736) (4,544,063) Class 2 ............................................................... -- -- Class 3 ............................................................... (580) -- Class 4 ............................................................... -- -- ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions ........................ 325,879,303 439,600,829 ------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ................................... 352,291,290 444,024,469 NET ASSETS Beginning of period ....................................................... 959,530,915 515,506,446 ------------------------------------------------------------------------------------------------------------------- End of period ............................................................. $1,311,822,205 $959,530,915 =================================================================================================================== UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD $14,232,353 $ 20,632 -------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 22 Statements of Changes in Net Assets (continued) Changes in Fund Shares TOTAL RETURN FUND ---------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ---------------------------------------------------------------------- CLASS 1: Shares sold .......................... 15,221,985 25,964,206 Issued for distribution reinvested ... -- 1,850,074 Shares redeemed ...................... (165,591) (281,159) --------------------------------------------------------------------- Net increase (decrease) in fund shares 15,056,394 27,533,121 ===================================================================== CLASS 2: Shares sold .......................... 59 -- Issued for distribution reinvested ... -- -- Shares redeemed ...................... -- -- --------------------------------------------------------------------- Net increase (decrease) in fund shares 59 -- ===================================================================== CLASS 3: Shares sold .......................... 4,577,403 -- Issued for distribution reinvested ... -- -- Shares redeemed ...................... (36) -- --------------------------------------------------------------------- Net increase (decrease) in fund shares 4,577,367 -- ===================================================================== CLASS 4: Shares sold .......................... 59 -- Issued for distribution reinvested ... -- -- Shares redeemed ...................... -- -- --------------------------------------------------------------------- Net increase (decrease) in fund shares 59 -- ===================================================================== See Notes to Financial Statements. 23 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund (the "Fund"), Income Fund, Money Market Fund and Real Estate Securities Fund. The Fund presently offers four classes of shares. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 24 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The 25 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. SWAP CONTRACTS As part of the investment strategy, the Fund may invest in swap agreements, which are agreements to exchange the return generated by one instrument for the return generated by another instrument. Total return swap agreements involve commitments to pay interest in exchange for a market linked return based upon a notional principal amount. To the extent the total return of the security or index underlying the agreement exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Swaps are marked to market daily based upon the underlying security or index. Payments received or made are recorded as realized gain or loss in the Statement of Operations. Entering into swap agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the value of the index or securities underlying the agreement. Notional principal amounts are used to express the extent of involvement in these transactions, but the amounts potentially subject to credit risk are much smaller. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. These transactions are arrangements in which the Fund purchases and sells securities with payment and delivery scheduled a month or more after entering into the transactions. The price of the underlying securities and the date when these securities will be delivered and paid for are fixed at the time the transaction is negotiated. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contracts. In connection with such purchases, the Fund maintains cash or liquid assets in an amount equal to purchase commitments for such underlying securities until settlement date and for sales commitments, the Fund maintains equivalent deliverable securities as "cover" for the transaction. Unsettled commitments are valued at the current market value of the underlying security. Daily fluctuations in the value of such contracts are recorded as unrealized gains or losses. The Fund will not enter into such commitments for the purpose of investment leverage. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward foreign currency exchange contracts to facilitate transactions in foreign denominated securities and to manage the Fund's currency exposure. Forward foreign currency exchange contracts are valued at the mean between the bid and the offered forward rates as last quoted by a recognized dealer. The aggregate principal amounts of the contracts are not recorded in the Fund's financial statements. Such amounts appear under the caption forward foreign currency contracts in the Schedule of Investments. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (or liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains or losses on foreign currency related transactions. The Fund's risks in using these contracts include changes in the value of foreign currency or the possibility that the counterparties do not perform under the contracts' terms. When the Fund enters into a forward foreign currency exchange contract, it is required to segregate cash or liquid securities with its custodian in an amount equal to the value of the Fund's total assets committed to the consummation of the forward contract. If the value of the segregated securities declines, additional cash or securities is segregated so that the value of the account will equal the amount of the Fund's commitment with respect to the contract. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. 26 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Net Tax Cost of Gross Tax Gross Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ---------------------------------------------------------------------------------------------------- $1,421,672,782 $84,836,496 $(42,102,906) $42,733,590
As of December 31, 2005, the Fund has no capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund elected to defer losses incurred after October 31, 2005 as follows: Capital Currency -------------------------------------------------------------------------------- $-- $45,645 The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Income Gains Total -------------------------------------------------------------------------------- $14,947,799 $14,912,395 $29,860,194 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio and pro rata across share classes . Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds and pro rata among share classes based on net assets. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum 27 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund. The advisory and administrative fee is stated in the following schedule: Annualized based on average daily net assets -------------------------------------------------------------------------------- Average Daily Advisory and Net Assets Administration of Fund Fees -------------------------------------------------------------------------------- First $100 million .50% Next $100 million .45% Next $100 million .40% Next $100 million .35% Over $400 million .30% Pursuant to an expense limitation agreement with the Fund, GEAM has agreed to limit total operating expenses charged to Fund assets attributable to each class of shares (excluding class specific expenses such as Distribution and Service (12b-1) Fees, and excluding interest, taxes, brokerage commissions, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Fund's business) to 0.32% of the average daily net assets of the Fund attributable to such shares, in each case on an annual basis. Under the agreement, this expense limitation will continue until April 30, 2009, unless extended. The expense limitation agreement will terminate upon termination of the management agreement, or by the Fund without payment of penalty upon sixty (60) days written notice to GEAM. The agreement can only be changed with the approval of both the Fund and GEAM. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $6,616 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DISTRIBUTION AND SHAREHOLDER SERVICING FEES The Fund has adopted a Shareholder Servicing and Distribution Plan ("the Plan") pursuant to Rule 12b-1 under the 1940 Act. The Fund pays GE Investment Distributors, Inc. ("GEID"), a wholly-owned subsidiary of GEAM and the Fund's principal underwriter, a monthly fee for distribution and/or shareholder services provided, at an annual rate of the average daily net assets attributable to each applicable class of shares. The annual rates applicable are 0.25% for Class 2 shares, 0.30% for Class 3 shares and 0.45% for Class 4 shares. Currently, Class 1 shares are not subject to a 12b-1 fee. DIRECTORS' COMPENSATION The Fund pays no compensation to its Directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual Fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006, were as follows: Purchases Sales -------------------------------------------------------------------------------- $1,020,809,165 $719,351,818 28 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- OPTIONS During the period ended June 30, 2006, the following option contracts were written: Number of of Contracts Premium ------------------------------------------------------------------------- Balance as of December 31, 2005 -- $ -- Written 305 12,616 Closed and Expired (220) (11,787) ------------------------------------------------------------------------- Balance as of June 30, 2006 85 829 ------------------------------------------------------------------------- SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral* ----------------------------------------------------------------------- $128,325,754 $131,871,586 * COLLATERAL OF $131,029,307 INCREASED BY $842,279 ON JULY 3, 2006 TO REFLECT THE JUNE 30, 2006 CHANGE IN VALUE OF SECURITIES ON LOAN. 29 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 30 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Funds of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members reviewed the applicable advisory fee breakpoints for the Fund and concluded that no changes were needed. The Board members recognized the economies of scale benefits derived by the Fund as a result of this fee structure. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper 31 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 32 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 33 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 34 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 35 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 36 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [GE logo omitted] GE Investments Funds, Inc. Income Fund Semi-Annual Report JUNE 30, 2006 [LOGO OMITTED] GE Investments Funds, Inc. Income Fund Contents ---------------------------------------------------------------------------- NOTES TO PERFORMANCE .............................................. 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ........................ 2 NOTES TO SCHEDULE OF INVESTMENTS .................................. 13 FINANCIAL STATEMENTS Financial Highlights ......................................... 14 Statement of Assets and Liabilities .......................... 15 Statement of Operations ...................................... 16 Statements of Changes in Net Assets .......................... 17 Notes to Financial Statements ................................ 18 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL ..................... 23 ADDITIONAL INFORMATION ............................................ 26 INVESTMENT TEAM ................................................... 29 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Lehman Brothers Aggregate Bond Index (LB Aggregate) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The LB Aggregate Bond Index is a market value-weighted index of investment-grade debt issues, including government, corporate, asset-backed and mortgage-backed securities, with maturities of one year or more. The results shown for the foregoing index assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Income Fund -------------------------------------------------------------------------------- THE INCOME FUND IS MANAGED BY A TEAM OF PORTFOLIO MANAGERS THAT INCLUDES ALFREDO CHANG, PAUL M. COLONNA, MARK DELANEY, ERIC H. GOULD, WILLIAM M. HEALEY AND VITA MARIE PIKE. AS LEAD PORTFOLIO MANAGER FOR THE INCOME FUND, MR. COLONNA (PICTURED BELOW) HAS OVERSIGHT AUTHORITY BUT DOES NOT POSSESS THE POWER TO VETO THE INVESTMENT DECISIONS OF HIS CO-MANAGERS. PAUL M. COLONNA IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. SINCE JANUARY 2005, HE HAS LED THE TEAM OF PORTFOLIO MANAGERS FOR THE INCOME FUND. PRIOR TO JOINING GE ASSET MANAGEMENT IN FEBRUARY 2000, MR. COLONNA WAS A SENIOR PORTFOLIO MANAGER WITH THE FEDERAL HOME LOAN MORTGAGE CORPORATION, OVERSEEING THE MORTGAGE INVESTMENT GROUP. ALFREDO CHANG IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A PORTFOLIO MANAGER OF THE INCOME FUND SINCE MARCH 2005. MR. CHANG JOINED GE ASSET MANAGEMENT IN JULY 2002 AS A PORTFOLIO MANAGER AND WAS MADE RESPONSIBLE FOR THE EMERGING MARKET FIXED INCOME EFFORT AT GE ASSET MANAGEMENT IN NOVEMBER 2003. MR. CHANG WAS AN ASSISTANT PORTFOLIO MANAGER WITH GENWORTH FINANCIAL, FORMERLY KNOWN AS GE FINANCIAL ASSURANCE, AN AFFILIATE OF GE ASSET MANAGEMENT, FROM AUGUST 2000 UNTIL HE JOINED GE ASSET MANAGEMENT IN JULY 2002. PRIOR TO THAT HE OVERSAW OFFSHORE INVESTMENT PORTFOLIOS AT AIG GLOBAL INVESTMENT CORPORATION. MARK DELANEY IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A MEMBER OF THE PORTFOLIO MANAGEMENT TEAM FOR THE INCOME FUND SINCE JOINING GE ASSET MANAGEMENT IN APRIL 2002. PRIOR TO JOINING GE ASSET MANAGEMENT, MR. DELANEY WAS A SENIOR PORTFOLIO MANAGER AT SMITH GRAHAM SINCE AUGUST 1994. ERIC H. GOULD IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS BEEN A PORTFOLIO MANAGER FOR THE INCOME FUND SINCE JOINING GE ASSET MANAGEMENT IN SEPTEMBER 2000. PRIOR TO JOINING GE ASSET MANAGEMENT, MR. GOULD WAS A SENIOR ASSET MANAGER FOR METROPOLITAN LIFE INSURANCE COMPANY. WILLIAM M. HEALEY IS A SENIOR VICE PRESIDENT OF GE ASSET MANAGEMENT. HE HAS SERVED ON THE PORTFOLIO MANAGEMENT TEAM FOR THE INCOME FUND SINCE SEPTEMBER 1997. PRIOR TO JOINING GE ASSET MANAGEMENT, MR. HEALEY SPENT OVER 10 YEARS IN THE FIXED INCOME GROUP AT METLIFE. VITA MARIE PIKE IS A VICE PRESIDENT OF GE ASSET MANAGEMENT. SHE HAS SERVED ON THE PORTFOLIO MANAGEMENT TEAM FOR THE INCOME FUND SINCE JUNE 2004. PRIOR TO JOINING GE ASSET MANAGEMENT IN JANUARY 2001, SHE WAS WITH ALLIANCE CAPITAL FOR OVER NINE YEARS SERVING IN A NUMBER OF DIFFERENT CAPACITIES INCLUDING PORTFOLIO MANAGER. [PHOTO OMITTED] 2 Q&A Q. HOW DID THE INCOME FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Income Fund returned -0.42%. The Lehman Brothers Aggregate Bond Index, the Fund's benchmark, returned -0.72% and the Fund's Lipper peer group of 52 Intermediate Investment Grade Debt funds returned an average of -0.70% for the same period. Q. WHAT WERE THE PRIMARY DRIVERS BEHIND FUND PERFORMANCE? A. Individual security return was the largest positive contributor to Fund performance relative to the benchmark. Sector allocation also provided excess return. In particular, the Fund's exposure to high yield bonds added significantly to excess return as high yield, in general, returned over 3.0% for the period. However, the Fund's performance during the period was negatively affected by relative duration exposure. Q. DESCRIBE WHAT HAPPENED IN THE U.S. ECONOMY DURING THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. Economic growth in the U.S. slowed decidedly in the second quarter, after a very strong 5.6% growth rate in the first quarter. With the increase in interest rates across the yield curve, the primary focus has been the impact on the U.S. housing market, which has fueled much of our growth in recent years. Indeed, there is justified cause for concern about housing. Despite an increase in new home sales, month-over-month in May, sales volume of both new and existing homes are down from year-ago levels. Market participants fear that a significant decline in home prices and rising energy costs will force retrenchment by the American consumer. Despite a slowing in economic growth, inflation pressures did not appear to be receding. High prices at the gas pump plagued consumers. Housing costs, which make up a large component of consumer inflation statistics through owner equivalent rent levels, had risen. Commodity prices remained above year-ago levels despite falling off a bit most recently. Utilization rates were back above pre-2001 levels. The combination of slowing growth and rising inflation had investors playing the guessing game on future Fed moves. This game has always been a favorite pastime of bond investors, but with a new Fed chairman in the mix, the second quarter had been enjoyable to watch. In April, after a 25 basis point hike in fed funds to 4.75%, FOMC comments led market thinking toward a move in May to 5% and then pausing in June. The Fed did, in fact, raise rates again in May to 5%, but a more hawkish tone regarding inflation in its statement and subsequent comments by various Fed members, including the chairman, left many investors believing the committee would continue rate hikes in June and beyond. The committee did follow up in June with another hike of 25 basis points to 5.25% while reiterating that future rate decisions will be data dependant. 3 Income Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees. JANUARY 1, 2006 - JUNE 30, 2006
---------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ---------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 995.78 2.97 ---------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,021.58 3.01 ----------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.60% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). **ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS (0.42)%. 4 Income Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [LINE CHART OMITTED, PLOT POINTS FOLLOWS] LB AGGREGATE GEI INCOME BOND INDEX 6/96 $ 10000.00 $ 10000.00 12/96 10489.79 10490.46 12/97 11433.46 11503.2 12/98 12342.18 12502.43 12/99 12166.22 12399.75 12/00 13472.85 13841.35 12/01 14473.50 15010.04 12/02 15904.23 16549.33 12/03 16476.77 17228.59 12/04 17040.28 17976.10 12/05 17387.45 18412.65 6/06 17314.03 18279.61 AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- SIX ONE FIVE TEN MONTHS YEAR YEAR YEAR -------------------------------------------------------------------------------- Income Fund -0.42% -0.43% 4.42% 5.64% -------------------------------------------------------------------------------- LB Aggregate Bond Index -0.72% -0.81% 4.97% 6.22% -------------------------------------------------------------------------------- Lipper peer group average* -0.70% -0.89% 4.86% 5.80% -------------------------------------------------------------------------------- Inception date 1/3/95 -------------------------------------------------------------------------------- Income Fund (ending value $17,314) LB Aggregate Bond Index (ending value $18,280) INVESTMENT PROFILE A fund designed for investors who seek maximum income consistent with prudent investment management and the preservation of capital by investing at least 80% of its net assets in debt securities under normal market conditions. QUALITY RATINGS AS OF JUNE 30, 2006 as a % of Market Value ================================================================================ MOODY'S/S&P/ PERCENTAGE OF FITCH RATING** MARKET VALUE -------------------------------------------------------------------------------- Aaa / AAA 77.48% -------------------------------------------------------------------------------- Aa / AA 2.42% -------------------------------------------------------------------------------- A / A 5.64% -------------------------------------------------------------------------------- Baa / BBB 8.61% -------------------------------------------------------------------------------- Ba / BB and lower 5.85% -------------------------------------------------------------------------------- NR / Other *** 0.00% ================================================================================ PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value ================================================================================ Market Value of $133,488 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Asset-Backed and Other 30.6% Mortgage-Backed 29.4% Corporate Notes 20.3% U.S. Treasuries 18.4% Federal Agencies 1.3% *LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR, FIVE-YEAR AND TEN-YEAR PERIODS INDICATED IN THE INTERMEDIATE INVESTMENT GRADE DEBT FUNDS PEER GROUP CONSISTING OF 52, 52, 34 AND 15 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. **MOODY'S INVESTORS SERVICES INC, STANDARD & POOR'S AND FITCH ARE NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS. ***LESS THAN 0.01% SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- INCOME FUND PRINCIPAL AMOUNT VALUE BONDS AND NOTES -- 79.1%+ -------------------------------------------------------------------------------- U.S. TREASURIES -- 22.3% U.S. Treasury Bonds 4.50% 02/15/36 $ 425,000 $ 381,170(h) 7.13% 02/15/23 290,000 347,011(h) 8.13% 08/15/19 - 08/15/21 1,725,000 2,196,185(h) U.S. Treasury Notes 4.13% 08/15/08 230,000 225,490(h) 4.88% 04/30/08 - 05/31/11 13,565,000 13,469,707(h) 5.13% 05/15/16 7,955,000 7,946,329(h) 24,565,892 FEDERAL AGENCIES -- 1.5% Federal Farm Credit Bank 3.75% 01/15/09 670,000 643,670 Federal Home Loan Mortgage Corp. 4.75% 12/08/10 1,065,000 1,033,224 1,676,894 AGENCY MORTGAGE BACKED -- 13.8% Federal Home Loan Mortgage Corp. 4.50% 06/01/33 - 02/01/35 307,986 279,492 5.00% 07/01/35 - 10/01/35 513,393 479,883 5.50% 05/01/20 88,365 86,670 6.00% 04/01/17 - 05/01/35 1,167,330 1,158,109 6.50% 01/01/27 - 12/01/34 519,332 523,564 7.00% 10/01/16 - 02/01/35 228,319 233,988 7.50% 11/01/09 - 09/01/33 32,964 33,998 8.00% 09/01/09 - 11/01/30 33,178 34,599 8.50% 04/01/30 - 05/01/30 34,920 37,460 Federal National Mortgage Assoc. 4.00% 05/01/19 - 06/01/19 315,795 291,626 4.50% 05/01/18 - 12/01/34 1,826,211 1,717,893 5.00% 03/01/34 - 08/01/35 662,809 620,466 5.50% 12/01/13 - 08/01/33 890,496 868,870 6.00% 06/01/14 - 07/01/35 2,042,094 2,015,981 6.50% 03/01/15 - 02/01/35 2,593,000 2,611,927 7.00% 03/01/15 - 05/01/35 852,516 873,226 7.50% 12/01/09 - 03/01/34 265,047 273,705 8.00% 12/01/12 - 11/01/33 195,993 206,781 8.50% 05/01/31 7,899 8,376 9.00% 04/01/16 - 12/01/22 34,388 36,428 5.00% TBA 25,000 24,070(b) 5.50% TBA 53,000 50,897(b) 6.00% TBA 285,000 285,980(b) 6.50% TBA 329,000 330,645(b) Government National Mortgage Assoc. 4.50% 08/15/33 - 09/15/34 593,179 545,132 5.13% 11/20/22 - 12/20/24 8,795 8,836(g) 5.38% 02/20/23 - 02/20/26 23,086 23,137(g) 6.00% 04/15/27 - 06/15/35 605,658 601,841 PRINCIPAL AMOUNT VALUE 6.50% 04/15/19 - 08/15/34 $ 492,906 $ 499,158 7.00% 03/15/12 - 06/15/34 238,533 245,340 7.50% 11/15/31 - 10/15/33 16,177 16,877 8.00% 12/15/29 - 04/15/30 7,532 7,992 8.50% 10/15/17 29,807 31,772 9.00% 11/15/16 - 12/15/21 70,278 76,188 15,140,907 AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.1% Federal Home Loan Mortgage Corp. 1.45% 10/15/18 446,964 17,383(e,g) 1.95% 12/15/30 1,156,622 51,686(e,g) 3.33% 10/15/33 235,000 163,997(g) 4.11% 12/15/33 150,000 111,399(g) 4.50% 04/15/13 - 03/15/19 994,078 103,082(e) 4.50% 05/15/17 - 11/15/19 350,000 321,148 5.00% 01/15/11 - 08/01/35 7,057,771 1,430,981(e) 5.00% 05/15/20 - 02/15/35 1,775,000 1,588,844 5.50% 04/15/17 - 06/15/33 681,989 138,464(e) 5.50% 10/15/34 241,155 238,202 6.50% 02/15/21 326 325 7.50% 01/15/16 70,177 72,241 7.50% 07/15/27 18,318 3,996(e) 8.00% 02/01/23 - 07/01/24 9,175 2,039(e) 8.25% 06/01/26 60,000 74,555(f,i) 10.44% 09/25/43 2,190,158 29,133(c,e,g) Federal Home Loan Mortgage STRIPS 5.30% 08/01/27 2,233 1,797(c,d) Federal National Mortgage Assoc. 1.18% 12/25/42 153,909 3,463(e,g) 1.68% 10/25/29 593,144 27,506(e,g) 1.78% 12/25/30 586,947 23,247(e,g) 2.18% 05/25/18 1,023,626 56,197(e,g) 2.28% 09/25/42 1,633,115 105,642(e,g) 2.33% 04/25/17 - 10/25/17 1,317,640 67,082(e,g) 2.38% 08/25/16 404,300 17,142(e,g) 2.78% 06/25/42 533,634 27,636(e,g) 3.56% 09/25/31 386,765 330,246(g) 4.00% 02/25/28 37,081 35,960 4.50% 05/25/18 173,771 17,649(e) 4.50% 12/25/19 125,000 110,567 4.75% 11/25/14 101,497 7,315(e) 5.00% 02/25/11 - 02/25/32 289,604 30,035(e) 5.00% 03/25/35 175,000 154,906 5.50% 07/25/34 - 02/25/35 485,092 478,816 f) 5.75% 02/25/35 250,000 247,948 6.00% 12/25/34 175,000 171,775 6.50% 12/25/34 102,300 103,190 8.00% 07/25/14 216,695 220,131 Federal National Mortgage Assoc. (Class 1) 5.27% 11/01/34 788,293 548,381(c,d) Federal National Mortgage Assoc. (Class S) 1.78% 02/25/31 554,902 21,361(e,g) See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 6 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Federal National Mortgage Assoc. REMIC 4.50% 11/25/13 $ 392,363 $ 17,233(e) 4.90% 03/25/31 544,205 506,715(g) 5.00% 10/25/22 153,156 26,929(e) 7.00% 09/25/20 1,157 1,158 Federal National Mortgage Assoc. REMIC (Class B) 5.39% 12/25/22 602 487(c,d) Federal National Mortgage Assoc. REMIC (Class J) 1080.91% 03/25/22 14 208(e) Federal National Mortgage Assoc. REMIC (Class K) 1008.00% 05/25/22 13 403(e) Federal National Mortgage Assoc. STRIPS (Class 2) 7.50% 11/01/23 55,039 14,534(e) 8.00% 08/01/23 - 07/01/24 19,283 4,443(e) 8.50% 07/25/22 938 216(e) 9.00% 05/25/22 607 154(e) Vendee Mortgage Trust 16.44% 05/15/33 1,500,187 46,881(c,e,g) 7,774,828 ASSET BACKED -- 1.5% Bank One Issuance Trust 3.59% 05/17/10 85,000 83,066 BMW Vehicle Owner Trust (Class B) 2.93% 03/25/09 213,000 212,131 Capital One Master Trust (Class C) 6.70% 06/15/11 200,000 203,906(a,f) Carmax Auto Owner Trust 4.35% 03/15/10 131,000 127,963 Chase Funding Mortgage Loan Asset-Backed Certificates 5.60% 02/25/33 75,075 75,271(f,g) 5.75% 05/25/32 32,000 30,295(f) Citibank Credit Card Issuance Trust 4.45% 04/07/10 274,000 267,694 Countrywide Asset-Backed Certificates 5.75% 05/25/33 30,840 30,887(f,g) Countrywide Home Equity Loan Trust (Class A) 5.43% 07/15/27 116,246 116,248(f,g) Honda Auto Receivables Owner Trust (Class A) 4.15% 10/15/10 146,000 142,132 Mid-State Trust 7.54% 07/01/35 2,968 3,032(f) Peco Energy Transition Trust 6.52% 12/31/10 192,000 198,018(f) Residential Asset Securities Corp. 5.57% 07/25/32 17,104 17,108(f,g) Volkswagen Auto Lease Trust (Class A) 3.94% 10/20/10 88,000 86,330 Wells Fargo Home Equity Trust 3.97% 09/25/24 77,000 76,064(f,g) 1,670,145 PRINCIPAL AMOUNT VALUE CORPORATE NOTES -- 24.7% Abbey National PLC 7.95% 10/26/29 $ 200,000 $ 236,825(f) Abbott Laboratories 5.88% 05/15/16 255,000 252,657 Air Jamaica Ltd. 9.38% 07/08/15 150,000 151,125(a,f) Allegiance Corp. 7.00% 10/15/26 210,000 213,857(f) Allied Waste North America 7.25% 03/15/15 350,000 334,250(f) Allstate Life Global Funding Trusts 3.85% 01/25/08 165,000 160,498(f) Altria Group, Inc. 7.20% 02/01/07 125,000 125,632(f) American Electric Power Company, Inc. (Series D) 5.25% 06/01/15 90,000 84,273(f) American General Corp. 7.50% 08/11/10 130,000 137,538(f) Appalachian Power Co. (Series G) 3.60% 05/15/08 150,000 144,249(f) Appalachian Power Co. (Series K) 5.00% 06/01/17 110,000 98,520(f) Archer-Daniels-Midland Co. 7.00% 02/01/31 110,000 119,322(f) Assurant, Inc. 6.75% 02/15/34 175,000 171,847(f) AT&T, Inc. 4.13% 09/15/09 220,000 209,157 5.88% 08/15/12 110,000 108,972 BAC CAP TRUST V 5.63% 03/08/35 180,000 156,567(f) Banco BMG S.A. 9.15% 01/15/16 115,000 112,700(a,f) Banco Mercantil del Norte S.A. 5.88% 02/17/14 225,000 221,906(a,f,g) Banco Santander Chile 5.38% 12/09/14 215,000 204,444(a,f) BellSouth Corp. 6.55% 06/15/34 185,000 176,009(f) BJ Services Co. 5.75% 06/01/11 165,000 163,407 BNP US Funding LLC (Series A) 7.74% 12/31/49 80,000 81,949(a,f,g) Boyd Gaming Corp. 7.13% 02/01/16 145,000 140,106(f) British Aerospace Finance, Inc. 7.50% 07/01/27 125,000 135,453(a,f) British Telecommunications PLC 8.38% 12/15/10 65,000 71,330 Burlington Northern Santa Fe Corp. 8.13% 04/15/20 100,000 117,951(f) Campbell Soup Co. 5.50% 03/15/07 160,000 159,900(f) Capital One Bank 6.50% 06/13/13 75,000 76,512(f) Capital One Financial Corp. 8.75% 02/01/07 170,000 172,767(f) See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 7 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Carolina Power & Light Co. 5.15% 04/01/15 $ 80,000 $ 75,322(f) 5.70% 04/01/35 45,000 40,775(f) 6.13% 09/15/33 235,000 226,141(f) CCSA Finance Ltd. 7.88% 05/17/16 100,000 94,500(a) Clear Channel Communications, Inc. 4.63% 01/15/08 255,000 249,428(f) Comcast Cable Communications Holdings, Inc. 9.46% 11/15/22 155,000 191,436(f) Commonwealth Bank of Australia 6.02% 03/29/49 160,000 152,398(a) Consumers Energy Co. 5.15% 02/15/17 125,000 113,453(f) 5.80% 09/15/35 110,000 98,671(f) Corp Interamericana de Entretenimiento S.A. 8.88% 06/14/15 150,000 142,500(a,f) Cosan S.A. Industria e Comercio 8.25% 02/28/49 140,000 126,000(a,f) Cosipa Commercial Ltd. 8.25% 06/14/16 115,000 115,575(a) Countrywide Home Loans, Inc. 5.63% 05/15/07 100,000 99,885(f) COX Communications, Inc. 5.45% 12/15/14 200,000 185,411(f) Crown Americas LLC and Crown Americas Capital Corp. 7.75% 11/15/15 395,000 389,075(a,f) CSX Transportation, Inc. 9.75% 06/15/20 105,000 136,096(f) DaimlerChrysler NA Holding Corp. 4.05% 06/04/08 110,000 106,517(f) DBS Bank Ltd. 5.00% 11/15/19 235,000 214,094(a,f,g) Detroit Edison Co. (Series B) 5.45% 02/15/35 190,000 162,498(f) Deutsche Bank Capital Funding Trust VII 5.63% 01/19/49 100,000 92,614(a,f,g) Dominion Resources, Inc. 5.69% 05/15/08 165,000 164,488(f,i) Dominion Resources, Inc. (Series B) 4.13% 02/15/08 130,000 126,975(f) Duke Capital LLC 4.33% 11/16/06 135,000 134,409(f) 5.67% 08/15/14 50,000 48,046(f) Echostar DBS Corp. 5.75% 10/01/08 155,000 151,513(f) 7.13% 02/01/16 305,000 293,563(a,f) El Paso Electric Co. 6.00% 05/15/35 165,000 148,465(f) Enterprise Products Operating LP 4.00% 10/15/07 160,000 155,677(f) EOP Operating LP (REIT) 7.75% 11/15/07 190,000 194,717(f) FirstEnergy Corp. (Series B) 6.45% 11/15/11 225,000 228,942(f) PRINCIPAL AMOUNT VALUE Forest Oil Corp. 8.00% 06/15/08 $ 275,000 $ 280,844 FPL Group Capital, Inc. (Series B) 5.55% 02/16/08 220,000 219,210(f) Freescale Semiconductor Inc. 7.13% 07/15/14 345,000 348,450 Georgia Power Co. 4.88% 07/15/07 200,000 198,803(f) Goodrich Corp. 7.10% 11/15/27 185,000 194,401(f) Greater Bay Bancorp 5.25% 03/31/08 265,000 261,811(f) Grupo Gigante S.A. de C.V. 8.75% 04/13/16 40,000 37,600(a,h) Grupo Televisa S.A. 6.63% 03/18/25 110,000 102,729 GS Caltex Corp. 5.50% 10/15/15 170,000 159,527(a,f) GTE Corp. 6.94% 04/15/28 240,000 237,154(f) Halliburton Co. 8.75% 02/15/21 150,000 183,928(f) HJ Heinz Finance Co. 6.75% 03/15/32 115,000 112,976 Hopson Development Holdings Ltd. 8.13% 11/09/12 145,000 144,275(a,f) HSBC Bank USA NA 3.88% 09/15/09 425,000 402,890(f) HSBC Capital Funding LP (Series 1) 9.55% 12/31/49 65,000 72,841(a,f,g) IBM Canada Credit Services Co. 3.75% 11/30/07 95,000 92,200(a,f) ING Capital Funding TR III 8.44% 12/29/49 55,000 59,974(f,g) ING Groep N.V. 5.78% 12/29/49 275,000 257,616(f,g) International Business Machines Corp. 3.80% 02/01/08 115,000 112,065(f) iStar Financial, Inc. 4.88% 01/15/09 55,000 53,712(f) 7.00% 03/15/08 40,000 40,635(f) Kansas Gas & Electric 5.65% 03/29/21 105,000 98,293(f) Kimco Realty Corp. (REIT) 4.82% 06/01/14 110,000 100,703(f) Kinder Morgan Energy Partners LP 5.13% 11/15/14 155,000 141,501(f) Kraft Foods, Inc. 5.25% 06/01/07 100,000 99,517(f) L-3 Communications Corp. 6.38% 10/15/15 165,000 157,575(f) Laboratory Corp of America Holdings 5.63% 12/15/15 110,000 105,155(f) Lyondell Chemical Co. (Series A) 9.63% 05/01/07 270,000 274,050(f) MacDermid, Inc. 9.13% 07/15/11 410,000 428,450(f) See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 8 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Marsh & McLennon Companies, Inc. 5.15% 09/15/10 $ 170,000 $ 164,936(f) Meritage Homes Corp. 6.25% 03/15/15 480,000 404,400(f) Merrill Lynch & Company, Inc. 6.05% 05/16/16 185,000 183,786 MGM Mirage 5.88% 02/27/14 495,000 443,644(f) Midamerican Energy Holdings Co. 3.50% 05/15/08 200,000 192,682(f) 6.13% 04/01/36 115,000 108,390(a,f) Mohegan Tribal Gaming Authority 8.00% 04/01/12 270,000 274,388(f) Motorola, Inc. 4.61% 11/16/07 135,000 133,057(f) MUFG Capital Finance 1 Ltd. 6.35% 07/25/49 100,000 96,316(g) National Power Corp. 9.44% 08/23/11 110,000 119,079(a,f,g) NB Capital Trust IV 8.25% 04/15/27 110,000 115,178(f) Nelnet, Inc. 5.13% 06/01/10 205,000 195,863(f) New Cingular Wireless Services Inc. 8.75% 03/01/31 220,000 268,307(f) News America, Inc. 7.25% 05/18/18 110,000 116,572(f) Nextel Communications, Inc. (Series E) 6.88% 10/31/13 275,000 279,218(f) Norfolk Southern Railway Co. 9.75% 06/15/20 170,000 222,204(f) Northeast Utilities (Series B) 3.30% 06/01/08 235,000 224,019(f) Northern States Power Co. 6.25% 06/01/36 65,000 64,507 Northrop Grumman Corp. 4.08% 11/16/06 70,000 69,600(f) NorthWestern Corp. 5.88% 11/01/14 85,000 83,276 Ocean Energy, Inc. 4.38% 10/01/07 75,000 73,536(f) Ohio Power Co. (Series E) 6.60% 02/15/33 65,000 65,352(f) Owens Brockway Glass Container Inc. 6.75% 12/01/14 115,000 106,663(f) Pacific Bell 7.13% 03/15/26 85,000 87,533 Pacific Gas & Electric Co. 6.05% 03/01/34 95,000 89,696(f) PanAmSat Corp. 9.00% 08/15/14 320,000 324,800(f) Pemex Finance Ltd. 9.69% 08/15/09 175,500 185,493(f) Pemex Project Funding Master Trust 6.13% 08/15/08 265,000 264,560(f) 7.38% 12/15/14 30,000 31,213(f) Pepco Holdings, Inc. 5.86% 06/01/10 45,000 45,119(f,g) PRINCIPAL AMOUNT VALUE Pioneer Natural Resources Co. 6.88% 05/01/18 $ 230,000 $ 221,629 Plains All American Pipeline LP 6.70% 05/15/36 115,000 112,862(a) Potomac Edison Co. 5.35% 11/15/14 95,000 90,745(f) Procter & Gamble - ESOP (Series A) 9.36% 01/01/21 305,000 370,467(f) Prudential Financial, Inc. 5.90% 03/17/36 115,000 104,897(f) Puget Energy, Inc. 3.36% 06/01/08 125,000 119,257(f) 5.48% 06/01/35 110,000 95,541(f) Quest Diagnostics Inc. 6.75% 07/12/06 115,000 115,018(f) Qwest Corp. 7.63% 06/15/15 400,000 395,000(f) Rabobank Capital Funding Trust 5.25% 12/29/49 130,000 119,092(a,g) Reader's Digest Assoc, Inc. 6.50% 03/01/11 345,000 332,925 Reckson Operating Partnership LP (REIT) 5.88% 08/15/14 140,000 135,480(f) Residential Capital Corp. 6.13% 11/21/08 245,000 241,742(f) 6.90% 04/17/09 170,000 169,991(a,g) Resona Bank Ltd. 5.85% 09/29/49 215,000 200,030(a) Rogers Cable Inc. 5.50% 03/15/14 250,000 221,875 Rouse Company LP/TRC Co-Issuer Inc. (REIT) 6.75% 05/01/13 165,000 160,694(a) RSHB Capital S.A. 7.18% 05/16/13 145,000 143,731(a) Safeco Capital Trust I (Series B) 8.07% 07/15/37 130,000 137,015 Simon Property Group LP (REIT) 4.60% 06/15/10 115,000 110,209 4.88% 08/15/10 150,000 144,549 Smith International, Inc. 6.00% 06/15/16 110,000 109,023 Southern Copper Corp. 7.50% 07/27/35 140,000 132,948 Sprint Capital Corp. 6.00% 01/15/07 290,000 290,389 Standard Chartered Bank Hong Kong Ltd. 4.38% 12/03/14 130,000 123,697(g) Stewart Enterprises, Inc. 6.25% 02/15/13 350,000 318,938 Tampa Electric Co. 6.55% 05/15/36 55,000 54,666 Telefonos de Mexico S.A. de C.V. 4.50% 11/19/08 125,000 120,414 8.75% 01/31/16 1,500,000 123,056 TELUS Corp. 7.50% 06/01/07 220,000 223,251 See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 9 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Tesoro Corp. 6.25% 11/01/12 $ 85,000 $ 80,750(a) The Kroger Co. 6.80% 12/15/18 110,000 110,560(f) Thomson Corp. 5.50% 08/15/35 115,000 99,431 Time Warner Entertainment Co. 8.38% 03/15/23 - 07/15/33 270,000 303,641 TuranAlem Finance BV 7.75% 04/25/13 100,000 97,125(a) TXU Electric Delivery Co. 5.00% 09/01/07 115,000 113,750(f) Tyson Foods, Inc. 7.25% 10/01/06 6,000 6,018 8.25% 10/01/11 220,000 233,466 United Overseas Bank Ltd. 4.50% 07/02/13 220,000 198,824(a) Valero Energy Corp. 3.50% 04/01/09 180,000 169,478 Verizon Pennsylvania Inc. 8.75% 08/15/31 110,000 124,762(f) Viacom, Inc. 5.63% 05/01/07 200,000 199,783 VTB Capital S.A. 6.17% 09/21/07 220,000 220,429(a,g) Westar Energy, Inc. 5.15% 01/01/17 90,000 82,344 7.13% 08/01/09 60,000 61,743 Westfield Capital Corporation Limited 4.38% 11/15/10 175,000 165,120(a) Weyerhaeuser Co. 6.13% 03/15/07 74,000 74,039 Williams Partners LP 7.50% 06/15/11 175,000 175,438(a) Wisconsin Electric Power 3.50% 12/01/07 160,000 155,621 27,122,632 NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.5% Banc of America Funding Corp. 5.75% 03/20/36 69,929 68,506(f,g) 5.88% 02/20/36 174,841 172,164(f,g) Banc of America Mortgage Securities (Class B) 5.39% 01/25/36 74,877 71,965(f,g) Bank of America Alternative Loan Trust 6.50% 07/25/35 88,594 88,462(f) Bear Stearns Commercial Mortgage Securities 6.02% 02/14/31 300,000 301,768(f) CalSTRS Trust 4.13% 11/20/12 529,000 518,237(a,f) Countrywide Alternative Loan Trust 6.00% 03/25/36 55,000 46,152 Countrywide Alternative Loan Trust (Class B) 6.00% 05/25/36 29,962 26,087 PRINCIPAL AMOUNT VALUE Countrywide Home Loan Mortgage Pass Through Trust (Class M) 5.50% 12/25/35 $ 74,452 $ 69,807(f) Credit Suisse Mortgage Capital Certificates (Class C) 5.65% 02/25/36 39,830 37,472(f,g) Crusade Global Trust (Class A) 5.59% 09/18/34 151,341 151,622(f,g) CS First Boston Mortgage Securities Corp. 1.69% 03/15/35 3,704,291 152,503(a,f,g) 5.33% 10/25/35 74,566 68,708(f,g) 5.63% 07/15/37 2,517,041 73,126(a,c,f,g) 6.13% 04/15/37 175,000 177,775(f) First Union-Lehman Brothers- Bank of America 6.56% 11/18/35 141,914 143,398(f) GMAC Commercial Mortgage Securities, Inc. 6.42% 05/15/35 335,832 339,703(f) 6.47% 04/15/34 159,000 163,034(f) GMAC Commercial Mortgage Securities, Inc. (Class X) 5.60% 12/10/41 4,396,097 107,119(c,f,g) Greenwich Capital Commercial Funding Corp. 5.12% 04/10/37 301,000 294,031(f) Indymac INDA Mortgage Loan Trust 5.16% 01/25/36 99,941 94,901(f,g) Indymac INDA Mortgage Loan Trust (Class B) 5.16% 01/25/36 99,941 96,944(f,g) Indymac Index Mortgage Loan Trust 5.41% 06/25/35 118,382 114,946(f,g) JPMorgan Chase Commercial Mortgage Securities Corp. 1.29% 01/12/39 2,711,739 104,677(a,f,g) 6.47% 11/15/35 190,000 195,635(f) JPMorgan Mortgage Trust 5.41% 11/25/35 255,340 247,166(f,g) LB-UBS Commercial Mortgage Trust 4.06% 09/15/27 495,000 473,990(f,g) 4.51% 12/15/29 163,000 153,678(f) 5.36% 03/15/34 559,328 8,637(a,c,f,g) 5.58% 01/18/12 3,432,304 102,587(c,f,g) 6.23% 03/15/26 130,000 131,638(f) 6.65% 10/15/35 832,115 35,566(a,c,f,g) 7.61% 02/15/40 2,728,401 57,241(a,c,f,g) 8.21% 03/15/36 3,234,704 90,093(a,c,f,g) LB-UBS Commercial Mortgage Trust (Class A) 6.13% 12/15/30 172,000 174,815(f) 6.65% 11/15/27 144,000 149,359(f) LB-UBS Commercial Mortgage Trust (Class B) 6.65% 07/14/16 34,000 35,220(a,f) See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 10 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE Master Alternative Loans Trust 5.00% 08/25/18 $ 206,530 $ 32,335(e,f) 6.50% 08/25/34 - 05/25/35 585,901 584,599(f) Master Alternative Loans Trust (Class 3) 6.50% 01/25/35 153,822 153,822(f) MLCC Mortgage Investors, Inc. 5.40% 02/25/36 59,996 58,208(f,g) Morgan Stanley Capital I 7.11% 04/15/33 513,000 530,882(f) Morgan Stanley Dean Witter Capital I 5.03% 04/15/34 497,636 9,914(a,c,f,g) 5.20% 10/15/35 772,261 14,705(a,c,f,g) 7.20% 10/15/33 199,000 207,785(f) Morgan Stanley Dean Witter Capital I (Class A) 6.39% 10/15/35 150,000 154,081(f) 6.54% 02/15/31 32,062 32,578(f) Morgan Stanley Dean Witter Capital I (Class X) 1.45% 02/01/31 368,283 15,077(a,f,g) Nomura Asset Securities Corp. (Class A) 6.59% 03/15/30 500,000 506,631(f) Residential Asset Securitization Trust 6.00% 01/25/46 24,907 21,241 Residential Funding Mortgage Security I 5.75% 01/25/36 199,308 187,121(f) Wells Fargo Mortgage Backed Securities Trust 5.00% 11/25/20 205,823 199,494 5.39% 08/25/35 106,684 102,367(g) 5.50% 01/25/36 149,998 137,856 8,287,428 SOVEREIGN BONDS -- 0.7% Government of Argentina 4.89% 08/03/12 145,000 120,640(g) 8.28% 12/31/33 161,312 143,590 Government of Bahamas 6.63% 05/15/33 125,000 133,621(a,f) Government of Brazil 12.50% 01/05/16 280,000 126,464 Government of Peru 8.38% 05/03/16 145,000 156,600 Government of Turkey 7.25% 03/15/15 85,000 79,794 Government of Uruguay 8.00% 11/18/22 60,000 57,450 818,159 TOTAL BONDS AND NOTES (COST $91,466,217) 87,056,885 NUMBER OF CONTRACTS VALUE PURCHASED OPTIONS -- 0.0 %* ------------------------------- ------------------------------------------------ CALL OPTIONS Euro Dollar Futures (COST $1,409) 35 $ 219 PRINCIPAL AMOUNT VALUE -------------------------------------------------------------------------------- SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 16.6% -------------------------------------------------------------------------------- ASSET BACKED -- 9.2% Bear Stearns Asset Backed Securities Inc. 5.54% 11/25/35 $ 2,000,000 2,003,286(f,g) Fleet Home Equity Loan Trust (Class A) 5.52% 01/20/33 445,998 446,545(f,g) Ford Credit Floorplan Master Owner Trust (Class A) 5.24% 07/15/09 2,500,000 2,498,200(g) Residential Asset Mortgage Products, Inc. 5.52% 04/25/35 5,000,000 5,008,236(f,g) 5.65% 12/25/33 110,602 110,881(f,g) Residential Asset Mortgage Products, Inc. (Class A) 5.60% 06/25/32 60,864 60,897(f,g) 10,128,045 NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.4% Bear Stearns Commercial Mortgage Securities (Class C) 5.51% 08/03/14 1,000,000 1,000,000(a,f,g) Granite Mortgages PLC (Class 1) 4.78% 01/20/43 860,888 862,223(f,g) JPMorgan Alternative Loan Trust 5.41% 08/25/36 3,000,000 3,000,000(g) Puma Finance Ltd. (Class A) 5.22% 10/11/34 247,298 247,718(f,g) Residential Accredit Loans, Inc. 5.39% 06/25/36 3,000,000 3,000,000(g) 8,109,941 TOTAL SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN (COST $18,225,847) 18,237,986 TOTAL INVESTMENT IN SECURITIES (COST $109,693,473) 105,295,090 See Notes to Schedule of Investments on page 13 and Notes to Financial Statements 11 INCOME FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- NUMBER OF SHARES VALUE SHORT-TERM INVESTMENTS -- 25.6% -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 18.5% GEI Short Term Investment Fund 6.93% 20,367,210 $ 20,367,210(c,j) SHORT-TERM SECURITIES PURCHASED WITH COLLATERAL FROM SECURITIES ON LOAN -- 5.6% GEI Short Term Investment Fund 6.93% 6,126,477 6,126,477(c,j) PRINCIPAL AMOUNT ---------------------------------------------------------- COMMERCIAL PAPER -- 1.5% Merril Lynch & Co. 5.26% 07/06/06 $1,700,000 1,698,758 TOTAL SHORT-TERM INVESTMENTS (COST $28,192,445) 28,192,445 TOTAL INVESTMENTS (COST $137,885,918) 133,487,535 LIABILITIES IN EXCESS OF OTHER ASSETS, NET -- (21.3)% (23,492,761) =========== NET ASSETS -- 100.0% $109,994,774 =========== OTHER INFORMATION -------------------------------------------------------------------------------- The GEI Income Fund had the following written option contracts open at June 30, 2006 (unaudited): EXPIRATION DATE/ NUMBER OF CALL OPTIONS STRIKE PRICE CONTRACTS VALUE -------------------------------------------------------------------------------- Euro Dollar Futures (Written Option Premium $342) July 06 / 95.00 35 $(219) The GEI Income Fund had the following long futures contracts open at June 30, 2006 (unaudited): NUMBER CURRENT EXPIRATION OF NOTIONAL UNREALIZED DESCRIPTION DATE CONTRACTS VALUE DEPRECIATION --------------------------------------------------------------- Euro Dollar Futures September 2006 20 $4,721,000 $ 945 U.S. Treasury Notes 5 Yr. Futures September 2006 45 4,653,281 (25,202) U.S. Treasury Notes 10 Yr. Futures September 2006 10 1,048,594 (7,371) ----------- $(31,628) =========== See Notes to Schedule of Investments on page 13 and Notes to Financial Statements. 12 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Pursuant to Rule 144A of the Securities Act of 1933, these securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2006, these securities amounted to $7,558,416 or 6.87% of net assets for the GE Investments Income Fund. These securities have been determined to be liquid using procedures established by the Board of Trustees. (b) Settlement is on a delayed delivery or when-issued basis with final maturity to be announced (TBA) in the future. (c) Coupon amount represents effective yield. (d) Principal only securities represent the right to receive the monthly principal payments on an underlying pool of mortgages. No payments of interest on the pool are passed through to the "principal only" holder. (e) Interest only securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the "interest only" holding. (f) At June 30, 2006, all or a portion of this security was pledged to cover collateral requirements for futures, options, forward foreign currency contracts and/or TBA's. (g) Variable or floating rate security. The stated rate represents the rate at June 30, 2006. (h) All or a portion of the security is out on loan. (i) Step coupon bond. Security becomes interest bearing at a future date. (j) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. + Percentages are based on net assets as of June 30, 2006. Abbreviations: REIT Real Estate Investment Trust REMIC Real Estate Mortgage Investment Conduit STRIPS Separate Trading of Registered Interest and Principal of Security TBA To Be Announced 13 Financial Highlights Selected data based on a share outstanding throughout the periods indicated INCOME FUND
6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 1/3/95 Net asset value, beginning of period .............. $11.84 $12.25 $12.61 $12.93 $12.26 $11.99 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income .......................... 0.30 0.61 0.55 0.51 0.37 0.60 Net realized and unrealized gains/(losses) on investments ............... (0.35) (0.36) (0.12) (0.04) 0.84 0.29 ------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME FROM INVESTMENT OPERATIONS ........... (0.05) 0.25 0.43 0.47 1.21 0.89 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income .......................... -- 0.61 0.57 0.56 0.38 0.62 Net realized gains ............................. -- 0.05 0.22 0.23 0.16 -- Return of capital .............................. -- 0.00(b) -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ............................... -- 0.66 0.79 0.79 0.54 0.62 ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD .................... $11.79 $11.84 $12.25 $12.61 $12.93 $12.26 ============================================================================================================================== TOTAL RETURN (A) .................................. (0.42)% 2.04% 3.42% 3.60% 9.89% 7.43% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ....... $109,995 $116,558 $135,172 $189,318 $220,800 $117,740 Ratios to average net assets: Net investment income* ...................... 5.06% 4.49% 3.82% 3.24% 3.79% 5.39% Expenses* ................................... 0.60% 0.60% 0.59% 0.55% 0.53% 0.55% Portfolio turnover rate ........................ 123% 311% 343% 419% 385% 278%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. (b) Less than $0.01 per share. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 14 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
INCOME FUND ----------------------------------------------------------------------------------------------------------------------- ASSETS Investments in securities, at market* (cost $109,693,473) .......................................... $105,295,090 Short-term Investments (at amortized cost) ......................................................... 1,698,758 Short-term affiliated investments (at amortized cost) .............................................. 26,493,687 Foreign cash (cost $227,202) ....................................................................... 227,483 Receivable for investments sold .................................................................... 449,096 Income receivables ................................................................................. 1,018,399 Receivable for fund shares sold .................................................................... 192,349 Variation margin receivable ........................................................................ 16,225 ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS ................................................................................... 135,391,087 ----------------------------------------------------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned ........................................................... 24,364,463 Payable for investments purchased .................................................................. 1,013,960 Payable for fund shares redeemed ................................................................... 2,303 Payable to GEAM .................................................................................... 15,368 Options written, at market (premium received $342) ................................................. 219 ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES .............................................................................. 25,396,313 ----------------------------------------------------------------------------------------------------------------------- NET ASSETS ............................................................................................ $109,994,774 ======================================================================================================================= NET ASSETS CONSIST OF: Capital paid in .................................................................................... 114,720,546 Undistributed (distribution in excess of) net investment income .................................... 2,759,182 Accumulated net realized gain (loss) ............................................................... (3,055,148) Net unrealized appreciation/(depreciation) on: Investments .................................................................................... (4,398,383) Futures ........................................................................................ (31,628) Written options ................................................................................ 123 Foreign currency related transactions .......................................................... 82 ----------------------------------------------------------------------------------------------------------------------- NET ASSETS ............................................................................................ $109,994,774 ======================================================================================================================= Shares outstanding ($0.01 par value; unlimited shares authorized) ..................................... 9,327,477 Net asset value per share ............................................................................. $11.79
* Includes $23,806,908 of securities on loan. See Notes to Financial Statements. 15 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INCOME FUND ----------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ....................................................................................... $ 3,907 Interest* ...................................................................................... 2,615,348 Interest from affliated investments ............................................................ 480,596 ----------------------------------------------------------------------------------------------------------------------- TOTAL INCOME ..................................................................................... 3,099,851 ----------------------------------------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ............................................................... 276,173 Custody and accounting expenses ................................................................ 33,935 Professional fees .............................................................................. 8,942 Trustee's fees ................................................................................. 1,751 Registration expenses .......................................................................... 431 Transfer agent ................................................................................. 110 Other expenses ................................................................................. 7,616 ----------------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES ................................................................................... 328,958 ----------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ..................................................................... 2,770,893 ======================================================================================================================= NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................................................. (1,587,061) Futures ..................................................................................... (69,566) Written options ............................................................................. (6,223) Foreign currency transactions ............................................................... (1,481) INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................................................. (1,531,797) Futures ..................................................................................... (29,346) Written options ............................................................................. 123 Foreign currency transactions ............................................................... 82 ----------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ......................................... (3,225,269) ----------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................................. $ (454,376) =======================================================================================================================
* Income attributable to security lending, net of rebate expenses, was $275. See Notes to Financial Statements. 16 Statements of Changes in Net Assets
INCOME FUND --------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 --------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) .................................................... $ 2,770,893 $ 5,667,191 Net realized gain (loss) on investments, futures, written options and foreign currency transactions .............................................. (1,664,331) (1,131,629) Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation ...... (1,560,938) (1,964,504) --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations .......................................... (454,376) 2,571,058 --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................................ -- (5,660,155) Net realized gains ............................................................... -- (471,683) Return of capital ................................................................ -- (28,414) --------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ................................................................ -- (6,160,252) --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions ................ (454,376) (3,589,194) --------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares ..................................................... 5,408,662 4,387,459 Value of distributions reinvested ................................................ -- 6,160,341 Cost of shares redeemed .......................................................... (11,517,686) (25,572,505) --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions .................................. (6,109,024) (15,024,705) --------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ............................................ (6,563,400) (18,613,899) NET ASSETS Beginning of period ................................................................ 116,558,174 135,172,073 --------------------------------------------------------------------------------------------------------------------------- End of period ...................................................................... $109,994,774 $116,558,174 --------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ........ $ 2,759,182 $ (11,711) --------------------------------------------------------------------------------------------------------------------------- CHANGES IN PORTFOLIO SHARES Shares sold ...................................................................... 457,838 354,588 Issued for distributions reinvested .............................................. -- 520,299 Shares redeemed .................................................................. (971,970) (2,069,626) --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in fund shares ................................................ (514,132) (1,194,739) ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 17 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund (the "Fund"), Money Market Fund and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 18 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The 19 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. SWAP CONTRACTS As part of the investment strategy, the Fund may invest in swap agreements, which are agreements to exchange the return generated by one instrument for the return generated by another instrument. Total return swap agreements involve commitments to pay interest in exchange for a market linked return based upon a notional principal amount. To the extent the total return of the security or index underlying the agreement exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Swaps are marked to market daily based upon the underlying security or index. Payments received or made are recorded as realized gain or loss in the Statement of Operations. Entering into swap agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the value of the index or securities underlying the agreement. Notional principal amounts are used to express the extent of involvement in these transactions, but the amounts potentially subject to credit risk are much smaller. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. These transactions are arrangements in which the Fund purchases and sells securities with payment and delivery scheduled a month or more after entering into the transactions. The price of the underlying securities and the date when these securities will be delivered and paid for are fixed at the time the transaction is negotiated. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contracts. In connection with such purchases, the Fund maintains cash or liquid assets in an amount equal to purchase commitments for such underlying securities until settlement date and for sales commitments, the Fund maintains equivalent deliverable securities as "cover" for the transaction. Unsettled commitments are valued at the current market value of the underlying security. Daily fluctuations in the value of such contracts are recorded as unrealized gains or losses. The Fund will not enter into such commitments for the purpose of investment leverage. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward foreign currency exchange contracts to facilitate transactions in foreign denominated securities and to manage the Fund's currency exposure. Forward foreign currency exchange contracts are valued at the mean between the bid and the offered forward rates as last quoted by a recognized dealer. The aggregate principal amounts of the contracts are not recorded in the Fund's financial statements. Such amounts appear under the caption forward foreign currency contracts in the Schedule of Investments. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (or liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains or losses on foreign currency related transactions. The Fund's risks in using these contracts include changes in the value of foreign currency or the possibility that the counterparties do not perform under the contracts' terms. When the Fund enters into a forward foreign currency exchange contract, it is required to segregate cash or liquid securities with its custodian in an amount equal to the value of the Fund's total assets committed to the consummation of the forward contract. If the value of the segregated securities declines, additional cash or securities is segregated so that the value of the account will equal the amount of the Fund's commitment with respect to the contract. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. 20 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At December 31, 2005, information on the tax components of capital is as follows:
Cost of Gross Tax Gross Tax Net Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ---------------------------------------------------------------------------------------------------------------- $137,965,372 $194,918 $(4,672,974) $(4,478,056)
As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires ----------------------------------------------- $1,055,894 12/31/13 Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund elected to defer losses incurred after October 31, 2005 as follows: Capital Currency ----------------------------------------------- $257,409 $11,711 The tax composition of distributions paid during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Return of Income Gains Capital Total --------------------------------------------------------- $6,053,503 $78,335 $28,414 $6,160,252 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) futures, and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, 21 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund at an annualized rate of .50%. GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ended June 30, 2006, $1,003 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales ------------------------------------------------- $131,926,366 $136,375,741 OPTIONS During the period ended June 30, 2006, the following option contracts were written: Number of of Contracts Premium ---------------------------------------------------------- Balance as of December 31, 2005 -- $ -- Written 135 5,169 Closed and Expired (100) (4,827) ---------------------------------------------------------- Balance as of June 30, 2006 35 $ 342 ---------------------------------------------------------- SECURITY LENDING At June 30, 2006, the Fund participated in securities lending: Loaned securities at Cash market value collateral ------------------------------------------------- $23,995,919 $24,364,463 22 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 23 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, the investment style and approach employed, the likely market cycles for the investment style, and the relative underperformance of the Fund in certain periods in light of GEAM's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods, particularly from a longer term perspective, which the Board members believed was most relevant. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members considered the potential institution of advisory fee breakpoints for the Fund, but concluded that GEAM had already appropriately shared the economies of scale. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM 24 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 25 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 26 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 27 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 28 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 29 [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [LOGO OMITTED] GE Investments Funds, Inc. Money Market Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. Money Market Fund Contents -------------------------------------------------------------------------------- NOTES TO PERFORMANCE ..................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ............................... 2 NOTES TO SCHEDULE OF INVESTMENTS ......................................... 6 FINANCIAL STATEMENTS Financial Highlights ................................................ 7 Statement of Assets and Liabilities ................................. 8 Statement of Operations ............................................. 9 Statements of Changes in Net Assets ................................. 10 Notes to Financial Statements ....................................... 11 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL ............................ 15 ADDITIONAL INFORMATION ................................................... 18 INVESTMENT TEAM .......................................................... 21 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Certain fees and Fund expenses have been waived and/or borne by the Fund's prior investment advisers. In addition, GE Asset Management waived certain fees for the Money Market Fund prior to fiscal 2002. Had these fees and expenses not been waived, the returns (and/or yields) would have been lower. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The 90 Day T-Bill is an unmanaged measure/index of the performance of U.S. Treasury bills currently available in the marketplace having a remaining maturity of 90 days. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Money Market Fund -------------------------------------------------------------------------------- Q&A DONALD J. DUNCAN IS A VICE PRESIDENT OF GE ASSET MANAGEMENT AND PORTFOLIO MANAGER OF THE MONEY MARKET FUND. MR. DUNCAN JOINED GE ASSET MANAGEMENT IN 1988 IN TRADE SUPPORT AND HELD SEVERAL POSITIONS INCLUDING MUTUAL FUND CONTROLLER. HE WAS APPOINTED INVESTMENT MANAGER - SHORT TERM SECURITIES IN 1990 AND VICE PRESIDENT - MONEY MARKETS IN 2002. Q. HOW DID THE MONEY MARKET FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30, 2006, the Money Market Fund returned 2.14%. The 90-day Treasury Bill, the Fund's benchmark, returned 2.28% and the Fund's Lipper peer group of 110 Money Market funds returned an average of 2.05% for the same period. Q. WHAT WERE THE PRIMARY DRIVERS BEHIND THE FUND'S PERFORMANCE? A. Portfolio positioning with respect to average maturity was a large contributor to Fund performance in the first half of 2006. As short rates were pushed higher by the Federal Reserve's continued policy of hiking the Fed funds target, we kept the average maturity of the fund shorter than that of the benchmark to take advantage of reinvesting at higher rates. Q. DESCRIBE WHAT HAPPENED IN THE US ECONOMY DURING THE SIX-MONTH PERIOD ENDING JUNE 30, 2006? A. Economic growth in the U.S. slowed decidedly in the second quarter, after a very strong 5.6% growth rate in the first quarter. With the increase in interest rates across the yield curve, the primary focus has been the impact on the U.S. housing market, which has fueled much of our growth in recent years. Indeed, there is justified cause for concern about housing. Despite an increase in new home sales, month-over-month in May, sales volume of both new and existing homes are down from year-ago levels. Market participants fear that a significant decline in home prices and rising energy costs will force retrenchment by the American consumer. Despite a slowing in economic growth, inflation pressures did not appear to be receding. High prices at the gas pump plagued consumers. Housing costs, which make up a large component of consumer inflation statistics through owner equivalent rent levels, had risen. Commodity prices remained above year-ago levels despite falling off a bit most recently. Utilization rates were back above pre-2001 levels. The combination of slowing growth and rising inflation had investors playing the guessing game on future Fed moves. This game has always been a favorite pastime of bond investors, but with a new Fed chairman in the mix, the second quarter had been enjoyable to watch. In April, after a 25 basis point hike in fed funds to 4.75%, FOMC comments led market thinking toward a move in May to 5% and then pausing in June. The Fed did, in fact, raise rates again in May to 5%, but a more hawkish tone regarding inflation in its statement and subsequent comments by various Fed members, including the chairman, left many investors believing the committee would continue rate hikes in June and beyond. The committee did follow up in June with another hike of 25 basis points to 5.25% while reiterating that future rate decisions will be data dependant. [Photo of Donald J. Duncan omitted] 2 Money Market Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees.
JANUARY 1, 2006 - JUNE 30, 2006 ------------------------------------------------------------------------------------------------------------------------------------ ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* ------------------------------------------------------------------------------------------------------------------------------------ Actual Fund Return** 1,000.00 1,021.42 2.49 ------------------------------------------------------------------------------------------------------------------------------------ Hypothetical 5% Return (2.5% for the period) 1,000.00 1,022.08 2.50 ------------------------------------------------------------------------------------------------------------------------------------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.50% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). ** ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 2.14%. 3 Money Market Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [LINE CHART OMITTED PLOT POINTS FOLLOWS] Money Market Fund 90-Day T-Bill 06/01/96 $10,000.00 $10,000.00 12/96 10,272.81 10,257.54 12/97 10,828.41 10,790.93 12/98 11,398.00 11,319.68 12/99 11,968.18 11,860.15 12/00 12,714.50 12,572.39 12/01 13,221.32 13,007.65 12/02 13,417.63 13,219.75 12/03 13,522.39 13,355.52 12/04 13,650.22 13,542.18 12/05 14,031.60 13,977.80 6/06 14,332.10 14,297.00 Money Market Fund (ending value $14,332) 90-Day T-Bill (ending value $14,297) INVESTMENT PROFILE A fund designed for investors who seek a high level of current income consistent with the preservation of capital and maintenance of liquidity by investing primarily in short-term U.S. dollar-denominated money market instruments. AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006 -------------------------------------------------------------------------------- Six One Five Ten Months Year Year Year -------------------------------------------------------------------------------- Money Market Fund 2.14% 3.84% 1.92% 3.66% -------------------------------------------------------------------------------- 90 Day T-Bill 2.28% 4.16% 2.17% 3.64% -------------------------------------------------------------------------------- Lipper peer group average* 2.05% 3.68% 1.79% 3.51% -------------------------------------------------------------------------------- Inception date 7/1/85 -------------------------------------------------------------------------------- FUND YIELD AT JUNE 30, 2006 -------------------------------------------------------------------------------- FUND IBC'S MONEY FUND** -------------------------------------------------------------------------------- 7-DAY CURRENT 4.71%+ 4.48% -------------------------------------------------------------------------------- 7-DAY EFFECTIVE 4.82% 4.59% -------------------------------------------------------------------------------- CURRENT YIELD REPRESENTS INCOME EARNED ON AN INVESTMENT IN THE MONEY MARKET FUND FOR A SEVEN DAY PERIOD AND THEN ANNUALIZED. EFFECTIVE YIELD IS CALCULATED SIMILARLY BUT COULD BE SLIGHTLY HIGHER BECAUSE IT REFLECTS THE COMPOUNDING EFFECT OF EARNINGS ON REINVESTED DIVIDENDS. + THE SEVEN DAY CURRENT YIELD, RATHER THAN THE TOTAL RETURN, MORE CLOSELY REFLECTS THE CURRENT EARNINGS OF THE MONEY MARKET FUND AT JUNE 30, 2006. ** IBC'S MONEY FUND REPORT PROVIDES AVERAGE YIELD FOR ALL MAJOR MONEY MARKET FUNDS. AN INVESTMENT IN THE MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. * LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX MONTHS, ONE YEAR, FIVE-YEAR, AND TEN-YEAR PERIODS INDICATED IN THE MONEY MARKET FUNDS PEER GROUP CONSISTING OF 110, 110, 91 AND 69 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 4 MONEY MARKET FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- MONEY MARKET FUND Portfolio Composition based on a Market Value of $324,759 (in thousands) as of June 30, 2006 [Pie chart omitted -- plot points are as follows:] Commercial Paper 37.3% Repurchase Agreements 24.8% Certificates of Deposit 17.0% Corporate Notes 12.2% U.S. Governments 8.6% Time Deposit 0.1% -------------------------------------------------------------------------------- PRINCIPAL AMORTIZED AMOUNT COST -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 100.0%+ -------------------------------------------------------------------------------- U.S. GOVERNMENTS -- 8.6% U.S. Agencies Federal Home Loan Mortgage Corp. 3.80% 07/12/06 $11,380,000 $ 11,380,000 5.50% 07/03/07 6,490,000 6,490,000 Federal Home Loan Mortgage Discount Notes 5.12% 01/18/07 10,510,000 10,220,704(a) 28,090,704 COMMERCIAL PAPER -- 37.3% Abbey National PLC 5.04% 07/03/06 11,350,000 11,346,822 AIG Funding Inc. 5.05% 07/14/06 12,140,000 12,117,861 Bank of Nova Scotia 5.14% 07/14/06 12,380,000 12,357,021 Bank of America Corp. 5.16% 08/08/06 11,840,000 11,775,512 Barclays PLC 5.13% 08/07/06 11,000,000 10,942,059 Bear Stearns Companies 5.09% 11/07/06 7,000,000 6,872,326 5.10% 11/14/06 3,430,000 3,363,915 Citigroup Inc. 5.24% 08/14/06 12,570,000 12,489,496 Credit Suisse First Boston 5.25% 07/24/06 12,660,000 12,617,536 ING Group 5.26% 07/28/06 12,870,000 12,819,228 Merril Lynch & Co. 5.20% 07/24/06 12,640,000 12,598,007 UBS AG 5.27% 07/03/06 1,780,000 1,779,479 121,079,262 PRINCIPAL AMORTIZED AMOUNT COST -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- 24.8% Barclays 5.15% dated 06/30/06, $16,216,957 to be received on 07/03/06, collateralized by $16,534,884 U.S. Government Agency Bond, Zero Coupon, maturing 04/03/07 $16,210,000 $ 16,210,000 Morgan Stanley Group, Inc. 5.15% dated 06/30/06, $48,020,600 to be received on 07/03/06, collateralized by $49,009,967 Resolution Funding Corporation Bonds, Zero Coupon, maturing 07/15/20 - 01/15/30 48,000,000 48,000,000 UBS 5.25% dated 06/30/06, $16,216,957 to be received on 07/03/06, collateralized by $16,534,957 U.S. Government Agency Bond, Zero Coupon, maturing 02/01/34 16,210,000 16,210,000 80,420,000 CORPORATE NOTES -- 12.2% American Express Credit Corp. 5.23% 07/05/07 6,940,000 6,944,319(c) Canadian Imperial Bank 5.28% 07/23/07 10,580,000 10,580,000(c) Morgan Stanley Group, Inc. 5.15% 07/03/07 11,130,000 11,130,000(c) Societe Generale 5.29% 10/31/06 11,050,000 11,049,460(c) 39,703,779 TIME DEPOSIT -- 0.1% State Street Corp. 4.85% 07/03/06 155,397 155,397(b) CERTIFICATES OF DEPOSIT -- 17.0% BNP Paribas 5.11% 08/15/06 10,390,000 10,390,000 Calyon 5.34% 05/04/07 10,430,000 10,430,000 Fortis Bank 5.08% 07/05/06 11,770,000 11,770,000 Toronto-Dominion Bank 5.03% 07/17/06 10,060,000 10,060,000 Wells Fargo Bank 5.22% 07/21/06 12,660,000 12,660,000 55,310,000 TOTAL SHORT-TERM INVESTMENTS (COST $324,759,142) 324,759,142 OTHER ASSETS AND LIABILITIES, NET -- 0.0%* 82,601 ----------- NET ASSETS -- 100.0% 324,841,743 =========== See Notes to Schedule of Investments on page 6 and Notes to Financial Statements. 5 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Coupon amount represents effective yield. (b) State Street Corp. is the parent company of State Street Bank & Trust Co., the Fund's custodian and accounting agent. (c) Variable or floating rate security. The stated rate represents the rate at June 30, 2006. * Less than 0.1% + Percentages are based on net assets as of June 30, 2006. 6 Financial Highlights Selected data based on a share outstanding throughout the periods indicated -------------------------------------------------------------------------------- MONEY MARKET FUND
6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION DATE -- -- -- -- -- 7/1/85 Net asset value, beginning of period .......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income ...................... 0.02 0.03 0.01 0.01 0.01 0.04 Net realized and unrealized gains on investments .................... -- -- -- 0.00(b) 0.00(b) 0.00(b) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME FROM INVESTMENT OPERATIONS ....... 0.02 0.03 0.01 0.01 0.01 0.04 ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income ...................... 0.02 0.03 0.01 0.01 0.01 0.04 Return of capital .......................... -- 0.00(b) -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS ........................... 0.02 0.03 0.01 0.01 0.01 0.04 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD ................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (A) .............................. 2.14% 2.79% 0.95% 0.78% 1.48% 3.99% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ... $324,842 $250,149 $278,703 $392,533 $685,353 $712,156 Ratios to average net assets: Net investment income* .................. 4.25% 2.74% 0.92% 0.80% 1.46% 3.80% Net expenses* ........................... 0.50% 0.49% 0.47% 0.43% 0.40% 0.34% Gross expenses .......................... 0.50% 0.49% 0.47% 0.43% 0.40% 0.42%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. Had the adviser not absorbed a portion of the expense, total returns would have been lower. (b) Less than $0.01 per share. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 7 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
MONEY MARKET FUND ------------------------------------------------------------------------------------------------ ASSETS Short-term Investments (at amortized cost) ................................ $324,759,142 Income receivables ........................................................ 462,753 Receivable for fund shares sold ........................................... 105,589 ------------------------------------------------------------------------------------------------ TOTAL ASSETS .......................................................... 325,327,484 ------------------------------------------------------------------------------------------------ LIABILITIES Payable for fund shares redeemed .......................................... 366,010 Payable to GEAM ........................................................... 119,604 Other liabilities ......................................................... 127 ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES ..................................................... 485,741 ------------------------------------------------------------------------------------------------ NET ASSETS ................................................................... $324,841,743 ------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Capital paid in ........................................................... 324,938,149 Undistributed (distribution in excess of) net investment income ........... (32,537) Accumulated net realized gain (loss) ...................................... (63,869) ------------------------------------------------------------------------------------------------ NET ASSETS ................................................................... $324,841,743 ------------------------------------------------------------------------------------------------ Shares outstanding ($0.01 par value; unlimited shares authorized) ............ 324,980,151 Net asset value per share .................................................... $1.00
See Notes to Financial Statements. 8 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
MONEY MARKET FUND ------------------------------------------------------------------------------------------------ INVESTMENT INCOME INCOME: Interest .............................................................. $6,201,067 ------------------------------------------------------------------------------------------------ TOTAL INCOME ............................................................ 6,201,067 ------------------------------------------------------------------------------------------------ EXPENSES: Advisory and administrative fees ...................................... 598,328 Professional fees ..................................................... 20,069 Custody and accounting expenses ....................................... 16,049 Trustee's fees ........................................................ 3,972 Registration expenses ................................................. 969 Transfer agent ........................................................ 109 Other expenses ........................................................ 10,935 ------------------------------------------------------------------------------------------------ TOTAL EXPENSES .......................................................... 650,431 ------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) ............................................ 5,550,636 ------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ......... $5,550,636 ------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 9 Statements of Changes in Net Assets
MONEY MARKET FUND ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) .................................................. $ 5,550,636 $ 7,726,824 ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from operations ........................................ 5,550,636 7,726,824 ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .......................................................... (5,583,173) (7,736,548) Net realized gains ............................................................. -- -- Return of capital .............................................................. -- (42,984) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DISTRIBUTIONS .............................................................. (5,583,173) (7,779,532) ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from operations and distributions .............. (32,537) (52,708) ------------------------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares ................................................... 129,893,843 199,487,509 Value of distributions reinvested .............................................. 5,583,187 7,752,316 Cost of shares redeemed ........................................................ (60,751,295) (235,741,886) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) from share transactions ............................... 74,725,735 (28,502,061) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS .......................................... 74,693,198 (28,554,769) NET ASSETS Beginning of period .............................................................. 250,148,545 278,703,314 ------------------------------------------------------------------------------------------------------------------------------------ End of period .................................................................... $324,841,743 $250,148,545 ------------------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ..... $ (32,537) $ -- ------------------------------------------------------------------------------------------------------------------------------------ CHANGES IN PORTFOLIO SHARES Shares sold .................................................................... 129,893,843 199,487,510 Issued for distributions reinvested ............................................ 5,583,187 7,752,316 Shares redeemed ................................................................ (60,751,295) (235,741,886) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in fund shares .............................................. 74,725,735 (28,502,060) ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 10 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund (the "Fund") and Real Estate Securities Fund. Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. In accordance with Rule 2a-7 of the 1940 Act, GE Money Market Fund values securities initially at cost and, thereafter, securities are assumed to have a constant amortization to maturity of any discount or premium. Amortized cost approximates fair value. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the 11 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
--------------------------------------------------------------------------------------- Net Tax Cost of Gross Tax Gross Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments --------------------------------------------------------------------------------------- $324,759,142 $ -- $ -- $ --
12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- As of December 31, 2005, the Fund has capital loss carryovers as indicated below. Capital loss carryovers are available to offset future realized capital gains to the extent provided in the Internal Revenue Code and regulations thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income. Amount Expires -------------------------------------------------------------------------------- $63,869 12/31/10 Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund had no losses incurred after October 31, 2005. The tax composition of distributions paid during the year ended December 31, 2005 was as follows: Long-Term Ordinary Capital Return of Income Gains Capital Total -------------------------------------------------------------------------------- $7,736,548 $ -- $42,984 $7,779,532 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares net investment income dividends daily and pays them monthly. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund. The advisory and administrative fee is stated in the following schedule: Annualized based on average daily net assets -------------------------------------------------------------------------------- Average Daily Advisory and Net Assets Administration of Fund Fees -------------------------------------------------------------------------------- Money Market Fund First $100 million .50% Next $100 million .45% Next $100 million .40% Next $100 million .35% Over $400 million .30% 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $1,832 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 14 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") at meetings held on December 9 and December 16, 2005. In considering whether to approve the Fund's investment advisory agreement, the Board members, including the independent members, considered and discussed a substantial amount of information and analysis provided, at the Board's request, by GEAM. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, which was prepared by an independent third party provider, Lipper Inc. ("Lipper"). The Board members reviewed the fees charged by GEAM for other mutual funds and investment products other than mutual funds that employ the same investment strategy as the Fund. Before approving the Fund's advisory agreement, the Board members reviewed the proposed continuance of the agreement with management of GEAM and with independent legal counsel. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed continuance. The independent Board members discussed the proposed continuance in a private session with their independent legal counsel at which no representatives of GEAM were present. In advance of the meeting, and in response to their request, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management, in its oral presentation, to highlight material differences from the information presented in 2004. During the meeting, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning GEAM's investment process. In reaching their determination relating to continuance of the agreement, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM, and the Board members, including the independent members, concurred that GEAM provides high quality advisory and administrative services to the Fund. In connection with their consideration of GEAM's services, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used for selecting investments, selecting brokers and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals, including analysts, research professionals and portfolio managers with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In light of these discussions, the Board members, including the independent members, concluded that GEAM's services were of a high quality and had benefited the Fund. 15 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUND. The Board members considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. The Board members also engaged in detailed discussions with GEAM management about the investment process, focusing on the Fund's investment objective, the number and experience of portfolio management personnel, and the investment strategy employed with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Fund's performance was acceptable over the relevant periods. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM. The Board members reviewed the information they had requested from GEAM concerning its profitability from the fees and services it provides to the Fund and the financial condition of GEAM for various past periods. The Board members considered the profit margin information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM should be entitled to earn a reasonable level of profits for the services it provides to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM from its relationship with the Fund was not unreasonable or excessive. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment. The Board members reviewed the applicable advisory fee breakpoints for the Fund and concluded that no changes were needed. The Board members recognized the economies of scale benefits derived by the Fund as a result of this fee structure. The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM, and that the Fund represents only a small portion of the assets managed by GEAM. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant, the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement was in the best interests of the Fund and its shareholders. 17 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 18 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 19 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 20 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 21 [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at HTTP://WWW.GEFUNDS.COM; and (ii) on the Commission's website at HTTP://WWW.SEC.GOV. [GE logo omitted] GE Investments Funds, Inc. Real Estate Securities Fund Semi-Annual Report JUNE 30, 2006 [GE LOGO OMITTED] GE Investments Funds, Inc. Real Estate Securities Fund Contents ----------------------------------------------------------------------------- NOTES TO PERFORMANCE ................................................... 1 MANAGER REVIEW AND SCHEDULE OF INVESTMENTS ............................. 2 NOTES TO SCHEDULE OF INVESTMENTS ....................................... 7 FINANCIAL STATEMENTS Financial Highlights .............................................. 8 Statement of Assets and Liabilities ............................... 9 Statement of Operations ........................................... 10 Statements of Changes in Net Assets ............................... 11 Notes to Financial Statements ..................................... 12 ADVISORY AND ADMINISTRATIVE AGREEMENT RENEWAL .......................... 16 ADDITIONAL INFORMATION ................................................. 20 INVESTMENT TEAM ........................................................ 23 This report is prepared for Policyholders of certain variable contracts and may be distributed to others only if preceded or accompanied by the variable contract's current prospectus and the current prospectus of the Funds available for investments thereunder. Notes to Performance June 30, 2006 (unaudited) -------------------------------------------------------------------------------- Total returns take into account changes in share price and assume reinvestment of dividends and capital gains distributions, if any. Investment returns and net asset value on an investment will fluctuate and you may have a gain or loss when you sell your shares. Periods less than one year are not annualized. Current performance may be lower or higher than that shown. You may call toll-free (800) 242-0134 for performance information as of the most recent month end. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns for all periods shown. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, and their prices will fluctuate with market conditions. The Wilshire Real Estate Securities Index (Wilshire RES) is an unmanaged index and do not reflect the actual cost of investing in the instruments that comprise the index. The Wilshire RES Index is a market capitalization-weighted index comprised of publicly traded real estate securities, such as real estate investment trusts (REITs) and real estate operating companies (REOCs). NAREIT Equity Index is an unmanaged index of all tax-qualified real estate investment trusts (REITs) listed on the New York Stock Exchange, American Stock Exchange and NASDAQ which have 75% or more of their gross invested book assets invested directly or indirectly in the equity ownership of real estate. The results shown for the foregoing indices assume the reinvestment of net dividends or interest. The peer universe of the underlying annuity funds used in our peer ranking calculation is based on the blend of Lipper peer categories, as shown. Lipper is an independent mutual fund rating service. A Fund's performance may be compared to or ranked within a universe of mutual funds with investment objectives and policies similar but not necessarily identical to the Fund's. Such comparisons or rankings are made on the basis of several factors, including the Fund's objectives and policies, management style and strategy, and portfolio composition, and may change over time if any of those factors change. 1 Real Estate Securities Fund -------------------------------------------------------------------------------- URDANG SECURITIES MANAGEMENT, INC. (URDANG) IS THE SUB-ADVISER FOR THE REAL ESTATE SECURITIES FUND. URDANG IS A WHOLLY OWNED SUBSIDIARY OF URDANG CAPITAL MANAGEMENT, INC. (URDANG CAPITAL). URDANG CAPITAL IS WHOLLY OWNED BY THE BANK OF NEW YORK COMPANY, INC. (BANK OF NEW YORK) AND OPERATES AS PART OF BANK OF NEW YORK'S ASSET MANAGEMENT DIVISION. AS A WHOLLY OWNED SUBSIDIARY OF URDANG CAPITAL, URDANG IS A SECOND TIER SUBSIDIARY OF BANK OF NEW YORK. URDANG IS A REGISTERED INVESTMENT ADVISER THAT WAS FORMED IN 1995 TO FOCUS EXCLUSIVELY ON OPPORTUNITIES IN THE REAL ESTATE SECURITIES MARKET, INCLUDING PUBLICLY TRADED REAL ESTATE INVESTMENT TRUSTS (REITS). AS OF DECEMBER 31, 2005, URDANG MANAGED ACCOUNTS INVESTED IN PUBLICLY-TRADED REAL ESTATE SECURITIES WITH ASSETS IN THE AGGREGATE TOTALING APPROXIMATELY $1.8 BILLION. THE REAL ESTATE SECURITIES FUND IS CO-MANAGED BY TODD BRIDDELL, CFA, DEAN FRANKEL, CFA AND PETER ZABIEREK, CFA. TODD BRIDDELL IS A MANAGING DIRECTOR OF REAL ESTATE SECURITIES AND SERVES AS SENIOR PORTFOLIO MANAGER TO THE FUND. HE CO-FOUNDED URDANG SECURITIES MANAGEMENT IN 1995 AND HAS 14 YEARS OF REAL ESTATE INDUSTRY EXPERIENCE. DEAN FRANKEL JOINED THE FIRM IN 1997 AND IS A PORTFOLIO MANAGER. HE MANAGES THE FIRM'S PROPRIETARY RESEARCH EFFORT AND OVERSEES THE FIRM'S TRADING ACTIVITIES. PETER ZABIEREK IS A PORTFOLIO MANAGER. PRIOR TO JOINING URDANG IN JANUARY 2003, HE WAS EMPLOYED BY MORGAN STANLEY AS A SENIOR EQUITY RESEARCH ASSOCIATE FROM 2002. FROM 1998 THROUGH 2001, MR. ZABIEREK WAS AN ASSOCIATE FOR SALOMON SMITH BARNEY IN ITS REAL ESTATE INVESTMENT BANKING DIVISION. Q. HOW DID THE REAL ESTATE SECURITIES FUND PERFORM COMPARED TO ITS BENCHMARK AND LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006? A. For the six-month period ended June 30,2006, the Real Estate Securities Fund returned 11.56%. The NAREIT Equity Index, the Fund's benchmark, returned 12.92%, and the Fund's Lipper peer group of 52 Real Estate funds returned an average of 13.19% for the same period. Q. WHAT MARKET CONDITIONS IMPACTED FUND PERFORMANCE? A. After a brisk start in the first quarter of 2006, U.S. REITs began to face strong headwinds just before the start of the second quarter. Despite choppy trading since mid-March, REITs ended the first half up 12.92% well ahead of other equity market benchmarks. Through June 30, the Dow Jones Industrial Average was up 5.22%, the S&P 500 was up 2.71%, and the Nasdaq Composite was down 1.08%. Signs of a domestic slowdown became more evident in the second quarter as recent economic indicators have been quite bearish on the whole. Although manufacturing growth, retail sales growth, and job growth have remained slightly positive, the Consumer Confidence Index and the Index of Leading Economic Indicators remain markedly negative on the near-term future of the U.S. economy. In addition, inflation and gas prices have been increasing steadily. Earnings reports for the first half have been strong and indicate that earnings growth for 2006 is expected to be in the high single digits. At the private level, asset sales continue to support REIT pricing, and historically, real estate has proved to be an appropriate hedge during inflationary times. At the halfway point in 2006, the REITs have outperformed the S&P 500 by over a thousand basis points, heightening the possibility that the REITs will beat the broader equity market for the seventh consecutive calendar year. Q. WHAT WERE THE PRIMARY DRIVERS OF FUND PERFORMANCE? A. Sector performance was mixed. The best absolute performance came from hotel, apartment, office, and diversified REITs. All of these sectors posted positive returns. Weaker stock performance came from the retail, health care, self-storage, industrial, and specialty sectors, all of which posted negative returns. Relative to the index, the Fund's overweights to apartments and hotel and underweights to health care, retail and specialty contributed positively to performance, while stock selection in the office REIT space was the primary drag. 2 Q&A The top performing stocks for the quarter in the portfolio include Highland Hospitality, Starwood Hotels and Resorts, Equity Office Properties, Highwoods Properties, and SL Green Realty with returns that ranged from 8.48% to 12.26%. The bottom performing stocks include Equity Lifestyle, Digital Realty Trust, Strategic Hotel Capital, Kimco Realty Corp, and Reckson Associates with returns that ranged from -8.2 to -11.7%. Q. WERE THERE ANY SIGNIFICANT CHANGES TO THE FUND OVER THE PERIOD? A. In the second quarter of 2006, the portfolio management team adjusted some property sector weightings to reflect changes in the macroeconomic environment, valuation, and fundamental operations. We maintained our over weight in multifamily REITs and hotels due to strong operating results and the fact that shorter leasing terms provide inflation protection. We also traded in some multifamily stocks that had outperformed for stocks with, in our view, better valuations. We moved our office weight from a neutral weight to an over weight because of growing landlord pricing power and attractive valuations. We also made some changes to our office and office/industrial portfolio, focusing a bit more on markets with strong office fundamentals such as New York City's midtown and southern California. On the other hand, we reduced our weight in industrial from overweight to neutral because short development lag may mute potential rent increases. We maintained our underweight in malls, shopping centers, health care and self-storage. 3 Real Estate Securities Fund -------------------------------------------------------------------------------- Understanding Your Fund's Expenses As a shareholder of the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following 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. To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the period and held for the entire six-month period ended June 30, 2006. ACTUAL EXPENSES The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your class under the heading "Expenses Paid During Period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds. Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees. JANUARY 1, 2006 - JUNE 30, 2006
--------------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT ACCOUNT VALUE EXPENSES THE BEGINNING OF AT THE END OF PAID DURING THE PERIOD ($) THE PERIOD ($) THE PERIOD ($)* --------------------------------------------------------------------------------------------------------------------------- Actual Fund Return** 1,000.00 1,115.63 4.71 --------------------------------------------------------------------------------------------------------------------------- Hypothetical 5% Return (2.5% for the period) 1,000.00 1,020.22 4.41 ---------------------------------------------------------------------------------------------------------------------------
*EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.88% (FROM PERIOD JANUARY 1, 2006 - JUNE 30, 2006), MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE SIX-MONTH PERIOD). **ACTUAL FUND RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 WAS 11.56%. 4 Real Estate Securities Fund (unaudited) -------------------------------------------------------------------------------- CHANGE IN VALUE OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [LINE CHART OMITTED, PLOT POINTS FOLLOWS]
REAL ESTATE WILSHIRE RES NAREIT EQUITY SECURITIES FUND INDEX INDEX 6/96 $ 10000.00 $ 10000.00 $ 10000.00 12/96 12736.89 12537.74 12662.65 12/97 15219.82 15020.00 15228.12 12/98 12528.23 12402.68 12562.87 12/99 12500.99 12007.46 11982.47 12/00 16568.96 15671.91 15141.69 12/01 18530.30 17290.60 17251.36 12/02 18280.91 17738.11 17910.50 12/03 25128.51 24314.36 24561.34 12/04 33242.47 32795.54 32317.19 12/05 37158.84 37330.62 36247.88 06/06 41455.33 42622.21 40929.79
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED JUNE 30, 2006
-------------------------------------------------------------------------------------------------- SIX ONE FIVE TEN MONTHS YEAR YEAR YEAR --------------------------------------------------------------------------------------------------- Real Estate Securities Fund 11.56% 19.04% 18.35% 15.28% --------------------------------------------------------------------------------------------------- Wilshire RES Index 14.17% 21.87% 19.89% 15.60% --------------------------------------------------------------------------------------------------- NAREIT Equity Index* 12.92% 19.06% 19.39% 15.13% --------------------------------------------------------------------------------------------------- Lipper peer group average** 13.19% 20.92% 19.54% 15.28% --------------------------------------------------------------------------------------------------- Inception date 5/1/95 ---------------------------------------------------------------------------------------------------
Real Estate Securities Fund (ending value $41,455) Wilshire RES Index (ending value $42,622) NAREIT Equity Index (ending value $40,930) INVESTMENT PROFILE A fund designed for investors who seek maximum total return through current income and capital appreciation by investing at least 80% of its net assets in equity securities and debt securities of U.S. issuers that are principally engaged in or related to the real estate industry, including those that own significant real estate assets, under normal market conditions. TOP TEN LARGEST HOLDINGS AS OF JUNE 30, 2006 as a % of Market Value ================================================ Simon Property Group, Inc. 6.81% ------------------------------------------------ Prologis 5.89% ------------------------------------------------ AvalonBoy Communities, Inc. 5.38% ------------------------------------------------ Vornado Realty Trust 4.86% ------------------------------------------------ Boston Properties, Inc. 4.49% ------------------------------------------------ Essex Property Trust, Inc. 3.80% ------------------------------------------------ Kimco Realty Co. 3.72% ------------------------------------------------ Alexandria Real Estate Equities, Inc. 3.61% ------------------------------------------------ Archstone-Smith Trust 3.38% ------------------------------------------------ Equity Office Properties Trust 3.15% ================================================ PORTFOLIO COMPOSITION AS OF JUNE 30, 2006 as a % of Market Value -------------------------------------------------------------------------------- Market Value of $145,787 (in thousands) [PIE CHART OMITTED, PLOT POINTS FOLLOWS] Office 22.5% Multifamily 21.4% Regional Malls 11.3% Shopping Centers 10.1% Hotel 9.3% Industrial 7.4% Diversified 6.5% Self Storage 3.6% Freestanding 1.8% Office/Industrial 1.5% Specialty 1.4% Short-Term 1.3% Man. Homes 1.0% Net Leased 0.5% Healthcare 0.4% * EFFECTIVE APRIL 1, 2006, THE NAREIT EQUITY INDEX REPLACED THE WILSHIRE RES INDEX AS THE BENCHMARK USED TO MEASURE THE FUND'S PERFORMANCE. ** LIPPER PERFORMANCE COMPARISONS ARE BASED ON AVERAGE ANNUAL TOTAL RETURNS FOR THE SIX-MONTH, ONE-YEAR, FIVE-YEAR, AND TEN-YEAR PERIODS INDICATED IN THE REAL ESTATE FUNDS PEER GROUP CONSISTING OF 52, 52, 26 AND 6 UNDERLYING ANNUITY FUNDS, RESPECTIVELY. SEE NOTES TO PERFORMANCE ON PAGE 1 FOR FURTHER INFORMATION, INCLUDING AN EXPLANATION OF LIPPER PEER CATEGORIES. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE AND THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES. 5 REAL ESTATE SECURITIES FUND Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- REAL ESTATE SECURITIES FUND NUMBER OF SHARES VALUE COMMON STOCK (REIT) -- 95.5%+ -------------------------------------------------------------------------------- DIVERSIFIED -- 6.5% Cousins Properties, Inc. 79,150 $ 2,448,110 Vornado Realty Trust 72,570 7,079,203 9,527,313 FREESTANDING -- 1.9% Realty Income Corp. 122,760 2,688,444 HEALTHCARE -- 0.4% Windrose Medical Properties Trust 40,890 596,994 HOTEL -- 6.3% Highland Hospitality Corp. 40,840 575,027 Host Marriott Corp. 201,408 4,404,793 Strategic Hotels & Resorts, Inc. 71,050 1,473,577 Sunstone Hotel Investors, Inc. 96,560 2,806,034 9,259,431 INDUSTRIAL -- 7.4% AMB Property Corp. 22,000 1,112,100 First Potomac Realty Trust 37,370 1,113,252 Prologis 164,700 8,584,164 10,809,516 MAN. HOMES -- 1.0% Equity Lifestyle Properties, Inc. 32,340 1,417,462 MULTIFAMILY -- 21.3% American Campus Communities, Inc. 27,870 692,570 Apartment Investment & Management Co. (Class A) 77,950 3,386,927 Archstone-Smith Trust 96,957 4,932,203 AvalonBay Communities, Inc. 70,870 7,839,639 Camden Property Trust 41,250 3,033,937 Equity Residential 63,070 2,821,121 Essex Property Trust, Inc. 49,610 5,539,453 Post Properties, Inc. 41,380 1,876,169 United Dominion Realty Trust, Inc. 37,310 1,045,053 31,167,072 NET LEASED -- 0.5% Spirit Finance Corp. 69,160 778,742 OFFICE -- 22.5% Alexandria Real Estate Equities, Inc. 59,350 5,263,158 Boston Properties, Inc. 72,450 6,549,480 Corporate Office Properties Trust SBI MD 68,380 2,877,430 Equity Office Properties Trust 125,740 4,590,767 Highwoods Properties, Inc. 80,710 2,920,088 Kilroy Realty Corp. 40,880 2,953,580 NUMBER OF SHARES VALUE Reckson Associates Realty Corp. 99,280 $ 4,108,206 SL Green Realty Corp. 32,430 3,550,112 32,812,821 OFFICE/INDUSTRIAL -- 1.5% Liberty Property Trust 50,650 2,238,730 REGIONAL MALLS -- 11.3% General Growth Properties, Inc. 64,010 2,884,291 Simon Property Group, Inc. 119,770 9,933,724 Taubman Centers, Inc. 73,980 3,025,782 The Mills Corp. 24,070 643,873 16,487,670 SELF STORAGE -- 3.5% Extra Space Storage, Inc. 103,770 1,685,225 Public Storage, Inc. 39,290 2,982,111 U-Store-It Trust 26,590 501,487 5,168,823 SHOPPING CENTERS -- 10.0% Federal Realty Investment Trust 57,870 4,050,900 Kimco Realty Corp. 148,690 5,425,698 Pan Pacific Retail Properties, Inc. 35,840 2,486,221 Regency Centers Corp. 43,200 2,684,880 14,647,699 SPECIALTY -- 1.4% Entertainment Properties Trust 17,660 760,263 Digital Realty Trust, Inc. 52,340 1,292,275 2,052,538 TOTAL COMMON STOCK (REIT) (COST $116,755,082) 139,653,255 -------------------------------------------------------------------------------- COMMON STOCK -- 2.9% -------------------------------------------------------------------------------- HOTEL -- 2.9% Starwood Hotels & Resorts Worldwide, Inc. (COST $3,671,284) 70,380 4,246,729 TOTAL INVESTMENTS IN SECURITIES (COST $120,426,366) 143,899,984 -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.3% -------------------------------------------------------------------------------- GEI Short Term Investment Fund 6.93% (COST $1,887,345) 1,887,345 1,887,345(a,b) TOTAL INVESTMENTS (COST $122,313,711) 145,787,329 OTHER ASSETS AND LIABILITIES, NET-- 0.3% 467,654 ------------ NET ASSETS-- 100.0% $146,254,983 ============ See Notes to Schedule of Investments on page 7 and Notes to Financial Statements. 6 Notes to Schedule of Investments June 30, 2006 (unaudited) -------------------------------------------------------------------------------- The views expressed in this document reflect our judgment as of the publication date and are subject to change at any time without notice. The securities cited may not represent current or future holdings and should not be considered as a recommendation to purchase or sell a particular security. See the prospectus for complete descriptions of investment objectives, policies, risks and permissible investments. (a) Coupon amount represents effective yield. (b) GEAM, the investment adviser of the Fund, also serves as investment adviser of the Trust. + Percentages are based on net assets as of June 30, 2006. Abbreviations: REIT Real Estate Investment Trust 7 Financial Highlights Selected data based on a share outstanding throughout the periods indicated -------------------------------------------------------------------------------- REAL ESTATE SECURITIES FUND
6/30/06+ 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 -------------------------------------------------------------------------------------------------------------------------------- INCEPTION DATE -- -- -- -- -- 5/1/95 Net asset value, beginning of period $19.20 $19.54 $16.78 $13.14 $14.78 $13.82 INCOME/(LOSS) FROM INVESTMENT OPERATIONS: Net investment income 0.27 0.70 0.65 0.50 0.80 0.64 Net realized and unrealized gains/(losses) on investments 1.95 1.62 4.76 4.42 (1.01) 1.00 -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME/(LOSS) FROM INVESTMENT OPERATIONS 2.22 2.32 5.41 4.92 (0.21) 1.64 -------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income -- 0.75 0.52 0.41 0.66 0.53 Net realized gains -- 1.91 2.13 0.87 0.77 0.15 -------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- 2.66 2.65 1.28 1.43 0.68 -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $21.42 $19.20 $19.54 $16.78 $13.14 $14.78 -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (A) 11.56% 11.78% 32.29% 37.38% (1.35)% 11.84% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $146,255 $143,801 $146,221 $98,294 $70,164 $87,306 Ratios to average net assets: Net investment income* 2.49% 3.21% 4.15% 4.65% 4.81% 5.05% Expenses* 0.88% 0.89% 0.90% 0.89% 0.89% 0.90% Portfolio turnover rate 57% 52% 78% 52% 90% 49%
NOTES TO FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (a) Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains and do not include the effect of insurance contract charges. * Annualized for periods less than one year. + Unaudited. See Notes to Financial Statements. 8 Statement of Assets and Liabilities JUNE 30, 2006 (UNAUDITED)
REAL ESATE SECURITIES FUND ------------------------------------------------------------------------------------------ ASSETS Investments in securities, at market (cost $120,426,366) ............. $143,899,984 Short-term affiliated investments (at amortized cost) ................ 1,887,345 Receivable for investments sold ...................................... 547,879 Income receivables ................................................... 569,197 ------------------------------------------------------------------------------------------ TOTAL ASSETS ..................................................... 146,904,405 ------------------------------------------------------------------------------------------ LIABILITIES Payable for investments purchased .................................... 509,794 Payable for fund shares redeemed ..................................... 37,793 Payable to GEAM ...................................................... 101,835 ------------------------------------------------------------------------------------------ TOTAL LIABILITIES ................................................ 649,422 ------------------------------------------------------------------------------------------ NET ASSETS .............................................................. $146,254,983 ------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Capital paid in ...................................................... 101,132,901 Undistributed (distribution in excess of) net investment income ...... 1,929,519 Accumulated net realized gain (loss) ................................. 19,718,945 Net unrealized appreciation/(depreciation) on: Investments ...................................................... 23,473,618 ------------------------------------------------------------------------------------------ NET ASSETS .............................................................. $146,254,983 ------------------------------------------------------------------------------------------ Shares outstanding ($0.01 par value; unlimited shares authorized) ....... 6,828,011 Net asset value per share ............................................... $21.42
See Notes to Financial Statements. 9 Statement of Operations FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
REAL ESATE SECURITIES FUND ------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Dividend ....................................................... $ 2,291,822 Interest ....................................................... 80,016 Interest from affliated investments ............................ 93,251 ------------------------------------------------------------------------------------- TOTAL INCOME ..................................................... 2,465,089 ------------------------------------------------------------------------------------- EXPENSES: Advisory and administrative fees ............................... 612,631 Custody and accounting expenses ................................ 12,887 Professional fees .............................................. 10,467 Trustee's fees ................................................. 2,013 Registration expenses .......................................... 442 Transfer agent ................................................. 86 Other expenses ................................................. 6,307 ------------------------------------------------------------------------------------- TOTAL EXPENSES ................................................... 644,833 ------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) ..................................... 1,820,256 ------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS REALIZED GAIN (LOSS) ON: Investments ................................................. 15,209,544 INCREASE (DECREASE) IN UNREALIZED APPRECIATION/ (DEPRECIATION) ON: Investments ................................................. (1,067,086) ------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments ......... 14,142,458 ------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $15,962,714 -------------------------------------------------------------------------------------
See Notes to Financial Statements. 10 Statements of Changes in Net Assets
REAL ESTATE SECURITIES FUND ----------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2006 DECEMBER 31, (UNAUDITED) 2005 ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investments income (loss) ............................................... $ 1,820,256 $ 4,570,571 Net realized gain (loss) on investments, futures, written options and foreign currency transactions ......................................... 15,209,544 14,590,401 Net increase (decrease) in unrealized appreciation/(depreciation) on investments, futures, written options and foreign currency translation . (1,067,086) (3,889,363) ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from operations ..................................... 15,962,714 15,271,609 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ....................................................... -- (4,983,011) Net realized gains .......................................................... -- (12,622,830) ----------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS ........................................................... -- (17,605,841) ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations and distributions ........... 15,962,714 (2,334,232) ----------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares ................................................ 3,647,373 13,870,109 Value of distributions reinvested ........................................... -- 17,605,807 Cost of shares redeemed ..................................................... (17,156,024) (31,561,870) ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) from share transactions ............................. (13,508,651) (85,954) ----------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ....................................... 2,454,063 (2,420,186) NET ASSETS Beginning of period ........................................................... 143,800,920 146,221,106 ----------------------------------------------------------------------------------------------------------------------------- End of period ................................................................. $ 146,254,983 $ 143,800,920 ============================================================================================================================= UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF) NET INVESTMENT INCOME, END OF PERIOD ... $ 1,929,519 $ 109,263 ----------------------------------------------------------------------------------------------------------------------------- CHANGES IN PORTFOLIO SHARES Shares sold ................................................................. 173,005 692,127 Issued for distributions reinvested ......................................... -- 910,802 Shares redeemed ............................................................. (834,378) (1,596,846) ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in fund shares ........................................... (661,373) 6,083 =============================================================================================================================
See Notes to Financial Statements. 11 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- 1. ORGANIZATION OF THE COMPANY GE Investments Funds, Inc. (the "Company") was incorporated under the laws of the Commonwealth of Virginia on May 14, 1984 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company is composed of thirteen investment portfolios (collectively the "Funds"), although only the following eleven are currently being offered: U.S. Equity Fund, S&P 500 Index Fund, Premier Growth Equity Fund, Value Equity Fund, Mid-Cap Equity Fund, Small-Cap Equity Fund, International Equity Fund, Total Return Fund, Income Fund, Money Market Fund and Real Estate Securities Fund (the "Fund"). Shares of the Funds of the Company are offered only to insurance company separate accounts that fund certain variable life insurance contracts and variable annuity contracts. These insurance companies may include insurance companies affiliated with GE Asset Management Incorporated ("GEAM"), the investment adviser and administrator of each of the Funds. As of June 30, 2006, GE Life and Annuity Assurance Company ("GE Life") and General Electric Capital Assurance Company, an affiliated insurance company, controlled the Funds by ownership, through separate accounts, of virtually all of the Funds' shares of beneficial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions at the date of the financial statements. Actual results may differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION AND TRANSACTIONS Securities for which exchange quotations are readily available are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. Securities listed on the NASDAQ will be valued at the NASDAQ's official close price. Certain fixed income securities are valued by a dealer or by a pricing service based upon a matrix system, which considers market transactions as well as dealer supplied valuations. Short-term investments maturing within sixty days are valued at amortized cost. If quotations are not readily available for a portfolio security, or if it is believed that a quotation or other market price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Fund's Board of Directors that are designed to establish its "fair value." These procedures require that the fair value of a security be established by the valuation committee. The fair value committee follows different protocols for different types of investments and circumstances. Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security's primary market and before the close of regular trading on the NYSE. This independent fair value pricing service uses a computerized system to appraise affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price. GE Asset Management may also separately monitor portfolio securities and, consistent with the Fund's fair value procedures, apply a different value to a portfolio security than would be applied had it been priced using market quotations or by an independent fair value pricing service. Determining the fair value of securities involves the application of both subjective and objective considerations. Security values may differ depending on the methodology used to determine their values, and may differ from the last quoted sale or closing price. No assurance can be given that use of these fair value procedures will always better represent the price at which a Fund could sell the affected portfolio security. Security transactions are accounted for as of the trade date. Realized gains and losses on investments sold are recorded on the basis of identified cost for both financial statement and federal tax purposes. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. The Fund's or a third party custodian takes possession of the collateral pledged for investments in repurchase agreements on behalf of the Fund. The Fund values the underlying collateral daily on a mark-to-market basis to determine that the value, including accrued interest, is at least equal to 102% of the repurchase price. In the event the seller defaults and the value of the security declines, or if the seller enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited. 12 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- SECURITY LENDING The Fund may loan securities to brokers, dealers, and financial institutions determined by GEAM to be creditworthy, subject to certain limitations. The Fund continues to receive the interest and dividends on the loaned securities during the term of the loan. The loans of securities are secured by collateral in the form of cash or other liquid assets, which are segregated and maintained with the custodian in an amount at least equal to 102% of the current market value of the loaned securities. During the term of the loan, the Fund will record any gain or loss in the market value of its loaned securities and of securities in which cash collateral is invested. The Fund will also earn interest, net of any rebate, from securities in which cash collateral is invested. In the event the counterparty (borrower) does not meet its contracted obligation to return the securities, the Fund may be exposed to the risk of loss of reacquiring the loaned securities at prevailing market prices using the proceeds of the sale of the collateral. FOREIGN CURRENCY Accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period. Such fluctuations are included in the net realized or unrealized gain or loss from investments. Net realized gains or losses on foreign currency transactions represent net gains or losses on sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income and withholding taxes accrued and the U.S. dollar amount actually received or paid, and gains or losses between the trade and settlement date on purchases and sales of securities. Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases or decreases in unrealized appreciation/depreciation on foreign currency related transactions. FUTURES CONTRACTS The Fund may invest in interest rate, financial or stock or bond index futures contracts subject to certain limitations. The Fund may invest in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund's exposure to the underlying instrument while selling futures tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving futures for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain or loss on the expiration or closing of a futures contract. OPTIONS The Fund may purchase and write options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The Fund will not enter into a transaction involving options for speculative purposes. The Fund's risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts' terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. 13 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased is adjusted by the original premium received or paid. REAL ESTATE INVESTMENT TRUSTS Dividend income, attributable to real estate investment trusts ("REITs"), is recorded based on management's estimate of the income included in the distributions received. Distributions received in excess of this amount are recorded as a reduction of the cost of the investments. The actual amounts of income and return of capital are determined by each REIT only after its fiscal year-end, and may differ from the estimated amounts. INVESTMENTS IN FOREIGN MARKETS Investments in foreign markets may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, repatriation on income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. INCOME TAXES The Fund intends to comply with all sections of the Internal Revenue Code applicable to regulated investment companies including the distribution of substantially all of its taxable net investment income and net realized capital gains to its shareholders. Therefore, no provision for federal income tax has been made. The Fund is treated as a separate taxpayer for federal income tax purposes. At June 30, 2006, information on the tax components of capital is as follows:
Cost of Gross Tax Gross Tax Net Tax Appreciation/ Investments for Unrealized Unrealized (Depreciation) Tax Purposes Appreciation Depreciation on Investments ----------------------------------------------------------------------------------------------------------------- $122,128,783 $25,340,923 $(1,868,055) $23,472,868
As of December 31, 2005, the Fund has no capital loss carryovers. Any net capital and currency losses incurred after October 31, within the Fund's tax year, are deemed to arise on the first day of the Fund's next tax year if the Fund so elects to defer such losses. The Fund has no losses incurred after October 31, 2005. The tax composition of distributions paid (other than return of capital distributions for the year) during the year ended December 31, 2005 was as follows: Ordinary Long-Term Income Capital Gains Total ------------------------------------------------------ $6,858,021 $10,747,820 $17,605,841 DISTRIBUTIONS TO SHAREHOLDERS The Fund declares and pays dividends from net investment income annually. The Fund declares and pays net realized capital gains in excess of capital loss carryforwards distributions annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include (but are not limited to) distributions from Real Estate Investment Trusts (REITS), and losses deferred due to wash sale transactions. Reclassifications due to permanent book/tax differences are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or 14 Notes to Financial Statements June 30, 2006 (unaudited) -------------------------------------------------------------------------------- losses, or the net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments. INVESTMENT INCOME Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. All discounts and premiums on bonds are accreted to call or maturity date, whichever is shorter, using the effective yield method. EXPENSES Expenses of the Company which are directly identifiable to one of the Funds are allocated to that portfolio. Expenses which are not directly identifiable to one of the Funds are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expenses and relative sizes of the Funds. All expenses of the Fund are paid by GEAM and reimbursed by the Fund. 3. LINE OF CREDIT The Fund shares a revolving credit facility of up to $25 million with a number of its affiliates. The credit facility is with its custodian bank, State Street Bank and Trust Company. The revolving credit facility requires the payment of a commitment fee equal to 0.09% per annum on the daily unused portion of the credit facility, payable quarterly. The portion borne by the Funds generally is borne proportionally based upon net assets. Generally, borrowings under the credit facility would accrue interest at the Federal Funds Rate plus 50 basis points and is borne by each of the borrowing Funds. The maximum amount allowed to be borrowed by any one of the Funds is the lesser of its prospectus limitation, 20% of its net assets, or $25 million. The credit facility was not utilized by the Fund during the period ended June 30, 2006. 4. AMOUNTS PAID TO AFFILIATES ADVISORY AND ADMINISTRATION FEES GEAM, a registered investment adviser, was retained by the Company's Board of Directors effective May 1, 1997 to act as investment adviser and administrator of the Fund. Compensation of GEAM for investment advisory and administrative services is paid monthly based on the average daily net assets of the Fund. The advisory and administrative fee is stated in the following schedule: Annualized based on average daily net assets -------------------------------------------------- Average Daily Advisory and Net Assets Administration of Fund Fees -------------------------------------------------- First $100 million .85% Next $100 million .80% Over $200 million .75% GENPACT performs certain accounting and certain administration services not provided by GEAM. For the period ending June 30, 2006, $1,032 was charged to the Fund. Administrative services not performed by GEAM or GENPACT were provided by an unaffiliated service provider. DIRECTORS' COMPENSATION The Fund pays no compensation to its directors who are officers or employees of GEAM or its affiliates. Directors who are not such officers or employees also serve in a similar capacity for other funds advised by GEAM. Compensation paid to unaffiliated directors are reflected on the Statement of Operations. These fees are allocated pro rata across all of the mutual fund platforms and share classes served by the directors, including the Fund, and are based upon the relative net assets of each fund within such platforms. (For additional information about directors compensation please refer to the Statement of Additional Information.) 5. SUB-ADVISORY FEES Pursuant to an investment sub-advisory agreement with GEAM, Urdang Securities Management, Inc. ("Urdang") is the Sub-Adviser to the Real Estate Securities Fund. Urdang is responsible for the day-to-day portfolio management of the assets of the Fund, including the responsibility for making decisions to buy, sell or hold a particular security, under the general supervision of GEAM and the Board. For their services, GEAM pays Urdang monthly sub-advisory fees which are calculated as a percentage of the average daily net assets of the Fund. 6. INVESTMENT TRANSACTIONS PURCHASES AND SALES OF SECURITIES The cost of purchases and the proceeds from sales of investments, other than short-term securities and options, for the period ended June 30, 2006 were as follows: Purchases Sales ----------------------------- $ 80,982,766 $ 91,421,498 15 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- The Fund Board, including the independent Board members, considered and unanimously approved the continuance of the Fund's investment advisory agreement with GE Asset Management Incorporated ("GEAM") and the Fund's sub-advisory agreement with Seneca Capital Management, L.L.C. ("Seneca"), at meetings held on December 9 and December 16, 2005. Due to changes occurring with respect to the business leadership of Seneca, the Fund Board also reviewed at the December 16, 2005 meeting a proposal by GEAM to complete a process of identifying a suitable replacement for Seneca as sub-adviser to the Fund. The changes necessitating this proposal related to the announcement that Gail Seneca, Managing Partner and Chief Investment Officer of Seneca, would be leaving her firm at the end of 2005. Because Ms. Seneca was responsible for positioning the real estate securities strategy utilized by the Fund as a core aspect of Seneca's investment management business, her impending departure raised questions about the continued emphasis of this strategy in Seneca's future business plans. Consequently, on January 26, 2006, the Board, including the independent members, considered and unanimously approved a new sub-advisory agreement with the replacement sub-adviser, Urdang Securities Management, Inc. ("Urdang"). In considering whether to approve the Fund's investment advisory and sub-advisory agreements, the Board, including the independent members, considered and discussed a substantial amount of information and analysis prepared by GEAM and the sub-advisers at the Board's request. The Board members also considered detailed information regarding performance and expenses of other investment companies with similar investment objectives and sizes, including information that was prepared by an independent third party provider, Lipper Inc. ("Lipper"). Before approving the Fund's advisory and sub-advisory agreements, the Board members reviewed the proposed agreements and approvals with management of GEAM and with experienced legal counsel who is independent of GEAM and the Fund. The Board members also reviewed a memorandum prepared by independent legal counsel discussing the legal standards for the consideration of the proposed approvals. In addition, the independent Board members discussed the proposed approvals in private sessions with their independent legal counsel at which no representatives of GEAM or the sub-advisers were present. In advance of the meetings, and in response to their requests, the Board members received from GEAM written responses to their inquiries, which included substantial exhibits and other materials related to GEAM's business and the services it provides to the Fund. The Board members took into account their multi-year experience as Board members and particularly their consideration of these agreements in 2004, noting that the information was presented in a similar manner and format. To focus their review, the Board members asked GEAM management , in its oral presentation, to highlight material differences from the information presented in 2004. Also in advance of the meetings, the Board members received from each sub-adviser a written response to a letter of inquiry prepared by GEAM at the Board's request , which included substantial exhibits and other materials related to the business of, and services provided by each sub-adviser. During the meetings, the Board members had an opportunity to discuss this information with GEAM managers, including senior executives, representatives from the legal and compliance departments, and senior investment personnel. At the meeting held on December 16, 2005, the Board members discussed in detail the process by which GEAM had selected Urdang as the proposed replacement sub-adviser. During the meetings, the Board members also had an opportunity to hear presentations by representatives of each sub-adviser. The Board members posed questions to these representatives and engaged in substantive discussions with them concerning the sub-adviser's investment process. In reaching their determinations relating to the agreements and approvals, the Board members considered all factors they believed relevant, including the factors discussed below. In their deliberations, the Board members did not identify any particular information that was all-important or controlling, and each Board member attributed different weights to the various factors. In particular, the Board members focused on the following: THE NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED. The Board members reviewed the services provided by GEAM and Seneca, and the Board members, including the independent members, concurred that GEAM and Seneca provide high quality advisory and administrative services to the Fund. The Board members reviewed the anticipated services to be provided by Urdang, and concurred that Urdang was capable of providing high quality investment 16 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- sub-advisory services to the Fund because of the apparent quality of its research, analysis, investment discipline and other services, such as securities trading. In connection with their consideration of GEAM's services specifically, the Board members focused on the favorable attributes of GEAM, including (i) an investment philosophy oriented toward long-term performance; (ii) effective processes used in overseeing the sub-advisers' activities and with respect to Fund administration, controllership and compliance activities; (iii) highly skilled professionals with a depth of experience; (iv) access to significant technological resources from which the Fund may benefit; and (v) a favorable history and reputation. The Board members discussed with senior officers of GEAM the personnel changes made, and proposed to be made, by GEAM, and that GEAM would be expending significant sums to enhance services, including improvements to its information technology capabilities. The Board members noted that the Fund represents only a small portion of the assets managed by GEAM, but benefits from a full array of services and resources provided by GEAM. In connection with their consideration of the services provided by Seneca, the Board members focused on Seneca's favorable attributes relating to its investment philosophy and discipline, its high caliber investment and trading personnel, its systems and other resources, including research capabilities, and its favorable history and reputation. In connection of their consideration of the anticipated services to be provided by Urdang, the Board members specifically considered a number of Urdang's favorable attributes, including an investment philosophy oriented toward long-term, risk adjusted performance, the processes used for selecting investments, selecting brokers and for compliance activities, the quality of the investment professionals employed by Urdang and the stability of its organization. In light of the foregoing, the Board members, including the independent members, concluded that the services provided by GEAM and Seneca were of a high quality and had benefited the Fund, and that the anticipated services to be provided by Urdang would be of high quality and would stand to benefit the Fund as well. INVESTMENT PERFORMANCE OF THE FUND. The Board members, including the independent members, considered the investment performance of the Fund for various periods. The Board members reviewed detailed comparisons of the performance of the Fund with the relevant securities indexes and peer groupings of mutual funds prepared by Lipper with respect to various periods. In connection with their consideration of Urdang's capabilities, the Board members, including the independent members, reviewed composite performance information presented by Urdang with respect to client accounts managed in a style similar to which it proposed to manage the Fund. The Board members also reviewed comparisons of Urdang's composite performance with relevant securities indexes and other comparable peer group funds with respect to various periods. The Board members also engaged in detailed discussions with GEAM management and representatives of each sub-adviser about their investment processes, focusing on the Fund's investment objective, the number and experience of portfolio management and supporting research personnel, the investment style and approach employed or to be employed by each sub-adviser, and the likely market cycles for their investment styles. The Board members, including the independent members, considered and discussed the relative underperformance of the Fund in certain periods in light of Seneca's commitment to long-term satisfactory performance with respect to the Fund's investment objective and investment approach. The Board members, including the independent members, concluded that the Funds' performance was acceptable over the relevant periods, particularly from a longer-term perspective, which the Board members believed was most relevant. They also concluded that Urdang's performance with respect to other client accounts managed similarly to the Fund was positive. COST OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED FROM THE RELATIONSHIP WITH THE FUND. The Board members considered the cost of the services provided by GEAM and the sub-advisers. The Board members reviewed the information they had requested from GEAM and Seneca concerning their profitability from the fees and services they provide to the Fund and the financial condition of GEAM and Seneca for various past periods. The Board members considered the profit margin 17 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- information for GEAM's investment company business as a whole, as well as GEAM's profitability data for the Fund. The Board members reviewed GEAM's assumptions and the methods of cost allocation used by GEAM in preparing Fund-specific profitability data. The Board members also discussed with GEAM the basis for its belief that the methods of allocation used were reasonable and consistent across its business. The Board members reviewed the assumptions and cost allocation methods used by Seneca in preparing its profitability data. The Board members noted and discussed the additional services provided by GEAM to the Fund compared to other investment products managed by GEAM. The Board members determined that GEAM and Seneca should be entitled to earn a reasonable level of profits for the services they provide to the Fund. The Board members also recognized that GEAM had made significant investments in its business and had not fully recovered the sums invested. Based on their review, the Board members, including the independent members, concluded that they were satisfied that the level of profitability achieved by GEAM and Seneca from their relationship with the Fund was not unreasonable or excessive. At the request of the Board members, Urdang provided information concerning the anticipated range of profitability for the services to be provided to the Fund by Urdang under its proposed sub-advisory agreement. The Board members reviewed Urdang's assumptions used in preparing this data. Urdang stated its belief that its employee compensation levels and anticipated profit margins are consistent with other investment managers and are reasonable and sufficiently high to ensure the long-term financial stability of Urdang. The Board members, including the independent members, determined that Urdang should be entitled to earn a reasonable level of profits for the services to be provided under the proposed sub-advisory agreement and, based on their review, concluded that the proposed sub-advisory fee and anticipated level of profitability to Urdang were not unreasonable or excessive on the basis of the information presented. The Board, including the independent members, also noted that retaining Urdang would not result in an increase in cost to the shareholders of the Fund since Urdang is paid by GEAM and not by the Fund directly. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND WHETHER FEE LEVELS WOULD REFLECT SUCH ECONOMIES OF SCALE. The Board members considered the extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board members considered the substantial infrastructure investments that GEAM has made with respect to its operations and its commitment to continue investing resources to enhance services to Fund shareholders, including its anticipated information technology expenditures. The Board members recognized the benefits to the Fund of GEAM's past investment in its operations through the expenditure of sums to support its substantial infrastructure, and that, in general, GEAM has not yet fully recouped that investment . The Board members also recognized the benefits to the Fund of being able to leverage a favorable cost structure achieved with respect to the Fund's other operating expenses as a result of GEAM's large overall base of assets under management and its vendor management practices. The Board members reviewed the applicable advisory fee breakpoints for the Fund and concluded that no changes were needed. The Board members recognized the economies of scale benefits derived by the Fund as a result of this fee structure. In connection with their consideration of the proposed sub-advisory fee to be paid to Urdang, the Board members, including the independent members, determined that economies of scale should not factor heavily into their decision as to whether to retain Urdang as the Fund's sub-adviser, because of the relatively small size of the Fund. Additionally, the Board considered the fact that, since Urdang's fee is paid by GEAM out of its own resources and not from the assets of the Fund, economies of scale would be generally less important for approval of a sub-advisory agreement than it would for approval of the investment advisory agreement with GEAM. The Board members, including the independent members, did recognize, however, that above the $100 million asset level, Urdang's fee incorporates a breakpoint scale reduction as assets increase. In light of this and in conjunction with a similar breakpoint scale reduction that occurs with respect to the fee charged by GEAM to the Fund, the Board and the independent members concluded that Urdang's fee would reflect the effect of economies of scale for the benefit of Fund investors. 18 Advisory and Administrative Agreement Renewal (unaudited) -------------------------------------------------------------------------------- COMPARISON OF SERVICES TO BE RENDERED AND FEES TO BE PAID. The Board members discussed the services provided to the Fund by GEAM, and the fees charged for those services. The Board members reviewed information concerning the fee and expense ratios for the Fund, and comparative information with respect to similar products. They discussed that the Fund's figures were within the applicable peer group range. The Board members considered that the comparative data provided by Lipper showed no material difference from last year in the fees being charged as compared to those being charged by other advisers to similar investment products, as determined by Lipper. In addition, the Board members considered their discussion with representatives of GEAM and the sub-adviser about the fees being charged to the Fund and, to the extent applicable, the potential effect, if any, of the Securities and Exchange Commission staff's recently proposed soft dollar interpretation on those fees. In light of the foregoing, the Board members, including the independent members, determined that the advisory fees were reasonable in relation to the services provided to the Fund. The Board members reviewed comparative fee information with respect to comparable mutual fund client accounts managed by Seneca and Urdang and with respect to other client accounts managed by Urdang in a similar style to that of the Fund. Urdang also provided comparative fee information with respect to the fees charged by other managers to funds with investment objectives similar to that of the Fund, including one comparison that involved an investment sub-advisory fee arrangement. In addition, the Board members, including the independent members, considered the fact that to the extent the average daily net assets of the Fund exceed $100 million in any month, GEAM would pay less to Urdang (and therefore retain more of its management fee) under the proposed sub-advisory agreement with Urdang than it is required to pay under the sub-advisory agreement with Seneca. The Board members, including the independent members, concluded that, based on this information, the sub-advisory fees were reasonable in light of the services provided or to be provided to the Fund. FALL-OUT BENEFITS. The Board members considered other actual and potential financial benefits to GEAM and the sub-advisers, including, to the extent applicable, soft dollar commission benefits generated through Fund portfolio transactions. The Board members noted, however, that the Fund benefits from the vast array of resources available through GEAM and the sub-advisers, and that the Fund represents only a small portion of the assets managed by each. CONCLUSION. No single factor was determinative to the Board members' decision. Based on their discussion and such other matters as were deemed relevant , the Board members, including the independent members, concluded that the proposed advisory fee and projected total expense ratio are reasonable in relation to the services provided to the Fund. In view of these facts, the Board members, including the independent members, concluded that the renewal of the advisory agreement with GEAM was in the best interests of the Fund and its shareholders, that renewal of the sub-advisory agreement with Seneca, until such time as a suitable replacement sub-adviser is identified and approved, was in the best interest of the shareholders of the Fund, and that the approval of the proposed sub-advisory agreement with Urdang was in the best interests of the Fund and its shareholders. 19 Additional Information (unaudited) -------------------------------------------------------------------------------- INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS: The business and affairs of the Company are managed under the direction of the Company's Board of Directors. Information pertaining to the Directors and officers of the Company is set forth below. INTERESTED DIRECTORS AND EXECUTIVE OFFICERS -------------------------------------------------------------------------------- MICHAEL J. COSGROVE -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 57 POSITION(S) HELD WITH FUND Chairman of the Board and President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President - Chief Commercial Officer of GEAM (formerly President, GE Asset Management Services division ("GEAMS") of GE Financial Assurance Holdings, Inc., an indirect wholly-owned subsidiary of General Electric Company ("GE")), since February 1997; Vice President, GE Capital Corporation, an indirect wholly-owned subsidiary of GE, since December 1999; Executive Vice President - Sales and Marketing of GEAM, a wholly-owned subsidiary of GE that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, since March 1993; Director of GEAM since 1988. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Chairman of the Board and President of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1988; Trustee of Fordham University since 2003 and Marymount College from 1994 through 2002. -------------------------------------------------------------------------------- ALAN M. LEWIS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 59 POSITION(S) HELD WITH FUND Director and Executive Vice President TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 6 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Executive Vice President, General Counsel and Secretary of GEAM since 1987 NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 48 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee and Executive Vice President of GE Funds, GE Institutional Funds and GE LifeStyle Funds since their inception. Trustee of Elfun Funds, GE Savings & Security Funds and General Electric Pension Trust since 1987. 20 Additional Information (unaudited) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SCOTT H. RHODES -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 47 POSITION(S) HELD WITH FUND Treasurer TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - less than one year PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS GEAM Mutual Funds Operations Manager since September 2005; Treasurer of GE Institutional Funds, GE LifeStyle Funds and GE Investments Funds since November 2005 and Elfun Funds and GE Savings & Security Funds since September 2005; from August 2004 to September 2005 Vice President, U.S. Trust Company, N.A. and Assistant Treasurer of Excelsior Funds, Inc., Excelsior Funds Trust, and Excelsior Tax Exempt Funds, Inc.; from January 2004 to August 2004, Vice President BlackRock Financial Management, Inc.; from December 1996 to November 2003, Controller - Mutual Funds, American Skandia Investment Services, Inc. and Assistant Treasurer of American Skandia Trust and American Skandia Advisor Funds, Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- MATTHEW J. SIMPSON -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 45 POSITION(S) HELD WITH FUND Vice President and Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Senior Vice President and General Counsel - Marketing and Client Services (formerly Asset Management Services), at GEAM and Senior Vice President and General Counsel of GEAMS since February 1997; from October 1992 to February 1997, Vice President and Associate General Counsel of GEAM; Secretary of GE Funds since 1993 and Vice President since September 2003; Secretary of GE Institutional Funds and GE LifeStyle Funds since their inception and Vice President since September 2003; Assistant Secretary of Elfun Funds and GE Savings & Security Funds since 1998 and Vice President since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A -------------------------------------------------------------------------------- JEANNE M. LAPORTA -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 40 POSITION(S) HELD WITH FUND Vice President and Assistant Secretary TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 2 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Associate General Counsel - Marketing and Client Services (formerly Asset Management Services) at GEAM since May 1997; Vice President and Assistant Secretary of GE Funds, GE Institutional Funds and GE LifeStyle Funds since September 2003; Vice President and Assistant Secretary of Elfun Funds and GE Savings & Security Funds since October 2003. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR N/A OTHER DIRECTORSHIPS HELD BY DIRECTOR N/A 21 Additional Information (unaudited) -------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- JOHN R. COSTANTINO -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 60 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Managing Director, Walden Partners, Ltd., consultants and investors, since August 1992. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, GE Institutional Funds and GE LifeStyle Funds since their inception; Trustee of Fordham University since 2002 and Marymount College from 2001 through 2002; Neuroscience Research Institute since 1986; Diocesan Finance Counsel of the Dioceses of Brooklyn & Queens since 2001; Gregorian University Foundation since 1994. -------------------------------------------------------------------------------- WILLIAM J. LUCAS -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 58 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Vice President and Treasurer of Fairfield University since 1983. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- ROBERT P. QUINN -------------------------------------------------------------------------------- ADDRESS c/o GEAM 3001 Summer St. Stamford, CT 06905 AGE 70 POSITION(S) HELD WITH FUND Director TERM OF OFFICE AND LENGTH OF TIME SERVED Until successor is elected and qualified - 9 years PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS Retired since 1983 from Salomon Brothers Inc. NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR 40 OTHER DIRECTORSHIPS HELD BY DIRECTOR GP Financial Corp, holding company; The Greenpoint Savings Bank, a financial institution. Trustee of GE Funds since 1993, and GE Institutional Funds and GE LifeStyle Funds since their inception. -------------------------------------------------------------------------------- The Statement of Additional Information for the Fund includes additional information about the Directors and Officers and is available, without charge, upon request by calling 1-800-242-0134. 22 Investment Team -------------------------------------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR GE Asset Management Incorporated BOARD OF DIRECTORS Michael J.Cosgrove, CHAIRMAN John R. Costantino Alan M. Lewis William J. Lucas Robert P. Quinn SECRETARY Matthew J. Simpson TREASURER Scott H. Rhodes ASSISTANT TREASURER Christopher M. Isaacs DISTRIBUTOR GE Investment Distributors, Inc. Member NASD and SIPC COUNSEL Sutherland, Asbill & Brennan, LLP CUSTODIAN State Street Bank & Trust Company INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP OFFICERS OF THE INVESTMENT ADVISER Ronald R. Pressman, CHIEF EXECUTIVE OFFICER (EFFECTIVE AS OF JULY 1, 2006) John H. Myers, CHIEF EXECUTIVE OFFICER (RETIRED FROM ALL POSITIONS AS OF JUNE 30, 2006) David B. Carlson, EVP, DOMESTIC EQUITIES Michael J. Cosgrove, EVP, CHIEF COMMERCIAL OFFICER Robert A. MacDougall, EVP, FIXED INCOME (RETIRED FROM ALL POSITIONS AS OF JANUARY 31, 2006) Kathryn D. Karlic, EVP, FIXED INCOME (AS OF FEBRUARY 1, 2006) Ralph R. Layman, EVP, INTERNATIONAL EQUITIES Alan M. Lewis, EVP, GENERAL COUNSEL AND SECRETARY Don W. Torey, EVP, ALTERNATIVE INVESTMENTS AND REAL ESTATE John J. Walker, EVP, CHIEF FINANCIAL OFFICER 23 [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] INVESTMENT ADVISER GE ASSET MANAGEMENT INCORPORATED 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 DISTRIBUTOR GE INVESTMENT DISTRIBUTORS, INC. MEMBER NASD AND SIPC 3001 SUMMER STREET PO BOX 7900 STAMFORD, CT 06904-7900 The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge (i) upon request, by calling 1-800-242-0134; (ii) on the Fund's website at http://www.gefunds.com; and (iii) on the Commission's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC - information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-months period ended June 30 is available without charge (i) through the Fund's website at http://www.gefunds.com; and (ii) on the Commission's website at http://www.sec.gov. [GE LOGO OMITTED] ITEM 2. CODE OF ETHICS. Applicable only to an annual filing. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Applicable only to an annual filing. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Applicable only to an annual filing. ITEM 5. Audit Committee of Listed Registrants Applicable only to Closed-End Management Investment Companies. ITEM 6. Schedule of Investments. Attached as part of ITEM 1. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Applicable only to Closed-End Management Investment Companies. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Applicable only to Closed-End Management Investment Companies. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Applicable only to Closed-End Management Investment Companies. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No material changes. ITEM 11. CONTROLS AND PROCEDURES. The officers providing the certifications in this report in accordance with Rule 30a-3 under the Investment Company Act of 1940 have concluded, based on their evaluation of the registrant's disclosure controls and procedures (as such term is defined in such rule), that such controls and procedures are adequate and reasonably designed to achieve the purpose described in paragraph (c) of such rule. There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their last evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 12. EXHIBITS. (a) Not applicable. (b) Attached hereto as Exhibit 1 and Exhibit 2 are the Certifications of Michael J. Cosgrove and Scott Rhodes as principal executive officer and principal financial officer, respectively, as required by Rule 30a-2 under the Investment Company Act of 1940. 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. GE INVESTMENTS FUNDS, INC By: /S/MICHAEL J. COSGROVE Michael J. Cosgrove Chairman, GE INVESTMENTS FUNDS, INC. Date: September 05, 2006 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/MICHAEL J. COSGROVE Michael J. Cosgrove Chairman, GE INVESTMENTS FUNDS, INC. Date: September 05, 2006 By: /S/SCOTT RHODES Scott Rhodes TREASURER, GE INVESTMENTS FUNDS, INC. Date: September 05, 2006 EXHIBIT INDEX (b)(1) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940. (b)(2) Certification of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.