-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LD3VeiMz0Vg74n5NtDBhYIuTkmnSicKcIhWj1RUuoAIYg73J0FDP8075YG8m+LXu oyPr6MV2nHh7M3lrn1tg1A== 0000810016-02-000003.txt : 20020414 0000810016-02-000003.hdr.sgml : 20020414 ACCESSION NUMBER: 0000810016-02-000003 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: W&R TARGET FUNDS INC CENTRAL INDEX KEY: 0000810016 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05017 FILM NUMBER: 02563189 BUSINESS ADDRESS: STREET 1: 6300 LAMAR AVENUE STREET 2: PO BOX 29217 CITY: OVERLAND PARK STATE: KS ZIP: 66202 BUSINESS PHONE: 9132362000 MAIL ADDRESS: STREET 1: P O BOX 29217 CITY: SHAWNEE MISSION STATE: KS ZIP: 66201-9217 FORMER COMPANY: FORMER CONFORMED NAME: TMK UNITED FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: TARGET UNITED FUNDS INC DATE OF NAME CHANGE: 19990506 N-30D 1 tgtn30d.txt ANNUAL REPORT TO SHAREHOLDERS DATED DECEMBER 31, 2001 W&R Target Funds Asset Strategy Portfolio Balanced Portfolio Bond Portfolio Core Equity Portfolio Growth Portfolio High Income Portfolio International Portfolio Limited-Term Bond Portfolio Money Market Portfolio Science and Technology Portfolio Small Cap Portfolio Value Portfolio Annual Report ----------------- December 31, 2001 CONTENTS 3 Asset Strategy Portfolio 17 Balanced Portfolio 31 Bond Portfolio 46 Core Equity Portfolio 57 Growth Portfolio 70 High Income Portfolio 85 International Portfolio 98 Limited-Term Bond Portfolio 110 Money Market Portfolio 122 Science and Technology Portfolio 134 Small Cap Portfolio 145 Value Portfolio 157 Notes to Financial Statements 166 Independent Auditors' Report 167 Directors & Officers 174 Annual Privacy Notice MANAGERS' DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Michael L. Avery and Daniel J. Vrabac, portfolio managers of W&R Target Funds, Inc. - Asset Strategy Portfolio This report relates to the operation of W&R Target Funds, Inc. - Asset Strategy Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio had a difficult year, in the face of economic turmoil, and underperformed for the year. It did slightly outperform its stock benchmark index, although it underperformed its bond benchmark indexes. The Portfolio's one-year return declined 9.96 percent, compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which declined 11.91 percent for the year, the Salomon Brothers Broad Investment Grade Index (reflecting the performance of securities that generally represent the bond market), which increased 8.52 percent, the Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit (reflecting the performance of securities that generally represent one-month certificates of deposit), which increased 4.14 percent, and the Lipper Variable Annuity Flexible Portfolio Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives), which declined 5.58 percent during the year. A variety of indexes is presented because the Portfolio invests in stocks, bonds and other instruments. What factors impacted the Portfolio's performance during the fiscal year? A number of factors negatively impacted performance throughout the year. In the first quarter we were overweighted in technology stocks, as we anticipated a rebound would occur (in spite of our overall bearish attitude). The rally didn't materialize, and our technology holdings brought our overall performance down significantly. This created a deficit that we couldn't overcome during the remainder of the year. Given our attitude regarding the market and the economy, we also were not able to participate in the unanticipated rally that did occur during the fourth quarter. This was a double hit: we were underweighted in stocks when the market rallied, and overweighted in Treasury securities in November and December when long-term interest rates rose by 100 basis points, taking away some of the gains we had accrued during the year on our fixed income holdings. What other market conditions or events influenced the Portfolio's performance during the fiscal year? We correctly anticipated an economic decline during the year. However, we appear to have miscalculated investor psychology after the September 11 terrorist attacks. In our view, the economy remains weak, and it is unclear as to whether it will rebound by the second half of 2002, or whether a recovery will be delayed until 2003. The biggest influence on Portfolio performance, we believe, was the attempt to time the market early in the year in the face of our underlying bearish attitude. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Our strategy during the year was to remain predominantly in fixed income securities (including cash). Had we stayed with this strategy alone, performance likely would have been far better. Where we apparently miscalculated was in attempting to move in and out of the equity market in volatile and uncertain times. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We remain underweighted in equities and overweighted in U.S. Treasuries. However, we intend to gradually build the equity portion of the portfolio going forward. We are doing this by concentrating on companies that we believe may benefit from the changed global environment, brought about in the aftermath of September 11. We envision that this will be a meticulous process, with an ultimate intent of tactically benefiting from equities even in what we believe to be a poor market for stocks in general. Respectfully, Michael L. Avery Daniel J. Vrabac Managers Asset Strategy Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Asset Strategy Portfolio, The S&P 500 Index, The Salomon Brothers Broad Investment Grade Index, Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit and Lipper Variable Annuity Flexible Portfolio Funds Universe Average Lipper Salomon Variable Salomon Brothers Annuity Brothers Short-Term Flexible W&R Target Broad Index Portfolio Asset S&P Investment for 1 month Funds Strategy 500 Grade Certificates Universe Portfolio Index Index of Deposit Average --------- ------- ---------- ---------- -------- 05/01/95 $10,000 $10,000 $10,000 $10,000 $10,000 12/31/95 10,182 12,179 11,130 10,401 11,536 12/31/96 10,795 14,975 11,533 10,976 13,198 12/31/97 12,307 19,961 12,644 11,599 15,747 12/31/98 13,531 25,689 13,746 12,257 17,997 12/31/99 16,639 31,102 13,632 12,909 20,232 12/31/00 20,388 28,245 15,212 13,753 20,486 12/31/01 18,358 24,882 16,508 14,322 19,342 === W&R Target Asset Strategy Portfolio* -- $18,358 +++ S&P 500 Index** -- $24,882 ... Salomon Brothers Broad Investment Grade Index** -- $16,508 *-*-Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit** -- $14,322 ****Lipper Variable Annuity Flexible Portfolio Funds Universe Average** -- $19,342 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes was effected as of April 30, 1995. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -9.96% 5 Years Ended 12-31-01 11.20% 6+ Years Ended 12-31-01++ 9.53% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-1-95 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Troy Ounces Value BULLION - 2.27% Gold ................................... 9,360 $ 2,611,460 (Cost: $2,578,108) ------------ Shares COMMON STOCKS Amusement and Recreation Services - 0.49% Westwood One, Inc.* .................... 18,800 564,940 ------------ Business Services - 3.79% AOL Time Warner Inc.* .................. 26,000 834,600 Armor Holdings, Inc.* .................. 13,600 367,064 BEA Systems, Inc.* ..................... 32,700 503,744 Edwards (J. D.) & Company* ............. 15,600 257,322 Micromuse Inc.* ........................ 24,200 362,879 Microsoft Corporation* ................. 8,100 536,665 Midway Games Inc.* ..................... 15,800 237,158 SAP Aktiengesellschaft, ADR ............ 16,700 533,231 THQ Inc.* .............................. 6,900 334,133 Take-Two Interactive Software, Inc.* ... 24,500 396,287 ------------ 4,363,083 ------------ Chemicals and Allied Products - 3.39% Air Products and Chemicals, Inc. ....... 4,700 220,477 American Home Products Corporation ..... 9,500 582,920 Colgate-Palmolive Company .............. 9,600 554,400 OM Group, Inc. ......................... 1,700 112,523 Pfizer Inc. ............................ 13,100 522,035 Pharmacia Corporation .................. 12,900 550,185 Schering-Plough Corporation ............ 22,900 820,049 Smith International, Inc.* ............. 10,200 546,924 ------------ 3,909,513 ------------ Coal Mining - 0.77% Arch Coal, Inc. ........................ 28,700 651,490 CONSOL Energy Inc. ..................... 9,400 233,496 ------------ 884,986 ------------ See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Communication - 1.06% Nextel Communications, Inc.* ........... 33,400 $ 365,897 Univision Communications Inc.* ......... 14,800 598,808 Western Wireless Corporation, Class A* . 9,000 254,295 ------------ 1,219,000 ------------ Depository Institutions - 0.41% U.S. Bancorp ........................... 12,100 253,253 Wells Fargo & Company .................. 5,000 217,250 ------------ 470,503 ------------ Electric, Gas and Sanitary Services - 0.79% El Paso Corporation .................... 15,000 669,150 Hawaiian Electric Industries, Inc. ..... 5,900 237,652 ------------ 906,802 ------------ Electronic and Other Electric Equipment - 0.45% Intel Corporation ...................... 16,600 521,987 ------------ Fabricated Metal Products - 0.23% Sturm, Ruger & Company, Inc. ........... 22,100 264,758 ------------ Health Services - 0.95% Health Management Associates, Inc., Class A* .............................. 29,400 540,960 Tenet Healthcare Corporation* .......... 9,400 551,968 ------------ 1,092,928 ------------ Holding and Other Investment Offices - 1.08% CarrAmerica Realty Corporation ......... 41,300 1,243,130 ------------ Industrial Machinery and Equipment - 1.18% Baker Hughes Incorporated .............. 14,200 517,874 EMC Corporation* ....................... 41,100 552,384 Lexmark International, Inc.* ........... 4,900 289,100 ------------ 1,359,358 ------------ See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Instruments and Related Products - 0.25% Korea Telecom Corp., ADR ............... 14,400 $ 292,752 ------------ Insurance Carriers - 0.18% Prudential Financial, Inc.* ............ 6,300 209,097 ------------ Metal Mining - 3.14% Agnico-Eagle Mines Limited ............. 47,400 467,838 AngloGold Limited, ADR ................. 84,800 1,531,488 Barrick Gold Corporation ............... 46,905 748,135 Glamis Gold Ltd.* ...................... 120,452 434,832 Goldcorp Incorporated (A) .............. 18,700 226,617 Meridian Gold Inc. (A)* ................ 20,630 211,792 ------------ 3,620,702 ------------ Miscellaneous Retail - 0.11% Galyan's Trading Company, Inc.* ........ 9,525 132,588 ------------ Motion Pictures - 0.47% Blockbuster Inc., Class A .............. 21,300 536,760 ------------ Nonmetallic Minerals, Except Fuels - 0.30% USEC Inc. .............................. 48,200 345,112 ------------ Oil and Gas Extraction - 0.84% Anadarko Petroleum Corporation ......... 8,400 477,540 Burlington Resources Inc. .............. 13,000 488,020 ----------- 965,560 ------------ Rubber and Miscellaneous Plastics Products - 0.09% Sealed Air Corporation* ................ 2,600 106,132 ------------ Security and Commodity Brokers - 0.20% Charles Schwab Corporation (The) ....... 14,600 225,862 ------------ TOTAL COMMON STOCKS - 20.17% $ 23,235,553 (Cost: $22,416,461) See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Shares Value PREFERRED STOCK - 0.18% Insurance Carriers Prudential Financial, Inc. and Prudential Financial Capital Trust I, 6.75%, Convertible* ................... 3,700 $ 215,340 ------------ (Cost: $185,000) Principal Amount in Thousands CORPORATE DEBT SECURITIES Building Materials and Garden Supplies - 0.46% Home Depot, Inc. (The), 6.5%, 9-15-04 ......................... $500 529,201 ------------ Chemicals and Allied Products - 1.34% Abbott Laboratories, 5.125%, 7-1-04 ........................ 500 514,958 Pfizer Inc., 3.625%, 11-1-04 ....................... 500 498,219 Procter & Gamble Company (The), 6.6%, 12-15-04 ........................ 500 533,089 ------------ 1,546,266 ------------ Electric, Gas and Sanitary Services - 1.84% Dominion Resources, Inc., 7.4%, 9-16-02 ......................... 200 205,366 El Paso Natural Gas Company, 7.75%, 1-15-02 ........................ 200 200,262 PP&L Capital Funding, Inc., 7.7%, 11-15-07 ........................ 250 259,589 Public Service Electric and Gas Company, 7.19%, 9-6-02 ......................... 200 205,960 WMX Technologies, Inc., 7.7%, 10-1-02 ......................... 200 205,110 Wisconsin Energy Corporation, 5.875%, 4-1-06 ........................ 500 507,143 Wisconsin Power and Light Company, 7.6%, 7-1-05 .......................... 500 537,024 ------------ 2,120,454 ------------ See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Electronic and Other Electric Equipment - 0.18% Tyco International Group S.A., 6.25%, 6-15-03 ........................ $200 $ 208,048 ------------ Fabricated Metal Products - 0.43% Gillette Company (The), 3.75%, 12-1-04 (B) .................... 500 497,811 ------------ Food and Kindred Products - 0.61% Companhia Brasileira de Bebidas, 10.5%, 12-15-11 (B) ................... 500 492,500 Diageo Capital plc, 6.0%, 3-27-03 ......................... 200 207,087 ------------ 699,587 ------------ Food Stores - 0.18% Safeway Inc., 7.0%, 9-15-02 ......................... 200 205,733 ------------ General Merchandise Stores - 0.18% Wal-Mart Stores, Inc., 6.875%, 8-1-02 ........................ 200 205,327 ------------ Industrial Machinery and Equipment - 0.45% Stanley Works (The), 5.75%, 3-1-04 ......................... 500 515,524 ------------ Nondepository Institutions - 0.84% Banco Latinoamericano de Exportaciones, S.A., 6.59%, 10-6-02 (B) .................... 200 203,576 Nacional Financiera, S.N.C., 9.75%, 3-12-02 ........................ 250 254,063 National Rural Utilities Cooperative Finance Corporation, 5.5%, 1-15-05 ......................... 500 509,521 ------------ 967,160 ------------ See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Oil and Gas Extraction - 0.18% Apache Corporation, 9.25%, 6-1-02 ......................... $200 $ 206,167 ------------ Paper and Allied Products - 0.18% Federal Paper Board Company, Inc., 8.125%, 7-1-02 ........................ 200 205,020 ------------ Primary Metal Industries - 0.18% CSN Islands Corporation, 9.625%, 8-2-02 (B) .................... 200 206,250 ------------ Railroad Transportation - 0.17% Norfolk Southern Corporation, 6.95%, 5-1-02 ......................... 200 202,874 ------------ Transportation Equipment - 0.26% TRW Inc., 6.5%, 6-1-02 .......................... 300 302,516 ------------ TOTAL CORPORATE DEBT SECURITIES - 7.48% $ 8,617,938 (Cost: $8,555,067) OTHER GOVERNMENT SECURITIES Canada - 0.47% Her Majesty in right of Canada, 6.375%, 11-30-04 ...................... 500 537,146 ------------ Mexico - 0.23% United Mexican States, 8.625%, 3-12-08 ....................... 250 268,125 ------------ TOTAL OTHER GOVERNMENT SECURITIES - 0.70% $ 805,271 (Cost: $779,777) See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES Mortgage-Backed Obligations - 4.30% Government National Mortgage Association Pass-Through Certificates: 5.5%, 11-15-16 ........................ $1,302 $ 1,291,002 5.5%, 12-15-16 ........................ 3,698 3,665,675 ------------ 4,956,677 ------------ United States Treasury - 50.45% 5.75%, 11-15-05 (C) ................... 14,800 15,635,386 6.125%, 8-15-07 ....................... 16,425 17,672,282 5.75%, 8-15-10 ........................ 23,625 24,800,722 ------------ 58,108,390 ------------ TOTAL UNITED STATES GOVERNMENT SECURITIES - 54.75% $ 63,065,067 (Cost: $62,632,121) Face Amount in Thousands UNREALIZED GAIN (LOSS) ON OPEN FORWARD CURRENCY CONTRACTS - 0.09% British Pound, 5-15-02 (D) ............. BP12 (625) Japanese Yen, 1-31-02 (D) .............. Y485,247 290,477 Japanese Yen, 1-31-02 (D) .............. Y485,247 (187,088) ------------ $ 102,764 ------------ Principal Amount in Thousands SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 6.09% Abbott Laboratories, 1.72%, 1-7-02 ......................... $2,306 2,305,339 du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. 2,710 2,710,000 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 2,000 1,998,933 ------------ 7,014,272 ------------ See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES (continued) Commercial Paper (continued) Food and Kindred Products - 1.73% Nestle Capital Corp., 2.02%, 1-24-02 ........................ $2,000 $ 1,997,419 ------------ General Merchandise Stores - 1.74% May Department Stores Co., 1.75%, 1-11-02 ........................ 2,000 1,999,028 ------------- Nondepository Institutions - 1.74% IBM Credit Corp., 1.75%, 1-11-02 ........................ 2,000 1,999,028 ------------ Total Commercial Paper - 11.30% 13,009,747 Municipal Obligations - 2.53% California California Pollution Control Financing Authority, Environmental Improvement Revenue Bonds, Shell Oil Company Project, Series 1998A (Taxable), 1.84%, 1-2-02 ......................... 2,918 2,918,000 ------------ TOTAL SHORT-TERM SECURITIES - 13.83% $ 15,927,747 (Cost: $15,927,747) TOTAL INVESTMENTS - 99.47% $114,581,140 (Cost: $113,074,281) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.53% 608,367 NET ASSETS - 100.00% $115,189,507 See Notes to Schedule of Investments on page 12. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO December 31, 2001 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. (A) Listed on an exchange outside of the United States. (B) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2001, the total value of these securities amounted to $1,400,137 or 1.22% of net assets. (C) As of December 31, 2001, a portion of the security was used as cover for the following written call option (See Note 5 to financial statements): Contracts Underlying Subject Expiration Month/Premium Market Security to Call Exercise Price Received Price ---------- ------------------------ -------- -------- Nasdaq 100 727 March/40 $215,919 $185,385 ======== ======== (D) Principal amounts are denominated in the indicated foreign currency, where applicable (BP - British Pound, Y - Japanese Yen). See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES ASSET STRATEGY PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investments--at value (Notes 1 and 3): Bullion (cost - $2,578) ............................ $ 2,611 Securities (cost - $110,496) ....................... 111,970 -------- 114,581 Cash ................................................ 1 Receivables: Dividends and interest ............................. 1,200 Fund shares sold ................................... 135 Investment securities sold ......................... 21 Prepaid insurance premium ............................ 1 -------- Total assets ..................................... 115,939 -------- LIABILITIES Payable for investment securities purchased ......... 518 Outstanding call options at market (Note 5) ......... 185 Payable to Fund shareholders ........................ 34 Accrued accounting services fee (Note 2) ............ 4 Accrued management fee (Note 2) ..................... 2 Accrued service fee (Note 2) ........................ 1 Other ............................................... 5 -------- Total liabilities ................................ 749 -------- Total net assets ................................ $115,190 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 18 Additional paid-in capital ......................... 121,149 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions .......................... (7,516) Net unrealized appreciation in value of securities .................................... 1,507 Net unrealized appreciation in value of written call options ..................................... 31 -------- Net assets applicable to outstanding units of capital ................................ $115,190 ======== Net asset value, redemption and offering price per share ........................ $6.2046 ======= Capital shares outstanding ............................ 18,565 Capital shares authorized ............................. 40,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS ASSET STRATEGY PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $ 3,176 Dividends (net of foreign withholding taxes of $3).. 161 ------- Total income ..................................... 3,337 ------- Expenses (Note 2): Investment management fee .......................... 639 Service fee ........................................ 225 Accounting services fee ............................ 38 Custodian fees ..................................... 21 Audit fees ......................................... 6 Legal fees ......................................... 2 Other .............................................. 8 ------- Total expenses ................................ 939 ------- Net investment income ....................... 2,398 ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities ..................... (7,738) Realized net gain on call options written ........... 456 Realized net gain on foreign currency transactions .. 20 ------- Realized net loss on investments ................... (7,262) ------- Unrealized depreciation in value of securities during the period .................................. (3,494) Unrealized appreciation in value of written call options during the period ..................... 62 Unrealized appreciation in value of foreign currency transactions during the period ............ 103 ------- Unrealized depreciation in value of investments during the period .................... (3,329) ------- Net loss on investments .......................... (10,591) ------- Net decrease in net assets resulting from operations ............................... $(8,193) ======= See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS ASSET STRATEGY PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income ................ $ 2,398 $ 693 Realized net gain (loss) on investments (7,262) 4,041 Unrealized appreciation (depreciation) (3,329) 1,758 -------- ------- Net increase (decrease) in net assets resulting from operations .......... (8,193) 6,492 -------- ------- Dividends to shareholders from (Note 1E):* Net investment income ................. (2,418) (691) Realized gains on security transactions................ (234) (4,043) -------- ------- (2,652) (4,734) -------- ------- Capital share transactions** ........... 66,933 35,757 -------- ------- Total increase ...................... 56,088 37,515 NET ASSETS Beginning of period .................... 59,102 21,587 -------- ------- End of period .......................... $115,190 $59,102 ======== ======= Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 16. **Shares issued from sale of shares .... 16,814 5,356 Shares issued from reinvestment of dividend and/or capital gains distribution ..... 428 671 Shares redeemed ........................ (7,055) (1,096) ------ ----- Increase in outstanding capital shares.. 10,187 4,931 ====== ===== Value issued from sale of shares ....... $110,309 $38,898 Value issued from reinvestment of dividend and/or capital gains distribution ..... 2,652 4,734 Value redeemed ......................... (46,028) (7,875) -------- ------- Increase in outstanding capital ........ $ 66,933 $35,757 ======== ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS ASSET STRATEGY PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $7.0540 $6.2625 $5.3868 $5.1969 $5.1343 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income .......... 0.1323 0.0908 0.1138 0.1391 0.1915 Net realized and unrealized gain (loss) on investments .. (0.8354) 1.3211 1.1232 0.3779 0.5277 ------- ------- ------- ------- ------- Total from investment operations ....... (0.7031) 1.4119 1.2370 0.5170 0.7192 ------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.1334)(0.0906) (0.1136)(0.1391) (0.1919) Capital gains ..... (0.0129)(0.5298) (0.2477)(0.1880) (0.4647) ------- ------- ------- ------- ------- Total distributions (0.1463)(0.6204) (0.3613)(0.3271) (0.6566) ------- ------- ------- ------- ------- Net asset value, end of period .... $6.2046 $7.0540 $6.2625 $5.3868 $5.1969 ======= ======= ======= ======= ======= Total return........ -9.96% 22.53% 22.96% 9.95% 14.01% Net assets, end of period (in millions) ........ $115 $59 $22 $14 $10 Ratio of expenses to average net assets ............ 1.03% 0.97% 0.73% 1.07% 0.93% Ratio of net investment income to average net assets ....... 2.63% 1.97% 2.18% 2.97% 3.55% Portfolio turnover rate ............. 187.87% 155.27% 179.63% 189.02% 222.50% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Cynthia P. Prince-Fox, portfolio manager of W&R Target Funds, Inc. - Balanced Portfolio This report relates to the operation of W&R Target Funds, Inc. - Balanced Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? Given the difficult environment, the Portfolio performed relatively well for the fiscal year, outperforming its stock market benchmark index, but underperforming its bond benchmark index. The Portfolio's one-year return declined 5.94 percent, compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which declined 11.91 percent for the year, the Salomon Brothers Treasury/Government Sponsored/Corporate Index (generally reflecting the performance of funds in the bond market), which increased 8.59 percent for the year, and the Lipper Variable Annuity Balanced Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 2.85 percent for the period. Multiple indexes are presented because the Portfolio invests in both stocks and bonds. What factors affected the Portfolio's performance during the fiscal year? The Portfolio outperformed its stock benchmark primarily due to stock selection. Our retail and insurance positions performed best. The three key areas that underperformed and adversely affected the Portfolio were financial services, oil and telecommunications. Overall, our fixed income investments had a positive return. However, due to our concerns about the economy, we were not heavily exposed to high grade corporate bonds, which demonstrated the best returns. What other market conditions or events influenced the Portfolio's performance during the fiscal year? The economy was already experiencing a slowdown when the September 11 terrorist attacks pushed the markets into a more tenuous position. We were positioned relatively defensively going into September, so we did not suffer a significant negative impact from the declines experienced immediately after the attacks. What we did not anticipate was how aggressively money flowed back into equities, particularly the cyclical, technology and retail sectors. While we did have exposure to these areas, we believe that our underweighted exposure to technology, in a market that surged over 20 percent, hindered our performance as the markets staged a rebound. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Our strategy of maintaining a relatively defensive equity portfolio during the year was based on our belief that equity valuations had reached extreme levels and were unsustainable, given the potential for a slower economic environment. We took the opportunity to reduce our technology weighting during the year. We concurrently increased our weightings in more defensive areas. Following September 11, we reduced or eliminated positions that we felt were at risk given the uncertainty of the environment, including travel industry holdings, such as Carnival Cruise and Boeing. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Overall, we placed the greatest emphasis during 2001 on the energy and health care industries. We also maintained an overweighted position in retail despite an uncertain economic environment, as we felt some of our key holdings, such as Wal-Mart and Home Depot, would be in a position for growth during the difficult environment. Looking forward, we intend to focus on companies and sectors that we feel will benefit during an improving economy. Respectfully, Cynthia P. Prince-Fox Manager Balanced Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Balanced Portfolio, The S&P 500 Index Salomon Brothers Treasury/Government Sponsored/Corporate Index and Lipper Variable Annuity Balanced Funds Universe Average Salomon Lipper Brothers Variable Treasury/ Annuity Government Balanced W&R Target S&P Sponsored/ Funds Balanced 500 Corporate Universe Portfolio Index Index Average ---------- -------- ---------- ---------- 05/03/94 Purchase $10,000 $10,000 $10,000 $10,000 12/31/94 9,963 10,398 10,046 10,014 12/31/95 12,374 14,306 11,978 12,473 12/31/96 13,758 17,591 12,327 14,109 12/31/97 16,301 23,447 13,535 16,776 12/31/98 17,714 30,176 14,814 19,121 12/31/99 19,510 36,533 14,514 20,800 12/31/00 20,903 33,178 16,219 21,309 12/31/01 19,661 29,227 17,613 20,702 ===== W&R Target Balanced Portfolio* -- $19,661 - ----- S&P 500 Index** -- $29,227 ..... Salomon Brothers Treasury/Government Sponsored/Corporate Index** -- $17,613 ***** Lipper Variable Annuity Balanced Funds Universe Average** -- $20,702 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes was effected as of April 30, 1994. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -5.94% 5 Years Ended 12-31-01 7.40% 7+ Years Ended 12-31-01++ 9.22% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-3-94 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Amusement and Recreation Services - 0.58% Walt Disney Company (The) .............. 50,000 $ 1,036,000 ------------ Apparel and Accessory Stores - 0.55% Abercrombie & Fitch, Class A* .......... 37,000 981,610 ------------ Building Materials and Garden Supplies - 0.67% Home Depot, Inc. (The) ................. 23,338 1,190,471 ------------ Business Services - 2.42% AOL Time Warner Inc.* .................. 40,500 1,300,050 Clear Channel Communications, Inc.* .... 32,100 1,634,211 Microsoft Corporation* ................. 20,900 1,384,730 ------------ 4,318,991 ------------ Cable and Other Pay Television Services - 0.53% Cox Communications, Inc., Class A* ..... 22,700 951,357 ------------ Chemicals and Allied Products - 6.54% American Home Products Corporation ..... 31,000 1,902,160 Bristol-Myers Squibb Company ........... 18,500 943,500 Dow Chemical Company (The) ............. 48,200 1,628,196 du Pont (E.I.) de Nemours and Company .. 40,800 1,734,408 Forest Laboratories, Inc.* ............. 16,200 1,327,590 Pfizer Inc. ............................ 38,850 1,548,173 Pharmacia Corporation .................. 39,380 1,679,557 Schering-Plough Corporation ............ 25,000 895,250 ------------ 11,658,834 ------------ Communication - 2.92% BellSouth Corporation .................. 26,700 1,018,605 Qwest Communications International Inc. 90,000 1,271,700 SBC Communications Inc. ................ 24,700 967,499 Sprint Corporation - FON Group ......... 58,600 1,176,688 Vodafone Group Plc, ADR ................ 30,000 770,400 ------------ 5,204,892 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Depository Institutions - 2.00% Morgan (J.P.) Chase & Co. .............. 33,500 $ 1,217,725 U.S. Bancorp ........................... 40,900 856,037 Wells Fargo & Company .................. 34,500 1,499,025 ------------ 3,572,787 ------------ Eating and Drinking Places - 1.70% McDonald's Corporation ................. 53,400 1,413,498 Starbucks Corporation* ................. 85,000 1,619,675 ------------ 3,033,173 ------------ Electric, Gas and Sanitary Services - 1.33% El Paso Corporation .................... 30,000 1,338,300 Exelon Corporation ..................... 21,600 1,034,208 ------------ 2,372,508 ------------ Electronic and Other Electric Equipment - 3.24% Analog Devices, Inc.* .................. 15,500 688,045 General Electric Company ............... 18,600 745,488 Lucent Technologies Inc. ............... 125,000 786,250 Maxim Integrated Products, Inc.* ....... 26,500 1,391,383 Nortel Networks Corporation ............ 125,000 937,500 Texas Instruments Incorporated ......... 43,800 1,226,400 ------------ 5,775,066 ------------ Engineering and Management Services - 0.47% KPMG Consulting, Inc.* ................. 50,900 846,212 ------------ Food and Kindred Products - 1.37% Anheuser-Busch Companies, Inc. ......... 24,000 1,085,040 ConAgra Foods, Inc. .................... 57,400 1,364,398 ------------ 2,449,438 ------------ Food Stores - 0.47% Kroger Co. (The)* ...................... 40,000 834,800 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) General Merchandise Stores - 1.54% Target Corporation ..................... 44,600 $ 1,830,830 Wal-Mart Stores, Inc. .................. 16,000 920,800 ------------ 2,751,630 ------------ Health Services - 1.60% HCA - The Healthcare Company ........... 40,600 $ 1,564,724 Health Management Associates, Inc., Class A* .............................. 70,000 1,288,000 ------------ 2,852,724 ------------ Industrial Machinery and Equipment - 4.04% Applied Materials, Inc.* ............... 26,200 1,050,751 Cisco Systems, Inc.* ................... 45,000 815,175 Cooper Cameron Corporation* ............ 29,700 1,198,692 Deere & Company* ....................... 37,200 1,624,152 Dell Computer Corporation* ............. 50,000 1,358,250 EMC Corporation* ....................... 32,100 431,424 Timken Company (The) ................... 45,000 728,100 ------------ 7,206,544 ------------ Instruments and Related Products - 0.68% Danaher Corporation .................... 20,000 1,206,200 ------------ Insurance Agents, Brokers and Service - 0.66% Hartford Financial Services Group Inc. (The) 18,700 1,174,921 ------------ Insurance Carriers - 1.14% Berkshire Hathaway Inc., Class B* ...... 500 1,262,500 Lincoln National Corporation ........... 15,900 772,263 ------------ 2,034,763 ------------ Metal Mining - 0.44% Barrick Gold Corporation ............... 49,184 784,485 ------------ Motion Pictures - 1.12% Blockbuster Inc., Class A .............. 30,000 756,000 Fox Entertainment Group, Inc., Class A* . 46,800 1,241,604 ------------ 1,997,604 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Nondepository Institutions - 2.26% American Express Company ............... 30,000 $ 1,070,700 Countrywide Credit Industries, Inc. .... 8,900 364,633 Fannie Mae ............................. 20,700 1,645,650 Morgan Stanley Dean Witter & Co. ....... 17,100 956,574 ------------ 4,037,557 ------------ Oil and Gas Extraction - 1.97% Anadarko Petroleum Corporation ......... 23,200 1,318,920 Burlington Resources Inc. .............. 45,200 1,696,808 Schlumberger Limited ................... 9,000 494,550 ------------ 3,510,278 ------------ Paper and Allied Products - 0.73% International Paper Company ............ 32,138 1,296,768 ------------ Petroleum and Coal Products - 0.61% Exxon Mobil Corporation ................ 27,746 1,090,418 ------------ Printing and Publishing - 0.73% New York Times Company (The), Class A .. 30,000 1,297,500 ------------ Rubber and Miscellaneous Plastics Products - 0.98% Sealed Air Corporation* ................ 43,000 1,755,260 ------------ Security and Commodity Brokers - 1.87% Charles Schwab Corporation (The) ....... 93,800 1,451,086 Goldman Sachs Group, Inc. (The) ........ 20,300 1,882,825 ------------ 3,333,911 ------------ Tobacco Products - 0.80% Philip Morris Companies Inc. ........... 31,000 1,421,350 ----------- Transportation by Air - 0.62% Southwest Airlines Co. ................. 60,000 1,108,800 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Transportation Equipment - 1.14% General Motors Corporation ............. 9,025 $ 438,615 Lockheed Martin Corporation ............ 34,300 1,600,781 ------------ 2,039,396 ------------ TOTAL COMMON STOCKS - 47.72% $ 85,126,248 (Cost: $80,814,831) PREFERRED STOCK - 0.43% Cable and Other Pay Television Services Cox Communications, Inc., 7.0%, Convertible 14,000 $ 772,380 ------------ (Cost: $700,000) Principal Amount in Thousands CORPORATE DEBT SECURITIES Apparel and Accessory Stores - 1.14% Gap, Inc. (The), 6.9%, 9-15-07 ......................... $2,500 2,031,128 ------------ Business Services - 0.34% Clear Channel Communications, Inc., Convertible, 2.625%, 4-1-03 ........................ 600 612,000 ------------ Chemicals and Allied Products - 0.15% American Home Products Corporation, 7.9%, 2-15-05 ......................... 250 274,151 ------------ Communication - 0.09% Southwestern Bell Telephone Company, 5.77%, 10-14-03 ....................... 150 155,326 ------------ Electronic and Other Electric Equipment - 0.15% Tyco International Group S.A., 6.375%, 6-15-05........................ 250 257,544 ------------ Food and Kindred Products - 0.30% Coca-Cola Enterprises Inc., 6.7%, 10-15-36 ........................ 500 527,041 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Instruments and Related Products - 1.45% Raytheon Company, 6.5%, 7-15-05 ......................... $2,500 $ 2,582,053 ------------ Nondepository Institutions - 2.84% Ford Motor Credit Company, 6.875%, 2-1-06 ........................ 2,500 2,503,602 Household Finance Corporation, 6.5%, 1-24-06 ......................... 2,500 2,562,370 ------------ 5,065,972 ------------ Transportation by Air - 0.20% Southwest Airlines Co., 7.875%, 9-1-07 ........................ 360 364,684 ------------ TOTAL CORPORATE DEBT SECURITIES - 6.66% $ 11,869,899 (Cost: $12,269,631) UNITED STATES GOVERNMENT SECURITIES Agency Obligations - 4.29% Federal Home Loan Mortgage Corporation, 7.0%, 2-15-03 ......................... 5,000 5,252,965 Federal National Mortgage Association: 6.51%, 5-6-08 ......................... 750 777,988 6.19%, 7-7-08 ......................... 500 514,785 7.25%, 1-15-10 ........................ 1,000 1,103,282 ------------ Total Agency Obligations 7,649,020 ------------ Mortgage-Backed Obligations - 6.71% Federal Home Loan Mortgage Corporation Fixed Rate Participation Certificates, 6.0%, 5-1-16 .......................... 9,321 9,362,839 Federal National Mortgage Association Fixed Rate Pass-Through Certificates, 7.0%, 9-1-25 .......................... 1,456 1,492,912 Government National Mortgage Association Fixed Rate Pass-Through Certificates, 6.5%, 8-15-28 ......................... 1,115 1,121,505 ------------ Total Mortgage-Backed Obligations 11,977,256 ------------ See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES (Continued) Treasury Obligations - 14.95% U.S. Treasury Bond: 7.25%, 8-15-22 ........................ $4,000 $ 4,707,500 6.25%, 8-15-23 ........................ 5,250 5,557,618 6.75%, 8-15-26 ........................ 3,000 3,386,952 U.S. Treasury Note: 6.5%, 3-31-02 ......................... 5,000 5,058,595 6.375%, 8-15-02 ....................... 1,100 1,131,325 7.5%, 2-15-05 ......................... 2,250 2,492,667 6.5%, 8-15-05 ......................... 4,000 4,332,344 ------------ Total Treasury Obligations 26,667,001 ------------ TOTAL UNITED STATES GOVERNMENT SECURITIES - 25.95% $ 46,293,277 (Cost: $45,189,753) SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 3.11% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. 551 551,000 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 5,000 4,997,333 ------------ 5,548,333 ------------ Electric, Gas and Sanitary Services - 2.43% Michigan Consolidated Gas Co., 2.25%, 1-8-02 ......................... 4,341 4,339,101 ----------- Food and Kindred Products - 4.29% General Mills, Inc., 2.0756%, Master Note .................. 7,647 7,647,000 ----------- Paper and Allied Products - 2.80% Kimberly-Clark Corporation, 1.78%, 2-14-02 ........................ 5,000 4,989,122 ----------- Printing and Publishing - 2.80% Gannett Co., 1.78%, 1-10-02 ........................ 5,000 4,997,775 ----------- Total Commercial Paper - 15.43% 27,521,331 See Notes to Schedule of Investments on page 26. THE INVESTMENTS OF THE BALANCED PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES (Continued) Municipal Obligation California - 3.11% California Pollution Control Financing Authority, Environmental Improvement Revenue Bonds, Shell Oil Company Project, Series 1998A (Taxable), 1.84%, 1-2-02 ......................... $5,545 $ 5,545,000 ------------ TOTAL SHORT-TERM SECURITIES - 18.54% $ 33,066,331 (Cost: $33,066,331) TOTAL INVESTMENT SECURITIES - 99.30% $177,128,135 (Cost: $172,040,546) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.70% 1,252,247 NET ASSETS - 100.00% $178,380,382 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES BALANCED PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $177,128 Cash ................................................ 1 Receivables: Dividends and interest ............................. 1,215 Fund shares sold ................................... 189 Prepaid insurance premium ............................ 2 -------- Total assets ..................................... 178,535 -------- LIABILITIES Payable to Fund shareholders ........................ 141 Accrued accounting services fee (Note 2) ............ 4 Accrued management fee (Note 2) ..................... 4 Accrued service fee (Note 2) ........................ 1 Other ............................................... 5 -------- Total liabilities ................................ 155 -------- Total net assets ................................ $178,380 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 27 Additional paid-in capital ......................... 180,598 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions ........................... (7,333) Net unrealized appreciation in value of investments 5,088 -------- Net assets applicable to outstanding units of capital ...................................... $178,380 ======== Net asset value, redemption and offering price per share ........................ $6.7224 ======= Capital shares outstanding ............................ 26,535 Capital shares authorized ............................. 50,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS BALANCED PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $ 4,784 Dividends (net of foreign withholding taxes of $1) . 1,031 -------- Total income ..................................... 5,815 -------- Expenses (Note 2): Investment management fee .......................... 1,185 Service fee ........................................ 422 Accounting services fee ............................ 44 Custodian fees ..................................... 14 Audit fees ......................................... 7 Legal fees ......................................... 3 Other .............................................. 17 -------- Total expenses ................................... 1,692 -------- Net investment income............................ 4,123 -------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments .................... (7,129) Unrealized depreciation in value of investments during the period .................................. (7,291) -------- Net loss on investments ............................ (14,420) -------- Net decrease in net assets resulting from operations ................................. $(10,297) ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS BALANCED PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income ............... $ 4,123 $ 3,766 Realized net gain (loss) on investments (7,129) 6,482 Unrealized depreciation ............. (7,291) (1,103) -------- -------- Net increase (decrease) in net assets resulting from operations ........ (10,297) 9,145 -------- -------- Dividends to shareholders from (Note 1E):* Net investment income ............... (4,123) (3,766) Realized gains on security transactions ...................... (204) (6,482) -------- -------- (4,327) (10,248) -------- -------- Capital share transactions** ......... 35,032 41,842 -------- -------- Total increase ................... 20,408 40,739 NET ASSETS Beginning of period .................. 157,972 117,233 -------- -------- End of period ........................ $178,380 $157,972 ======== ======== Undistributed net investment income . $--- $--- ==== ==== *See "Financial Highlights" on page 30. **Shares issued from sale of shares .... 14,523 6,635 Shares issued from reinvestment of dividend and/or capital gains distribution .... 643 1,399 Shares redeemed ........................ (10,195) (2,503) ------ ----- Increase in outstanding capital shares.. 4,971 5,531 ====== ===== Value issued from sale of shares ....... $101,894 $50,547 Value issued from reinvestment of dividend and/or capital gains distribution .... 4,327 10,248 Value redeemed ......................... (71,189) (18,953) -------- ------- Increase in outstanding capital ........ $ 35,032 $41,842 ======== ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS BALANCED PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $7.3258 $7.3120 $7.1081 6.7686 $6.1967 ------- ------- ------- ------ ------- Income (loss) from investment operations: Net investment income .......... 0.1593 0.1873 0.1760 0.1865 0.1805 Net realized and unrealized gain (loss) on investments .. (0.5955) 0.3361 0.5446 0.4003 0.9650 ------- ------- ------- ------ ------- Total from investment operations ....... (0.4362) 0.5234 0.7206 0.5868 1.1455 ------- ------- ------- ------ ------- Less distributions from: Net investment income .......... (0.1593)(0.1873) (0.1759)(0.1865) (0.1805) Capital gains ..... (0.0079)(0.3223) (0.3408)(0.0608) (0.3931) ------- ------- ------- ------ ------- Total distributions (0.1672)(0.5096) (0.5167)(0.2473) (0.5736) ------- ------- ------- ------ ------- Net asset value, end of period .... $6.7224 $7.3258 $7.3120 $7.1081 $6.7686 ======= ======= ======= ======= ======= Total return........ -5.94% 7.14% 10.14% 8.67% 18.49% Net assets, end of period (in millions) .... $178 $158 $117 $92 $68 Ratio of expenses to average net assets ............ 1.00% 1.01% 0.95% 0.74% 0.67% Ratio of net investment income to average net assets ....... 2.44% 2.81% 2.56% 2.92% 3.06% Portfolio turnover rate ............. 38.82% 42.32% 62.90% 54.62% 55.66% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with James C. Cusser, portfolio manager of W&R Target Funds, Inc. - Bond Portfolio This report relates to the operation of W&R Target Funds, Inc. - Bond Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio performed relatively well during the fiscal year, although it slightly underperformed its benchmark index. The Portfolio increased 7.47 percent for the year, compared with the Salomon Brothers Broad Investment Grade Index (reflecting the performance of securities that generally represent the bond market), which increased 8.52 percent, and the Lipper Variable Annuity Corporate Debt A Rated Funds Universe Average (reflecting the universe of funds with similar investment objectives), which increased 7.65 percent for the year. Why did the Portfolio slightly lag its benchmark index during the fiscal year? Corporate bonds, which represent the greatest share of the Portfolio, did well because corporate prospects generally improve with the economy. Mortgage securities also did well -- mortgages account for about 30 percent of the portfolio -- because market volatility settled down. The benchmark index generally has larger holdings overall in corporate bonds, which likely accounted for its slightly better performance. What other market conditions or events influenced the Portfolio's performance during the fiscal year? Several fundamental investment factors changed in the last few months. The September 11 terrorist attacks marked the most important factor weighing on the Portfolio during the year, and we expect that it will continue to be a significant factor in the fixed income markets for some time to come. The attacks, it seems, acted as a general irritant to the whole of the capitalist culture and thereby, specifically, raised the cost of capital for everyone. A second important factor affecting the fixed income markets, and most specifically corporate bonds, is the deteriorating confidence in financial reporting. So-called "quality of earnings" has always been a factor in capital distribution, but never before in recent times has the quality been so grossly and so deeply mistrusted. From global/cultural events, to accounting transparency, and even to economic theory, the investment game changed in the past several months. Combined, these circumstances will make future markets more challenging, in our opinion. By year-end, the economy appeared as though it was rebounding from its low points of August and September. Longer-term interest rates rose, despite continued Federal Reserve easing, and spread products, including mortgages and corporate bonds, did fairly well, as most all fixed income securities improved against benchmark Treasury bonds. What strategies and techniques did you employ that specifically affected Portfolio performance? The Portfolio remains well balanced and diversified, we believe, which should help mitigate some of the uncertainty in the markets. It also is fairly liquid and nimble in order to take advantage of opportunities as they arise. Presently, we are carrying a somewhat larger-than-normal percentage in cash, for example. Spreads to comparable-maturity Treasuries were the widest in years, as various indicators of volatility were at their highest in October and November. Hence, the Portfolio now has about a 30 percent weighting in government-backed mortgages -- this is about equal to the Lehman Bros. Aggregate Index, but is about 10 percent above the historical weighting in this normally corporate-heavy portfolio. This increase in mortgage weighting also increases the Portfolio's exposure to the highest credit quality sector, the government-backed sector. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We do not see a near-term end to the overall market turmoil. For the time being, we are happy to stay liquid, to keep higher quality in the Portfolio, and to be on the alert to the opportunities that inevitably will come in the challenging markets ahead. We expect to see higher interest rates in the months ahead, but we also anticipate profit in our spread product positions, mortgages and corporate bonds. Respectfully, James C. Cusser Manager Bond Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Bond Portfolio, Salomon Brothers Broad Investment Grade Index and Lipper Variable Annuity Corporate Debt Funds A-Rated Universe Average Lipper Variable Annuity Salomon Corporate Brothers Debt Funds W&R Target Broad A-Rated Bond Investment Universe Portfolio Grade Index Average ---------- ----------- ----------- 12/31/91 Purchase $10,000 $10,000 $10,000 12/31/92 10,767 10,759 10,747 12/31/93 12,097 11,823 11,935 12/31/94 11,383 11,487 11,451 12/31/95 13,727 13,618 13,654 12/31/96 14,193 14,111 14,005 12/31/97 15,580 15,468 15,324 12/31/98 16,725 16,816 16,570 12/31/99 16,485 16,676 16,256 12/31/00 18,106 18,609 17,985 12/31/01 19,460 20,195 19,361 +++++ W&R Target Bond Portfolio* -- $19,460 ..... Salomon Brothers Broad Investment Grade Index -- $20,195 ***** Lipper Variable Annuity Corporate Debt Funds A-Rated Universe Average -- $19,361 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 7.47% 5 Years Ended 12-31-01 6.51% 10 Years Ended 12-31-01 6.91% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Cable and Other Pay Television Services - 0.60% Cox Trust II, 7.0%, 8-16-04 ......................... $ 500 $ 512,344 Jones Intercable, Inc., 9.625%, 3-15-02 ....................... 500 505,639 ------------ 1,017,983 ------------ Chemicals and Allied Products - 1.39% Procter & Gamble Company (The), 8.0%, 9-1-24 .......................... 2,000 2,364,312 ------------ Communication - 2.01% BellSouth Corporation, 5.0%, 10-15-06 ........................ 500 496,300 Deutsche Telekom International Finance B.V., 8.25%, 6-15-30 ........................ 1,000 1,109,876 Pacific Bell, 7.25%, 11-1-27 ........................ 750 753,897 Tele-Communications, Inc., 8.35%, 2-15-05 ........................ 1,000 1,075,069 ------------ 3,435,142 ------------ Depository Institutions - 6.20% AmSouth Bancorporation, 6.75%, 11-1-25 ........................ 2,000 2,057,372 Banco Itau S.A., 10.0%, 8-15-11 (A) .................... 500 525,000 Citigroup Inc., 5.75%, 5-10-06 ........................ 500 512,122 First Union Corporation, 6.824%, 8-1-26 ........................ 1,132 1,199,682 ING Groep N.V., 5.5%, 5-11-05 (B) ..................... EUR1,000 919,020 NationsBank Corporation, 8.57%, 11-15-24 ....................... $1,000 1,181,226 SouthTrust Bank of Alabama, National Association, 7.69%, 5-15-25 ........................ 3,000 3,130,932 Wachovia Corporation, 6.605%, 10-1-25 ....................... 1,000 1,046,836 ------------ 10,572,190 ------------ See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Electric, Gas and Sanitary Services - 5.37% California Infrastructure and Economic Development Bank, Special Purpose Trust PG&E-1, 6.42%, 9-25-08 ........................ $1,000 $ 1,049,036 Cleveland Electric Illuminating Co. (The), 9.5%, 5-15-05 ......................... 678 690,522 Entergy Arkansas, Inc., 7.5%, 8-1-07 .......................... 750 764,547 HQI Transelec Chile S.A., 7.875%, 4-15-11 ....................... 750 758,949 Kansas Gas and Electric Company, 7.6%, 12-15-03 ........................ 1,000 1,020,500 Niagara Mohawk Power Corporation, 7.375%, 7-1-03 ........................ 756 786,508 TXU Eastern Funding Company, 6.45%, 5-15-05 ........................ 1,750 1,770,638 Union Electric Co., 8.25%, 10-15-22 ....................... 1,500 1,578,009 Williams Companies, Inc. (The), 7.125%, 9-1-11 ........................ 750 736,525 ------------ 9,155,234 ------------ Food and Kindred Products - 1.65% Anheuser-Busch Companies, Inc., 7.0%, 9-1-05 .......................... 500 518,414 Coca-Cola Enterprises Inc., 6.7%, 10-15-36 ........................ 400 421,633 ConAgra, Inc., 7.125%, 10-1-26 ....................... 1,750 1,868,729 ------------ 2,808,776 ------------ General Merchandise Stores - 0.47% Fred Meyer, Inc., 7.45%, 3-1-08 ......................... 750 805,506 ------------ Health Services - 0.63% HCA - The Healthcare Company, 8.75%, 9-1-10 ......................... 1,000 1,080,000 ------------ See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Holding and Other Investment Offices - 0.95% GRUMA, S.A. de C.V., 7.625%, 10-15-07 ...................... $ 500 $ 470,000 NBD Bank, National Association, 8.25%, 11-1-24 ........................ 1,000 1,144,789 ------------ 1,614,789 ------------ Hotels and Other Lodging Places - 0.28% Host Marriott, L.P., 8.375%, 2-15-06 ....................... 500 481,250 ------------ Industrial Machinery and Equipment - 0.54% International Business Machines Corporation, 5.375%, 3-31-05 (B) ................... EUR1,000 914,572 ------------ Insurance Carriers - 0.01% Reliance Group Holdings, Inc., 9.0%, 11-15-00 (C) .................... $ 250 10,000 ------------ Nondepository Institutions - 9.39% Asset Securitization Corporation, 7.49%, 4-14-29 ........................ 1,244 1,340,394 Banco Nacional de Comercio Exterior, S.N.C., 7.25%, 2-2-04 ......................... 1,000 1,051,250 CHYPS CBO 1997-1 Ltd., 6.72%, 1-15-10 (A) .................... 1,500 975,000 Chase Manhattan - First Union Commercial Mortgage Trust, 7.439%, 7-15-09 ....................... 1,500 1,617,362 Chevy Chase Savings Bank, F.S.B., 9.25%, 12-1-05 ........................ 500 500,000 Countrywide Home Loans, Inc., 6.5%, 8-25-29 ......................... 2,541 2,568,638 First Union National Bank Commercial Mortgage, 7.841%, 3-15-10 ....................... 2,500 2,750,782 General Motors Acceptance Corporation: 5.5%, 2-2-05 (B) ...................... EUR1,250 1,113,085 6.125%, 9-15-06 ....................... $1,000 989,748 8.875%, 6-1-10 ........................ 500 548,389 See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Nondepository Institutions (Continued) IMC Home Equity Loan Trust, 6.9%, 1-20-22 ......................... $ 670 $ 684,919 Norse CBO, Ltd. and Norse CBO, Inc., 6.515%, 8-13-10 (A) ................... 1,250 1,250,000 Residential Asset Securities Corporation, 8.0%, 10-25-24 ........................ 45 44,957 Westinghouse Electric Corporation, 8.875%, 6-14-14 ....................... 500 584,674 ------------ 16,019,198 ------------ Oil and Gas Extraction - 2.49% Halliburton Company, 6.75%, 2-1-27 ......................... 2,000 1,811,610 Mitchell Energy & Development Corp., 9.25%, 1-15-02 ........................ 27 27,049 Ocean Energy, Inc., 8.375%, 7-1-08 ........................ 1,000 1,045,000 Pemex Project Funding Master Trust: 8.5%, 2-15-08 ......................... 800 834,000 9.125%, 10-13-10 ...................... 500 530,000 ------------ 4,247,659 ------------ Paper and Allied Products - 1.51% Canadian Pacific Forest Products Ltd., 9.25%, 6-15-02 ........................ 1,000 1,019,206 Champion International Corporation, 6.4%, 2-15-26 ......................... 1,500 1,551,050 ------------ 2,570,256 ------------ Printing and Publishing - 1.06% Quebecor Printing Capital Corporation, 6.5%, 8-1-27 .......................... 1,750 1,799,627 ------------ Railroad Transportation - 0.34% CSX Corporation, 6.95%, 5-1-27 ......................... 575 583,404 ------------ See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Security and Commodity Brokers - 0.66% Salomon Inc., 3.65%, 2-14-02 ........................ $ 1,000 $ 1,121,240 ------------ Stone, Clay and Glass Products - 0.72% CEMEX, S.A. de C.V., 8.625%, 7-18-03 (A) ................... 500 527,500 Owens-Illinois, Inc., 7.15%, 5-15-05 ........................ 750 705,000 ------------ 1,232,500 ------------ Transportation Equipment - 0.04% Federal-Mogul Corporation, 0.0%, 7-1-06 (C) ...................... 500 67,500 ------------ United States Postal Service - 0.14% Postal Square Limited Partnership, 6.5%, 6-15-22 ......................... 230 237,175 ------------ TOTAL CORPORATE DEBT SECURITIES - 36.45% $ 62,138,313 (Cost: $61,824,839) OTHER GOVERNMENT SECURITIES Canada - 2.30% Hydro-Quebec, 8.05%, 7-7-24 ......................... 1,000 1,175,051 Province de Quebec: 7.14%, 2-27-26 ........................ 1,500 1,656,696 6.29%, 3-6-26 ......................... 1,000 1,093,378 ------------ 3,925,125 ------------ Supranational - 0.69% Inter-American Development Bank, 8.4%, 9-1-09 .......................... 1,000 1,176,862 ------------ TOTAL OTHER GOVERNMENT SECURITIES - 2.99% $ 5,101,987 (Cost: $4,551,133) See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES Agency Obligations - 8.69% Federal Home Loan Bank, 5.75%, 9-24-08 ........................ $2,000 $ 2,022,688 Federal Home Loan Mortgage Corporation, 4.5%, 3-15-04 (B) ..................... EUR750 676,004 Federal National Mortgage Association: 5.5%, 2-15-06 ......................... $5,500 5,665,077 5.25%, 8-14-06 ........................ 1,500 1,523,850 6.25%, 7-19-11 ........................ 1,000 1,026,035 Federal National Mortgage Association Principal STRIPS, 0.0%, 2-12-18 ......................... 2,500 859,100 Tennessee Valley Authority: 4.875%, 12-15-16 ...................... 2,000 2,002,296 5.88%, 4-1-36 ......................... 1,000 1,039,102 ------------ Total Agency Obligations 14,814,152 ------------ Mortgage-Backed Obligations - 28.81% Federal Home Loan Mortgage Corporation Agency REMIC/CMO: 6.0%, 3-25-14 ......................... 3,500 3,500,035 6.5%, 9-25-18 ......................... 500 518,900 6.25%, 1-15-21 ........................ 4,000 4,145,480 6.5%, 8-25-21 ......................... 500 508,950 6.5%, 11-25-21 ........................ 2,088 2,163,982 6.5%, 1-15-27 ......................... 2,424 2,458,930 6.5%, 7-15-28 ......................... 3,982 4,065,394 7.5%, 3-15-29 ......................... 2,000 2,064,375 7.5%, 9-15-29 ......................... 592 619,219 6.5%, 11-15-29 ........................ 1,665 1,648,191 Federal Home Loan Mortgage Corporation Fixed Rate Participation Certificates: 9.0%, 6-1-27 .......................... 1,489 1,618,523 7.0%, 5-1-31 .......................... 1,916 1,952,627 6.5%, 10-1-31 ......................... 2,223 2,228,356 Federal Home Loan Mortgage Corporation Non-Agency REMIC/CMO, 6.5%, 11-15-29 ........................ 3,082 3,062,799 Federal National Mortgage Association Fixed Rate Pass-Through Certificates: 6.09%, 4-1-09 ......................... 1,943 1,989,029 7.0%, 6-1-24 .......................... 1,684 1,730,497 6.0%, 12-1-28 ......................... 2,155 2,122,354 6.5%, 1-1-30 .......................... 1,310 1,315,969 See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES (Continued) Mortgage-Backed Obligations (Continued) Government National Mortgage Association Fixed Rate Pass-Through Certificates: 8.0%, 11-15-17 ........................ $1,655 $ 1,765,346 7.5%, 7-15-23 ......................... 543 567,409 7.5%, 12-15-23 ........................ 882 922,359 8.0%, 9-15-25 ......................... 534 566,768 7.0%, 7-20-27 ......................... 318 325,061 7.0%, 8-20-27 ......................... 644 658,996 6.5%, 5-15-29 ......................... 1,219 1,226,087 7.5%, 7-15-29 ......................... 1,059 1,098,819 7.75%, 10-15-31 ....................... 310 329,182 United States Department of Veterans Affairs, Guaranteed Remic Pass-Through Certificates, Vendee Mortgage Trust: 2000-1 Class 2-C, 7.25%, 11-15-21 ....................... 500 533,784 2000-2 Class 1-D, 7.5%, 9-15-26 ......................... 2,000 2,132,360 2001-2 Class 1-D, 6.75%, 9-15-19 ........................ 750 789,630 2001-3 Class G, 6.5%, 4-15-27 ......................... 500 498,900 ------------ Total Mortgage-Backed Obligations 49,128,311 ------------ Treasury Obligations - 14.72% U.S. Treasury Bond: 11.25%, 2-15-15 ....................... 3,250 4,974,658 6.0%, 2-15-26 ......................... 2,750 2,834,219 6.125%, 11-15-27 ...................... 5,000 5,259,570 U.S. Treasury Note: 7.5%, 2-15-05 ......................... 1,500 1,661,778 6.5%, 8-15-05 ......................... 2,000 2,166,172 7.0%, 7-15-06 ......................... 2,000 2,215,938 5.625%, 5-15-08 ....................... 2,000 2,096,406 6.5%, 2-15-10 ......................... 1,500 1,647,891 5.0%, 2-15-11 ......................... 2,250 2,243,144 ------------ Total Treasury Obligations 25,099,776 ------------ TOTAL UNITED STATES GOVERNMENT SECURITIES - 52.22% $ 89,042,239 (Cost: $87,162,632) See Notes to Schedule of Investments on page 41. THE INVESTMENTS OF THE BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES Chemicals and Allied Products - 0.82% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. $1,405 $ 1,405,000 ------------ Food and Kindred Products - 6.18% General Mills, Inc., 2.0756%, Master Note .................. 6,035 6,035,000 Nestle Capital Corp., 2.04%, 1-25-02 ........................ 4,500 4,493,880 ------------ 10,528,880 ------------ TOTAL SHORT-TERM SECURITIES - 7.00% $ 11,933,880 (Cost: $11,933,880) TOTAL INVESTMENT SECURITIES - 98.66% $168,216,419 (Cost: $165,472,484) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.34% 2,287,500 NET ASSETS - 100.00% $170,503,919 Notes to Schedule of Investments (A) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2001, the total value of these securities amounted to $3,277,500 or 1.92% of net assets. (B) Principal amounts are denominated in the indicated foreign currency, where applicable (EUR-EURO). (C) Non-income producing as the issuer has either missed its most recent interest payment or declared bankruptcy. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES BOND PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $168,216 Cash ................................................ 22 Receivables: Interest ........................................... 2,234 Fund shares sold ................................... 147 Prepaid insurance premium ........................... 2 -------- Total assets ..................................... 170,621 -------- LIABILITIES Payable to Fund shareholders ........................ 105 Accrued accounting services fee (Note 2) ............. 4 Accrued management fee (Note 2) ..................... 2 Accrued service fee (Note 2) ........................ 1 Other ............................................... 5 -------- Total liabilities ................................ 117 -------- Total net assets ................................ $170,504 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 32 Additional paid-in capital ......................... 170,099 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions ....................... (2,371) Net unrealized appreciation in value of investments ................................... 2,744 -------- Net assets applicable to outstanding units of capital ...................................... $170,504 ======== Net asset value, redemption and offering price per share ........................ $5.3615 ======= Capital shares outstanding ............................ 31,802 Capital shares authorized ............................. 60,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS BOND PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $9,025 ------ Expenses (Note 2): Investment management fee .......................... 750 Service fee ........................................ 357 Accounting services fee ............................ 44 Custodian fees ..................................... 14 Audit fees ......................................... 7 Legal fees ......................................... 4 Other .............................................. 7 ------ Total expenses ................................... 1,183 ------ Net investment income............................ 7,842 ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities ..................... (55) Realized net loss on foreign currency transactions .. (4) ------ Realized net loss on investments ................... (59) Unrealized appreciation in value of investments during the period .................... 1,937 ------ Net gain on investments .......................... 1,878 ------ Net increase in net assets resulting from operations ..................... $9,720 ====== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS BOND PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income ................ $ 7,842 $ 6,701 Realized net loss on investments ..... (59) (463) Unrealized appreciation .............. 1,937 4,234 -------- -------- Net increase in net assets resulting from operations ................... 9,720 10,472 -------- -------- Dividends to shareholders from net investment income (Note 1E):* ........ (7,838) (6,696) -------- -------- Capital share transactions** ........... 51,392 2,918 -------- -------- Total increase .................... 53,274 6,694 NET ASSETS Beginning of period .................... 117,230 110,536 -------- -------- End of period .......................... $170,504 $117,230 ======== ======== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 45. **Shares issued from sale of shares .... 19,079 3,306 Shares issued from reinvestment of dividend 1,462 1,280 Shares redeemed ........................ (11,150) (4,065) ------ ----- Increase in outstanding capital shares . 9,391 521 ====== ===== Value issued from sale of shares ....... $104,584 $17,401 Value issued from reinvestment of dividend 7,838 6,696 Value redeemed ......................... (61,030) (21,179) -------- ------- Increase in outstanding capital ........ $ 51,392 $ 2,918 ======== ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS BOND PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $5.2308 $5.0497 $5.4451 $5.3686 $5.2004 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income .......... 0.2585 0.3172 0.3173 0.3180 0.3400 Net realized and unrealized gain (loss) on investments ..... 0.1306 0.1811 (0.3954) 0.0765 0.1682 ------- ------- ------- ------- ------- Total from investment operations ....... 0.3891 0.4983 (0.0781) 0.3945 0.5082 ------- ------- ------- ------- ------- Less distributions from net investment income (0.2584)(0.3172) (0.3173)(0.3180) (0.3400) ------- ------- ------- ------- ------- Net asset value, end of period .... $5.3615 $5.2308 $5.0497 $5.4451 $5.3686 ======= ======= ======= ======= ======= Total return ....... 7.47% 9.83% -1.44% 7.35% 9.77% Net assets, end of period (in millions) ........ $171 $117 $111 $114 $99 Ratio of expenses to average net assets ............ 0.83% 0.84% 0.81% 0.67% 0.58% Ratio of net investment income to average net assets ....... 5.49% 6.08% 5.73% 5.99% 6.35% Portfolio turnover rate ............. 29.06% 32.68% 47.27% 32.75% 36.81% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with James D. Wineland, portfolio manager of W&R Target Funds, Inc.- Core Equity Portfolio This report relates to the operation of W&R Target Funds, Inc. - Core Equity Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? In a challenging environment with difficult economic circumstances, the Portfolio did not do as well as anticipated during the fiscal year, underperforming its benchmark index. The Portfolio's one-year return declined 14.91 percent, compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which declined 11.91 percent for the year, and the Lipper Variable Annuity Large-Cap Core Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 12.79 percent during the period. Why did the Portfolio underperform its benchmark index during the fiscal year? Primarily, we believe, because we maintained a strong exposure to pharmaceuticals and energy, two sectors that ultimately underperformed for the year. We also maintained a lower exposure to some technology stocks, which happened to outperform during the fourth quarter of 2001. What other market conditions or events influenced the Portfolio's performance during the fiscal year? There were quite a few distractions and elements that impacted the investment environment during the year, and the Portfolio was not immune to these challenges. The economy slipped into recession, corporate earnings sharply declined and the valuation "bubble" in technology and telecommunication stocks continued to deflate. On top of all of this, the terrorist attacks on September 11 were a tremendous negative blow to our nation's confidence. By year-end, however, there were some encouraging economic signs, so we believe that 2002 may bring a stronger investment climate. What strategies and techniques did you employ that specifically affected the Portfolio's performance? We remained fully invested in the market through much of the downturn. We added to our technology holdings in the first half of the year, bringing our positions higher, but maintaining what generally were less than market weightings. Our overweight positions in health care, energy and financial services remained essentially unchanged. We continue to think the earnings outlook for these three sectors is relatively sound and that these stocks are much more reasonably valued than some more-speculative cyclical groups that performed well in late 2001. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? As noted above, energy, health care and financial services are sectors we focused on during the year and anticipate continuing to emphasize as we begin 2002. We believe that valuations and earnings prospects in these sectors are reasonable, given the current environment. We do expect the U.S. and global economies to recover in 2002. However, we also expect market returns to be modest when compared to some of the tremendous growth years we generally have experienced since 1982. Why? Because we feel that the dramatic rise in stock valuations largely has been driven by a huge decline in interest rates and the collapse of inflation. This process, while not likely to quickly reverse, also is not likely to provide huge impetus for further valuation improvement. More simply stated, we do not expect price-to-earning ratios to expand significantly in the years ahead. Stock price appreciation should more appropriately be based on the earnings growth of individual companies, rather than a more universal rise in stock valuations. Going forward, we intend to continue to invest in what we believe are high-quality, large cap companies that are leaders in their respective industries. Respectfully, James D. Wineland Manager Core Equity Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Core Equity Portfolio, S&P 500 Index and Lipper Variable Annuity Large-Cap Core Funds Universe Average Lipper Variable Annuity Large-Cap W&R Target S&P Core Funds Core Equity 500 Universe Portfolio Index Average ---------- ----- ----------- 12/31/91 Purchase $10,000 $10,000 $10,000 12/31/92 11,378 10,763 10,845 12/31/93 13,347 11,847 12,203 12/31/94 13,195 12,003 12,159 12/31/95 17,359 16,514 16,041 12/31/96 20,788 20,306 19,478 12/31/97 26,225 27,066 24,922 12/31/98 31,769 34,834 30,521 12/31/99 35,748 42,172 35,982 12/31/00 39,066 38,299 33,690 12/31/01 33,242 33,739 29,380 - ----- W&R Target Core Equity Portfolio* -- $33,242 +++++ S&P 500 Index -- $33,739 ***** Lipper Variable Annuity Large-Cap Core Funds Universe Average -- $29,380 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -14.91% 5 Years Ended 12-31-01 9.84% 10 Years Ended 12-31-01 12.74% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE CORE EQUITY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Amusement and Recreation Services - 0.92% Walt Disney Company (The) .............. 406,800 $ 8,428,896 ------------ Business Services - 10.04% AOL Time Warner Inc.* .................. 737,350 23,668,935 Clear Channel Communications, Inc.* .... 312,700 15,919,557 eBay Inc.* ............................. 169,000 11,305,255 Microsoft Corporation* ................. 481,300 31,888,532 SAP Aktiengesellschaft, ADR ............ 80,900 2,583,137 Veritas Software Corp.* ................ 138,900 6,227,581 ------------ 91,592,997 ------------ Cable and Other Pay Television Services - 3.60% Cox Communications, Inc., Class A* ..... 555,300 23,272,623 Viacom Inc., Class B* .................. 216,700 9,567,305 ------------ 32,839,928 ------------ Chemicals and Allied Products - 19.50% Air Products and Chemicals, Inc. ....... 215,000 10,085,650 American Home Products Corporation ..... 160,500 9,848,280 Biogen, Inc.* .......................... 164,400 9,429,162 Dow Chemical Company (The) ............. 472,400 15,957,672 du Pont (E.I.) de Nemours and Company .. 305,600 12,991,056 Forest Laboratories, Inc.* ............. 380,900 31,214,755 Johnson & Johnson ...................... 108,700 6,424,170 King Pharmaceuticals, Inc.* ............ 463,233 19,516,006 Merck & Co., Inc. ...................... 143,300 8,426,040 Pfizer Inc. ............................ 608,550 24,250,717 Pharmacia Corporation .................. 307,927 13,133,087 Schering-Plough Corporation ............ 464,200 16,623,002 ------------ 177,899,597 ------------ Communication - 5.50% BellSouth Corporation .................. 228,300 8,709,645 Nextel Communications, Inc.* ........... 799,600 8,759,618 SBC Communications Inc. ................ 436,800 17,109,456 Telefonaktiebolaget LM Ericsson, ADR, Class B ............................... 1,039,800 5,432,955 Vodafone Group Plc, ADR ................ 396,200 10,174,416 ------------ 50,186,090 ------------ See Notes to Schedule of Investments on page 52. THE INVESTMENTS OF THE CORE EQUITY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Depository Institutions - 4.95% Morgan (J.P.) Chase & Co. .............. 443,550 $ 16,123,042 U.S. Bancorp ........................... 683,600 14,307,748 UBS AG, Registered Shares (A) .......... 73,150 3,692,531 Wells Fargo & Company .................. 253,600 11,018,920 ------------ 45,142,241 ------------ Electric, Gas and Sanitary Services - 2.61% El Paso Corporation .................... 534,900 23,861,889 ------------ Electronic and Other Electric Equipment - 6.86% Analog Devices, Inc.* .................. 190,800 8,469,612 General Electric Company ............... 544,400 21,819,552 Intel Corporation ...................... 342,100 10,757,335 Nokia Oyj (A) .......................... 317,400 8,182,633 Texas Instruments Incorporated ......... 298,200 8,349,600 Xilinx, Inc.* .......................... 128,900 5,032,256 ------------ 62,610,988 ------------ Food and Kindred Products - 1.07% Anheuser-Busch Companies, Inc. ......... 215,000 9,720,150 ------------ Furniture and Home Furnishings Stores - 0.50% Best Buy Co., Inc.* .................... 61,200 4,558,176 ------------ General Merchandise Stores - 3.17% Target Corporation ..................... 704,900 28,936,145 ------------ Holding and Other Investment Offices - 0.51% Zurich Financial Services (A) .......... 20,000 4,692,488 ------------ Industrial Machinery and Equipment - 7.90% Baker Hughes Incorporated .............. 657,600 23,982,672 Caterpillar Inc. ....................... 190,400 9,948,400 Cisco Systems, Inc.* ................... 647,000 11,720,405 Deere & Company* ....................... 253,700 11,076,542 Dell Computer Corporation* ............. 290,600 7,894,149 See Notes to Schedule of Investments on page 52. THE INVESTMENTS OF THE CORE EQUITY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Industrial Machinery and Equipment (Continued) EMC Corporation* ....................... 552,900 $ 7,430,976 ------------ 72,053,144 ------------ Instruments and Related Products - 2.44% Guidant Corporation* ................... 319,000 15,886,200 Medtronic, Inc. ........................ 125,200 6,411,492 ------------ 22,297,692 ------------ Insurance Carriers - 5.15% American International Group, Inc. ..... 248,437 19,725,898 Chubb Corporation (The) ................ 252,800 17,443,200 Munchener Ruckversicherungs - Gesellschaft Aktiengesellschaft (A) ................ 36,200 9,831,921 ------------ 47,001,019 ------------ Nondepository Institutions - 2.67% Fannie Mae ............................. 156,500 12,441,750 Freddie Mac ............................ 182,400 11,928,960 ------------ 24,370,710 ------------ Oil and Gas Extraction - 8.75% Anadarko Petroleum Corporation ......... 544,400 30,949,140 Burlington Resources Inc. .............. 532,600 19,993,804 Schlumberger Limited ................... 328,600 18,056,570 Transocean Sedco Forex Inc. ............ 320,271 10,831,565 ------------ 79,831,079 ------------ Petroleum and Coal Products - 3.43% Exxon Mobil Corporation ................ 444,758 17,478,989 Royal Dutch Petroleum Company, NY Shares 281,700 13,808,934 ------------ 31,287,923 ------------ See Notes to Schedule of Investments on page 52. THE INVESTMENTS OF THE CORE EQUITY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Primary Metal Industries - 1.61% Alcoa Incorporated ..................... 412,700 $ 14,671,485 ------------ Security and Commodity Brokers - 3.60% Charles Schwab Corporation (The) ....... 604,700 9,354,709 Goldman Sachs Group, Inc. (The) ........ 253,600 23,521,400 ------------ 32,876,109 ------------ Transportation Equipment - 2.32% Lockheed Martin Corporation ............ 453,900 21,183,513 ------------ TOTAL COMMON STOCKS - 97.10% $886,042,259 (Cost: $756,918,541) PREFERRED STOCK - 0.49% Cable and Other Pay Television Services Cox Communications, Inc., 7.0%, Convertible 81,800 $ 4,512,906 ------------ (Cost: $4,169,190) TOTAL SHORT-TERM SECURITIES - 2.34% $ 21,350,363 (Cost: $21,350,363) TOTAL INVESTMENT SECURITIES - 99.93% $911,905,528 (Cost: $782,438,094) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.07% 606,214 NET ASSETS - 100.00% $912,511,742 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. (A) Listed on an exchange outside of the United States. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES CORE EQUITY PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $911,906 Cash ................................................ 1 Receivables: Dividends and interest ............................. 1,016 Fund shares sold ................................... 629 Prepaid insurance premium ........................... 6 -------- Total assets ..................................... 913,558 -------- LIABILITIES Payable to Fund shareholders ........................ 989 Accrued management fee (Note 2) ..................... 18 Accrued accounting services fee (Note 2) ............ 8 Accrued service fee (Note 2) ........................ 6 Other ............................................... 25 -------- Total liabilities ................................ 1,046 -------- Total net assets ................................ $912,512 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 88 Additional paid-in capital ......................... 860,460 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions .......................... (77,497) Net unrealized appreciation in value of investments ...................................... 129,461 -------- Net assets applicable to outstanding units of capital ...................................... $912,512 ======== Net asset value, redemption and offering price per share ........................ $10.3608 ======== Capital shares outstanding ............................ 88,073 Capital shares authorized ............................. 160,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS CORE EQUITY PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Dividends (net of foreign withholding taxes of $70) .......................................... $ 9,695 Interest and amortization .......................... 1,685 --------- Total income ..................................... 11,380 --------- Expenses (Note 2): Investment management fee .......................... 6,665 Service fee ........................................ 2,386 Accounting services fee ............................ 98 Custodian fees ..................................... 79 Legal fees ......................................... 17 Audit fees ......................................... 10 Other .............................................. 98 --------- Total expenses ................................... 9,353 --------- Net investment income ........................... 2,027 --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities ..................... (76,999) Realized net loss on written call options ........... (474) Realized net loss on foreign currency transactions .. (12) --------- Realized net loss on investments ................... (77,485) Unrealized depreciation in value of investments during the period .................................. (89,874) --------- Net loss on investments .......................... (167,359) --------- Net decrease in net assets resulting from operations ............................... $(165,332) ========= See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS CORE EQUITY PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income ................ $ 2,027 $ 2,890 Realized net gain (loss) on investments (77,485) 147,040 Unrealized depreciation .............. (89,874) (64,309) ---------- ---------- Net increase (decrease) in net assets resulting from operations ......... (165,332) 85,621 ---------- ---------- Dividends to shareholders from (Note 1E):* Net investment income ................ (2,015) (2,756) Realized gains on security transactions ............... (24) (147,174) ---------- ---------- (2,039) (149,930) ---------- ---------- Capital share transactions** ........... (4,068) 207,725 ---------- ---------- Total increase (decrease) .......... (171,439) 143,416 NET ASSETS Beginning of period .................... 1,083,951 940,535 ---------- ---------- End of period .......................... $ 912,512 $1,083,951 ========== ========== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 56. **Shares issued from sale of shares .... 32,587 12,569 Shares issued from reinvestment of dividend and/or capital gains distribution 197 12,286 Shares redeemed ........................ (33,540) (8,593) ------ ------ Increase (decrease) in outstanding capital shares......................... (756) 16,262 ====== ====== Value issued from sale of shares ....... $346,389 $177,335 Value issued from reinvestment of dividend and/or capital gains distribution 2,039 149,930 Value redeemed ......................... (352,496) (119,540) -------- -------- Increase (decrease) in outstanding capital .............................. $ (4,068) $207,725 ======== ======== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS CORE EQUITY PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $12.2027$12.9609 $12.3351$11.9615 $10.1373 -------- ------- --------------- -------- Income (loss) from investment operations: Net investment income .......... 0.0231 0.0376 0.1571 0.1752 0.0916 Net realized and unrealized gain (loss) on investments .. (1.8418) 1.1650 1.3879 2.3532 2.5598 ---------------- --------------- -------- Total from investment operations ....... (1.8187) 1.2026 1.5450 2.5284 2.6514 ---------------- --------------- -------- Less distributions from: Net investment income .......... (0.0229)(0.0360) (0.1570)(0.1752) (0.0915) Capital gains ..... (0.0003)(1.9248) (0.7622)(1.9796) (0.7357) ---------------- --------------- -------- Total distributions. (0.0232)(1.9608) (0.9192)(2.1548) (0.8272) ---------------- ------- ------- -------- Net asset value, end of period .... $10.3608$12.2027 $12.9609$12.3351 $11.9615 ================ =============== ======== Total return........ -14.91% 9.28% 12.52% 21.14% 26.16% Net assets, end of period (in millions) ........ $913 $1,084 $941 $811 $637 Ratio of expenses to average net assets ............ 0.98% 0.98% 0.96% 0.80% 0.72% Ratio of net investment income to average net assets ....... 0.21% 0.28% 1.23% 1.35% 0.80% Portfolio turnover rate ............. 30.50% 49.11% 70.20% 62.84% 36.61% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Philip J. Sanders, portfolio manager of W&R Target Funds, Inc.- Growth Portfolio This report relates to the operation of W&R Target Funds, Inc. - Growth Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio declined during the fiscal year, underperforming its benchmark index in what proved to be a difficult investment environment. Nonetheless, it compared favorably with its peer group of large cap growth funds. The Portfolio declined 14.34 percent over the fiscal year, compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which declined 11.91 percent during the period, and the Lipper Variable Annuity Large-Cap Growth Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 21.73 percent during the period. Why did the Portfolio underperform its benchmark index during the fiscal year? The Portfolio modestly lagged its benchmark during the year due to several key factors. First, we maintained a slightly overweighted position in the technology sector throughout much of the year. We believe that this proved detrimental to performance, as investors adopted a more conservative investment stance in the face of a deteriorating economic and corporate profit outlook. The Portfolio's holdings in the networking and software sectors were particularly notable laggards during the year. Also, our overweighted position in the energy sector (especially in the first quarter of 2001) hampered performance when energy prices declined. As the prospects for the economy dimmed throughout the year, concerns about a cyclical downturn in near-term demand trends overwhelmed a reasonably favorable long-term fundamental outlook for many energy companies exposed to the natural gas industry. Furthermore, the Portfolio's growth orientation clearly played a role in its relative underperformance, as value funds generally held up better during the overall market decline of 2001. We feel that the Portfolio benefited from relatively strong stock selection in the health care and retail sectors, but not enough to offset the previously mentioned factors. What other market conditions or events influenced the Portfolio's performance during the fiscal year? A deteriorating economic environment throughout the year negatively influenced the Portfolio's return. As 2001 progressed, Gross Domestic Product (GDP) growth decelerated and eventually turned negative in the second half of the year, resulting in recession. The already widespread trends of declining corporate profits and increasing corporate layoffs were only exacerbated by the tragic terrorist attacks of September 11. Despite an aggressive interest rate easing cycle implemented by the Federal Reserve, investors appeared to remain focused on the negative economic environment and maintained a cautious stance throughout much of the year. Some evidence of economic stabilization began to emerge late in the year, prompting a fourth quarter rally, thus mitigating some of the earlier losses. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Our investment philosophy is based on the belief that premium long-term valuations are awarded to companies that can generate superior levels of profitability and growth on an ongoing basis. Consequently, we focused on what we feel are high-quality, industry-leading companies possessing sustainable competitive advantages and that are well-positioned to benefit from secular trends embedded in the marketplace. An assessment of the macro-economic environment and individual stock valuation metrics also were considered when evaluating the price to pay for a security. The Portfolio's growth orientation and focus on long-term fundamentals did not prove particularly helpful to performance during the fiscal year, as the market rewarded a more defensive, value-oriented approach in the face of economic weakness. Nevertheless, we remain confident in the long-term merits of our investment philosophy and process and believe the Portfolio is positioned to benefit when the economy recovers. What industries or securities did you emphasize during the fiscal year, and what looks attractive to you going forward? Last year's primary areas of emphasis included health care, technology and, to a lesser extent, energy. This remains the case as we continue to believe that a balanced approach is appropriate. Although there is recent evidence suggesting the economy could be stabilizing, we believe it is too early to abandon high- quality, defensive growth stocks, such as those found in the health care sector. On the other hand, we believe that the market's focus is likely to gradually shift from economic decline to economic recovery as 2002 unfolds. This would tend to favor more economically sensitive companies, such as those found in the technology, capital goods and energy sectors. In the months ahead, we expect continued market volatility as weak near-term corporate earnings reports likely will challenge the conviction of investors who may believe economic recovery is at hand. In addition to timing, the strength of any recovery is by no means certain. Thus, we intend to be opportunistic in our approach as we increase exposure to companies that we feel are more leveraged to economic recovery. As always, we intend to focus on what we believe are quality companies that possess the necessary attributes to generate superior levels of profitability and growth on a sustainable basis. Respectfully, Philip J. Sanders Manager Growth Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Growth Portfolio, S&P 500 Index and Lipper Variable Annuity Large-Cap Growth Funds Universe Average Lipper Variable Annuity Large-Cap W&R Target S&P Growth Funds Growth 500 Universe Portfolio Index Average ---------- ----- ----------- 12/31/91 Purchase $10,000 $10,000 $10,000 12/31/92 12,084 10,763 10,786 12/31/93 13,779 11,847 12,015 12/31/94 14,108 12,003 11,831 12/31/95 19,548 16,514 15,982 12/31/96 21,973 20,306 19,126 12/31/97 26,685 27,066 24,132 12/31/98 33,974 34,834 32,306 12/31/99 45,644 42,172 45,029 12/31/00 46,290 38,299 38,191 12/31/01 39,653 33,739 29,890 - ----- W&R Target Growth Portfolio* -- $39,653 +++++ S&P 500 Index -- $33,739 ***** Lipper Variable Annuity Large-Cap Growth Funds Universe Average -- $29,890 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -14.34% 5 Years Ended 12-31-01 12.53% 10 Years Ended 12-31-01 14.77% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. A substantial portion of the Fund's returns during recent periods is attributable to investments in initial public offerings. No assurance can be given that the Fund will continue to be able to invest in such offerings to the same extent as it has in the past or that future offerings in which the Fund invests will have as equally beneficial impact on performance. THE INVESTMENTS OF THE GROWTH PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Amusement and Recreation Services - 0.80% Walt Disney Company (The) .............. 385,000 $ 7,977,200 ------------ Building Materials and Garden Supplies - 2.36% Home Depot, Inc. (The) ................. 325,000 16,578,250 Lowe's Companies, Inc. ................. 150,000 6,961,500 ------------ 23,539,750 ------------ Business Services - 10.29% AOL Time Warner Inc.* .................. 459,000 14,733,900 BEA Systems, Inc.* ..................... 250,000 3,851,250 Cendant Corporation* ................... 910,000 17,845,100 First Data Corporation ................. 80,000 6,276,000 Micromuse Inc.* ........................ 310,000 4,648,450 Microsoft Corporation* ................. 444,000 29,417,220 Oracle Corporation* .................... 475,000 6,562,125 PeopleSoft, Inc.* ...................... 135,000 5,427,675 SAP Aktiengesellschaft, ADR ............ 165,000 5,268,450 Siebel Systems, Inc.* .................. 180,000 5,038,200 Veritas Software Corp.* ................ 75,000 3,362,625 ------------ 102,430,995 ------------ Cable and Other Pay Television Services - 3.32% Comcast Corporation, Class A Special* .. 335,000 12,061,675 Cox Communications, Inc., Class A* ..... 125,000 5,238,750 Viacom Inc., Class B* .................. 356,542 15,741,329 ------------ 33,041,754 ------------ Chemicals and Allied Products - 19.01% Abbott Laboratories .................... 355,000 19,791,250 Air Products and Chemicals, Inc. ....... 100,000 4,691,000 American Home Products Corporation ..... 385,000 23,623,600 Forest Laboratories, Inc.* ............. 245,000 20,077,750 Johnson & Johnson ...................... 309,400 18,285,540 King Pharmaceuticals, Inc.* ............ 380,000 16,009,400 Merck & Co., Inc. ...................... 225,000 13,230,000 Pfizer Inc. ............................ 1,051,425 41,899,286 Pharmacia Corporation .................. 404,850 17,266,853 Schering-Plough Corporation ............ 130,000 4,655,300 Smith International, Inc.* ............. 180,000 9,651,600 ------------ 189,181,579 ------------ See Notes to Schedule of Investments on page 65. THE INVESTMENTS OF THE GROWTH PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Communication - 2.19% Sprint Corporation - FON Group ........ $550,000 $ 11,044,000 Vodafone Group Plc, ADR ................ 420,000 10,785,600 ------------ 21,829,600 ------------ Depository Institutions - 7.35% Bank of America Corporation ............ 75,000 4,721,250 Bank of New York Company, Inc. (The) ... 245,000 9,996,000 Citigroup Inc. ......................... 460,000 23,220,800 Mellon Financial Corporation ........... 290,000 10,909,800 Morgan (J.P.) Chase & Co. .............. 370,000 13,449,500 Wells Fargo & Company .................. 250,000 10,862,500 ------------ 73,159,850 ------------ Electronic and Other Electric Equipment - 6.28% Altera Corporation* .................... 300,000 6,361,500 Analog Devices, Inc.* .................. 210,000 9,321,900 Intel Corporation ...................... 375,000 11,791,875 Maxim Integrated Products, Inc.* ....... 135,000 7,088,175 Microchip Technology Incorporated* ..... 250,000 9,686,250 Nortel Networks Corporation ............ 835,000 6,262,500 Texas Instruments Incorporated ......... 150,000 4,200,000 Xilinx, Inc.* .......................... 200,000 7,808,000 ------------ 62,520,200 ------------ Engineering and Management Services - 1.91% Accenture Ltd* ......................... 707,500 19,045,900 ------------ Food and Kindred Products - 1.56% Coca-Cola Company (The) ................ 130,000 6,129,500 Kraft Foods Inc. ....................... 275,000 9,358,250 ------------ 15,487,750 ------------ Furniture and Home Furnishings Stores - 0.91% Best Buy Co., Inc.* .................... 105,000 7,820,400 Circuit City Stores, Inc. - Circuit City Group ................................. 49,000 1,271,550 ------------ 9,091,950 ------------ See Notes to Schedule of Investments on page 65. THE INVESTMENTS OF THE GROWTH PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) General Merchandise Stores - 2.86% Kohl's Corporation* .................... 180,000 $ 12,679,200 Target Corporation ..................... 385,000 15,804,250 ------------ 28,483,450 ------------ Health Services - 3.53% Health Management Associates, Inc., Class A* .............................. 935,000 17,204,000 Tenet Healthcare Corporation* .......... 305,000 17,909,600 ------------ 35,113,600 ------------ Industrial Machinery and Equipment - 9.49% Applied Materials, Inc.* ............... 241,000 9,665,305 Baker Hughes Incorporated .............. 255,000 9,299,850 Cisco Systems, Inc.* ................... 1,540,700 27,909,780 Cooper Cameron Corporation* ............ 230,000 9,282,800 Deere & Company* ....................... 180,000 7,858,800 EMC Corporation* ...................... 658,400 8,848,896 Hewlett-Packard Company ................ 310,000 6,367,400 Lexmark International, Inc.* ........... 85,000 5,015,000 SPX CORPORATION* ....................... 75,000 10,267,500 ------------ 94,515,331 ------------ Instruments and Related Products - 3.53% Danaher Corporation .................... 50,000 3,015,500 Guidant Corporation* ................... 261,000 12,997,800 Medtronic, Inc. ........................ 225,000 11,522,250 Northrop Grumman Corporation ........... 75,000 7,560,750 ------------ 35,096,300 ------------ Insurance Agents, Brokers and Service - 1.58% Hartford Financial Services Group Inc. (The) ............................ 250,000 15,707,500 ------------ Insurance Carriers - 1.51% American International Group, Inc. ..... 188,812 14,991,673 ------------ See Notes to Schedule of Investments on page 65. THE INVESTMENTS OF THE GROWTH PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Nondepository Institutions - 4.62% Fannie Mae ............................. 233,600 $ 18,571,200 Freddie Mac ............................ 240,000 15,696,000 Morgan Stanley Dean Witter & Co. ....... 210,000 11,747,400 ------------ 46,014,600 ------------ Oil and Gas Extraction - 3.12% Anadarko Petroleum Corporation ......... 235,000 13,359,750 Burlington Resources Inc. .............. 335,000 12,575,900 Transocean Sedco Forex Inc. ............ 151,811 5,134,248 ------------ 31,069,898 ------------ Petroleum and Coal Products - 1.88% Exxon Mobil Corporation ................ 475,000 18,667,500 ------------ Security and Commodity Brokers - 2.28% Charles Schwab Corporation (The) ....... 330,000 5,105,100 Goldman Sachs Group, Inc. (The) ........ 190,000 17,622,500 ------------ 22,727,600 ------------ Tobacco Products - 2.10% Philip Morris Companies Inc. ........... 455,000 20,861,750 ------------ Transportation Equipment - 1.84% Harley-Davidson, Inc. .................. 190,600 10,351,486 Lockheed Martin Corporation ............ 170,000 7,933,900 ------------ 18,285,386 ------------ Wholesale Trade -- Nondurable Goods - 0.51% AmerisourceBergen Corporation .......... 80,000 5,084,000 ------------ TOTAL COMMON STOCKS - 94.83% $943,925,116 (Cost: $792,583,471) See Notes to Schedule of Investments on page 65. THE INVESTMENTS OF THE GROWTH PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES Chemicals and Allied Products - 3.16% Abbott Laboratories, 1.95%, 1-2-02 ......................... $ 4,750 $ 4,749,742 du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. 3,278 3,278,000 Merck & Co., Inc., 1.75%, 1-18-02 ........................ 8,443 8,436,023 Pfizer Inc., 1.74%, 1-7-02 ......................... 5,000 4,998,550 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 10,000 9,994,667 ------------ 31,456,982 ------------ Food and Kindred Products - 1.02% General Mills, Inc., 2.0756%, Master Note .................. 166 166,000 Nestle Capital Corp., 2.02%, 1-24-02 ........................ 10,000 9,987,095 ------------ 10,153,095 ------------ Printing and Publishing - 1.00% Gannett Co., 1.78%, 1-10-02 ........................ 10,000 9,995,550 ------------ TOTAL SHORT-TERM SECURITIES - 5.18% $ 51,605,627 (Cost: $51,605,627) TOTAL INVESTMENT SECURITIES - 100.01% $995,530,743 (Cost: $844,189,098) LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.01%) (148,916) NET ASSETS - 100.00% $995,381,827 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES GROWTH PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $995,531 Cash ................................................ 1 Receivables: Investment securities sold.......................... 1,383 Fund shares sold ................................... 625 Dividends and interest ............................. 623 Prepaid insurance premium ........................... 8 ---------- Total assets ..................................... 998,171 ---------- LIABILITIES Payable to Fund shareholders ........................ 1,467 Payable for investment securities purchased .......... 1,265 Accrued management fee (Note 2) ..................... 19 Accrued accounting services fee (Note 2) ............ 7 Accrued service fee (Note 2) ........................ 7 Other ............................................... 24 ---------- Total liabilities ................................ 2,789 ---------- Total net assets ................................ $995,382 ========== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 119 Additional paid-in capital ......................... 928,698 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions .......................... (84,777) Net unrealized appreciation in value of investments ............................. 151,342 ---------- Net assets applicable to outstanding units of capital ...................................... $995,382 ========== Net asset value, redemption and offering price per share ........................ $8.3923 ======= Capital shares outstanding ............................ 118,606 Capital shares authorized ............................. 210,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS GROWTH PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Dividends (net of foreign withholding taxes of $2) . $ 8,375 Interest and amortization .......................... 4,965 --------- Total income ..................................... 13,340 --------- Expenses (Note 2): Investment management fee .......................... 7,455 Service fee ........................................ 2,685 Accounting services fee ............................ 105 Custodian fees ..................................... 53 Legal fees ......................................... 19 Audit fees ......................................... 9 Other .............................................. 114 --------- Total expenses ................................... 10,440 --------- Net investment income ........................... 2,900 --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments .................... (78,995) Unrealized depreciation in value of investments during the period .................................. (106,389) --------- Net loss on investments ............................ (185,384) --------- Net decrease in net assets resulting from operations ................................. $(182,484) ========= See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS GROWTH PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income ................ $ 2,900 $ 1,855 Realized net gain (loss) on investments (78,995) 128,585 Unrealized depreciation .............. (106,389) (119,217) --------- --------- Net increase (decrease) in net assets resulting from operations ......... (182,484) 11,223 ---------- --------- Dividends to shareholders from (Note 1E):* Net investment income ................ (2,900) (1,855) Realized gains on security transactions ........................ (5,782) (128,585) ---------- --------- (8,682) (130,440) ---------- --------- Capital share transactions** ........... (69,828) 212,845 ---------- --------- Total increase (decrease) ........... (260,994) 93,628 NET ASSETS Beginning of period .................... 1,256,376 1,162,748 ---------- ---------- End of period .......................... $ 995,382 $1,256,376 ========== ========== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 69. **Shares issued from sale of shares .... 39,502 17,563 Shares issued from reinvestment of dividend and/or capital gains distribution 1,035 13,198 Shares redeemed ........................ (49,054) (10,556) ------ ------ Increase (decrease) in outstanding capital shares ............................... (8,517) 20,205 ====== ====== Value issued from sale of shares ....... $339,919 $206,239 Value issued from reinvestment of dividend and/or capital gains distribution 8,682 130,440 Value redeemed ......................... (418,429) (123,834) -------- -------- Increase (decrease) in outstanding capital .............................. $(69,828) $212,845 ======== ======== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS GROWTH PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $9.8831$10.8751 $ 9.2989 $7.5679 $6.7967 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income .......... 0.0246 0.0163 0.0056 0.0456 0.0574 Net realized and unrealized gain (loss) on investments .. (1.4417) 0.1375 3.1886 2.0215 1.4003 ------- ------- ------- ------- ------- Total from investment operations ....... (1.4171) 0.1538 3.1942 2.0671 1.4577 ------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.0246)(0.0163) (0.0056)(0.0456) (0.0570) Capital gains .... (0.0491)(1.1295) (1.6124)(0.2905) (0.6295) ------- ------- ------- ------- ------- Total distributions. (0.0737)(1.1458) (1.6180)(0.3361) (0.6865) ------- ------- ------- ------- ------- Net asset value, end of period .... $8.3923$ 9.8831 $10.8751 $9.2989 $7.5679 ======= ======= ======= ======= ======= Total return ....... -14.34% 1.41% 34.35% 27.31% 21.45% Net assets, end of period (in millions) ........ $995 $1,256 $1,163 $825 $639 Ratio of expenses to average net assets ............ 0.97% 0.96% 0.96% 0.80% 0.72% Ratio of net investment income to average net assets ....... 0.27% 0.14% 0.06% 0.55% 0.75% Portfolio turnover rate ............. 50.70% 56.52% 65.82% 75.58% 162.41% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with William M. Nelson, portfolio manager of W&R Target Funds, Inc. - - High Income Portfolio This report relates to the operation of W&R Target Funds, Inc. - High Income Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the fiscal year? The Portfolio did well during the period, outperforming its benchmark index. For the fiscal year, the Portfolio increased 9.18 percent, compared with the Salomon Brothers High Yield Market Index (generally reflecting the performance of securities that represent the high yield bond market), which increased 5.44 percent during the period, and the Lipper Variable Annuity High Current Yield Funds Universe Average (reflecting the performance of the universe of funds with similar objectives), which increased 1.12 percent for the fiscal year. What helped the Portfolio outperform its benchmark index during the fiscal year? The Portfolio benefited from the eleven interest rate cuts instigated by the Federal Reserve, and from our defensive positioning. Entering 2001, we adopted a defensive posture in anticipation of a downturn in the economy and a possible recession. The Portfolio held some higher-quality credits, some shorter maturities and was exposed to more defensive sectors, such as cable, than was the benchmark. We continued to under-invest in wire-line telecommunications, which continued its negative slide during the year. At times, the Portfolio held significant positions in cash as we felt that fewer opportunities presented themselves. In the latter part of 2001, we began to look for opportunities that a rebound in the economy would reward investors. What other market conditions or events influenced the Portfolio's performance during the fiscal year? The Portfolio's return was impacted by a number of factors. The numerous rate cuts by the Federal Reserve boosted performance of the higher quality credits, as spreads in general narrowed. Negative factors impacting performance include the approximately 11 percent default rate that the high yield sector overall experienced in 2001. This caused the market in general to require a larger-risk premium, thus dampening the chances of the market to experience spread tightening. In the aftermath of September 11, high yield spreads widened considerably. Opportunities then presented themselves and we invested some of the Portfolio's cash reserves. What strategies and techniques did you employ that specifically affected the Portfolio's performance? We continued to upgrade the quality of the Portfolio by purchasing defensive and higher-quality BB credits. We also continued to hold shorter-duration paper, maintained larger cash positions at times, and held some mortgage-backed paper. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? During the year, the Portfolio held large positions in cable and wireless telecommunications. Going forward, we anticipate continuing to be somewhat defensive in nature. We continue to look for sectors and credits that we believe should benefit from an upturn in the economy. We believe we are near the end of the Federal Reserve rate cuts for the near term. We still believe that default rates for 2002 may be greater than historical averages for the high yield sector, but we likely will look at commodity and "old economy" sectors for opportunities when a sustained recovery becomes more apparent. Respectfully, William M. Nelson Manager High Income Portfolio Comparison of Change in Value of $10,000 Investment W&R Target High Income Portfolio, Salomon Brothers High Yield Market Index and Lipper Variable Annuity High Current Yield Funds Universe Average Lipper Salomon Variable Brothers Annuity High High Current W&R Target Yield Yield Funds High Income Market Universe Portfolio Index Average ----------- ------ ---------- 12/31/91 Purchase $10,000 $10,000 $10,000 12/31/92 11,569 11,785 11,625 12/31/93 13,641 13,833 13,764 12/31/94 13,293 13,661 13,385 12/31/95 15,716 16,354 15,812 12/31/96 17,667 18,199 17,989 12/31/97 20,147 20,600 20,380 12/31/98 20,540 21,343 20,509 12/31/99 21,406 21,713 21,240 12/31/00 19,324 20,480 19,682 12/31/01 21,098 21,594 19,903 +++++ W&R Target High Income Portfolio* -- $21,098 - ----- Salomon Brothers High Yield Market Index -- $21,594 ***** Lipper Variable Annuity High Current Yield Funds Universe Average -- $19,903 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 9.18% 5 Years Ended 12-31-01 3.61% 10 Years Ended 12-31-01 7.72% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. Investing in high income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS, RIGHTS AND WARRANTS Cable and Other Pay Television Services - 0.26% Charter Communications, Inc.* .......... 18,000 $ 295,830 ------------ Chemicals and Allied Products - 0.12% Smith International, Inc.* ............. 2,500 134,050 ------------ Communication - 0.18% GT Group Telecom, Inc., Warrants (A)* .. 300 1,500 IWO Holdings, Inc., Warrants (A)* ...... 1,500 105,000 Leap Wireless International, Inc., Warrants (A)* ......................... 1,250 31,250 ONO Finance Plc, Rights (A)* ........... 250 2,500 Powertel, Inc., Warrants* .............. 2,400 72,681 Primus Telecommunications Group, Incorporated, Warrants* ............... 500 5 ------------ 212,936 ------------ Electric, Gas and Sanitary Services - 0.19% El Paso Corporation .................... 5,000 223,050 ------------ Hotels and Other Lodging Places - 0.35% Ameristar Casinos, Inc.* ............... 16,250 407,144 ------------ Industrial Machinery and Equipment - 0.29% Baker Hughes Incorporated .............. 5,000 182,350 Cooper Cameron Corporation* ............ 3,750 151,350 ------------ 333,700 ------------ Oil and Gas Extraction - 0.26% Schlumberger Limited ................... 2,500 137,375 Transocean Sedco Forex Inc. ............ 5,000 169,100 ------------ 306,475 ------------ TOTAL COMMON STOCKS, RIGHTS AND WARRANTS - 1.65% $ 1,913,185 (Cost: $2,153,680) See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Shares Value PREFERRED STOCKS Cable and Other Pay Television Services - 1.38% Adelphia Communications Corporation, 13.0% 2,500 $ 225,000 CSC Holdings, Inc., 11.125% ............ 8,222 859,199 CSC Holdings, Inc., 11.75% ............. 5,000 527,500 Intermedia Communications Inc., 13.5%* . 1 675 ------------ 1,612,374 ------------ Nondepository Institutions - 0.43% California Federal Preferred Capital Corporation, 9.125% ................... 20,000 499,800 ------------ Textile Mill Products - 0.74% Anvil Holdings, Inc., 13.0%* ........... 63,561 858,071 ------------ TOTAL PREFERRED STOCKS - 2.55% $ 2,970,245 (Cost: $2,808,793) Principal Amount in Thousands CORPORATE DEBT SECURITIES Amusement and Recreation Services - 2.00% Ameristar Casinos, Inc., 10.75%, 2-15-09 ....................... $ 750 810,000 Mandalay Resort Group, 9.375%, 2-15-10 (A) ................... 500 498,125 Premier Parks Inc., 9.75%, 6-15-07 ........................ 1,000 1,015,000 ----------- 2,323,125 ----------- Auto Repair, Services, and Parking - 0.91% Avis Rent A Car, Inc., 11.0%, 5-1-09 ......................... 1,000 1,060,000 ----------- Automotive Dealers and Service Stations - 1.57% Advance Stores Company, Incorporated, 10.25%, 4-15-08 (A) ................... 750 761,250 CSK Auto, Inc., 12.0%, 6-15-06 (A) .................... 750 755,625 Sonic Automotive, Inc., 11.0%, 8-1-08 (A) ..................... 300 310,500 ----------- 1,827,375 ----------- See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Cable and Other Pay Television Services - 12.84% Adelphia Communications Corporation: 9.25%, 10-1-02 ........................ $1,000 $ 1,006,250 10.5%, 7-15-04 ........................ 1,150 1,154,312 9.875%, 3-1-07 ........................ 2,000 1,982,500 9.375%, 11-15-09 ...................... 1,500 1,441,875 CSC Holdings, Inc., 8.125%, 8-15-09 ....................... 250 256,779 Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation: 10.75%, 10-1-09 ....................... 2,500 2,637,500 0.0%, 5-15-11 (B) ..................... 2,000 1,230,000 FrontierVision Holdings, L.P.: 11.0%, 10-15-06 ....................... 1,500 1,546,875 11.875%, 9-15-07 ...................... 2,000 2,097,500 Insight Communications Company, Inc., 0.0%, 2-15-11 (B) ..................... 2,000 1,180,000 Renaissance Media Group LLC, 0.0%, 4-15-08 (B) ..................... 500 400,000 ------------ 14,933,591 ------------ Chemicals and Allied Products - 0.66% OM Group, Inc., 9.25%, 12-15-11 (A) ................... 750 765,000 ----------- Communication - 24.59% ACME Television, LLC, 10.875%, 9-30-04 ...................... 26 24,993 AirGate PCS, Inc., 0.0%, 10-1-09 (B) ..................... 1,000 760,000 Allbritton Communications Company, 9.75%, 11-30-07 ....................... 500 522,500 American Cellular Corporation, 9.5%, 10-15-09 ........................ 750 727,500 EchoStar DBS Corporation, 9.375%, 2-1-09 ........................ 1,000 1,030,000 GT Group Telecom, Inc., 0.0%, 2-1-10 (B) ...................... 300 39,000 Gray Communications Systems, Inc., 9.25%, 12-15-11 (A) ................... 500 495,000 Grupo Iusacell, S.A. de C.V., 14.25%, 12-1-06 ....................... 1,000 1,075,000 Horizon PCS, Inc., 13.75%, 6-15-11 (A) ................... 2,000 1,990,000 See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Communication (Continued) IWO Holdings, Inc., 14.0%, 1-15-11 ........................ $1,500 $ 1,545,000 LIN Holdings Corp., 0.0%, 3-1-08 (B) ...................... 3,275 1,833,250 Leap Wireless International, Inc., 12.5%, 4-15-10 ........................ 1,500 1,140,000 Nextel Communications, Inc.: 0.0%, 9-15-07 (B) ..................... 1,000 765,000 0.0%, 2-15-08 (B) ..................... 1,000 687,500 Nextel Partners, Inc.: 12.5%, 11-15-09 (A) ................... 650 568,750 11.0%, 3-15-10 ........................ 1,000 810,000 ONO Finance Plc, 13.0%, 5-1-09 ......................... 250 189,687 Sinclair Broadcast Group, Inc.: 10.0%, 9-30-05 ........................ 2,000 2,066,660 8.75%, 12-15-11 (A) ................... 1,125 1,125,000 Spanish Broadcasting System, Inc., 9.625%, 11-1-09 ....................... 1,000 990,000 Susquehanna Media Co., 8.5%, 5-15-09 ......................... 1,000 1,021,250 Tritel PCS, Inc.: 0.0%, 5-15-09 (B) ..................... 1,000 850,000 10.375%, 1-15-11 ...................... 500 572,500 Triton PCS, Inc.: 0.0%, 5-1-08 (B) ...................... 2,000 1,810,000 9.375%, 2-1-11 ........................ 750 776,250 8.75%, 11-15-11 (A) ................... 500 500,000 US Unwired Inc., 0.0%, 11-01-09 (B) .................... 2,000 1,410,000 VoiceStream Wireless Corporation, 10.375%, 11-15-09 ..................... 2,033 2,321,625 Young Broadcasting Inc.: 8.5%, 12-15-08 (A) .................... 500 502,500 10.0%, 3-1-11 ......................... 500 465,000 ------------ 28,613,965 ------------ Eating and Drinking Places - 0.68% Domino's, Inc., 10.375%, 1-15-09 ...................... 750 795,000 ------------ See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Electric, Gas and Sanitary Services - 3.95% Allied Waste North America, Inc.: 8.5%, 12-1-08 (A) ..................... $ 1,500 $ 1,515,000 10.0%, 8-1-09 ......................... 2,000 2,060,000 AutoNation, Inc., 9.0%, 8-1-08 (A) ...................... 1,000 1,017,500 ----------- 4,592,500 ----------- Electronic and Other Electric Equipment - 1.78% Alamosa (Delaware), Inc.: 12.5%, 2-1-11 ......................... 1,000 1,020,000 13.625%, 8-15-11 ...................... 1,000 1,050,000 ----------- 2,070,000 ----------- Food and Kindred Products - 4.47% Aurora Foods Inc., 9.875%, 2-15-07 ....................... 1,250 1,200,000 B & G Foods, Inc., 9.625%, 8-1-07 ........................ 1,000 960,000 Cott Corporation, 9.375%, 7-1-05 ........................ 360 367,200 Land O' Lakes, Inc., 8.75%, 11-15-11 (A) ................... 1,250 1,206,250 Pilgrim's Pride Corporation, 9.625%, 9-15-11 ....................... 1,375 1,464,375 ----------- 5,197,825 ----------- Food Stores - 0.02% Big V Supermarkets, Inc., 11.0%, 2-15-04 (C) .................... 500 25,000 ----------- Furniture and Fixtures - 0.93% Sealy Mattress Company, 0.0%, 12-15-07 (B) .................... 1,250 1,081,250 ----------- General Building Contractors - 1.12% Meritage Corporation, 9.75%, 6-1-11 ......................... 1,260 1,299,375 ----------- See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Health Services - 6.72% Alliance Imaging, Inc., 10.375%, 4-15-11 ...................... $ 750 $ 795,000 Columbia/HCA Healthcare Corporation: 7.0%, 7-1-07 .......................... 2,111 2,149,977 7.25%, 5-20-08 ........................ 1,618 1,652,001 Extendicare Health Services, Inc., 9.35%, 12-15-07 ....................... 1,000 940,000 Insight Health Services Corp., 9.875%, 11-1-11 (A) ................... 1,250 1,293,750 United Surgical Partners Holdings, Inc., 10.0%, 12-15-11 (A) ................... 1,000 985,000 ------------ 7,815,728 ------------ Hotels and Other Lodging Places - 1.65% CapStar Hotel Company, 8.75%, 8-15-07 ........................ 500 418,750 Host Marriott, L.P., 9.25%, 10-1-07 ........................ 1,000 996,250 Prime Hospitality Corp., 9.75%, 4-1-07 ......................... 500 503,750 ------------ 1,918,750 ------------ Industrial Machinery and Equipment - 2.04% AAF-McQuay Inc., 8.875%, 2-15-03 ....................... 2,000 1,995,000 American Standard Inc., 9.25%, 12-1-16 ........................ 374 382,651 ------------ 2,377,651 ------------ Metal Mining - 0.67% Compass Minerals Group, Inc., 10.0%, 8-15-11 (A) .................... 750 778,125 ------------ See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Miscellaneous Retail - 3.42% AmeriGas Partners, L.P. and AP Eagle Finance Corp., 8.875%, 5-20-11 ....................... $ 500 $ 515,000 Armkel, LLC, and Armkel Finance, Inc., 9.5%, 8-15-09 (A) ..................... 750 787,500 Jo-Ann Stores, Inc., 10.375%, 5-1-07 ....................... 400 328,000 Michaels Stores, Inc., 9.25%, 7-1-09 ......................... 1,000 1,055,000 Rite Aid Corporation: 7.125%, 1-15-07 ....................... 1,000 805,000 11.25%, 7-1-08 ........................ 500 490,000 ------------ 3,980,500 ------------ Motion Pictures - 0.84% AMC Entertainment Inc., 9.5%, 3-15-09 ......................... 1,000 978,750 ------------ Oil and Gas Extraction - 5.23% Chesapeake Energy Corporation, 7.875%, 3-15-04 ....................... 2,000 2,005,000 Key Energy Services, Inc., 8.375%, 3-1-08 ........................ 750 757,500 Pride Petroleum Services, Inc., 9.375%, 5-1-07 ........................ 500 526,250 SESI, L.L.C., 8.875%, 5-15-11 ....................... 750 705,000 Snyder Oil Corporation, 8.75%, 6-15-07 ........................ 2,000 2,090,000 ------------ 6,083,750 ------------ Paper and Allied Products - 3.19% Buckeye Cellulose Corporation, 8.5%, 12-15-05 ........................ 1,750 1,706,250 Container Corporation of America: 10.75%, 5-1-02 ........................ 80 81,100 9.75%, 4-1-03 ......................... 965 984,300 Corporacion Durango, S.A. de C.V., 13.125%, 8-1-06 ....................... 1,000 940,000 ------------ 3,711,650 ------------ See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Printing and Publishing - 0.66% TransWestern Publishing Company LLC, 9.625%, 11-15-07 ...................... $ 750 $ 768,750 ------------ Railroad Transportation - 1.07% TFM, S.A. de C.V., 0.0%, 6-15-09 (B) ..................... 1,410 1,240,800 ------------ Rubber and Miscellaneous Plastics Products - 0.69% Applied Extrusion Technologies, Inc., 10.75%, 7-1-11 ........................ 750 798,750 ------------ Special Trade Contractors - 1.52% Integrated Electrical Services, Inc., 9.375%, 2-1-09 ........................ 2,000 1,770,000 ------------ Textile Mill Products - 0.67% Norske Skog Canada Limited, 8.625%, 6-15-11 (A) ................... 750 778,125 ------------ Wholesale Trade - Durable Goods - 1.20% WESCO Distribution, Inc., 9.125%, 6-1-08 ........................ 1,500 1,395,000 ------------ Wholesale Trade - Nondurable Goods - 1.48% Bergen Brunswig Corporation, 7.25%, 6-1-05 ......................... 250 251,250 Core-Mark International, Inc., 11.375%, 9-15-03 ...................... 1,000 960,000 DIMON Incorporated, 9.625%, 10-15-11 (A) .................. 500 517,500 ------------ 1,728,750 ------------ TOTAL CORPORATE DEBT SECURITIES - 86.57% $100,709,085 (Cost: $100,848,026) See Notes to Schedule of Investments on page 80. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITY - 2.42% Mortgage-Backed Security Federal Home Loan Mortgage Corporation Fixed Rate Participation Certificates, 6.0%, 5-1-16 .......................... $ 2,796 $ 2,808,852 ------------ (Cost: $2,779,461) SHORT-TERM SECURITIES Railroad Transportation - 1.08% Union Pacific Corporation, 3.0%, 1-10-02 ......................... 1,255 1,254,059 ------------ Wholesale Trade - Nondurable Goods - 3.92% Kroger Co. (The), 2.55%, 1-2-02 ......................... 4,562 4,561,677 ------------ TOTAL SHORT-TERM SECURITIES - 5.00% $ 5,815,736 (Cost $5,815,736) TOTAL INVESTMENT SECURITIES - 98.19% $114,217,103 (Cost: $114,405,696) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.81% 2,109,829 NET ASSETS - 100.00% $116,326,932 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. (A) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2001, the total value of these securities amounted to $17,290,750 or 14.86% of net assets. (B) The security does not bear interest for an initial period of time and subsequently becomes interest bearing. (C) Non-income producing as the issuer has either missed its most recent interest payment or declared bankruptcy. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES HIGH INCOME PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $114,217 Cash ................................................ 16 Receivables: Dividends and interest ............................. 2,135 Fund shares sold ................................... 45 Prepaid insurance premium ........................... 1 -------- Total assets ....................................... 116,414 -------- LIABILITIES Payable to Fund shareholders ........................ 76 Accrued accounting services fee (Note 2) ............ 4 Accrued management fee (Note 2) ..................... 2 Accrued service fee (Note 2) ........................ 1 Other ............................................... 4 -------- Total liabilities .................................. 87 -------- Total net assets ................................. $116,327 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 35 Additional paid-in capital ......................... 148,737 Accumulated undistributed loss: Accumulated undistributed net realized loss on investment transactions ....................... (32,256) Net unrealized depreciation in value of investments ............................. (189) -------- Net assets applicable to outstanding units of capital ...................................... $116,327 ======== Net asset value, redemption and offering price per share ........................ $3.3261 ======= Capital shares outstanding ............................ 34,974 Capital shares authorized ............................. 70,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS HIGH INCOME PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $11,217 Dividends .......................................... 450 ------- Total income ..................................... 11,667 ------- Expenses (Note 2): Investment management fee .......................... 693 Service fee ........................................ 265 Accounting services fee ............................ 44 Custodian fees ..................................... 9 Audit fees ......................................... 7 Legal fees ......................................... 3 Other .............................................. 11 ------- Total expenses ................................... 1,032 ------- Net investment income ........................... 10,635 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments .................... (10,744) Unrealized appreciation in value of investments during the period .................................. 9,495 ------- Net loss on investments ............................ (1,249) ------- Net increase in net assets resulting from operations ................................. $ 9,386 ======= See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS HIGH INCOME PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income ................ $ 10,635 $ 11,105 Realized net loss on investments ..... (10,744) (13,198) Unrealized appreciation (depreciation) 9,495 (8,922) -------- -------- Net increase (decrease) in net assets resulting from operations ......... 9,386 (11,015) -------- -------- Dividends to shareholders from net investment income (Note 1E)* ......... (10,635) (11,105) -------- -------- Capital share transactions** ........... 15,749 3,248 -------- -------- Total increase (decrease) ........... 14,500 (18,872) NET ASSETS Beginning of period .................... 101,827 120,699 -------- -------- End of period .......................... $116,327 $101,827 ======== ======== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 84. **Shares issued from sale of shares .... 15,528 3,983 Shares issued from reinvestment of dividend ............................. 3,197 3,312 Shares redeemed ........................ (14,109) (5,888) ------ ----- Increase in outstanding capital shares . 4,616 1,407 ====== ===== Value issued from sale of shares ....... $55,473 $15,990 Value issued from reinvestment of dividend ............................. 10,635 11,105 Value redeemed ......................... (50,359) (23,847) ------- ------- Increase in outstanding capital ........ $15,749 $ 3,248 ======= ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS HIGH INCOME PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $3.3542 $4.1691 $4.4143 $4.7402 $4.5750 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income .......... 0.3346 0.4107 0.4313 0.4185 0.4098 Net realized and unrealized gain (loss) on investments .. (0.0281)(0.8149) (0.2452)(0.3259) 0.2324 ------- ------- ------- ------- ------- Total from investment operations ....... 0.3065 (0.4042) 0.1861 0.0926 0.6422 ------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.3346)(0.4107) (0.4313)(0.4185) (0.4098) Capital gains ..... (0.0000)(0.0000) (0.0000)(0.0000) (0.0672) ------- ------- ------- ------- ------- Total distributions (0.3346)(0.4107) (0.4313)(0.4185) (0.4770) ------- ------- ------- ------- ------- Net asset value, end of period .... $3.3261 $3.3542 $4.1691 $4.4143 $4.7402 ======= ======= ======= ======= ======= Total return ....... 9.18% -9.73% 4.22% 1.95% 14.04% Net assets, end of period (in millions) ........ $116 $102 $121 $126 $120 Ratio of expenses to average net assets ............ 0.93% 0.96% 0.92% 0.77% 0.70% Ratio of net investment income to average net assets ....... 9.60% 10.02% 9.17% 8.76% 8.79% Portfolio turnover rate ............. 193.71% 118.96% 87.84% 63.64% 65.28% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Thomas A. Mengel, portfolio manager of W&R Target Funds, Inc. - - International Portfolio This report relates to the operation of W&R Target Funds, Inc. - International Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison of the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? In the midst of a global economic slowdown, the Portfolio declined 22.23 percent for the fiscal year, slightly underperforming its benchmark index. The Morgan Stanley Capital International E.A.FE. Index (Europe, Australia, Far East - the index that generally reflects the performance of the international securities markets) declined 21.44 percent, and the Lipper Variable Annuity International Funds Universe Average (reflecting the performance of the universe of funds with similar objectives) also declined 21.44 percent for the year. Why did the Portfolio slightly lag its benchmark index during the fiscal year? The Portfolio underperformed, we believe, because we remained in a defensive investment position for the first three quarters of the year. Our cautious approach initially was a reaction to the rapidly deteriorating global technology sector and the impact it potentially would have on earnings, equity prices, investor sentiment and global economies. Early in 2001 it was apparent that the United States was headed into a recession, and there was serious risk that the global economic slowdown might become a global recession. The Portfolio also was negatively impacted by the generally strong U.S. dollar. Europe's single currency, the euro, was especially weak for most of the fiscal year, which had a negative influence on our performance. In the fourth quarter of 2001, we pared our defensive investment positions and raised our cyclical and growth holdings. This was in response to improved investor confidence and early signs of global economic stabilization late in the quarter, which we believe resulted primarily from an unprecedented pace of monetary ease in the United States. Most major foreign central banks also reduced interest rates throughout 2001. In addition, several countries provided fiscal stimulus, such as tax cuts, to aid their economies. What other market conditions or events influenced the Portfolio's performance during the fiscal year? In 2001, investors were faced with the first major global downturn in more than 25 years. In addition to a business cycle slowdown, we encountered a massive decrease in technology sector capital spending. Despite efforts to cut operating costs, many companies announced serious earnings disappointments. Corporate profitability continues to be hurt by broad deflationary pressure on the prices of many goods, such as consumer electronics and personal computers. Global central banks responded swiftly and appropriately by reducing interest rates and providing liquidity to financial markets. Additional interest rate cuts and fiscal stimulus were added in response to the tragic terrorist attacks of September 11. This external shock immediately created disruptions and distortions in the global economy while introducing additional uncertainty into the global business cycle. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Because the Portfolio primarily holds foreign investments, the strong U.S. dollar had a negative impact on valuation for most of the fiscal year. Although the majority of our high-tech and developing country holdings were pared in 2001, we continued to hold what we felt were fundamentally sound growth companies that were negatively impacted by more than a year of high energy prices (which are now back to reasonable levels). Many of our holdings also were impacted by the global economic slowdown, which favored fixed income investments rather than equity exposure. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Through most of the year we remained in a defense posture, with limited exposure to regions most closely aligned with U.S. economic activity: Asia, Latin America, Japan, Canada and emerging markets in general. Emerging markets also were avoided because of the generally increased credit risk during a global slowdown. In the fourth quarter we observed improved investor confidence and early signs of global economic stabilization. In response to this, we pared our cash and defensive holdings and raised our investments in cyclical and growth shares. We increased sector weightings in banking, insurance, telecommunications and services. We also repositioned European holdings to further highlight France and Britain, where we believe early resumption of economic growth is most likely to occur. We intend to continue to monitor industrial and consumer activity in anticipation of taking advantage of shifts between economic sectors. In addition, we look forward to new investment opportunities across continental Europe, as the successful January introduction of euro notes and coins completes another major step in reducing transaction costs and barriers to business. Our exposure to Japan and emerging markets remains extremely selective, due to what we believe are serious unresolved political and financial risks in these areas. Respectfully, Thomas A. Mengel Manager International Portfolio Comparison of Change in Value of $10,000 Investment W&R Target International Portfolio, Morgan Stanley Capital International E.A.FE. Index and Lipper Variable Annuity International Funds Universe Average Lipper Morgan Variable Stanley Annuity Capital International W&R Target International Funds International E.A.FE. Universe Portfolio Index Average --------- --------- ------------ 05/03/94 Purchase $10,000 $10,000 $10,000 12/31/94 10,026 9,990 9,821 12/31/95 10,756 11,110 11,064 12/31/96 12,381 11,782 12,661 12/31/97 14,448 11,991 13,378 12/31/98 19,345 14,389 15,188 12/31/99 32,031 18,269 21,626 12/31/00 24,454 15,681 18,429 12/31/01 19,017 12,318 14,478 - ----- W&R Target International Portfolio* -- $19,017 +++++ Morgan Stanley Capital International E.A.FE. Index** -- $12,318 ***** Lipper Variable Annuity International Funds Universe Average** -- $14,478 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes were effected as of April 30, 1994. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -22.23% 5 Years Ended 12-31-01 8.96% 7+ Years Ended 12-31-01++ 8.74% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-3-94 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. International investing involves special risks, including policital, economic and currency risks. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Belgium - 3.88% Fortis (A) ............................. 164,100 $ 4,250,981 Interbrew S.A. (A) ..................... 109,000 2,983,728 ------------ 7,234,709 ------------ Canada - 1.30% AT&T Canada Inc., Class B (A)* ......... 80,000 2,419,691 ------------ China - 0.96% China Unicom Limited (A)* .............. 1,622,000 1,788,978 ------------ Finland - 1.12% Nokia Corporation, Series A, ADR ....... 44,700 1,096,491 Nokia Oyj (A) .......................... 38,800 1,000,271 ------------ 2,096,762 ------------ France - 16.19% Accor SA (A) ........................... 40,800 1,482,952 Alcatel, Class A (A) ................... 85,800 1,466,480 Altran Technologies Company (A) ........ 39,700 1,793,553 ASSURANCES GENERALES DE FRANCE (A)* .... 53,300 2,557,429 Aventis S.A. (A) ....................... 45,000 3,194,705 BNP Paribas SA (A) ..................... 21,500 1,923,500 Carrefour SA (A) ....................... 45,800 2,381,036 Infogrames Entertainment S.A. (A)* ..... 110,000 1,331,739 Lafarge S.A. (A) ....................... 23,800 2,222,491 Lagardere SCA (A) ...................... 39,880 1,668,555 Publicis Groupe S.A. (A) ............... 1,210 32,045 Suez (A) ............................... 185,600 5,617,518 TotalFinaElf, S.A. (A) ................. 12,600 1,799,130 Vivendi Universal S.A. (A) ............. 50,000 2,737,365 ------------ 30,208,498 ------------ Germany - 12.14% Allianz AG, Registered Shares (A) ...... 17,800 4,206,996 Deutsche Post AG (A) ................... 94,700 1,306,680 Deutsche Prandbrief- und Hypothekenbank AG (A) ................. 18,725 1,060,982 Infineon Technologies AG (A) ........... 46,400 970,674 Kamps AG (A) ........................... 50,000 401,480 Munchener Ruckversicherungs - Gesellschaft Aktiengesellschaft (A) ................ 20,200 5,486,320 See Notes to Schedule of Investments on page 93. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Germany (Continued) Nordex AG (A)(B)* ...................... 82,000 $ 492,726 Rhoen-Klinikum AG (A) .................. 49,800 2,593,420 Schering AG (A) ........................ 41,600 2,225,642 Siemens AG (A) ......................... 16,000 1,066,104 Techem AG (A)(B)* ...................... 130,000 2,806,356 vi[z]rt (A)(B) ......................... 60,000 30,445 ------------ 22,647,825 ------------ Ireland - 0.61% Bank of Ireland (The) (A) .............. 120,001 1,135,549 ------------ Italy - 8.27% Assicurazioni Generali S.p.A. (A) ...... 123,200 3,421,786 Autostrade - Concessioni e Costruzioni Autostrade S.p.A. (A) ................. 211,000 1,465,091 RAS S.p.A. (A) ......................... 178,000 2,096,368 Saipem S.p.A. (A) ...................... 287,500 1,407,629 Sanpaolo IMI S.p.A. (A) ................ 67,000 718,703 Snam Rete Gas S.p.A. (A)(B)* ........... 761,200 2,012,532 Telecom Italia S.p.A., Ordinary Shares (A)............................. 227,000 1,939,924 UniCredito Italiano SpA (A) ............ 591,100 2,373,149 ------------ 15,435,182 ------------ Japan - 8.49% ACOM CO., LTD. (A) ..................... 14,000 1,020,611 Canon Inc. (A) ......................... 62,000 2,134,504 Kao Corporation (A) .................... 90,000 1,872,137 Kyocera Corporation (A) ................ 24,300 1,585,992 NTT DoCoMo, Inc. (A) ................... 60 705,343 NTT DoCoMo, Inc. (A)(B) ................ 115 1,351,908 Nomura Holdings, Inc. (A) .............. 90,000 1,154,198 Pioneer Corporation (A) ................. 47,000 1,026,107 Promise Co., Ltd. (A) .................. 28,700 1,553,305 Takeda Chemical Industries, Ltd. (A) ... 55,000 2,489,695 THK CO., LTD. (A) ...................... 64,000 934,107 ------------ 15,827,907 ------------ Korea - 0.38% Korea Telecom Corp., ADR ............... 35,000 711,550 ------------ Luxembourg - 0.40% Thiel Logistik AG (A)(B)* .............. 38,200 744,724 ------------ See Notes to Schedule of Investments on page 93. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Mexico - 1.03% Telefonos de Mexico, S.A. de C.V., ADR . 55,100 $ 1,929,602 ------------ Netherlands - 3.02% Equant N.V. (A)* ....................... 99,600 1,193,416 Head N.V. (A) .......................... 132,500 438,780 Ordina N.V. (A) ........................ 87,609 889,081 Unilever N.V.- Certicaaten Van Aandelen (A) .......................... 33,800 1,981,345 Vedior NV - Certicaaten Van Aandelen (A) ...................... 95,000 1,139,144 ------------ 5,641,766 ------------ Portugal - 0.40% Banco Comercial Portugues, S.A. (A)(B) . 183,600 743,655 ------------ Spain - 4.00% Banco Bilbao Vizcaya Argentaria, S.A. (A) 80,600 997,327 Banco Santander Central Hispano, S.A. (A) 112,600 943,226 Endesa S.A. (A) ........................ 138,000 2,158,432 Red Electrica de Espana (A) ............ 119,225 1,109,101 Telefonica, S.A. (A)* .................. 167,746 2,244,392 ------------ 7,452,478 ------------ Sweden - 0.58% Telefonaktiebolaget LM Ericsson, ADR, Class B ............................... 207,000 1,081,575 ------------ Switzerland - 5.23% Converium Holding AG (A)(B)* ........... 14,900 724,312 Lonza Group AG, Registered Shares (A) .. 3,363 2,197,973 Nestle S.A., Registered Shares (A) ..... 8,850 1,887,175 Swiss Reinsurance Company (A)(B) ....... 2,080 209,240 Swiss Reinsurance Company, Registered Shares (A).................. 16,500 1,659,840 Syngenta AG (A)* ....................... 20,000 1,036,082 UBS AG, Registered Shares (A) .......... 40,520 2,045,404 ------------ 9,760,026 ------------ United Kingdom - 19.08% Amdocs Limited* ........................ 80,000 2,717,600 Amey plc (A) ........................... 165,000 891,983 See Notes to Schedule of Investments on page 93. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) United Kingdom (Continued) Barclays PLC (A) ....................... 69,050 $ 2,283,756 Boots Company PLC (The) (A) ............ 197,500 1,678,249 Capita Group plc (The) (A) ............. 306,880 2,187,212 Capita Group Plc (The) (A)(B) .......... 215,610 1,536,707 Compass Group PLC (A) .................. 302,400 2,264,090 Diageo plc (A) ......................... 91,890 1,048,679 Kingfisher plc (A) ..................... 269,417 1,570,631 Lloyds TSB Group plc (A) ............... 359,364 3,897,428 Pearson plc (A) ........................ 127,500 1,466,194 Reckitt Benckiser plc (A) .............. 246,800 3,587,978 Reed International P.L.C. (A) .......... 277,200 2,297,062 Shire Pharmaceuticals Group plc (A)* ... 228,100 2,851,861 St. James's Place Capital plc (A) ...... 465,000 2,379,580 Vodafone Group Plc (A) ................. 1,123,400 2,935,675 ------------ 35,594,685 ------------ United States - 1.54% Pharmacia Corporation .................. 67,200 2,866,080 ------------ TOTAL COMMON STOCKS - 88.62% $165,321,242 (Cost: $177,995,561) PREFERRED STOCK - 0.52% Brazil Petroleo Brasileiro S.A. - Petrobras (A) ......................... 43,600 $ 965,220 ------------ (Cost: $702,912) Principal Amount in Thousands CORPORATE DEBT SECURITY - 0.10% Germany Kamps AG, Convertible, 0.0%, 3-17-15 (C) ..................... EUR407 $ 191,965 ------------ (Cost: $206,642) See Notes to Schedule of Investments on page 93. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Face Amount in Thousands Value UNREALIZED GAIN ON OPEN FORWARD CURRENCY CONTRACTS - 0.00% Japanese Yen, 3-19-02 (C) .............. Y900,000 533,223 Japanese Yen, 3-19-02 (C) .............. Y900,000 (526,287) ------------ $ 6,936 ------------ Principal Amount in Thousands SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 2.73% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. $ 88 88,000 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 5,000 4,997,333 ------------ 5,085,333 ------------ Depository Institutions - 4.02% UBS Finance Delaware LLC, 1.8%, 1-2-02 .......................... 7,500 7,499,625 ------------ Total Commercial Paper - 6.75% 12,584,958 Repurchase Agreement - 3.88% J.P. Morgan Securities Inc., 1.6% Repurchase Agreement dated 12-31-01, to be repurchased at $7,247,644 on 1-2-02** .............................. 7,247 7,247,000 ------------ TOTAL SHORT-TERM SECURITIES - 10.63% $ 19,831,958 (Cost: $19,831,958) TOTAL INVESTMENT SECURITIES - 99.87% $186,317,321 (Cost: $198,737,073) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.13% 233,675 NET ASSETS - 100.00% $186,550,996 See Notes to Schedule of Investments on page 93. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO December 31, 2001 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. **Collateralized by $5,770,000 U.S. Treasury Notes, 8.125% due 5-15-21; market value and accrued interest aggregate $7,421,963. (A) Not listed on an exchange in the United States. (B) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2001, the total value of these securities amounted to $10,652,605 or 5.71% of net assets. (C) Principal amounts are denominated in the indicated foreign currency, where applicable(EUR-EURO, Y - Japanese Yen). See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES INTERNATIONAL PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $186,317 Cash ................................................ 1 Receivables: Dividends and interest ............................. 288 Investment securities sold ......................... 168 Fund shares sold ................................... 83 Prepaid insurance premium ............................ 1 -------- Total assets ..................................... 186,858 -------- LIABILITIES Payable to Fund shareholders ........................ 236 Accrued accounting services fee (Note 2) ............ 4 Accrued management fee (Note 2) ..................... 4 Accrued service fee (Note 2) ........................ 1 Other ............................................... 62 -------- Total liabilities ................................ 307 -------- Total net assets ................................ $186,551 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 32 Additional paid-in capital ......................... 235,648 Accumulated undistributed loss: Accumulated undistributed net realized loss on investment transactions .......................... (36,707) Net unrealized depreciation in value of investments ................................... (12,422) -------- Net assets applicable to outstanding units of capital ...................................... $186,551 ======== Net asset value, redemption and offering price per share ..................................... $5.8536 ======= Capital shares outstanding ............................ 31,869 Capital shares authorized ............................. 70,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS INTERNATIONAL PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Dividends (net of foreign withholding taxes of $233) $ 2,372 Interest and amortization .......................... 1,855 -------- Total income ..................................... 4,227 -------- Expenses (Note 2): Investment management fee .......................... 1,839 Service fee ........................................ 542 Custodian fees ..................................... 228 Accounting services fee ............................ 51 Audit fees ......................................... 9 Legal fees ......................................... 4 Other .............................................. 24 -------- Total expenses ................................... 2,697 -------- Net investment income ........................... 1,530 -------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities ..................... (30,060) Realized net loss on foreign currency transactions .. (252) -------- Realized net loss on investments ................... (30,312) -------- Unrealized depreciation in value of securities during the period .................................. (28,376) Unrealized appreciation in value of foreign currency transactions during the period ............ 7 -------- Unrealized depreciation in value of investments during the period .................... (28,369) -------- Net loss on investments .......................... (58,681) -------- Net decrease in net assets resulting from operations ............................... $(57,151) ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS INTERNATIONAL PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ DECREASE IN NET ASSETS Operations: Net investment income ................ $ 1,530 $ 922 Realized net gain (loss) on investments ......................... (30,312) 35,868 Unrealized depreciation .............. (28,369) (117,075) -------- -------- Net decrease in net assets resulting from operations ................... (57,151) (80,285) -------- -------- Dividends to shareholders from (Note 1E):* Net investment income ................ (1,278) (544) Realized gains on security transactions ............... (6,647) (36,034) -------- -------- (7,925) (36,578) -------- -------- Capital share transactions** ........... (14,802) 83,263 -------- -------- Total decrease .................... (79,878) (33,600) NET ASSETS Beginning of period .................... 266,429 300,029 -------- -------- End of period .......................... $186,551 $266,429 ======== ======== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 97. **Shares issued from sale of shares .... 10,052 6,858 Shares issued from reinvestment of dividend and/or capital gains distribution .... 1,354 4,653 Shares redeemed ........................ (13,430) (2,756) ------ ------ Increase (decrease) in outstanding capital shares ...................... (2,024) 8,755 ====== ====== Value issued from sale of shares ....... $ 66,669 $75,985 Value issued from reinvestment of dividend and/or capital gains distribution .... 7,925 36,578 Value redeemed ......................... (89,396) (29,300) -------- ------- Increase (decrease) in outstanding capital $(14,802) $83,263 ======== ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS INTERNATIONAL PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $ 7.8610$11.9354 $ 7.8176 $6.3842 $5.9990 -------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income .......... 0.0498 0.0298 0.0032 0.0353 0.0485 Net realized and unrealized gain (loss) on investments... (1.7977)(2.8531) 5.1235 2.1283 0.9534 -------- ------- ------- ------- ------- Total from investment operations ....... (1.7479)(2.8233) 5.1267 2.1636 1.0019 -------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.0419)(0.0186) (0.0000)(0.0353) (0.0463) Capital gains ..... (0.2176)(1.2325) (1.0089)(0.6949) (0.5704) -------- ------- ------- ------- ------- Total distributions. (0.2595)(1.2511) (1.0089)(0.7302) (0.6167) -------- ------- ------- ------- ------- Net asset value, end of period .... $5.8536$ 7.8610 $11.9354 $7.8176 $6.3842 ======== ======= ======= ======= ======= Total return........ -22.23% -23.66% 65.58% 33.89% 16.70% Net assets, end of period (in millions) ........ $187 $266 $300 $169 $115 Ratio of expenses to average net assets ............ 1.25% 1.23% 1.21% 1.02% 0.98% Ratio of net investment income to average net assets ....... 0.71% 0.31% 0.04% 0.47% 0.79% Portfolio turnover rate ............. 99.52% 116.84% 118.71% 88.84% 117.37% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with W. Patrick Sterner, portfolio manager of W&R Target Funds, Inc. - Limited-Term Bond Portfolio This report relates to the operation of W&R Target Funds, Inc. - Limited-Term Bond Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio performed well during the fiscal year, slightly outperforming its benchmark index. The Portfolio's one-year return increased 9.21 percent, compared with the Salomon Brothers 1-5 Year Treasury/Government Sponsored/Corporate Index (reflecting the performance of securities that generally represent the short-maturity sector of the bond market), which increased 9.09 percent for the year, and the Lipper Variable Annuity Short- Intermediate Investment Grade Debt Funds Universe Average (reflecting the performance of the universe of funds with similar objectives), which increased 7.55 percent during the year. What helped the Portfolio outperform its benchmark index during the fiscal year? There were several factors that contributed positively to the Portfolio's performance throughout the fiscal year. The most important issue, we believe, was our overweighting in corporate bonds, which was the best-performing sector of the fixed income market during 2001. Exposure to the defense industry, railroads and waste disposal companies within the corporate sector also contributed positively to overall return. What other market conditions or events influenced the Portfolio's performance during the fiscal year? During the fourth quarter, the Portfolio weathered a dramatic sell-off in the bond market. A short duration, along with an overweighting in 15-year mortgage- backed securities, helped returns, in our opinion. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Our management style attempts to identify relative value opportunities between sectors of the market. Those sectors include Treasuries, agencies, corporates and mortgage-backed securities. Based on our determination that intermediate- maturity corporates offered good value, we overweighted the sector to what we feel has been the benefit of the Portfolio. In addition, as interest rates declined during the year, we continued to shorten duration. We believe that this helped to insulate the Portfolio from the dramatic sell-off during the fourth quarter. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We continue to feel that mortgage-backed securities offer the best overall value in the market for the near term. Going forward, we believe that fixed income returns will be affected both by near-term inflation levels and the speed of any forthcoming economic recovery. While we look for interest rates ultimately to move higher, we feel that it likely will not be a dramatic increase, based on our forecast of a gradual recovery and low inflation. In this environment, we feel that shorter duration and an emphasis on mortgage-backed securities and high quality corporate bonds should provide solid returns. Respectfully, W. Patrick Sterner Manager Limited-Term Bond Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Limited-Term Bond Portfolio and Salomon Brothers 1 - 5 Year Treasury/Government Sponsored/Corporate Index and Lipper Variable Annuity Short-Intermediate Investment Grade Debt Funds Universe Average Lipper Variable Salomon Annuity Brothers Short- 1-5 Year Intermediate Treasury/ Investment W&R Target Government Grade Limited-Term Sponsored/ Debt Funds Bond Corporate Universe Portfolio Index Average --------- ----------- ---------- 05/03/94 Purchase $10,000 $10,000 $10,000 12/31/94 10,026 10,105 10,101 12/31/95 11,462 11,404 11,207 12/31/96 11,892 11,938 11,663 12/31/97 12,707 12,791 12,424 12/31/98 13,553 13,769 13,208 12/31/99 13,790 14,065 13,504 12/31/00 14,993 15,328 14,525 12/31/01 16,375 16,722 15,622 +++++ W&R Target Limited-Term Bond Portfolio* -- $16,375 ..... Salomon Brothers 1 - 5 Year Treasury/Government Sponsored/Corporate Index** -- $16,722 ***** Lipper Variable Annuity Short-Intermediate Investment Grade Debt Funds Universe Average** -- $15,622 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes were effected as of April 30, 1994. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 9.21% 5 Years Ended 12-31-01 6.61% 7+ Years Ended 12-31-01++ 6.64% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-3-94 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Chemicals and Allied Products - 3.01% Praxair, Inc., 6.75%, 3-1-03 ......................... $450 $ 467,015 ----------- Communication - 6.46% AT&T Corp., 6.75%, 4-1-04 ......................... 400 415,804 Qwest Corporation, 7.625%, 6-9-03 ........................ 200 204,499 WorldCom, Inc., 7.875%, 5-15-03 ....................... 366 382,640 ----------- 1,002,943 ----------- Depository Institutions - 1.45% Mercantile Bancorporation Inc., 7.625%, 10-15-02 ...................... 217 225,193 ----------- Electric, Gas and Sanitary Services - 12.45% NorAm Energy Corp., 6.375%, 11-1-03 ....................... 300 304,444 Public Service Electric and Gas Company, 7.19%, 9-6-02 ......................... 200 205,960 UtiliCorp United, 6.875%, 10-1-04 ....................... 100 102,775 WMX Technologies, Inc., 7.0%, 5-15-05 ......................... 250 255,651 Western Resources, Inc., 7.25%, 8-15-02 ........................ 200 200,538 Williams Companies, Inc. (The), 6.5%, 11-15-02 ........................ 300 306,692 Wisconsin Energy Corporation, 5.875%, 4-1-06 ........................ 550 557,857 ----------- 1,933,917 ----------- Food and Kindred Products - 1.38% Grand Metropolitan Investment Corp., 7.125%, 9-15-04 ....................... 200 214,975 ----------- General Merchandise Stores - 0.95% Penney (J.C.) Company, Inc., 7.6%, 4-1-07 .......................... 150 146,969 ----------- See Notes to Schedule of Investments on page 105. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Industrial Machinery and Equipment - 2.36% Black & Decker Corp., 7.5%, 4-1-03 .......................... $350 $ 365,957 ----------- Instruments and Related Products - 1.00% Raytheon Company, 6.75%, 8-15-07 ........................ 150 155,332 ----------- Insurance Carriers - 2.33% Aon Corporation, 7.4%, 10-1-02 ......................... 350 361,772 ----------- Lumber and Wood Products - 1.33% Masco Corporation, 6.0%, 5-3-04 .......................... 200 206,584 ----------- Metal Mining - 1.32% BHP Finance (USA) Limited, 7.875%, 12-1-02 ....................... 200 206,553 ----------- Motion Pictures - 1.32% Time Warner Entertainment Company, L.P., 9.625%, 5-1-02 ........................ 200 204,270 ----------- Nondepository Institutions - 8.69% American General Finance Corporation, 6.2%, 3-15-03 ......................... 270 280,866 Aristar, Inc., 5.85%, 1-27-04 ........................ 150 154,432 Ford Motor Credit Company, 6.7%, 7-16-04 ......................... 383 388,379 General Motors Acceptance Corporation, 7.0%, 9-15-02 ......................... 203 208,319 Household Finance Corporation, 7.25%, 7-15-03 ........................ 300 317,731 ----------- 1,349,727 ----------- Oil and Gas Extraction - 3.04% Anadarko Petroleum Corporation, 6.5%, 5-15-05 ......................... 450 471,729 ----------- See Notes to Schedule of Investments on page 105. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Paper and Allied Products - 1.33% International Paper Company, 6.125%, 11-1-03 ....................... $200 $ 206,849 ----------- Petroleum and Coal Products - 2.75% Chevron Corporation Profit Sharing/Savings Plan Trust Fund, 8.11%, 12-1-04 ........................ 60 63,902 Phillips Petroleum Company, 6.65%, 3-1-03 ......................... 350 362,995 ----------- 426,897 ----------- Railroad Transportation - 2.48% Norfolk Southern Corporation, 7.35%, 5-15-07 ........................ 200 214,317 Union Pacific Corporation, 7.875%, 2-15-02 ....................... 170 170,991 ----------- 385,308 ----------- Transportation Equipment - 1.59% Lockheed Martin Corporation, 7.25%, 5-15-06 ........................ 230 246,900 ----------- TOTAL CORPORATE DEBT SECURITIES - 55.24% $ 8,578,890 (Cost: $8,402,720) UNITED STATES GOVERNMENT SECURITIES Agency Obligations - 10.93% Federal Home Loan Bank: 5.125%, 1-13-03 ....................... 350 359,957 4.875%, 5-14-04 ....................... 350 360,053 Federal National Mortgage Association: 5.0%, 2-14-03 ......................... 200 205,726 6.99%, 7-9-07 ......................... 300 307,526 Tennessee Valley Authority, 5.0%, 12-18-03 ........................ 450 464,761 ----------- Total Agency Obligations 1,698,023 ----------- See Notes to Schedule of Investments on page 105. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES (Continued) Mortgage-Backed Obligations - 29.08% Federal Home Loan Mortgage Corporation Agency REMIC/CMO, 6.05%, 9-15-20 ........................ $ 35 $ 35,390 Federal Home Loan Mortgage Corporation Fixed Rate Participation Certificates: 7.0%, 8-1-07 .......................... 109 111,571 5.5%, 2-1-16 .......................... 439 432,294 6.0%, 5-1-16 .......................... 233 234,071 Federal National Mortgage Association Fixed Rate Pass-Through Certificates: 6.5%, 12-1-10 ......................... 32 33,420 6.0%, 1-1-11 .......................... 35 35,581 6.5%, 2-1-11 .......................... 42 42,935 7.0%, 5-1-11 .......................... 27 27,832 7.0%, 7-1-11 .......................... 32 33,224 7.0%, 9-1-12 .......................... 37 38,494 6.0%, 11-1-13 ......................... 165 167,021 7.0%, 9-1-14 .......................... 103 106,821 7.0%, 10-1-14 ......................... 144 149,639 6.0%, 3-1-16 .......................... 884 888,748 6.0%, 6-1-16 .......................... 288 288,429 6.5%, 6-1-16 .......................... 225 229,100 7.0%, 4-1-26 .......................... 41 42,299 Government National Mortgage Association Fixed Rate Pass-Through Certificates: 6.5%, 1-15-14 ......................... 81 83,525 7.5%, 3-15-15 ......................... 137 144,334 6.0%, 8-15-16 ......................... 385 388,576 6.0%, 12-1-16 ......................... 450 454,500 7.0%, 6-15-28 ......................... 381 390,020 7.0%, 7-15-29 ......................... 154 157,752 ----------- Total Mortgage-Backed Obligations 4,515,576 ----------- Treasury Obligations - 2.25% U.S. Treasury Note, 5.0%, 8-15-11 ......................... 350 349,125 ----------- TOTAL UNITED STATES GOVERNMENT SECURITIES - 42.26% $ 6,562,724 (Cost: $6,530,889) See Notes to Schedule of Investments on page 105. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES Chemicals and Allied Products - 2.95% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. $458 $ 458,000 ----------- Food and Kindred Products - 2.35% General Mills, Inc., 2.0756%, Master Note .................. 366 366,000 ------------ TOTAL SHORT-TERM SECURITIES - 5.30% $ 824,000 (Cost: $824,000) TOTAL INVESTMENT SECURITIES - 102.80% $15,965,614 (Cost: $15,757,609) LIABILITIES, NET OF CASH AND OTHER ASSETS - (2.80%) (434,655) NET ASSETS - 100.00% $15,530,959 Notes to Schedule of Investments See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES LIMITED-TERM BOND PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) .............................. $15,966 Cash ................................................ 1 Receivables: Interest receivable................................. 202 Fund shares sold.................................... 20 ------- Total assets ....................................... 16,189 ------- LIABILITIES Payable for investment securities purchased ......... 453 Payable to Fund shareholders ......................... 201 Accrued accounting services fee (Note 2) ............. 1 Other ............................................... 3 ------- Total liabilities .................................. 658 ------- Total net assets ................................. $15,531 ======= NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 3 Additional paid-in capital ......................... 15,331 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions ....................... (11) Net unrealized appreciation in value of investments ................................... 208 ------- Net assets applicable to outstanding units of capital ...................................... $15,531 ======= Net asset value, redemption and offering price per share ........................ $5.4437 ======= Capital shares outstanding ............................ 2,853 Capital shares authorized ............................. 20,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS LIMITED-TERM BOND PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $587 ---- Expenses (Note 2): Investment management fee .......................... 50 Service fee ........................................ 25 Audit fees ......................................... 5 Accounting services fee............................. 4 Custodian fees ..................................... 3 Other .............................................. 1 ---- Total ............................................ 88 Less expenses in excess of voluntary waiver of management fee (Note 2) ............. (50) ---- Total expenses ................................ 38 ---- Net investment income ........................ 549 ---- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 3) Realized net gain on investments .................... 5 Unrealized appreciation in value of investments during the period ...................... 227 ---- Net gain on investments ............................ 232 ---- Net increase in net assets resulting from operations ................................. $781 ==== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS LIMITED-TERM BOND PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income ................ $ 549 $ 373 Realized net gain (loss) on investments 5 (9) Unrealized appreciation .............. 227 137 ------- ------ Net increase in net assets resulting from operations .......... 781 501 ------- ------ Dividends to shareholders from net investment income (Note 1E)* ..... (549) (373) ------- ------ Capital share transactions** ........... 8,823 309 ------- ------ Total increase .................... 9,055 437 NET ASSETS Beginning of period .................... 6,476 6,039 ------- ------ End of period .......................... $15,531 $6,476 ======= ====== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 109. **Shares issued from sale of shares .... 2,367 282 Shares issued from reinvestment of dividend 101 72 Shares redeemed ........................ (868) (299) ----- --- Increase in outstanding capital shares . 1,600 55 ===== === Value issued from sale of shares ....... $13,044 $1,469 Value issued from reinvestment of dividend 549 373 Value redeemed ......................... (4,770) (1,533) ------- ------ Increase in outstanding capital ........ $ 8,823 $ 309 ======= ====== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LIMITED-TERM BOND PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 Net asset value, ------- ------- ------- ------- ------- beginning of period ........... $5.1666 $5.0405 $5.2292 $5.1882 $5.1639 Income (loss) from ------- ------- ------- ------- ------- investment operations: Net investment income 0.1971 0.3155 0.2799 0.2935 0.3086 Net realized and unrealized gain (loss) on investments .. 0.2771 0.1261 (0.1887) 0.0522 0.0451 Total from investment ------- ------- ------- ------- ------- operations ....... 0.4742 0.4416 0.0912 0.3457 0.3537 ------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.1971)(0.3155) (0.2799)(0.2935) (0.3086) Capital gains ..... (0.0000)(0.0000) (0.0000)(0.0112) (0.0208) ------- ------- ------- ------- ------- Total distributions (0.1971)(0.3155) (0.2799)(0.3047) (0.3294) Net asset value, ------- ------- ------- ------- ------- end of period .... $5.4437 $5.1666 $5.0405 $5.2292 $5.1882 ======= ======= ======= ======= ======= Total return ....... 9.21% 8.73% 1.74% 6.66% 6.85% Net assets, end of period (in millions) $16 $6 $6 $5 $4 Ratio of expenses to average net assets including voluntary expense waiver .... 0.38% 0.40% 0.64% 0.79% 0.73% Ratio of net investment income to average net assets including voluntary expense waiver ............ 5.52% 6.33% 5.63% 5.65% 5.93% Ratio of expenses to average net assets excluding voluntary expense waiver ... 0.88% 0.90% 0.91% --- --- Ratio of net investment income to average net assets excluding voluntary expense waiver ... 5.02% 5.83% 5.36% --- --- Portfolio turnover rate ............. 22.43% 47.32% 22.81% 47.11% 35.62% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Mira Stevovich, portfolio manager of W&R Target Funds, Inc. - Money Market Portfolio This report relates to the operation of W&R Target Funds, Inc. - Money Market Portfolio for the fiscal year ended December 31, 2001. The following discussion and tables provide you with information regarding the Portfolio's performance during that period. Please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio's overall yield decreased during the fiscal year, due to an ongoing campaign of interest rate cuts initiated by the Federal Reserve. The Federal Reserve cut the target federal funds rate eleven times during 2001, for a total of 4.75 percent, in an attempt to stimulate the U.S. economy. This rate-cutting environment is obviously not an ideal setting for money market portfolios in general. What market conditions or events influenced the Portfolio's performance during the fiscal year? The weak U.S. economy has resulted in lower credit quality among companies issuing debt securities. We remain vigilant in our review and monitoring of companies in which we invest, and we focus on investing only in companies with the highest credit quality. However, securities issued by the highest quality companies are issued at premium rates of interest (the lowest-yielding securities). Therefore, we believe that our emphasis on the highest credit quality and safest investments has translated into a somewhat lower overall return for the Portfolio. What strategies and techniques did you employ that specifically affected the Portfolio's performance? Our concern with credit quality has been the focus of our management strategy during most of the fiscal year. We have chosen to extend the overall maturity of our holdings with very select securities of the highest quality, based on our strict credit-risk constraints. Following the terrorist attacks on September 11, we assumed a defensive posture and kept new security purchases relatively short. This, we felt, would help to maintain liquidity during an uncertain environment. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We have extended the average maturity of the Portfolio, primarily with U.S. Treasury securities and U.S. Government Agency securities, which are comparable to the highest credit ratings. In light of the current climate, and continued weakness in the U.S. economy, we intend to review security purchases on a case- by-case basis, following closely the developments in all industries and their effects on each company in which we invest. Respectfully, Mira Stevovich Manager Money Market Portfolio THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value BANK OBLIGATIONS Notes Meriter Management Services, Inc. (U.S. Bank Milwaukee, National Association), 2.1%, 1-2-02 .......................... $1,655 $ 1,655,000 Wells Fargo & Company: 1.75%, 1-8-02 ......................... 1,500 1,499,490 1.84%, 1-17-02 ........................ 2,000 1,998,364 ----------- TOTAL BANK OBLIGATIONS - 5.21% $ 5,152,854 ----------- (Cost: $5,152,854) CORPORATE OBLIGATIONS Commercial Paper Chemicals and Allied Products - 17.84% Abbott Laboratories: 1.95%, 1-2-02 ......................... 3,000 2,999,837 1.8%, 1-11-02 ......................... 1,250 1,249,375 BOC Group Inc. (DE): 1.85%, 1-2-02 ......................... 2,845 2,844,854 2.0%, 1-3-02 .......................... 1,500 1,499,833 Merck & Co., Inc., 1.75%, 1-18-02 ........................ 2,307 2,305,094 Pfizer Inc.: 1.74%, 1-7-02 ......................... 1,000 999,710 1.85%, 1-31-02 ........................ 1,750 1,747,302 Pharmacia Corporation, 1.85%, 1-10-02 ........................ 1,000 999,538 Procter & Gamble Company (The): 1.92%, 1-11-02 ........................ 2,000 1,998,933 1.78%, 2-12-02 ........................ 1,000 997,923 ----------- 17,642,399 ----------- Communication - 1.45% SBC Communications Inc., 1.82%, 1-18-02 ........................ 1,432 1,430,769 ----------- Eating and Drinking Places - 1.21% McDonald's Corporation, 1.82%, 1-4-02 ......................... 1,199 1,198,818 ----------- Electric, Gas and Sanitary Services - 9.60% Idaho Power Co.: 1.82%, 1-7-02 ......................... 2,000 1,999,393 1.95%, 1-11-02 ........................ 1,000 999,458 1.85%, 1-17-02 ........................ 1,000 999,178 See Notes to Schedule of Investments on page 117. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE OBLIGATIONS (continued) Commercial Paper (continued) Electric, Gas and Sanitary Services (continued) Questar Corp.: 2.29375%, 1-3-02 ...................... $2,000 $ 2,000,000 1.9%, 1-8-02 .......................... 1,000 999,631 1.85%, 1-11-02 ........................ 1,000 999,486 Tampa Electric Co., 1.82%, 1-8-02 ......................... 1,500 1,499,469 ----------- 9,496,615 ----------- Food and Kindred Products - 8.59% Coca-Cola Company (The), 1.74%, 1-10-02 ........................ 1,000 999,565 Diageo Capital plc, 1.85%, 2-1-02 ......................... 2,750 2,745,619 Nestle Capital Corp.: 1.97%, 1-17-02 ........................ 2,000 1,998,249 2.02%, 1-24-02 ........................ 2,000 1,997,419 2.04%, 1-25-02 ........................ 750 748,980 ----------- 8,489,832 ----------- General Merchandise Stores - 3.23% May Department Stores Co., 1.75%, 1-11-02 ........................ 3,200 3,198,444 ----------- Nondepository Institutions - 4.55% Deere (John) Capital Corp.: 1.81%, 1-9-02 ......................... 1,750 1,749,296 2.51%, 1-22-02 ........................ 1,750 1,750,531 IBM Credit Corp., 1.75%, 1-11-02 ........................ 1,000 999,514 ----------- 4,499,341 ----------- Paper and Allied Products - 3.41% Kimberly-Clark Corporation: 1.8%, 1-31-02 ......................... 1,875 1,872,188 1.78%, 2-14-02 ........................ 1,500 1,496,737 ----------- 3,368,925 ----------- See Notes to Schedule of Investments on page 117. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE OBLIGATIONS (continued) Commercial Paper (continued) Petroleum and Coal Products - 1.26% BP America Inc., 1.72%, 2-7-02 ......................... $1,250 $ 1,247,790 ----------- Printing and Publishing - 2.58% Gannett Co., 1.78%, 1-10-02 ........................ 2,550 2,548,865 ----------- Wholesale Trade -- Nondurable Goods - 1.52% Unilever Capital Corporation: 2.08%, 1-2-02 ......................... 500 499,971 2.01%, 1-17-02 ........................ 1,000 999,107 ----------- 1,499,078 ----------- Total Commercial Paper - 55.24% 54,620,876 Commercial Paper (backed by irrevocable bank letter of credit) - 1.52% Electric, Gas and Sanitary Services AES Hawaii Inc. (Bank of America N.A.), 1.95%, 1-8-02 ......................... 1,500 1,499,350 ----------- Notes Chemicals and Allied Products - 0.51% Lilly (Eli) & Company, 4.7%, 3-22-02 ......................... 500 500,000 ----------- Communication - 1.72% BellSouth Corporation, 4.287%, 4-26-02 ....................... 1,700 1,699,258 ----------- Electric, Gas and Sanitary Services - 1.80% Baltimore Gas & Electric Co., 2.08125%, 3-4-02 ...................... 1,784 1,783,961 ----------- See Notes to Schedule of Investments on page 117. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE OBLIGATIONS (continued) Notes (continued) Nondepository Institutions - 1.01% Caterpillar Financial Services Corp., 2.1175%, 3-5-02 ....................... $1,000 $ 1,000,761 ----------- Total Notes - 5.04% 4,983,980 TOTAL CORPORATE OBLIGATIONS - 61.80% $61,104,206 (Cost: $61,104,206) MUNICIPAL OBLIGATIONS Colorado - 1.83% City and County of Denver, Colorado, Department of Aviation, Airport System, Subordinate Commercial Paper Taxable Notes, Series 2000B (Westdeutsche Landesbank Girozentrale and Bayerische Landesbank Girozentrale), 1.91%, 1-4-02 ......................... 1,805 1,804,713 ----------- Indiana - 1.01% City of Whiting, Indiana, Industrial Sewage and Solid Waste Disposal Revenue Bonds (Amoco Oil Company Project), Taxable Series 1995 (Amoco Corporation), 1.9%, 1-23-02 ......................... 1,000 1,000,000 ----------- Louisiana - 3.03% Industrial Development Board of the Parish of Calcasieu, Inc., Environmental Revenue Bonds (CITGO Petroleum Corporation Project), Series 1996 (Taxable), (Westdeutsche Landesbank Girozentrale), 1.8%, 1-9-02 .......................... 2,050 2,050,000 Industrial District No. 3 of the Parish of West Baton Rouge, State of Louisiana, Variable Rate Demand Revenue Bonds, Series 1995 (Taxable), (The Dow Chemical Company Project), 1.96%, 1-9-02 ......................... 950 950,000 ----------- 3,000,000 ----------- New York - 2.02% The City of New York, General Obligation Bonds, Fiscal 1995 Series B, Taxable Adjustable Rate Bonds (Bayerische Landesbank Girozentrale, New York Branch), 2.57%, 1-9-02 ......................... 2,000 2,000,000 ----------- See Notes to Schedule of Investments on page 117. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value MUNICIPAL OBLIGATIONS (continued) Ohio - 2.02% State of Ohio, Taxable Solid Waste Revenue Bonds, Series 2000, Taxable (BP Exploration & Oil Inc. Project - BP Amoco P.L.C. Guarantor), 1.96%, 1-9-02 ......................... $2,000 $ 2,000,000 ----------- Rhode Island - 0.37% Rhode Island Industrial Facilities Corporation, Variable Rate Demand, Taxable Industrial Development Revenue Bonds, 2001 Series B (Gardner Specialty Metals, LLC and B.A. Ballou & Co. Incorporated Project), (Fleet National Bank), 2.25%, 1-2-02 ......................... 360 360,000 ----------- Texas - 2.02% Brazos River Harbor Navigation District of Brazoria County, Texas, Taxable Variable Rate Demand Revenue Bonds, Series 2001A (The Dow Chemical Company Project), 1.96%, 1-9-02 ......................... 2,000 2,000,000 ----------- Washington - 4.12% Washington State Housing Finance Commission, Taxable Variable Rate Demand Multifamily Revenue Bonds (Brittany Park Project), Series 1996B (U.S. Bank of Washington, National Association), 1.95%, 1-2-02 ......................... 2,290 2,290,000 Watts Brothers Frozen Foods, L.L.C., Variable Rate Demand Taxable Revenue Bonds, 1997 (U.S. Bank of Washington, National Association), 2.35%, 1-3-02 ......................... 1,285 1,285,000 Wenatchee Valley Clinic, P.S., Floating Rate Taxable Bonds, Series 1998 (U.S. Bank, National Association), 2.35%, 1-3-02 ......................... 500 500,000 ----------- 4,075,000 ----------- TOTAL MUNICIPAL OBLIGATIONS - 16.42% $16,239,713 (Cost: $16,239,713) See Notes to Schedule of Investments on page 117. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO December 31, 2001 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES Federal Home Loan Mortgage Corporation: 5.05%, 1-3-02 ......................... $ 600 $ 599,832 4.875%, 1-22-02 ....................... 1,000 999,736 6.4%, 3-13-02 ......................... 750 752,982 3.46%, 10-3-02 ........................ 2,500 2,500,000 Federal National Mortgage Association, 1.54%, 1-2-02 ......................... 1,000 1,000,000 United States Treasury Bill: 1.75%, 5-30-02 ........................ 1,800 1,786,963 1.8%, 6-6-02 .......................... 2,000 1,984,400 1.86%, 6-6-02 ......................... 2,500 2,479,904 United States Treasury Note, 6.625%, 5-31-02 ....................... 3,000 3,059,498 ----------- TOTAL UNITED STATES GOVERNMENT SECURITIES - 15.34% $15,163,315 (Cost: $15,163,315) TOTAL INVESTMENT SECURITIES - 98.77% $97,660,088 (Cost: $97,660,088) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.23% 1,216,572 NET ASSETS - 100.00% $98,876,660 Notes to Schedule of Investments See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES MONEY MARKET PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $97,660 Cash ................................................ 1 Receivables: Fund shares sold ................................... 1,325 Interest ........................................... 200 Prepaid insurance premium ........................... 8 ------- Total assets ..................................... 99,194 ------- LIABILITIES Payable to Fund shareholders ........................ 308 Accrued accounting services fee (Note 2) ............ 3 Accrued management fee (Note 2) ..................... 1 Accrued service fee (Note 2) ........................ 1 Other ............................................... 4 ------- Total liabilities ................................ 317 ------- Total net assets ................................ $98,877 ======= NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 99 Additional paid-in capital ......................... 98,778 ------- Net assets applicable to outstanding units of capital ...................................... $98,877 ======= Net asset value, redemption and offering price per share ........................ $1.0000 ======= Capital shares outstanding ............................ 98,877 Capital shares authorized ............................. 150,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS MONEY MARKET PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Interest and amortization (Note 1B) ................. $3,187 ------ Expenses (Note 2): Investment management fee .......................... 316 Service fee ........................................ 198 Accounting services fee ............................ 34 Custodian fees ..................................... 13 Audit fees ......................................... 4 Legal fees ......................................... 1 Other .............................................. 11 ------ Total expenses ................................... 577 ------ Net investment income............................ 2,610 ------ Net increase in net assets resulting from operations ................................... $2,610 ====== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS MONEY MARKET PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income ................ $ 2,610 $ 3,137 ------- ------- Net increase in net assets resulting from operations ........... 2,610 3,137 ------- ------- Dividends to shareholders from net investment income (Note 1E)* ..... (2,610) (3,137) ------- ------- Capital share transactions** ........... 47,175 (12,700) ------- ------- Total increase (decrease) ......... 47,175 (12,700) NET ASSETS Beginning of period .................... 51,702 64,402 ------- ------- End of period .......................... $98,877 $51,702 ======= ======= Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 121. **Shares issued from sale of shares .... 174,935 283,377 Shares issued from reinvestment of dividends 2,610 3,137 Shares redeemed ........................ (130,370) (299,214) ------- ------- Increase (decrease) in outstanding capital shares ....................... 47,175 (12,700) ======= ======= Value issued from sale of shares ....... $174,935 $283,377 Value issued from reinvestment of dividends 2,610 3,137 Value redeemed ......................... (130,370) (299,214) -------- -------- Increase (decrease) in outstanding capital .............................. $ 47,175 $(12,700) ======== ======== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 ------- ------- ------- ------- ------- Net investment income ........... 0.0356 0.0571 0.0450 0.0492 0.0503 Less dividends declared ......... (0.0356)(0.0571) (0.0450)(0.0492) (0.0503) ------- ------- ------- ------- ------- Net asset value, end of period .... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 ======= ======= ======= ======= ======= Total return ....... 3.62% 5.87% 4.62% 5.04% 5.13% Net assets, end of period (in millions) ........ $99 $52 $64 $54 $43 Ratio of expenses to average net assets ............ 0.73% 0.75% 0.77% 0.68% 0.58% Ratio of net investment income to average net assets ....... 3.31% 5.67% 4.51% 4.90% 5.04% See Notes to Financial Statements. MANAGER'S DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Zachary H. Shafran, portfolio manager of W&R Target Funds, Inc. - Science and Technology Portfolio This report relates to the operation of W&R Target Funds, Inc. - Science and Technology Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform over the last fiscal year? The Portfolio did relatively well, as it outperformed its benchmark index during the fiscal year. Even so, given the very challenging environment for the technology sector, it had a negative return for the year. The Portfolio declined 11.91 percent for the fiscal year, compared with the Goldman Sachs Technology Industry Composite Index (reflecting the performance of securities that generally represent the technology sector of the stock market), which declined 28.57 percent for the year, and the Lipper Variable Annuity Specialty/Miscellaneous Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 19.92 percent for the year. What helped the Portfolio outperform its benchmark index during the fiscal year? The Portfolio outperformed primarily, we believe, due to our defensive and diversified approach during the year. The maintenance of a higher-than-normal cash reserve as part of that approach also was beneficial. What other market conditions or events influenced the Portfolio's return during the fiscal year? There were numerous conditions, events, and factors that influenced the Portfolio's return. The global economy remained soft throughout the year, yet that softness was cushioned by strong domestic consumer confidence. Capital expenditures, especially those for technology, continued to slow, with future budgets remaining under pressure as the decade-long capital spending boom continued to unwind. One outcome of this situation was that many upstarts in telecommunications, the dot.com sector and elsewhere continued to lose ground. The terrorist attacks in September certainly were the shocking and surprising events of the year, and they changed the world. The attacks highlighted just how vulnerable the world community can be. They also exposed just how weak the global economy had become, and caused many incremental and unusual disruptions. Many governments, corporations, organizations and individuals were forced to, and are still in the process of, assessing the impact of terrorism and how to respond accordingly over time. What strategies and techniques did you employ that specifically affected the Portfolio's performance? We believe that four major decisions have had a dominant effect on the Portfolio's performance during the last year. First, cash reserves were above average. Second, the Portfolio was well diversified. Third, close attention was given to the valuation of each company. And fourth, science, specifically health care, was emphasized as an alternative to technology. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Over the last year, the following sectors received the most emphasis: pharmaceuticals, biotechnology, health care services, technology, defense/defense electronics and energy. Going forward, we anticipate that emphasis likely will continue on these same sectors, with the exception of health care services, where we think the pricing environment may become marginally less favorable. Overall, we intend to remain flexible as we study our opportunities in the short term, with a continued close focus on stock selection. Respectfully, Zachary H. Shafran Manager Science and Technology Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Science and Technology Portfolio, Goldman Sachs Technology Industry Composite Index and Lipper Variable Annuity Specialty/Miscellaneous Funds Universe Average Lipper Variable Goldman Annuity Sachs Specialty/ W&R Target Technology Miscellaneous Science and Industry Funds Technology Composite Universe Portfolio Index Average --------- --------- ------- 4/4/97 Purchase $10,000 $10,000 $10,000 12/31/97 11,623 12,760 12,429 12/31/98 16,976 21,580 15,900 12/31/99 46,626 40,757 23,083 12/31/00 36,766 25,336 21,607 12/31/01 32,386 18,098 17,302 ===== W&R Target Science and Technology Portfolio* -- $32,386 ***** Goldman Sachs Technology Industry Composite Index** -- $18,098 ..... Lipper Variable Annuity Specialty/Miscellaneous Funds Universe Average** - - - $17,302 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes (including income) was effected as of March 31, 1997. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -11.91% 4+ Years Ended 12-31-01++ 28.10% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++4-4-97 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. Investing in companies involved in one specified sector may invovle a greater degree of risk than an investment with greater diversification. THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Business Services - 8.41% AOL Time Warner Inc.* .................. 124,100 $ 3,983,610 BAM! Entertainment, Inc.* .............. 36,000 298,980 E.piphany, Inc.* ....................... 112,900 987,875 Eclipsys Corporation* .................. 117,200 1,962,514 Edwards (J. D.) & Company* ............. 185,300 3,056,524 Getty Images, Inc.* .................... 72,500 1,672,212 Inktomi Corporation* ................... 146,400 975,024 Iona Technologies plc, ADR* ............ 31,700 642,559 Micromuse Inc.* ........................ 150,100 2,250,749 Microsoft Corporation* ................. 18,900 1,252,220 NetIQ Corporation (A)* ................. 56,500 1,991,908 Veritas Software Corp. (A)* ............ 76,100 3,411,943 ------------ 22,486,118 ------------ Cable and Other Pay Television Services - 4.08% Adelphia Communications Corporation, Class A* .............................. 193,200 6,024,942 Cox Communications, Inc., Class A* ..... 116,900 4,899,279 ------------ 10,924,221 ------------ Chemicals and Allied Products - 22.45% American Home Products Corporation ..... 74,400 4,565,184 Biogen, Inc.* .......................... 131,200 7,524,976 Bristol-Myers Squibb Company ........... 114,500 5,839,500 Cubist Pharmaceuticals, Inc.* .......... 46,300 1,659,161 Forest Laboratories, Inc. (A)* ......... 100,200 8,211,390 ICOS Corporation (A)* .................. 73,900 4,247,402 IVAX Corporation* ...................... 192,600 3,878,964 Johnson & Johnson ...................... 84,200 4,976,220 Merck & Co., Inc. ...................... 40,000 2,352,000 Noven Pharmaceuticals, Inc.* ........... 136,400 2,424,510 Pfizer Inc. ............................ 118,700 4,730,195 Pharmacyclics, Inc.* ................... 70,000 695,450 QLT Inc.* .............................. 76,700 1,949,714 SICOR Inc.* ............................ 79,200 1,248,192 Transkaryotic Therapies, Inc.* ......... 134,500 5,749,202 ------------ 60,052,060 ------------ Communication - 7.13% Research In Motion Limited (A)* ........ 277,100 6,574,198 Sprint Corporation - FON Group ......... 371,900 7,467,752 See Notes to Schedule of Investments on page 129. THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Communication (Continued) Telefonaktiebolaget LM Ericsson, ADR, Class B ............................... $320,200 $ 1,673,045 Vodafone Group Plc, ADR ................................... 131,000 3,364,080 ------------ 19,079,075 ------------ Depository Institutions - 4.05% Concord EFS, Inc. (A)* ................. 240,000 7,868,400 Euronet Worldwide, Inc.* ............... 162,550 2,952,721 ------------ 10,821,121 ------------ Educational Services - 1.91% Edison Schools Inc.* ................... 260,900 5,120,162 ------------ Electronic and Other Electric Equipment - 4.72% Agere Systems Inc.* .................... 569,400 3,239,886 Harmonic Inc.* ......................... 40,300 484,608 LSI Logic Corporation* ................. 100,100 1,579,578 Lattice Semiconductor Corporation* ..... 88,200 1,813,833 Micron Technology, Inc. (A)* ........... 66,900 2,073,900 QUALCOMM Incorporated* ................. 33,300 1,680,817 Samsung Electronics Co., Ltd. (B) ...... 6,300 1,338,180 Sony Corporation, ADR .................. 9,000 405,900 ------------ 12,616,702 ------------ Engineering and Management Services - 1.41% Incyte Pharmaceuticals, Inc.* .......... 60,000 1,166,100 Paychex, Inc. .......................... 75,000 2,613,375 ------------ 3,779,475 ------------ Health Services - 2.31% AMN Healthcare Services, Inc.* ......... 40,800 1,117,920 Fisher & Paykel Industries Limited* .... 15,295 431,090 Health Management Associates, Inc., Class A* .............................. 92,900 1,709,360 Tenet Healthcare Corporation* .......... 49,700 2,918,384 ----------- 6,176,754 ----------- See Notes to Schedule of Investments on page 129. THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Industrial Machinery and Equipment - 7.30% Baker Hughes Incorporated .............. 67,400 $ 2,458,078 Cisco Systems, Inc.* ................... 175,700 3,182,806 Cooper Cameron Corporation* ............ 18,000 726,480 EMC Corporation* ....................... 94,600 1,271,424 Hewlett-Packard Company ................ 98,300 2,019,082 Pall Corporation ....................... 113,300 2,725,998 RSA Security Inc.* ..................... 143,600 2,498,640 Symbol Technologies, Inc. .............. 293,100 4,654,428 ----------- 19,536,936 ----------- Instruments and Related Products - 5.11% Garmin Ltd.* ........................... 45,600 $ 968,544 Guidant Corporation* ................... 198,700 9,895,260 Northrop Grumman Corporation ........... 27,700 2,792,437 ------------ 13,656,241 ------------ Insurance Carriers - 1.74% Anthem, Inc.* .......................... 94,100 4,657,950 ----------- Oil and Gas Extraction - 5.14% Apache Corporation ..................... 118,250 5,898,310 Burlington Resources Inc. .............. 60,215 2,260,471 Noble Affiliates, Inc. ................. 85,200 3,006,708 Unocal Corporation ..................... 71,600 2,582,612 ----------- 13,748,101 ----------- Petroleum and Coal Products - 0.61% Phillips Petroleum Company ............. 26,900 1,620,994 ----------- Primary Metal Industries - 0.30% Lone Star Technologies, Inc.* .......... 45,500 800,800 ----------- TOTAL COMMON STOCKS - 76.67% $205,076,710 (Cost: $199,480,430) See Notes to Schedule of Investments on page 129. THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 Number of Contracts Value OPTIONS - 0.41% Research In Motion Limited, March 20, Purchased Put Options, Expires 3-16-02 .......... 2,771 $ 537,574 Schering-Plough Corporation, May 35, Purchased Call Options, Expires 5-18-02 ......... 1,676 569,840 ----------- $ 1,107,414 ----------- (Cost: $1,306,842) Principal Amount in Thousands SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 11.96% Abbott Laboratories, 1.86%, 1-23-02 ........................ $10,000 9,988,633 BOC Group Inc. (DE), 1.8%, 1-2-02 .......................... 12,000 11,999,400 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 10,000 9,994,667 ------------ 31,982,700 ------------ Electric, Gas and Sanitary Services - 1.12% Idaho Power Co., 1.95%, 1-11-02 ........................ 3,000 2,998,375 ------------ Food and Kindred Products - 2.46% General Mills, Inc., 2.0756%, Master Note .................. 1,595 1,595,000 Nestle Capital Corp., 2.02%, 1-24-02 ........................ 5,000 4,993,547 ------------ 6,588,547 ------------ Paper and Allied Products - 1.87% Kimberly-Clark Corporation, 1.8%, 1-31-02 ......................... 5,000 4,992,500 ------------ Printing and Publishing - 1.87% Gannett Co., 1.78%, 1-10-02 ........................ 5,000 4,997,775 ------------ Total Commercial Paper - 19.28% 51,559,897 See Notes to Schedule of Investments on page 129. THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 Principal Amount in Thousands Value Municipal Obligation - 3.51% California California Pollution Control Financing Authority, Environmental Improvement Revenue Bonds, Shell Oil Company Project, Series 1998A (Taxable), 1.84%, 1-2-02 ......................... $9,382 $ 9,382,000 ------------- TOTAL SHORT-TERM SECURITIES - 22.79% $ 60,941,897 (Cost: $60,941,897) TOTAL INVESTMENT SECURITIES - 99.87% $267,126,021 (Cost: $261,729,169) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.13% 337,322 NET ASSETS - 100.00% $267,463,343 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. (A) As of December 31, 2001, all or a portion of these securities were used as cover for the following written call options (See Note 5 to financial statements): Contracts Underlying Subject Expiration Month/Premium Market Security to Call Exercise Price Received Price - ------------------------------------------------------------------------- Concord EFS, Inc. 845 March/30 $ 250,957$ 346,450 Forest Laboratories, Inc. 984 January/75 264,204 720,288 ICOS Corporation 285 January/65 59,013 14,250 Micron Technology, Inc. 669 January/22.5 103,695 572,664 NetIQ Corporation 565 January/30 105,651 333,350 Research In Motion Limited474 March/22.5 163,530 186,282 Research In Motion Limited2,297 March/25 671,683 647,754 Veritas Software Corp. 761 January/35 104,253 761,000 -------------------- $1,722,986$3,582,038 ==================== (B) Listed on an exchange outside of the United States. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES SCIENCE AND TECHNOLOGY PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $267,126 Cash ................................................ 1,001 Receivables: Investment securities sold.......................... 3,249 Fund shares sold ................................... 299 Dividends and interest ............................. 35 Prepaid insurance premium ............................ 2 -------- Total assets ..................................... 271,712 -------- LIABILITIES Outstanding call options at market (Note 5) ......... 3,582 Payable for investment securities purchased ......... 375 Payable to Fund shareholders ........................ 271 Accrued management fee (Note 2) ..................... 6 Accrued accounting services fee (Note 2) ............ 5 Accrued service fee (Note 2) ........................ 2 Other ............................................... 8 -------- Total liabilities ................................ 4,249 -------- Total net assets ................................ $267,463 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 21 Additional paid-in capital ......................... 301,476 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions .......................... (37,572) Net unrealized appreciation in value of securities ....................................... 5,596 Net unrealized depreciation in value of written call options ..................................... (1,859) Net unrealized depreciation in value of purchased call options ..................................... (38) Net unrealized depreciation in value of purchased put options ...................................... (161) -------- Net assets applicable to outstanding units of capital ...................................... $267,463 ======== Net asset value, redemption and offering price per share ........................ $12.4927 ======== Capital shares outstanding ............................ 21,410 Capital shares authorized ............................. 50,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS SCIENCE AND TECHNOLOGY PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $ 3,421 Dividends (net of foreign withholding taxes of $7). 829 -------- Total income ..................................... 4,250 -------- Expenses (Note 2): Investment management fee .......................... 2,227 Service fee ........................................ 660 Accounting services fee ............................ 55 Custodian fees ..................................... 25 Audit fees ......................................... 7 Legal fees ......................................... 5 Other .............................................. 27 -------- Total expenses ................................... 3,006 -------- Net investment income ........................... 1,244 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities ...................... (38,486) Realized net gain on written call options ........... 476 Realized net gain on purchased put options ........... 522 Realized net gain on foreign currency transactions .. 10 -------- Realized net loss on investments ................... (37,478) -------- Unrealized appreciation in value of securities during the period ....................... 1,841 Unrealized depreciation in value of written call options during the period........................... (1,859) Unrealized depreciation in value of purchased call options during the period........................... (38) Unrealized depreciation in value of purchased put options during the period........................... (161) -------- Unrealized depreciation in value of investments during the period ................................. (217) -------- Net loss on investments .......................... (37,695) -------- Net decrease in net assets resulting from operations ..................... $(36,451) ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS SCIENCE AND TECHNOLOGY PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income ................ $ 1,244 $ 1,920 Realized net gain (loss) on investments (37,478) 55,083 Unrealized depreciation .............. (217) (132,295) -------- -------- Net decrease in net assets resulting from operations ......... (36,451) (75,292) -------- -------- Dividends to shareholders from (Note 1E):* Net investment income ................ (1,254) (1,920) Realized gains on security transactions ............... (84) (55,084) -------- -------- (1,338) (57,004) -------- -------- Capital share transactions** ........... 9,896 174,968 -------- -------- Total increase (decrease) ......... (27,893) 42,672 NET ASSETS Beginning of period .................... 295,356 252,684 -------- -------- End of period .......................... $267,463 $295,356 ======== ======== Undistributed net investment income .. $--- $--- ==== ==== *See "Financial Highlights" on page 133. **Shares issued from sale of shares .... 9,581 7,789 Shares issued from reinvestment of dividend and/or capital gains distribution .... 107 3,999 Shares redeemed ........................ (8,999) (2,343) ----- ----- Increase in outstanding capital shares . 689 9,445 ===== ===== Value issued from sale of shares ....... $117,460 $166,054 Value issued from reinvestment of dividend and/or capital gains distribution .... 1,338 57,004 Value redeemed ......................... (108,902) (48,090) -------- -------- Increase in outstanding capital ........ $ 9,896 $174,968 ======== ======== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SCIENCE AND TECHNOLOGY PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal For the year ended December 31, period -------------------------------- ended 2001 2000 1999 1998 12/31/97* ------- ------- ------- ------- ---------- Net asset value, beginning of period $14.2542 $22.4087$ 8.2750 $5.7726 $5.0000 -------- -------- ------- ------- ------- Income (loss) from investment operations: Net investment income (loss) ... 0.0584 0.1151 (0.0309) 0.0032 0.0146 Net realized and unrealized gain (loss) on investments .. (1.7571) (4.8532)14.4840 2.6551 0.7971 -------- -------- ------- ------- ------- Total from investment operations ....... (1.6987) (4.7381)14.4531 2.6583 0.8117 -------- -------- ------- ------- ------- Less distributions from: Net investment income .......... (0.0589) (0.1151)(0.0000) (0.0032)(0.0146) Capital gains ..... (0.0039) (3.3013)(0.3194) (0.1527)(0.0245) -------- -------- ------- ------- ------- Total distributions (0.0628) (3.4164)(0.3194) (0.1559)(0.0391) -------- -------- ------- ------- ------- Net asset value, end of period .... $12.4927 $14.2542$22.4087 $8.2750 $5.7726 ======== ======== ======= ======= ======= Total return........ -11.91% -21.15% 174.66% 46.05% 16.24% Net assets, end of period (in millions) ........ $267 $295 $253 $35 $10 Ratio of expenses to average net assets ............ 1.15% 1.14% 1.10% 0.92% 0.94% Ratio of net investment income (loss) to average net assets ....... 0.47% 0.64% -0.38% 0.07% 0.64% Portfolio turnover rate ............. 93.19% 93.76% 47.36% 64.72% 15.63% *The Science and Technology Portfolio's inception date is March 13, 1997; however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial offering, the per share information is for a capital share outstanding for the period from April 4, 1997 (initial offering) through December 31, 1997. Ratios have been annualized. See Notes to Financial Statements. MANAGERS' DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Mark G. Seferovich and Grant P. Sarris, portfolio managers of W&R Target Funds, Inc. - Small Cap Portfolio This report relates to the operation of W&R Target Funds, Inc. - Small Cap Portfolio for the fiscal year ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Please note that we have added the Portfolio's Lipper Universe Average to this year's annual report as an additional means of comparison to the Portfolio's performance. In addition, please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform during the last fiscal year? The Portfolio performed fairly well, as it significantly outperformed its benchmark index for the year. Even so, given the difficult economy and challenging environment for stocks overall, it had a slightly negative return for the year. The Portfolio declined 1.93 percent for the fiscal year, compared with the Russell 2000 Growth Index (reflecting the performance of securities that generally represent the small companies sector of the stock market), which declined 9.22 percent for the year, and the Lipper Variable Annuity Small-Cap Growth Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 12.95 percent for the year. What helped the Portfolio outperform its benchmark index during the fiscal year? Several factors contributed to the Portfolio's performance during the fiscal year. Our healthy cash position allowed the Portfolio to weather many of the downturns suffered in the equity markets during the first and third quarters, while we believe our sector and stock selection contributed to stronger performance in the second and fourth quarters, when the equity markets did well. Slight underweightings in technology and health care, combined with slight overweightings in consumer staples and transportation, also seemed to help performance. We also believe that an underweighting in the financial services sector detracted from our performance, as that sector generally performed well. What other market conditions or events influenced the Portfolio's performance during the fiscal year? Certainly 2001 will be remembered for many reasons. The equity market continued its decline in the first quarter, while the second quarter offered some improvement, with many analysts expecting an economic recovery later in the year. Obviously, the tragic events in September delayed any economic recovery, while sending the equity market into temporary shock. The quick rebound in the fourth quarter was apparently primarily driven by the feeling that the economy had bottomed, and thus would improve, bolstered by a continuation of interest rate cuts by the Federal Reserve. Additionally, the initial success the U.S. was having in the war on terrorism seemed to help lift consumer confidence. What strategies and techniques did you employ that specifically affected the Portfolio's performance? The conviction to stay with many stocks that were steady performers, such as O'Reilly Automotive, ITT Educational Services and American Italian Pasta Company, contributed nicely to overall Portfolio performance, as money shifted out of some technology names into more of the steady-growth companies. In the third quarter we increased holdings in some companies in the technology sector on the belief that they were oversold, and this we feel also ultimately helped our performance for the year. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We remained underweighted in technology in 2001, and enter 2002 with an underweighted position, on the belief that the valuations do not look attractive at this time. We feel that the energy sector may provide some investment opportunity, given the prolonged period of under-investment. The dramatic rise of the market in the fourth quarter of 2001 has limited some of the new investment opportunities, in our opinion, due to current valuation and expected economic growth. However, there likely will be opportunities and sectors that should generate strong returns in 2002, and we will seek to capitalize on those opportunities, but will be valuation sensitive in our pursuit of these investments. We also intend to look for companies that have lowered their cost structures and that may have the opportunity for revenue growth. We believe revenue growth will be difficult to achieve in 2002; as such, it will be one of the top evaluation criteria. Respectfully, Mark G. Seferovich Grant P. Sarris Managers Small Cap Portfolio Comparison of Change in Value of $10,000 Investment W&R Target Small Cap Portfolio, Russell 2000 Growth Index and Lipper Variable Annuity Small-Cap Growth Funds Universe Average Lipper Variable Annuity Small-Cap W&R Target Russell 2000 Growth Funds Small Cap Growth Universe Portfolio Index Average ---------- ------------ --------- 05/03/94 Purchase $10,000 $10,000 $10,000 12/31/94 12,091 10,137 10,902 12/31/95 15,999 13,274 14,165 12/31/96 17,360 14,756 16,654 12/31/97 22,834 16,663 18,948 12/31/98 25,315 16,869 19,638 12/31/99 38,537 24,136 31,920 12/31/00 33,779 18,738 28,977 12/31/01 33,126 17,011 25,224 ----- W&R Target Small Cap Portfolio* -- $33,126 ..... Russell 2000 Growth Index** -- $17,011 ***** Lipper Variable Annuity Small-Cap Growth Funds Universe Average** -- $25,224 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the above indexes (including income) are not available, investment in the indexes was effected as of April 30, 1994. Average Annual Total Return+ ---------------------------- Year Ended 12-31-01 -1.93% 5 Years Ended 12-31-01 13.80% 7+ Years Ended 12-31-01++ 16.91% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-3-94 (the initial offering date) through 12-31-01. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. Investing in small cap stocks may carry more risk than investing in stocks of larager, more well-established companies. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Automotive Dealers and Service Stations - 2.04% O'Reilly Automotive, Inc.* ............. 200,000 $ 7,321,000 ------------ Business Services - 21.54% Acxiom Corporation* .................... 505,000 8,814,775 Catalina Marketing Corporation* ........ 175,700 6,096,790 Cerner Corporation* .................... 105,400 5,262,095 CheckFree Corporation* ................. 185,000 3,331,850 Citrix Systems, Inc.* .................. 166,500 3,773,723 Dendrite International, Inc.* .......... 451,200 6,328,080 Digital Insight Corporation* ........... 430,600 9,682,041 FactSet Research Systems, Inc. ......... 163,000 5,696,850 Getty Images, Inc.* .................... 348,700 8,042,765 MemberWorks Incorporated* .............. 189,600 2,649,660 OTG Software, Inc.* .................... 288,200 2,845,975 ProBusiness Services, Inc.* ............ 106,900 2,006,513 Sanchez Computer Associates, Inc.* ..... 286,700 2,464,187 Take-Two Interactive Software, Inc.* ... 280,500 4,537,087 Transaction Systems Architects, Inc., Class A* .............................. 473,700 5,835,984 ------------ 77,368,375 ------------ Chemicals and Allied Products - 1.92% Biosite Incorporated* .................. 100,800 1,857,240 Gene Logic Inc.* ....................... 252,700 4,760,868 Pharmacyclics, Inc.* ................... 28,100 279,173 ------------ 6,897,281 ------------ Communication - 2.16% Emmis Communications Corporation, Class A* .............................. 120,400 2,839,634 Western Wireless Corporation, Class A* .............................. 174,600 4,933,323 ------------ 7,772,957 ------------ See Notes to Schedule of Investments on page 140. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Educational Services - 2.31% ITT Educational Services, Inc.* ........ 225,200 $ 8,303,124 ------------ Electronic and Other Electric Equipment - 8.46% Advanced Fibre Communications, Inc.* ... 380,000 6,714,600 Cree, Inc.* ............................ 269,600 7,943,764 Genesis Microchip Incorporated* ........ 68,600 4,527,257 Tekelec* ............................... 274,400 4,977,616 Tellium, Inc.* ......................... 284,900 1,767,804 TriQuint Semiconductor, Inc.* .......... 364,400 4,467,544 ------------ 30,398,585 ------------ Engineering and Management Services - 5.16% Affymetrix, Inc.* ...................... 262,498 9,910,612 MAXIMUS, Inc.* ......................... 205,000 8,622,300 ------------ 18,532,912 ------------ Food and Kindred Products - 3.06% American Italian Pasta Company, Class A* 261,100 10,974,033 ------------ Health Services - 6.45% American Healthways, Inc.* ............. 315,000 10,078,425 Amsurg Corp.* .......................... 282,000 7,666,170 Apria Healthcare Group Inc.* ........... 217,100 5,425,329 ------------ 23,169,924 ------------ Industrial Machinery and Equipment - 1.54% Lam Research Corporation* .............. 237,800 5,520,527 ------------ See Notes to Schedule of Investments on page 140. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Instruments and Related Products - 5.80% Credence Systems Corporation* .......... 126,800 $ 2,355,310 PerkinElmer, Inc. ...................... 166,750 5,839,585 Urologix, Inc.* ........................ 245,500 4,908,773 VISX, Incorporated* .................... 584,200 7,740,650 ------------ 20,844,318 ------------ Miscellaneous Retail - 1.57% Borders Group, Inc.* ................... 132,400 2,626,816 Galyan's Trading Company, Inc.* ........ 216,490 3,013,541 ------------ 5,640,357 ------------ Nondepository Institutions - 2.05% Financial Federal Corporation* ......... 235,400 7,356,250 ------------ Oil and Gas Extraction - 3.41% Global Industries, Ltd.* ............... 481,400 4,294,088 Newfield Exploration Company* .......... 223,700 7,943,587 ------------ 12,237,675 ------------ Railroad Transportation - 1.40% Kansas City Southern Industries, Inc.* . 356,600 5,038,758 ------------ Rubber and Miscellaneous Plastics Products - 1.49% AptarGroup, Inc. ....................... 152,700 5,349,081 ------------ Stone, Clay and Glass Products - 1.46% Cabot Microelectronics Corporation* .... 66,300 5,253,612 ------------ Transportation Equipment - 2.80% Gentex Corporation* .................... 376,000 10,056,120 ------------ Wholesale Trade -- Durable Goods - 2.66% MSC Industrial Direct Co., Inc., Class A* .............................. 483,700 9,553,075 ------------ TOTAL COMMON STOCKS - 77.28% $277,587,964 (Cost: $257,888,734) See Notes to Schedule of Investments on page 140. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Principal Amount in Thousands Value CORPORATE DEBT SECURITY - 0.05% Communication Kestrel Solutions, Inc., 5.5%, 7-15-05, Convertible (A) ........ $ 1,000 $ 165,000 ------------ (Cost: $1,000,000) SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 4.25% Abbott Laboratories, 1.72%, 1-7-02 ......................... 2,666 2,665,236 Air Products and Chemicals, Inc., 1.98%, 1-4-02 ......................... 1,307 1,306,784 du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. 1,326 1,326,000 Procter & Gamble Company (The), 1.92%, 1-11-02 ........................ 10,000 9,994,667 ------------ 15,292,687 ------------ Food and Kindred Products - 3.90% General Mills, Inc., 2.0756%, Master Note .................. 5,014 5,014,000 Nestle Capital Corp., 2.02%, 1-24-02 ........................ 9,000 8,988,385 ------------ 14,002,385 ------------ Nondepository Institutions - 1.95% IBM Credit Corp., 1.75%, 1-11-02 ........................ 7,000 6,996,597 ------------ Paper and Allied Products - 2.28% Kimberly-Clark Corporation, 1.78%, 2-14-02 ........................ 8,200 8,182,161 ------------ Printing and Publishing - 2.78% Gannett Co., 1.78%, 1-10-02 ........................ 10,000 9,995,550 ------------ Total Commercial Paper - 15.16% 54,469,380 See Notes to Schedule of Investments on page 140. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES (Continued) Municipal Obligation - 3.47% California California Pollution Control Financing Authority, Environmental Improvement Revenue Bonds, Shell Oil Company Project, Series 1998A (Taxable), 1.84%, 1-2-02 ......................... $12,455 $ 12,455,000 ------------ Repurchase Agreement - 4.09% J.P. Morgan Securities Inc., 1.6% Repurchase Agreement dated 12-31-01, to be repurchased at $14,690,306 on 1-2-02** .............................. 14,689 14,689,000 ------------ TOTAL SHORT-TERM SECURITIES - 22.72% $ 81,613,380 (Cost: $81,613,380) TOTAL INVESTMENT SECURITIES - 100.05% $359,366,344 (Cost: $340,502,114) LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.05%) (169,642) NET ASSETS - 100.00% $359,196,702 See Notes to Schedule of Investments on page 140. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO December 31, 2001 Notes to Schedule of Investments *No dividends were paid during the preceding 12 months. **Collateralized by $14,916,608 U.S. Treasury Notes, 8.125% due 5-15-21; market value and accrued interest aggregate $15,043,303. (A) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2001, the total value of this security amounted to 0.05% of net assets. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES SMALL CAP PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $359,366 Cash ................................................ 1 Receivables: Investment shares sold.............................. 399 Fund shares sold ................................... 106 Dividends and interest ............................. 37 Prepaid insurance premium ........................... 3 -------- Total assets ..................................... 359,912 -------- LIABILITIES Payable to Fund shareholders ........................ 690 Accrued management fee (Note 2) ..................... 8 Accrued accounting services fee (Note 2) ............ 6 Accrued service fee (Note 2) ........................ 2 Other ............................................... 9 -------- Total liabilities ................................ 715 -------- Total net assets ................................ $359,197 ======== NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 45 Additional paid-in capital ......................... 386,072 Accumulated undistributed income (loss): Accumulated undistributed net investment loss....... (2) Accumulated undistributed net realized loss on investment transactions .......................... (45,782) Net unrealized appreciation in value of investments ...................................... 18,864 -------- Net assets applicable to outstanding units of capital ...................................... $359,197 ======== Net asset value, redemption and offering price per share ........................ $7.9770 ======= Capital shares outstanding ............................ 45,029 Capital shares authorized ............................. 80,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS SMALL CAP PORTFOLIO For the Fiscal Year Ended December 31, 2001 (In Thousands) INVESTMENT LOSS Income (Note 1B): Interest and amortization .......................... $ 3,307 Dividends .......................................... 65 ------- Total income ..................................... 3,372 ------- Expenses (Note 2): Investment management fee .......................... 2,862 Service fee ........................................ 845 Accounting services fee ............................ 60 Custodian fees ..................................... 26 Audit fees ......................................... 7 Legal fees ......................................... 6 Other .............................................. 31 ------- Total expenses ................................... 3,837 ------- Net investment loss ............................. (465) ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments .................... (45,780) Unrealized appreciation in value of investments during the period ...................... 39,983 ------- Net loss on investments ............................ (5,797) ------- Net decrease in net assets resulting from operations ....................... $(6,262) ======= See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS SMALL CAP PORTFOLIO (In Thousands) For the fiscal year ended December 31, ------------------------ 2001 2000 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income (loss) ......... $ (465) $ 2,426 Realized net gain (loss) on investments (45,780) 66,818 Unrealized appreciation (depreciation) 39,983 (118,168) -------- -------- Net decrease in net assets resulting from operations ................... (6,262) (48,924) -------- -------- Dividends to shareholders from (Note 1E):* Net investment income ................ (1) (2,426) Realized gains on security transactions ............... (2) (66,818) -------- -------- (3) (69,244) -------- -------- Capital share transactions** ........... 20,255 145,475 -------- -------- Total increase .................... 13,990 27,307 NET ASSETS Beginning of period .................... 345,207 317,900 -------- -------- End of period .......................... $359,197 $345,207 ======== ======== Undistributed net investment income(loss) $(2) $--- ==== ==== *See "Financial Highlights" on page 144. **Shares issued from sale of shares .... 18,777 9,393 Shares issued from reinvestment of dividend and/or capital gains distribution .... 1 8,513 Shares redeemed ........................ (16,186) (2,843) ------ ------ Increase in outstanding capital shares . 2,592 15,063 ====== ====== Value issued from sale of shares ....... $143,499 $108,820 Value issued from reinvestment of dividend and/or capital gains distribution .... 3 69,244 Value redeemed ......................... (123,247) (32,589) -------- -------- Increase in outstanding capital ........ $ 20,255 $145,475 ======== ======== See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SMALL CAP PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Net asset value, beginning of period ........ $8.1345$11.6130 $ 7.9019 $8.3316 $8.0176 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income (loss) ... (0.0103) 0.0717 0.0423 0.0798 0.0279 Net realized and unrealized gain (loss) on investments .. (0.1471)(1.5051) 4.0847 0.8255 2.5004 ------- ------- ------- ------- ------- Total from investment operations ....... (0.1574)(1.4334) 4.1270 0.9053 2.5283 ------- ------- ------- ------- ------- Less distributions: From net investment income .......... (0.0000)*(0.0717)(0.0421)(0.0798) (0.0282) From capital gains (0.0001)(1.9734) (0.3738)(1.2027) (2.1861) In excess of capital gains ... (0.0000)(0.0000) (0.0000)(0.0525) (0.0000) ------- ------- ------- ------- ------- Total distributions (0.0001)(2.0451) (0.4159)(1.3350) (2.2143) ------- ------- ------- ------- ------- Net asset value, end of period .... $7.9770$ 8.1345 $11.6130 $7.9019 $8.3316 ======= ======= ======= ======= ======= Total return........ -1.93% -12.35% 52.23% 10.87% 31.53% Net assets, end of period (in millions) .... $359 $345 $318 $181 $148 Ratio of expenses to average net assets ............ 1.14% 1.13% 1.12% 0.97% 0.90% Ratio of net investment income (loss) to average net assets ....... -0.14% 0.68% 0.53% 0.94% 0.32% Portfolio turnover rate ............. 30.31% 58.35% 130.99% 177.32% 211.46% *Not shown due to rounding. See Notes to Financial Statements. MANAGERS' DISCUSSION December 31, 2001 ---------------------------------------------------------------------- An interview with Harry M. Flavin and Cynthia P. Prince-Fox, portfolio managers of W&R Target Funds, Inc. - Value Portfolio This report relates to the operation of W&R Target Funds, Inc. - Value Portfolio for the fiscal period ended December 31, 2001. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance since its inception on May 1, 2001. Please remember that the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. How did the Portfolio perform since its inception? The Portfolio has performed fairly well since its inception on May 1, 2001, as it outperformed its benchmark index. The Portfolio increased 2.03 percent since its inception, compared with the Russell 1000 Value Index (reflecting the performance of securities that generally represent the value sector of the stock market), which declined 4.43 percent during the same period, and the Lipper Variable Annuity Multi-Cap Value Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives), which declined 2.27 percent during the same period. What helped the Portfolio outperform its benchmark index since its inception? We believe that we have been successful in finding good businesses trading at discounts to their intrinsic value. The Portfolio benefited from our contrarian investments in the beaten down telecommunications services sector, such as WorldCom, AT&T Wireless and Sprint Corp. We also made what we believe were well-timed investments in consumer stocks such as Nokia and Disney. Our "total return" holdings with high dividend support, such as Philip Morris and JP Morgan, also performed well. Additionally, two companies in which we maintain holdings were acquired by other companies, Heller Financial and Prodigy Communications, at substantial premiums to our cost. What other market conditions or events influenced the Portfolio's performance since its inception? We felt that the market was undergoing a major transition during the year, which we would call a return to value, and that it would be longer-term than most analysts anticipated. That belief turned out to be accurate. The Portfolio continues to benefit from good initial inflows, while we generally have been cautious with our cash and opportunistic during a tough environment. What strategies and techniques did you employ that specifically affected the Portfolio's performance? We avoided industry groups and individual issues where we thought the earnings risk was significant and where we felt valuations still reflected unrealistic expectations. We believe that the correct posture for a period of decelerating economic growth should include elements of value, earnings stability, diversification and cash reserves. What industries or sectors did you emphasize since the Portfolio's inception, and what looks attractive to you going forward? Our emphasis has to this point been on "old economy" companies. Our larger holdings in basic industrial stocks and durable goods producers reflect this. We also have been underweighted in technology issues as a group, but our contrarian bets in wireless services and long distance transport were significant and very meaningful to returns. We have been overweighted in consumer nondurables, as we felt this sector offered value and earnings stability. Going forward, our weightings may change as new opportunities present themselves. We recently have added to our energy holdings by increasing our exposure to natural gas companies, feeling that supply should eventually become an issue again as production growth remains difficult. We also think there are some interesting opportunities developing in the health care sector, as fears about more regulation work into the companies' stock prices. We intend to continue to focus on value, earnings stability and above-average diversification as the year progresses. Respectfully, Harry M. Flavin Cynthia M Prince-Fox Managers Value Portfolio Please note: Effective January 2002, Cynthia P. Prince-Fox was added as a co- manager of W&R Target Funds, Inc. - Value Portfolio. Prior to that time, Harry M. Flavin was the sole manager of the Portfolio. Comparison of Change in Value of $10,000 Investment W&R Target Value Portfolio, Russell 1000 Value Index and Lipper Variable Annuity Multi-Cap Value Funds Universe Average Lipper Variable Annuity Multi-Cap Russell Value W&R Target 1000 Funds Value Value Universe Portfolio Index Average --------- --------- ---------- 5-1-01 Purchase 10,000 10,000 10,000 6-30-01 9,950 9,994 10,007 9-30-01 9,691 8,901 8,793 12-31-01 10,203 9,557 9,773 ===== W&R Target Value Portfolio* -- $10,203 +++++ Russell 1000 Value Index ** -- $9,557 - ----- Lipper Variable Annuity Multi-Cap Value Funds Universe Average ** -- $9,773 *The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. **Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the indexes (including income) are not available, investment in the indexes was effected as of April 30, 2001. Aggregate Total Return+ -------------- Period Ended 12-31-01++ 2.03% +Performance data quoted represents past performance. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ++5-1-01 (the initial offering date) through 12-31-010. Past performance is not necessarily indicative of future performance. Indexes are unmanaged. Performance data quoted does not take into account any expenses or charges associated with owning a variable life or annuity policy invested in the W&R Target Funds, Inc. THE INVESTMENTS OF THE VALUE PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS Amusement and Recreation Services - 0.51% Walt Disney Company (The) .............. 11,000 $ 227,920 ----------- Business Services - 3.38% AOL Time Warner Inc.* .................. 12,500 401,250 Amdocs Limited* ........................ 23,500 798,295 Cendant Corporation* ................... 15,000 294,150 ----------- 1,493,695 ----------- Cable and Other Pay Television Services - 1.40% Cox Communications, Inc., Class A* ..... 14,800 620,268 ----------- Chemicals and Allied Products - 5.62% Abbott Laboratories .................... 1,000 55,750 Air Products and Chemicals, Inc. ....... 9,000 422,190 American Home Products Corporation ..... 7,500 460,200 Biogen, Inc.* .......................... 500 28,678 Dow Chemical Company (The) ............. 13,400 452,652 du Pont (E.I.) de Nemours and Company .. 4,000 170,040 PPG Industries, Inc. ................... 2,000 103,440 Pharmacia Corporation .................. 14,000 597,100 Schering-Plough Corporation ............ 5,500 196,955 ----------- 2,487,005 ----------- Communication - 5.31% AT&T Wireless Services, Inc.* .......... 10,000 143,700 ALLTEL Corporation ..................... 5,000 308,650 BellSouth Corporation .................. 8,000 305,200 SBC Communications Inc. ................ 20,100 787,317 Verizon Communications Inc. ............ 6,500 308,490 WorldCom, Inc. - MCI group ............. 12 153 WorldCom, Inc. - WorldCom group* ....... 34,900 491,566 ----------- 2,345,076 ----------- Depository Institutions - 3.67% Bank of America Corporation ............ 5,000 314,750 Citigroup Inc. ......................... 15,000 757,200 Morgan (J.P.) Chase & Co. .............. 13,000 472,550 U.S. Bancorp ........................... 3,800 79,534 ----------- 1,624,034 ----------- See Notes to Schedule of Investments on page 152. THE INVESTMENTS OF THE VALUE PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Eating and Drinking Places - 0.21% McDonald's Corporation ................. 3,500 $ 92,645 ----------- Electric, Gas, and Sanitary Services - 4.39% Allegheny Energy, Inc. ................. 8,000 289,760 American Electric Power Company, Inc. .. 5,000 217,650 Cinergy Corp. .......................... 6,000 200,580 PPL Corporation ........................ 12,000 418,200 Williams Companies, Inc. (The) ......... 32,000 816,640 ----------- 1,942,830 ----------- Electronic and Other Electric Equipment - 1.53% Nokia Corporation, Series A, ADR ....... 27,500 674,575 ----------- Food and Kindred Products - 3.91% ConAgra Foods, Inc. .................... 33,000 784,410 Dean Foods Company* .................... 7,000 477,400 General Mills, Inc. .................... 9,000 468,090 ----------- 1,729,900 ----------- General Merchandise Stores - 1.58% Federated Department Stores, Inc.* ..... 17,100 699,390 ----------- Heavy Construction, Excluding Building - 0.18% Fluor Corporation ...................... 2,100 78,540 ----------- Holding and Other Investment Offices - 2.13% Archstone-Smith Trust .................. 9,000 236,700 Equity Residential Properties Trust .... 10,000 287,100 Vornado Realty Trust ................... 10,000 416,000 ----------- 939,800 ----------- Industrial Machinery and Equipment - 1.85% Deere & Company* ....................... 2,100 91,686 Imagistics International Inc.* ......... 600 7,410 International Business Machines Corporation 3,600 435,456 Pitney Bowes Inc. ...................... 7,500 282,075 ----------- 816,627 ----------- See Notes to Schedule of Investments on page 152. THE INVESTMENTS OF THE VALUE PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Instruments and Related Products - 3.37% Becton, Dickinson and Company .......... 8,000 $ 265,200 Honeywell International Inc. ........... 10,900 368,638 Northrop Grumman Corporation ........... 8,500 856,885 ----------- 1,490,723 ----------- Insurance Agents, Brokers and Service - 0.33% Hartford Financial Services Group Inc. (The) ...................... 2,300 144,509 ----------- Insurance Carriers - 4.77% ACE LIMITED ............................ 8,700 349,305 Allstate Corporation (The) ............. 10,500 353,850 Berkshire Hathaway Inc., Class B* ...... 450 1,136,250 Fidelity National Financial, Inc. ...... 550 13,640 First American Corporation (The) ....... 2,500 46,850 Prudential Financial, Inc.* ............ 6,300 209,097 ----------- 2,108,992 ----------- Metal Mining - 0.65% Newmont Mining Corporation ............. 15,000 286,650 ---------- Nondepository Institutions - 2.95% American Express Company ............... 18,300 653,127 Fannie Mae ............................. 6,200 492,900 First Data Corporation ................. 2,000 156,900 ----------- 1,302,927 ----------- Oil and Gas Extraction - 3.71% Anadarko Petroleum Corporation ......... 7,500 426,375 Burlington Resources Inc. .............. 11,000 412,940 OCCIDENTAL PETROLEUM CORPORATION ....... 21,500 570,395 Ocean Energy, Inc. ..................... 12,000 230,400 ----------- 1,640,110 ----------- Paper and Allied Products - 2.92% Jefferson Smurfit Group, ADR ........... 9,000 202,500 Kimberly-Clark Corporation ............. 13,100 783,380 Minnesota Mining and Manufacturing Company 2,600 307,346 ----------- 1,293,226 ----------- See Notes to Schedule of Investments on page 152. THE INVESTMENTS OF THE VALUE PORTFOLIO December 31, 2001 Shares Value COMMON STOCKS (Continued) Petroleum and Coal Products - 1.36% BP Amoco p.l.c., ADR ................... 1,500 $ 69,765 Exxon Mobil Corporation ................ 10,000 393,000 Royal Dutch Petroleum Company, NY Shares 2,800 137,256 ----------- 600,021 ----------- Railroad Transportation - 0.13% HOLding Company Depositary ReceiptS for shares of common stock of Canadian Pacific Limited* ............. 1,500 58,845 ----------- Real Estate - 0.29% Security Capital Group Incorporated, Class B* .............................. 5,000 126,850 ----------- Rubber and Miscellaneous Plastics Products - 2.03% Sealed Air Corporation* ................ 22,000 898,040 ----------- Security and Commodity Brokers - 0.34% Goldman Sachs Group, Inc. (The) ........ 1,600 148,400 ----------- Tobacco Products - 1.47% Philip Morris Companies Inc. ........... 12,000 550,200 UST Inc. ............................... 2,900 101,500 ----------- 651,700 ----------- Transportation Equipment - 1.90% BorgWarner Inc. ........................ 1,200 62,700 Lockheed Martin Corporation ............ 8,900 415,363 Superior Industries International, Inc. . 9,000 362,250 ----------- 840,313 ----------- TOTAL COMMON STOCKS - 61.89% $27,363,611 (Cost: $26,303,584) PREFERRED STOCK - 0.03% Rubber and Miscellaneous Plastics Products Sealed Air Corporation, $2, Convertible ........................... 300 $ 12,435 ----------- (Cost: $12,965) See Notes to Schedule of Investments on page 152. THE INVESTMENTS OF THE VALUE PORTFOLIO December 31, 2001 Principal Amount in Thousands Value SHORT-TERM SECURITIES Commercial Paper Chemicals and Allied Products - 4.31% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note ................. $ 1,907 $ 1,907,000 ----------- Food and Kindred Products - 7.78% General Mills, Inc., 2.0756%, Master Note .................. 1,939 1,939,000 Nestle Capital Corp., 2.04%, 1-25-02 ........................ 1,500 1,497,960 ----------- 3,436,960 ----------- Total Commercial Paper - 12.09% 5,343,960 Repurchase Agreement - 25.18% J.P. Morgan Securities Inc., 1.6% Repurchase Agreement dated 12-31-01, to be repurchased at $11,136,990 on, 1-2-02** .............................. 11,136 11,136,000 ----------- TOTAL SHORT-TERM SECURITIES - 37.27% $16,479,960 (Cost: $16,479,960) TOTAL INVESTMENT SECURITIES - 99.19% $43,856,006 (Cost: $42,796,509) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.81% 359,502 NET ASSETS - 100.00% $44,215,508 Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. **Collateralized by $11,313,408 U.S. Treasury Notes, 8.125% due 5-15-21; market value and accrued interest aggregate $11,409,500. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES VALUE PORTFOLIO December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities--at value (Notes 1 and 3) ..... $43,856 Cash ................................................ 1 Receivables: Fund shares sold ................................... 374 Dividends and interest ............................. 48 ------- Total assets ..................................... 44,279 ------- LIABILITIES Payable for investment securities purchased ......... 57 Accrued accounting services fee (Note 2) ............. 2 Accrued management fee (Note 2) ...................... 1 Other ............................................... 3 ------- Total liabilities ................................ 63 ------- Total net assets ................................ $44,216 ======= NET ASSETS $0.001 par value capital stock: Capital stock ...................................... $ 9 Additional paid-in capital ......................... 43,233 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions ................... (85) Net unrealized appreciation in value of investments ...................................... 1,059 ------- Net assets applicable to outstanding units of capital ...................................... $44,216 ======= Net asset value, redemption and offering price per share ........................ $5.0815 ======= Capital shares outstanding ............................ 8,701 Capital shares authorized ............................. 40,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS VALUE PORTFOLIO For the Period from May 1, 2001* through December 31, 2001 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization .......................... $ 153 Dividends .......................................... 120 ------ Total income ..................................... 273 ------ Expenses (Note 2): Investment management fee .......................... 86 Service fee ........................................ 31 Accounting services fee ............................ 7 Custodian fees ..................................... 6 Legal fees ......................................... 1 ---- Total ........................................... 131 Less expenses in excess of voluntary waiver of management fee (Note 2) ........................ (28) ------ Total expenses ................................. 103 ------ Net investment income ....................... 170 ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments .................... (85) Unrealized appreciation in value of investments during the period ...................... 1,059 ------ Net gain on investments ............................ 974 ------ Net increase in net assets resulting from operations ....................... $1,144 ====== *Commencement of operations. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS VALUE PORTFOLIO For the Period from May 1, 2001* through December 31, 2001 (In Thousands) INCREASE IN NET ASSETS Operations: Net investment income ................ $ 170 Realized net loss on investments ..... (85) Unrealized appreciation .............. 1,059 ------- Net increase in net assets resulting from operations ......... 1,144 ------- Dividends to shareholders from net investment income (Note 1E)** ......... (170) ------- Capital share transactions*** .......... 43,232 ------- Total increase .................... 44,206 NET ASSETS Beginning of period .................... 10 ------- End of period .......................... $44,216 ======= Undistributed net investment income .. $--- ==== *Commencement of operations. **See "Financial Highlights" on page 156. ***Shares issued from sale of shares ... 8,723 Shares issued from reinvestment of dividend 33 Shares redeemed ........................ (57) ----- Increase in outstanding capital shares . 8,699 ===== Value issued from sale of shares ....... $43,342 Value issued from reinvestment of dividend 170 Value redeemed ......................... (280) ------- Increase in outstanding capital ........ $43,232 ======= See Notes to Financial Statements. FINANCIAL HIGHLIGHTS VALUE PORTFOLIO For a Share of Capital Stock Outstanding Throughout The Period: For the period from 5-1-01* through 12-31-01 -------- Net asset value, beginning of period ........... $5.0000 Income from ------- investment operations: Net investment income .......... 0.0198 Net realized and unrealized gain on investments .. 0.0815 Total from investment ------- operations ...... 0.1013 ------- Less distributions from net investment income .......... (0.0198) ------- Net asset value, end of period .... $5.0815 ======= Total return ....... 2.03% Net assets, end of period (in millions) $44 Ratio of expenses to average net assets including voluntary expense waiver ... 0.84%** Ratio of net investment income to average net assets including voluntary expense waiver ............ 1.39%** Ratio of expenses to average net assets excluding voluntary expense waiver ... 1.07%** Ratio of net investment income to average net assets excluding voluntary expense waiver ... 1.16%** Portfolio turnover rate 10.91% *Commencement of operations. **Annualized. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS W&R TARGET FUNDS, INC. December 31, 2001 NOTE 1 -- Significant Accounting Policies W&R Target Funds, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. Capital stock is currently divided into the twelve classes that are designated the Asset Strategy Portfolio, the Balanced Portfolio, the Bond Portfolio, the Core Equity Portfolio, the Growth Portfolio, the High Income Portfolio, the International Portfolio, the Limited-Term Bond Portfolio, the Money Market Portfolio, the Science and Technology Portfolio, the Small Cap Portfolio and the Value Portfolio. The assets belonging to each Portfolio are held separately by the Custodian. The capital shares of each Portfolio represent a pro rata beneficial interest in the principal, net income (loss), and realized and unrealized capital gains or losses of its respective investments and other assets. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America. A. Security valuation -- Each stock and convertible bond is valued at the latest sale price thereof on each business day of the fiscal period as reported by the principal securities exchange on which the issue is traded or, if no sale is reported for a stock, the average of the latest bid and asked prices. Bonds, other than convertible bonds, are valued using a pricing system provided by a pricing service or dealer in bonds. Convertible bonds are valued using this pricing system only on days when there is no sale reported. Stocks which are traded over-the-counter are priced using the Nasdaq Stock Market, which provides information on bid and asked prices quoted by major dealers in such stocks. Securities for which quotations are not readily available are valued as determined in good faith in accordance with procedures established by and under the general supervision of the Fund's Board of Directors. Short-term debt securities are valued at amortized cost, which approximates market. B. Security transactions and related investment income -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Securities gains and losses are calculated on the identified cost basis. Premium and discount on the purchase of bonds are amortized for both financial and tax reporting purposes. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex- dividend date. Interest income is recorded on the accrual basis. See Note 3 -- Investment Securities Transactions. C. Foreign currency translations -- All assets and liabilities denominated in foreign currencies are translated into U.S. dollars daily. Purchases and sales of investment securities and accruals of income and expenses are translated at the rate of exchange prevailing on the date of the transaction. For assets and liabilities other than investments in securities, net realized and unrealized gains and losses from foreign currency translations arise from changes in currency exchange rates. The Fund combines fluctuations from currency exchange rates and fluctuations in market value when computing net realized and unrealized gain or loss from investments. D. Federal income taxes -- It is the Fund's policy to distribute all of its taxable income and capital gains to its shareholders and otherwise qualify as a regulated investment company under the Internal Revenue Code. Accordingly, provision has not been made for Federal income taxes. See Note 4 -- Federal Income Tax Matters. E. Dividends and distributions -- Dividends and distributions to shareholders are recorded by each Portfolio on the record date. Net investment income distributions and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due to differing treatments for items such as deferral of wash sales and post-October losses, foreign currency transactions, net operating losses and expiring capital loss carryovers. At December 31, 2001, Small Cap Portfolio reclassified $463,727 between accumulated undistributed net investment income and additional paid-in capital. Net investment income, net realized gains and net assets are not affected by these changes. F. Options -- See Note 5 -- Options The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A new provision in the AICPA Audit and Accounting Guide for Investment Companies, as revised, requires mandatory amortization of premiums and discounts on debt securities for fiscal years beginning after December 15, 2000. The Fund already amortizes premiums and discounts on debt securities; therefore there is no impact to the Fund as a result of the adoption of this provision. NOTE 2 -- Investment Management And Payments To Affiliated Persons The Fund pays a fee for investment management services. The fee is computed daily based on the net asset value at the close of business. The fee is payable by each Portfolio at the following annual rates: Annual Fund Net Asset Breakpoints Rate ----------------------------------------------------------------- Asset Strategy Portfolio Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% Balanced Portfolio Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% Bond Portfolio Up to $500 Million .525% Over $500 Million up to $1 Billion .500% Over $1 Billion up to $1.5 Billion .450% Over $1.5 Billion .400% Core Equity Portfolio Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% Growth Portfolio Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% High Income Portfolio Up to $500 Million .625% Over $500 Million up to $1 Billion .600% Over $1 Billion up to $1.5 Billion .550% Over $1.5 Billion .500% International Portfolio Up to $1 Billion .850% Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% Limited-Term Bond Up to $500 Million .500% Portfolio Over $500 Million up to $1 Billion .450% Over $1 Billion up to $1.5 Billion .400% Over $1.5 Billion .350% Money Market Portfolio All Net Assets .400% Science and Technology Up to $1 Billion .850% Portfolio Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% Small Cap Portfolio Up to $1 Billion .850% Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% Value Portfolio Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% However, Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment manager, has agreed to waive a Portfolio's management fee on any day that the Portfolio's net assets are less than $25 million, subject to its right to change or modify this waiver. The Fund accrues and pays this fee daily. During the year ended December 31, 2001, WRIMCO voluntarily waived its fee as shown in the following table: Limited-Term Bond Portfolio $49,775 Value Portfolio 27,507 Pursuant to assignment of the Investment Management Agreement between the Fund and Waddell & Reed, Inc. ("W&R"), WRIMCO, a wholly owned subsidiary of W&R, serves as the Fund's investment manager. The Fund has an Accounting Services Agreement with Waddell & Reed Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement, WARSCO acts as the agent in providing bookkeeping and accounting services and assistance to the Fund, including maintenance of Fund records, pricing of Fund shares, preparation of prospectuses for existing shareholders, preparation of proxy statements and certain shareholder reports. For these services, each Portfolio pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the following table. Accounting Services Fee Average Net Asset Level Annual Fee (all dollars in millions)Rate for Each Portfolio ------------------------- ------------------- From $ 0 to $ 10 $ 0 From $ 10 to $ 25 $ 11,000 From $ 25 to $ 50 $ 22,000 From $ 50 to $ 100 $ 33,000 From $ 100 to $ 200 $ 44,000 From $ 200 to $ 350 $ 55,000 From $ 350 to $ 550 $ 66,000 From $ 550 to $ 750 $ 77,000 From $ 750 to $1,000 $ 93,500 $1,000 and Over $110,000 The Fund has adopted a Service Plan pursuant to Rule 12b-1 of the 1940 Act. Under the Plan, each Portfolio may pay a fee to W&R in an amount not to exceed 0.25% of the Portfolio's average annual net assets. The fee is to be paid to compensate W&R for amounts it expends in connection with the provision of personal services to Policyowners and/or maintenance of Policyowner accounts. The Fund paid Directors' fees of $108,789, which are included in other expenses. W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding company. NOTE 3 -- Investment Securities Transactions Investment securities transactions for the fiscal year ended December 31, 2001 are summarized as follows: Asset Strategy Balanced Bond Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government obligations $ 94,937,543$ 86,478,973 $ 19,970,309 Purchases of U.S. Government obligations 104,030,964 9,841,495 61,546,624 Purchases of short-term securities 861,272,771 1,593,669,203 531,034,908 Purchases of options 3,175,874 --- --- Purchases of bullion 2,182,618 --- --- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government obligations 87,635,799 48,480,741 13,318,008 Proceeds from maturities and sales of U.S. Government obligations 46,002,801 3,182,465 25,386,394 Proceeds from maturities and sales of short-term securities 861,823,433 1,604,853,000 522,828,198 Proceeds from bullion --- --- --- Proceeds from options 3,788,677 --- --- High Core Equity Growth Income Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government obligations $ 282,153,377$ 562,925,859$ 208,906,019 Purchases of U.S. Government obligations --- --- 2,949,319 Purchases of short-term securities 1,742,569,240 3,605,874,212 1,271,832,611 Purchases of options 2,740,449 --- --- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government obligations 280,753,748 490,794,976 191,304,957 Proceeds from maturities and sales of U.S. Government obligations --- --- 171,249 Proceeds from maturities and sales of short-term securities 1,803,002,280 3,756,880,543 1,280,479,815 Proceeds from options 2,266,814 --- --- Limited- Science and International Term Bond Technology Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government obligations $ 197,130,575 $ 5,309,102$ 208,776,241 Purchases of U.S. Government obligations --- 5,988,689 --- Purchases of short-term securities 1,835,098,414 15,550,179 2,739,483,799 Purchases of options --- --- 7,955,054 Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government obligations 173,635,136 572,000 173,489,330 Proceeds from maturities and sales of U.S. Government obligations --- 1,474,533 --- Proceeds from maturities and sales of short-term securities 1,879,239,443 15,411,040 2,769,213,791 Proceeds from options --- --- 10,146,129 Small Cap Value Portfolio Portfolio ----------- --------- Purchases of investment securities, excluding short- term and U.S. Government obligations $ 106,302,513 $ 27,667,640 Purchases of U.S. Government obligations --- --- Purchases of short-term securities 2,843,850,464 868,710,257 Purchases of options --- --- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government obligations 79,034,195 1,266,046 Proceeds from maturities and sales of U.S. Government obligations --- --- Proceeds from maturities and sales of short-term securities 2,853,475,000 852,264,000 Proceeds from options --- --- For Federal income tax purposes, cost of investments owned at December 31, 2001, and the related unrealized appreciation (depreciation) were as follows: Aggregate Appreciation CostAppreciationDepreciation(Depreciation) ------------------------------------------------ Asset Strategy Portfolio$113,074,281$ 2,274,993$ 870,898$ 1,404,095 Balanced Portfolio 172,049,688 12,338,575 7,260,128 5,078,447 Bond Portfolio 165,472,484 4,895,382 2,151,447 2,743,935 Core Equity Portfolio 782,439,858 184,908,531 55,442,861 129,465,670 Growth Portfolio 844,196,985 203,072,631 51,738,873 151,333,758 High Income Portfolio 114,452,826 2,949,608 3,185,331 (235,723) International Portfolio198,858,593 6,498,684 19,046,892 (12,548,208) Limited-Term Bond Portfolio15,757,609 251,724 43,719 208,005 Money Market Portfolio 97,660,088 --- --- --- Science and Technology Portfolio 261,729,169 28,005,964 22,609,112 5,396,852 Small Cap Portfolio 340,504,405 58,428,616 39,566,677 18,861,939 Value Portfolio 42,796,509 1,499,452 439,955 1,059,497 NOTE 4 -- Federal Income Tax Matters The Fund's income and expenses attributed to each Portfolio and the gains and losses on security transactions of each Portfolio have been attributed to that Portfolio for Federal income tax purposes as well as accounting purposes. For Federal income tax purposes, Asset Strategy, Core Equity, Science and Technology, and Small Cap Portfolios realized capital losses of $6,107,622, $75,112,594, $35,158,646 and $41,349,713, respectively, during the year ended December 31, 2001, which included the effect of certain losses deferred into the next fiscal year (see discussion below). These losses are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized by December 31, 2009. For Federal income tax purposes, Balanced and Growth Portfolios realized capital losses of $7,156,738 and $80,837,850, respectively, during the year ended December 31, 2001, which included the effect of certain losses deferred into the next fiscal year, as well as the effect of losses recognized from the prior year (see discussion below). These losses are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized by December 31, 2009. For Federal income tax purposes, Bond Portfolio realized capital losses of $54,574 during the year ended December 31, 2001. Capital loss carryovers of Bond Portfolio aggregated $2,370,989 at December 31, 2001 and are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized as follows: $1,337,336 at December 31, 2002; $16,696 at December 31, 2004; $962,383 at December 31, 2008 and $54,574 at December 31, 2009. For Federal income tax purposes, High Income Portfolio realized capital losses of $9,637,801 for the year ended December 31, 2001, which included the effect of certain losses deferred into the next fiscal year, as well as the effect of losses recognized from the prior year (see discussion below). Capital loss carryovers of High Income Portfolio aggregated $29,628,658 at December 31, 2001 and are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized as follows: $65,442 at December 31, 2006; $6,542,253 at December 31, 2007; $13,383,162 at December 31, 2008 and $9,637,801 at December 31, 2009. For Federal income tax purposes, International Portfolio realized capital losses of $36,579,000 for the year ended December 31, 2001, which included the effect of losses recognized from the prior year (see discussion below). These losses are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized by December 31, 2009. For Federal income tax purposes, Limited-Term Bond Portfolio realized no capital gain or losses during the year ended December 31, 2001, because of the utilization of capital loss carryovers and the effect of certain losses deferred into the next fiscal year (see discussion below). Capital loss carryovers of Limited-Term Bond Portfolio aggregated $9,954 by December 31, 2000 and are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized by December 31, 2008. For Federal income tax purposes, Value Portfolio realized capital losses of $85,194 for the period ended December 31, 2001. These losses are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized by December 31, 2009. Internal Revenue Code regulations permit each Portfolio to defer into its next fiscal year net capital losses or net long-term capital losses incurred between each November 1 and the end of its fiscal year ("post-October losses"). From November 1, 2001 through December 31, 2001, Asset Strategy, Balanced, Core Equity, Growth, High Income, Limited-Term Bond, Science and Technology and Small Cap Portfolios incurred net capital losses of $1,305,177, $166,890, $2,382,368, $3,931,341, $2,579,946, $1,228, $2,413,616 and $4,429,576, respectively, which have been deferred to the fiscal year ending December 31, 2002. In addition, during the year ended December 31, 2001, Balanced, Growth, High Income and International Portfolios recognized post-October losses of $172,015, $5,585,679, $1,489,067 and $6,647,311, respectively, that had been deferred from the year ended December 31, 2000. NOTE 5 -- Options Options purchased by the Fund are accounted for in the same manner as marketable portfolio securities. The cost of portfolio securities acquired through the exercise of call options is increased by the premium paid to purchase the call. The proceeds from securities sold through the exercise of put options are decreased by the premium paid to purchase the put. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is recorded as a liability. The amount of the liability is subsequently adjusted to reflect the current market value of the option written. The current market value of an option is the last sales price on the principal exchange on which the option is traded or, in the absence of transactions, the mean between the bid and asked prices or at a value supplied by a broker-dealer. When an option expires on its stipulated expiration date or the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the call option was sold) and the liability related to such option is extinguished. When a written call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. For the Fund, when a written put option is exercised, the cost basis of the securities purchased by the Fund is reduced by the amount of the premium received. For Asset Strategy Portfolio, transactions in call options written were as follows: Number of Premiums Contracts Received --------- -------- Outstanding at December 31, 2000 389 $ 59,391 Options written 17,773 3,788,677 Options terminated in closing purchase transactions (16,685) (3,435,655) Options exercised (750) (196,494) Options expired --- --- ------ ---------- Outstanding at December 31, 2001 727 $ 215,919 ====== ========== For Core Equity Portfolio, transactions in call options written were as follows: Number of Premiums Contracts Received --------- -------- Outstanding at December 31, 2000 --- $ --- Options written 13,415 2,266,814 Options terminated in closing purchase transactions (13,415) (2,266,814) Options exercised --- --- Options expired --- --- ----- --------- Outstanding at December 31, 2001 --- $ --- ===== ========= For Science and Technology Portfolio, transactions in call options written were as follows: Number of Premiums Contracts Received --------- -------- Outstanding at December 31, 2000 --- $ --- Options written 30,507 8,607,297 Options terminated in closing purchase transactions (18,322) (5,555,262) Options exercised (3,160) (782,843) Options expired (2,145) (546,206) ------ ---------- Outstanding at December 31, 2001 6,880 $1,722,986 ====== ========== INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, W&R Target Funds, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Asset Strategy Portfolio, Balanced Portfolio, Bond Portfolio, Core Equity Portfolio, Growth Portfolio, High Income Portfolio, International Portfolio, Limited-Term Bond Portfolio, Money Market Portfolio, Science and Technology Portfolio, Small Cap Portfolio and Value Portfolio (collectively the "Portfolios") comprising W&R Target Funds, Inc., as of December 31, 2001, and the related statements of operations for the fiscal year then ended (for the fiscal period from May 1, 2001 (commencement of operations) to December 31, 2001 for Value Portfolio), the statements of changes in net assets for each of the two fiscal years in the period then ended (for the fiscal period from May 1, 2001 to December 31, 2001 for Value Portfolio), and the financial highlights for each of the periods presented in the five fiscal years in the period then ended. These financial statements and financial highlights are the responsibility of the Portfolios' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of each of the respective Portfolios of W&R Target Funds, Inc. as of December 31, 2001, the results of their operations for the fiscal period then ended, the changes in their net assets for each of the fiscal periods in the two year period then ended, and their financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Kansas City, Missouri February 8, 2002 The Board of Directors of W&R Target Funds, Inc. Each of the individuals listed below serves as a director for each of the portfolios within the Waddell & Reed Advisors Funds, W&R Funds, Inc., Waddell & Reed InvestEd Portfolios, Inc. and W&R Target Funds, Inc. for a total of 47 portfolios served. Four of the five interested directors are "interested" by virtue of their current or former engagement as officers of Waddell & Reed Financial, Inc. (WDR) or its wholly-owned subsidiaries, including the funds' investment advisor, Waddell & Reed Investment Management Company (WRIMCO); the funds' principal underwriter, Waddell & Reed, Inc. (W&R); and the funds' transfer agent, Waddell & Reed Services Company (WARSCO). The fifth interested director is a partner in a law firm that has represented (W&R) within the past two years. The other directors (more than a majority of the total number) are disinterested; that is, they are not employees or officers of, and have no financial interest in, WDR or any of its wholly-owned subsidiaries, including W&R, WRIMCO and WARSCO. Disinterested Directors James M. Concannon (54) Washburn Law School, 1700 College, Topeka, KS 66621 Position held with Fund: Director Director since 1997 Principal Occupations During Past 5 Years: Professor of Law, Washburn Law School; formerly, Dean, Washburn Law School Other Directorships held by Director: Director, Am Vestors CBO II, Inc., a bond investment company John A. Dillingham (62) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since 1997 Principal Occupations During Past 5 Years: President and Director, JoDill Corp. and Dillingham Enterprises, Inc., both farming enterprises; formerly, Instructor at Central Missouri State University; formerly, Consultant and Director, McDougal Construction Co. Other Directorships held by Director: Chairman, Clay Co. IDA and Kansas City Municipal Assistance Corp., both bonding authorities; Director, American Royal and Salvation Army David P. Gardner (68) 2441 Iron Canyon Drive, Park City UT 84060 Position held with Fund: Director Director since 1998 Principal Occupation During Past 5 Years: formerly, President, William and Flora Hewlett Foundation Other Directorships held by Director: Chairman, J. Paul Getty Trust; Director, Fluor Corp., Campus Pipeline, John & Karen Huntsman Foundation and Huntsman Cancer Foundation; formerly, Chairman, George S. and Dolores Dor'e Eccles Foundation; formerly, Director, First Security Corp., Digital Ventures and Charitableway Linda K. Graves (48) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since 1995 Principal Occupation During Past 5 Years: First Lady of Kansas Other Directorships held by Director: Chairman & Director, Community Foundation of Johnson County; Director, Greater Kansas City Community Foundation, and Friends of Cedar Crest Association; Director, American Guaranty Life Insurance Company Joseph Harroz, Jr. (34) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since 1998 Principal Occupations During Past 5 Years: Vice President & General Counsel, Board of Regents, University of Oklahoma; Adjunct Professor, University of Oklahoma Law School; Managing Member, Harroz Investments, LLC, commercial enterprise investments Other Directorships held by Director: Treasurer, Oklahoma Appleseed (Center for Law and Justice) John F. Hayes (82) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since 1988 Principal Occupation During Past 5 Years: Chairman, Gilliland & Hayes, PA, a law firm Other Directorships held by Director: Director, Central Bank & Trust and Central Financial Corp.; formerly, Director, Central Properties, Inc. Glendon E. Johnson (77) 13635 Deering Bay Drive, Unit 284, Miami, FL 33158 Position held with Fund: Director Director since 1971 Principal Occupations During Past 5 Years: Retired; formerly, Chief Executive Officer and Director, John Alden Financial Corp. Other Directorships held by Director: Manager, Castle Valley Ranches LLC; Chairman, Wellness Council of America; Chairman, Bank Assurance Partners, marketing; Executive Board and Advisory Committee, Boy Scouts of America Eleanor B. Schwartz (64) 1213 W. 95th Ct., Chartwell #4, Kansas City, MO 64114 Position held with Fund: Director Director since 1995 Principal Occupations During Past 5 Years: Professor, University of Missouri at Kansas City; formerly, Chancellor, University of Missouri at Kansas City Other Directorships held by Director: None Frederick Vogel III (66) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since 1971 Principal Occupation During Past 5 Years: Retired Other Directorships held by Director: None Interested Directors Robert L. Hechler (65) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Director; formerly, President, Principal Financial Officer (PFO) and Vice President (VP) Director since 1998 Principal Occupations During Past 5 Years: Consultant, WDR and W&R (2001 to present); Director, WDR (1998 to present); Executive VP and Chief Operating Officer, WDR (1998 to 2001); Director, Chief Executive Officer (CEO) and President, W&R (1993 to 2001); PFO and Treasurer, W&R (1981 to 2001); Director, Executive VP, PFO and Treasurer, WRIMCO (1985 to 2001); Director and President, WARSCO (1981 to 2001); Treasurer, WARSCO (1981 to 1999) Other Directorships held by Director: None Henry J. Herrmann (59) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Director and President; formerly, Vice President Director since 1998 Principal Occupation(s) During Past 5 Years: Director, President and Chief Investment Officer, WDR (1998 to present); Treasurer, WDR (1998 to 1999); Director, W&R (1993 to present); Director, WRIMCO (1992 to present); President and CEO, WRIMCO, (1993 to present) Other Directorships held by Director: None William T. Morgan (73) 928 Glorietta Blvd., Coronado, CA 92118 Position held with Fund: Director Director since 1985 Principal Occupation(s) During Past 5 Years: Retired Other Directorships held by Director: None Frank J. Ross, Jr. (48) Polsinelli, Shalton & Welte,700 West 47th Street, Suite 1000, Kansas City, MO 64112 Position held with Fund: Director Director since 1996 Principal Occupation During Past 5 Years: Shareholder/Director, Polsinelli, Shalton & Welte, a law firm Other Directorships held by Director: Director, Columbian Bank & Trust Keith A. Tucker (56) 6300 Lamar Avenue, Overland Park, KS 66202 Positions(s) held with Fund: COB and Director; formerly, President Length of Time Served: Director, 10 years Principal Occupation(s) During Past 5 Years: COB, Director and CEO, WDR (1998 to present); PFO, WDR (1998 to 1999); COB, W&R (1993 to present); COB and Director, WRIMCO (1993 to present); COB and Director, WARSCO (1993 to present); Vice COB, Torchmark Corporation (1991 to 1998); COB, Torchmark Distributors, Inc. (1993 to 1997) Other Directorships held by Director: Director, Vesta Insurance Group (1996 to 1997) DIRECTORS Keith A. Tucker, Overland Park, Kansas, Chairman of the Board James M. Concannon, Topeka, Kansas John A. Dillingham, Kansas City, Missouri David P. Gardner, San Mateo, California Linda K. Graves, Topeka, Kansas Joseph Harroz, Jr., Norman, Oklahoma John F. Hayes, Hutchinson, Kansas Robert L. Hechler, Overland Park, Kansas Henry J. Herrmann, Overland Park, Kansas Glendon E. Johnson, Miami, Florida William T. Morgan, Coronado, California Frank J. Ross, Jr., Kansas City, Missouri Eleanor B. Schwartz, Kansas City, Missouri Frederick Vogel III, Milwaukee, Wisconsin OFFICERS Henry J. Herrmann, President Michael L. Avery, Vice President James C. Cusser, Vice President Harry M. Flavin, Vice President Theodore W. Howard, Vice President and Treasurer Thomas A. Mengel, Vice President William M. Nelson, Vice President Cynthia P. Prince-Fox, Vice President Kristen A. Richards, Vice President and Secretary Philip J. Sanders, Vice President Grant P. Sarris, Vice President Daniel C. Schulte, Vice President Mark G. Seferovich, Vice President Zachary H. Shafran, Vice President W. Patrick Sterner, Vice President Mira Stevovich, Vice President Daniel J. Vrabac, Vice President James D. Wineland, Vice President Annual Privacy Notice Waddell & Reed, Inc., Waddell & Reed Advisors Group of Mutual Funds and W&R Funds, Inc. ("Waddell & Reed") are committed to ensuring their customers have access to a broad range of products and services to help them achieve their personal financial goals. In the course of doing business with Waddell & Reed, customers are requested to share financial information and they may be asked to provide other personal details. Customers can be assured that Waddell & Reed is diligent in its efforts to keep such information confidential. Recognition of a Customer's Expectation of Privacy At Waddell & Reed, we believe the confidentiality and protection of customer information is one of our fundamental responsibilities. And while information is critical to providing quality service, we recognize that one of our most important assets is our customers' trust. Thus, the safekeeping of customer information is a priority for Waddell & Reed. Information Collected In order to tailor available financial products to your specific needs, Waddell & Reed may request that you complete a variety of forms that require nonpublic personal information about your financial history and other personal details, including but not limited to, your name, address, social security number, assets, income and investments. Waddell & Reed may also gather information about your transactions with us, our affiliates and others. Categories of Information that may be Disclosed While Waddell & Reed may disclose information it collects from applications and other forms, as described above, we at Waddell & Reed also want to assure all of our customers that whenever information is used, it is done with discretion. The safeguarding of customer information is an issue we take seriously. Categories of Parties to whom we disclose nonpublic personal information Waddell & Reed may disclose nonpublic personal information about you to the following types of third parties: selectively chosen financial service providers, whom we believe have valuable products or services that could benefit you. Whenever we do this, we carefully review the company and the product or service to make sure that it provides value to our customers. We share the minimum amount of information necessary for that company to offer its product or service. We may also share information with unaffiliated companies that assist us in providing our products and services to our customers; in the normal course of our business (for example, with consumer reporting agencies and government agencies); when legally required or permitted in connection with fraud investigations and litigation; and at the request or with the permission of a customer. Opt Out Right If you prefer that we not disclose nonpublic personal information about you to nonaffiliated third parties, you may opt out of those disclosures, that is, you may direct us not to make those disclosures (other than disclosures permitted by law). If you wish to opt out of disclosures to nonaffiliated third parties, please provide a written request to opt-out with your name and social security number to your financial advisor. Confidentiality and Security We restrict access to nonpublic personal information about you to those employees who need to know that information to provide products and services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information. If you decide to close your account(s) or become an inactive customer, we will adhere to the privacy policies and practices as described in this notice. This report is submitted for the general information of the shareholders of W&R Target Funds, Inc. It is not authorized for distribution to prospective investors in the Fund unless accompanied with or preceded by the W&R Target Funds, Inc. current prospectus and current Fund performance information. ASSET STRATEGY Portfolio Goal: To seek high total return over the long term. Invested In: An allocation of its assets among stocks, bonds (of any quality) and short-term instruments. BALANCED Portfolio Goals: To seek current income, with a secondary goal of long-term appreciation of capital. Invested in: Primarily a mix of stocks, fixed-income securities and cash, depending on market conditions. BOND Portfolio Goal: To seek a reasonable return with emphasis on preservation of capital. Invested In: Primarily domestic debt securities, usually of investment grade. CORE EQUITY Portfolio Goals: To seek capital growth and income. Invested In: Primarily common stocks of large, high-quality U.S. and foreign companies that are well known, have been consistently profitable and have dominant market positions in their industries. GROWTH Portfolio Goals: To seek capital growth, with a secondary goal of current income. Invested In: Primarily common stocks of U.S. and foreign companies with market capitalization of at least $1 billion representing faster growing sectors of the economy, such as the technology, health care and consumer-oriented sectors. HIGH INCOME Portfolio Goals: To seek a high level of current income, with a secondary goal of capital growth. Invested In: Primarily high-yield, high-risk, fixed-income securities of U.S. and foreign issuers. INTERNATIONAL Portfolio Goals: To seek long-term appreciation of capital, with a secondary goal of current income. Invested in: Primarily common stocks of foreign companies that may have the potential for long-term growth. LlMITED-TERM BOND Portfolio Goal: To seek a high level of current income consistent with preservation of capital. Invested in: Primarily investment-grade debt securities of U.S. issuers, including U.S. Government securities. The Portfolio maintains a dollar-weighted average portfolio maturity of 2-5 years. MONEY MARKET Portfolio Goal: To seek maximum current income consistent with stability of principal. Invested In: U.S. dollar-denominated, high-quality money market obligations and instruments. SCIENCE AND TECHNOLOGY Portfolio Goal: To seek long-term capital growth. Invested in: Primarily in the equity securities of U.S. and foreign science and technology companies whose products, processes or services are being or are expected to be significantly benefited by the use or commercial application of scientific or technological developments or discoveries. SMALL CAP Portfolio Goal: To seek growth of capital. Invested in: Primarily common stocks of relatively new or unseasoned companies in their early stages of development, or smaller companies positioned in new or in emerging industries where the opportunity for rapid growth is above average. VALUE Portfolio Goal: To seek long-term capital appreciation. Invested in: Primarily stocks of large U.S. and foreign companies that are undervalued relative to the true worth of the company. FOR MORE INFORMATION: Contact your financial advisor, or your local office as listed on your Account Statement, or contact: United Investors Life Nationwide Financial, Inc. Variable Products Division or P.O. Box 182449 P.O. Box 156 One Nationwide Plaza Birmingham, AL 35201-0156 Columbus, OH 43218-2449 (205)325-4300 1-888-867-5175 Or Call 1-888-WADDELL For more complete information regarding the W&R Target Funds, including charges and expenses, please obtain the Fund's prospectus by calling or writing to the number or address listed above. Please read the prospectus carefully before investing. NUR1016A(12-01) For more complete information regarding the W&R Target Funds, including charges and expenses, please obtain the Fund's prospectus by calling or writing to the number or address listed above. Please read the prospectus carefully before investing. -----END PRIVACY-ENHANCED MESSAGE-----