N-CSR 1 ar123106svs2.htm ANNUAL REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM N-CSR

 

Investment Company Act file number

811-5002

 

DWS Variable Series II

(Exact Name of Registrant as Specified in Charter)

 

222 South Riverside Plaza

Chicago, IL 60606

(Address of principal executive offices)             (Zip code)

 

Registrant’s Telephone Number, including Area Code: (212) 454-7190

 

Paul Schubert

345 Park Avenue

New York, NY 10154

(Name and Address of Agent for Service)

 

Date of fiscal year end:

12/31

 

Date of reporting period:

12/31/06

 

 

ITEM 1.               REPORT TO STOCKHOLDERS

 

 

vs2_coverlogo0

DECEMBER 31, 2006

ANNUAL REPORT

DWS VARIABLE SERIES II

DWS Balanced VIP

DWS Blue Chip VIP

DWS Conservative Allocation VIP

DWS Core Fixed Income VIP

DWS Davis Venture Value VIP

DWS Dreman High Return Equity VIP

DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP)

DWS Global Thematic VIP

DWS Government & Agency Securities VIP

DWS Growth Allocation VIP

DWS High Income VIP

DWS International Select Equity VIP

DWS Janus Growth & Income VIP

DWS Large Cap Value VIP

DWS Mid Cap Growth VIP

DWS Moderate Allocation VIP

DWS Money Market VIP

DWS Small Cap Growth VIP

DWS Strategic Income VIP

DWS Technology VIP

DWS Turner Mid Cap Growth VIP

Contents

Information About Your Portfolio's Expenses, Management Summary, Portfolio Summary, Investment Portfolio, Financial Statements and Financial Highlights for:

Click here DWS Balanced VIP

Click here DWS Blue Chip VIP

Click here DWS Conservative Allocation VIP

Click here DWS Core Fixed Income VIP

Click here DWS Davis Venture Value VIP

Click here DWS Dreman High Return Equity VIP

Click here DWS Dreman Small Mid Cap Value VIP
(formerly DWS Dreman Small Cap Value VIP)

Click here DWS Global Thematic VIP

Click here DWS Government & Agency Securities VIP

Click here DWS Growth Allocation VIP

Click here DWS High Income VIP

Click here DWS International Select Equity VIP

Click here DWS Janus Growth & Income VIP

Click here DWS Large Cap Value VIP

Click here DWS Mid Cap Growth VIP

Click here DWS Moderate Allocation VIP

Click here DWS Money Market VIP

Click here DWS Small Cap Growth VIP

Click here DWS Strategic Income VIP

Click here DWS Technology VIP

Click here DWS Turner Mid Cap Growth VIP

 

Click here Notes to Financial Statements

Click here Report of Independent Registered Public Accounting Firm

Click here Tax Information

Click here Proxy Voting

Click here Shareholder Meeting Results

Click here Investment Management Agreement Approval

Click here Trustees and Officers

This report must be preceded or accompanied by a prospectus. To obtain an additional prospectus, call (800) 778-1482 or your financial representative. We advise you to carefully consider the product's objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the product. Please read the prospectus carefully before you invest.

NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

Investments in variable portfolios involve risk. Some portfolios have more risk than others. These include portfolios that allow exposure to or otherwise concentrate investments in certain sectors, geographic regions, security types, market capitalization or foreign securities (e.g., political or economic instability, which can be accentuated in Emerging Market countries). Please read the prospectus for specific details regarding its investments and risk profile.

DWS Scudder is part of Deutsche Asset Management, which is the marketing name in the US for the asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.

Performance Summary December 31, 2006

DWS Balanced VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. The Portfolio also invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond portfolio, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Balanced VIP from 12/31/1996 to 12/31/2006

[] DWS Balanced VIP — Class A

[] S&P 500® Index

[] Lehman Brothers Aggregate Bond Index

The Standard & Poor's 500® (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, agency issues, corporate and issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1590

 

Yearly periods ended December 31

 

Comparative Results

DWS Balanced VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$11,024

$12,261

$12,284

$17,813

Average annual total return

10.24%

7.03%

4.20%

5.94%

S&P 500 Index
 Growth of $10,000

$11,579

$13,470

$13,503

$22,447

Average annual total return

15.79%

10.44%

6.19%

8.42%

Lehman Brothers Aggregate Bond Index
 Growth of $10,000

$10,433

$11,150

$12,798

$18,313

Average annual total return

4.33%

3.70%

5.06%

6.24%

DWS Balanced VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$10,982

$12,125

$13,666

Average annual total return

 

9.82%

6.63%

7.19%

S&P 500 Index
 Growth of $10,000

 

$11,579

$13,470

$15,549

Average annual total return

 

15.79%

10.44%

10.31%

Lehman Brothers Aggregate Bond Index
 Growth of $10,000

 

$10,433

$11,150

$12,331

Average annual total return

 

4.33%

3.70%

4.77%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Balanced VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses, had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,084.20

 

$ 1,082.40

 

Expenses Paid per $1,000*

$ 2.68

 

$ 4.67

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,022.63

 

$ 1,020.72

 

Expenses Paid per $1,000*

$ 2.60

 

$ 4.53

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Balanced VIP

.51%

 

.89%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Balanced VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. All major asset classes — equities, bonds and cash — had positive returns for the year. Most equity indexes had double digit returns, while bond returns, except for high-yield, were in single digits. Within the equity market, small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years.

For the 12 months ended December 31, 2006, the DWS Balanced VIP Portfolio had a return of 10.24% (Class A shares, unadjusted for contract charges). Since this Portfolio invests in stocks and bonds in several different categories, performance is analyzed by comparing the Portfolio's return with indexes that represent each asset class. In order to create a benchmark that is representative of the Portfolio's standard asset mix, we calculate a blended benchmark return that is 60% return of the Standard & Poor's 500® (S&P 500) Index and 40% return of the Lehman Brothers Aggregate Bond Index. During 2006, the Portfolio underperformed this blended benchmark, which had a return of 11.11%.

The Portfolio's allocation between stocks and bonds remained close to the neutral position of 60% equity and 40% fixed income during 2006, but with a modest overweight in equities throughout the year.1 This overweight was positive for returns, as equities outperformed bonds. Within equities, an allocation to small cap equities was positive for performance, while an overweight in large cap growth relative to large cap value detracted. In the fixed income portion of the portfolio, a position in high-yield bonds was positive for performance.

William Chepolis, CFA Inna Okounkova Gary Sullivan, CFA Robert Wang
Matthew F. MacDonald Thomas F. Sassi Julie M. Van Cleave, CFA
Portfolio Managers, Deutsche Investment Management Americas Inc.

Effective January 23, 2007, the following people will handle the day-to-day management of the portfolio.

Julie Abbett Jin Chen,CFA William Chepolis, CFA
Matthew F. MacDonald Inna Okounkova Thomas Picciochi
Gary Sullivan, CFA Robert Wang Julie M.VanCleave, CFA

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. The Portfolio also invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond portfolio, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Russell 1000 Index is an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 2000 Index is an unmanaged capitalization-weighted measure of approximately 2,000 of the smallest companies in the Russell 3000 Index.

The Standard & Poor's 500 (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, agency issues, corporate and issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not include fees or expenses. It is not possible to invest directly into an index.

The Lipper Variable Annuity Mixed-Asset Target Allocation Moderate Funds category consists of funds that maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. Category returns assume reinvestment of dividends. It is not possible to invest directly into a Lipper category.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Balanced VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

60%

58%

Corporate Bonds

14%

12%

Commercial and Non-Agency Mortgage Backed Securities

12%

7%

Cash Equivalents

3%

5%

Foreign Bonds — US$ Denominated

3%

3%

US Treasury Obligations

3%

3%

Collateralized Mortgage Obligations

3%

5%

US Government Agency Sponsored Pass-Throughs

1%

2%

Asset Backed

1%

2%

Municipal Bonds and Notes

—

2%

US Government Sponsored Agencies

—

1%

 

100%

100%

Sector Diversification (Excludes Cash Equivalents and Securities Lending)

12/31/06

12/31/05

 

 

 

Financials

23%

19%

Energy

13%

12%

Information Technology

13%

18%

Consumer Discretionary

13%

12%

Health Care

10%

12%

Industrials

9%

10%

Consumer Staples

7%

7%

Materials

5%

4%

Telecommunication Services

4%

3%

Utilities

3%

3%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 7. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Balanced VIP

 


Shares

Value ($)

 

 

Common Stocks 59.8%

Consumer Discretionary 6.3%

Auto Components 0.1%

American Axle & Manufacturing Holdings, Inc.

7,000

132,930

ArvinMeritor, Inc.

18,000

328,140

Sauer-Danfoss, Inc.

5,000

161,250

Tenneco, Inc.*

12,200

301,584

 

923,904

Automobiles 0.3%

Harley-Davidson, Inc.

24,660

1,737,790

Winnebago Industries, Inc.

9,500

312,645

 

2,050,435

Distributors 0.0%

Building Materials Holding Corp.

11,400

281,466

Core-Mark Holding Co., Inc.*

700

23,415

 

304,881

Diversified Consumer Services 0.1%

Coinstar, Inc.*

9,300

284,301

Jackson Hewitt Tax Service, Inc.

3,800

129,086

Stewart Enterprises, Inc. "A"

2,200

13,750

 

427,137

Hotels Restaurants & Leisure 0.5%

Buffalo Wild Wings, Inc.*

5,100

271,320

Jack in the Box, Inc.*

6,400

390,656

LIFE TIME FITNESS, Inc.*

500

24,255

Luby's, Inc.*

17,000

185,130

O'Charley's, Inc.*

6,800

144,704

Papa John's International, Inc.*

4,000

116,040

Starbucks Corp.*

47,870

1,695,555

Triarc Companies, Inc. "B"

9,800

196,000

Vail Resorts, Inc.*

1,500

67,230

WMS Industries, Inc.*

4,300

149,898

 

3,240,788

Household Durables 0.3%

Blyth, Inc.

15,700

325,775

Fortune Brands, Inc.

19,910

1,700,115

 

2,025,890

Internet & Catalog Retail 0.0%

Stamps.com, Inc.*

3,800

59,850

Leisure Equipment & Products 0.1%

K2, Inc.*

4,700

61,993

Oakley, Inc.

13,900

278,834

 

340,827

Media 1.0%

Carmike Cinemas, Inc.

2,700

55,053

Catalina Marketing Corp.

3,900

107,250

Idearc, Inc.*

3,900

111,735

LodgeNet Entertainment Corp.*

3,300

82,599

McGraw-Hill Companies, Inc.

42,170

2,868,404

Mediacom Communications Corp. "A"*

25,800

207,432

Omnicom Group, Inc.

23,310

2,436,827

Scholastic Corp.*

6,800

243,712

 

6,113,012

 


Shares

Value ($)

 

 

Multiline Retail 1.3%

Big Lots, Inc.*

11,900

272,748

Federated Department Stores, Inc.

61,000

2,325,930

Kohl's Corp.*

16,580

1,134,569

Target Corp.

74,300

4,238,815

The Bon-Ton Stores, Inc.

5,900

204,435

 

8,176,497

Specialty Retail 2.4%

Best Buy Co., Inc.

59,420

2,922,870

Cache, Inc.*

3,000

75,720

Christopher & Banks Corp.

11,200

208,992

Dress Barn, Inc.*

12,600

293,958

DSW, Inc. "A"*

7,600

293,132

Group 1 Automotive, Inc.

7,100

367,212

Gymboree Corp.*

7,300

278,568

Lowe's Companies, Inc.

121,300

3,778,495

New York & Co., Inc.*

21,000

274,680

Payless ShoeSource, Inc.*

9,700

318,354

Select Comfort Corp.*

13,300

231,287

Staples, Inc.

171,510

4,579,317

TJX Companies, Inc.

50,000

1,426,000

 

15,048,585

Textiles, Apparel & Luxury Goods 0.2%

Brown Shoe Co., Inc.

6,500

310,310

Kellwood Co.

3,500

113,820

Maidenform Brands, Inc.*

11,200

202,944

NIKE, Inc. "B"

200

15,496

Perry Ellis International, Inc.*

8,600

352,600

Xerium Technologies, Inc.

5,200

50,908

 

1,046,078

Consumer Staples 5.1%

Beverages 1.4%

Coca-Cola Co.

58,200

2,808,150

Diageo PLC

91,373

1,793,557

PepsiCo, Inc.

68,260

4,269,663

 

8,871,370

Food & Staples Retailing 1.0%

Central European Distribution Corp.*

600

17,820

Pantry, Inc.*

4,800

224,832

Shoppers Drug Mart Corp.

19,300

828,999

Spartan Stores, Inc.

11,400

238,602

Wal-Mart Stores, Inc.

45,940

2,121,509

Walgreen Co.

65,810

3,020,021

 

6,451,783

Food Products 1.3%

Dean Foods Co.*

39,160

1,655,685

Flowers Foods, Inc.

11,800

318,482

General Mills, Inc.

43,700

2,517,120

Groupe Danone

12,089

1,831,988

Kellogg Co.

31,810

1,592,409

 

7,915,684

Household Products 1.3%

Colgate-Palmolive Co.

70,270

4,584,415

Procter & Gamble Co.

56,990

3,662,747

 

8,247,162

 


Shares

Value ($)

 

 

Personal Products 0.1%

Chattem, Inc.*

4,500

225,360

Elizabeth Arden, Inc.*

10,300

196,215

 

421,575

Tobacco 0.0%

Alliance One International, Inc.*

12,200

86,132

Energy 9.1%

Energy Equipment & Services 3.8%

Baker Hughes, Inc.

74,550

5,565,903

BJ Services Co.

102,200

2,996,504

ENSCO International, Inc.

55,400

2,773,324

Grey Wolf, Inc.*

15,000

102,900

Halliburton Co.

45,170

1,402,528

Noble Corp.

18,030

1,372,984

Parker Drilling Co.*

26,300

214,871

Pioneer Drilling Co.*

17,900

237,712

Schlumberger Ltd.

97,860

6,180,838

Superior Well Services, Inc.*

2,100

53,676

Transocean, Inc.*

34,740

2,810,119

 

23,711,359

Oil, Gas & Consumable Fuels 5.3%

Alpha Natural Resources, Inc.*

11,900

169,337

Anadarko Petroleum Corp.

57,300

2,493,696

Apache Corp.

12,900

857,979

Berry Petroleum Co. "A"

7,500

232,575

Bois d'Arc Energy, Inc.*

6,200

90,706

BP PLC (ADR)

36,300

2,435,730

Brigham Exploration Co.*

28,600

209,066

Callon Petroleum Co.*

18,700

281,061

Chevron Corp.

46,600

3,426,498

Clayton Williams Energy, Inc.*

1,400

50,834

Comstock Resources, Inc.*

9,000

279,540

ConocoPhillips

81,780

5,884,071

Devon Energy Corp.

78,570

5,270,476

Edge Petroleum Corp.*

10,300

187,872

EOG Resources, Inc.

25,420

1,587,479

ExxonMobil Corp.

66,600

5,103,558

Houston Exploration Co.*

1,900

98,382

Petrohawk Energy Corp.*

15,800

181,700

Swift Energy Co.*

6,600

295,746

USEC, Inc.*

20,300

258,216

Valero Energy Corp.

39,470

2,019,285

Whiting Petroleum Corp.*

6,400

298,240

XTO Energy, Inc.

39,836

1,874,284

 

33,586,331

Financials 12.3%

Capital Markets 2.2%

Apollo Investment Corp.

9,517

213,181

Cohen & Steers, Inc.

1,700

68,289

Lehman Brothers Holdings, Inc.

59,090

4,616,111

MCG Capital Corp.

4,400

89,408

Merrill Lynch & Co., Inc.

21,970

2,045,407

Morgan Stanley

23,100

1,881,033

SWS Group, Inc.

1,400

49,980

The Goldman Sachs Group, Inc.

18,120

3,612,222

UBS AG (Registered)

21,278

1,293,094

Waddell & Reed Financial, Inc. "A"

3,400

93,024

 

13,961,749

 


Shares

Value ($)

 

 

Commercial Banks 3.1%

BancFirst Corp.

700

37,800

Banner Corp.

800

35,472

Center Financial Corp.

4,400

105,468

City Holding Co.

3,000

122,670

CVB Financial Corp.

9,118

131,846

First Community Bancorp.

6,500

339,755

Frontier Financial Corp.

3,075

89,882

Greater Bay Bancorp.

1,900

50,027

Hanmi Financial Corp.

12,400

279,372

National City Corp.

89,600

3,275,776

Oriental Financial Group, Inc.

5,500

71,225

Pacific Capital Bancorp.

3,900

130,962

Preferred Bank

400

24,036

Prosperity Bancshares, Inc.

700

24,157

Regions Financial Corp.

35,312

1,320,669

Sandy Spring Bancorp., Inc.

400

15,272

Sterling Bancshares, Inc.

32,050

417,291

Sterling Financial Corp.

2,300

77,763

SunTrust Banks, Inc.

12,900

1,089,405

Taylor Capital Group, Inc.

2,900

106,169

Trustmark Corp.

2,200

71,962

United Community Banks, Inc.

700

22,624

US Bancorp.

89,200

3,228,148

Wachovia Corp.

92,000

5,239,400

Wells Fargo & Co.

91,200

3,243,072

West Coast Bancorp.

1,100

38,104

 

19,588,327

Consumer Finance 0.4%

Advanta Corp. "B"

500

21,815

American Express Co.

26,210

1,590,161

Cash America International, Inc.

7,400

347,060

First Cash Financial Services, Inc.*

7,500

194,025

United PanAm Financial Corp.*

6,400

88,064

 

2,241,125

Diversified Financial Services 3.2%

Bank of America Corp.

149,100

7,960,449

Citigroup, Inc.

131,500

7,324,550

JPMorgan Chase & Co.

104,500

5,047,350

 

20,332,349

Insurance 1.9%

Aflac, Inc.

75,600

3,477,600

American International Group, Inc.

63,200

4,528,912

Argonaut Group, Inc.*

6,500

226,590

Genworth Financial, Inc. "A"

27,460

939,407

Hartford Financial Services Group, Inc.

22,400

2,090,144

Odyssey Re Holdings Corp.

11,900

443,870

Seabright Insurance Holdings*

9,600

172,896

Tower Group, Inc.

6,100

189,527

 

12,068,946

Real Estate Investment Trusts 0.7%

Alexandria Real Estate Equities, Inc. (REIT)

1,800

180,720

American Home Mortgage Investment Corp. (REIT)

4,500

158,040

BioMed Realty Trust, Inc. (REIT)

5,900

168,740

Corporate Office Properties Trust (REIT)

1,500

75,705

Cousins Properties, Inc. (REIT)

4,800

169,296

Crescent Real Estate Equities Co. (REIT)

6,700

132,325

 


Shares

Value ($)

 

 

EastGroup Properties, Inc. (REIT)

1,500

80,340

Entertainment Properties Trust (REIT)

400

23,376

Equity Lifestyle Properties, Inc. (REIT)

1,800

97,974

FelCor Lodging Trust, Inc. (REIT)

400

8,736

First Industrial Realty Trust, Inc. (REIT)

4,600

215,694

Glimcher Realty Trust (REIT)

3,700

98,827

Healthcare Realty Trust, Inc. (REIT)

2,600

102,804

Highwoods Properties, Inc. (REIT)

5,100

207,876

Home Properties, Inc. (REIT)

1,200

71,124

LaSalle Hotel Properties (REIT)

500

22,925

Lexington Corporate Properties Trust (REIT)

7,600

170,392

LTC Properties, Inc. (REIT)

700

19,117

Mid-America Apartment Communities, Inc. (REIT)

1,900

108,756

National Retail Properties, Inc. (REIT)

6,800

156,060

Nationwide Health Properties, Inc. (REIT)

7,200

217,584

Newcastle Investment Corp. (REIT)

6,100

191,052

OMEGA Healthcare Investors, Inc. (REIT)

2,900

51,388

Parkway Properties, Inc. (REIT)

2,800

142,828

Pennsylvania Real Estate Investment Trust (REIT)

2,200

86,636

Potlatch Corp. (REIT)

4,200

184,044

RAIT Investment Trust (REIT)

2,900

99,992

Realty Income Corp. (REIT)

4,300

119,110

Redwood Trust, Inc. (REIT)

2,600

151,008

Senior Housing Properties Trust (REIT)

8,000

195,840

Sovran Self Storage, Inc. (REIT)

1,600

91,648

Strategic Hotels & Resorts, Inc. (REIT)

5,200

113,308

Sun Communities, Inc. (REIT)

400

12,944

Sunstone Hotel Investors, Inc. (REIT)

3,700

98,901

Urstadt Biddle Properties "A" (REIT)

600

11,454

Washington Real Estate Investment Trust (REIT)

4,300

172,000

 

4,208,564

Thrifts & Mortgage Finance 0.8%

BankUnited Financial Corp. "A"

10,900

304,764

Corus Bankshares, Inc.

13,500

311,445

First Niagara Financial Group, Inc.

8,000

118,880

FirstFed Financial Corp.*

6,200

415,214

Franklin Bank Corp.*

1,400

28,756

Fremont General Corp.

18,500

299,885

NetBank, Inc.

11,200

51,968

Ocwen Financial Corp.*

18,600

294,996

PFF Bancorp., Inc.

7,750

267,452

TierOne Corp.

6,000

189,660

Triad Guaranty, Inc.*

1,300

71,331

Washington Mutual, Inc.

62,800

2,856,772

WSFS Financial Corp.

1,900

127,167

 

5,338,290

Health Care 7.8%

Biotechnology 1.6%

Alkermes, Inc.*

17,600

235,312

Amgen, Inc.*

24,450

1,670,179

 


Shares

Value ($)

 

 

Digene Corp.*

4,900

234,808

Genentech, Inc.*

45,590

3,698,717

Gilead Sciences, Inc.*

54,190

3,518,557

ICOS Corp.*

1,800

60,822

OSI Pharmaceuticals, Inc.*

6,400

223,872

Progenics Pharmaceuticals, Inc.*

8,100

208,494

 

9,850,761

Health Care Equipment & Supplies 2.1%

Baxter International, Inc.

119,820

5,558,450

C.R. Bard, Inc.

18,650

1,547,390

HealthTronics, Inc.*

9,300

61,938

Integra LifeSciences Holdings*

8,200

349,238

Medtronic, Inc.

50,800

2,718,308

West Pharmaceutical Services, Inc.

8,300

425,209

Zimmer Holdings, Inc.*

31,290

2,452,510

Zoll Medical Corp.*

900

52,416

 

13,165,459

Health Care Providers & Services 1.0%

Alliance Imaging, Inc.*

30,900

205,485

Apria Healthcare Group, Inc.*

16,700

445,055

Centene Corp.*

9,800

240,786

CorVel Corp.*

4,900

233,093

Gentiva Health Services, Inc.*

11,200

213,472

inVentiv Health, Inc.*

4,600

162,610

Kindred Healthcare, Inc.*

11,200

282,800

LCA-Vision, Inc.

4,800

164,928

LHC Group, Inc.*

700

19,957

Magellan Health Services, Inc.*

9,000

388,980

MedCath Corp.*

9,700

265,392

UnitedHealth Group, Inc.

65,230

3,504,808

 

6,127,366

Health Care Technology 0.0%

TriZetto Group, Inc.*

6,200

113,894

Vital Images, Inc.*

4,400

153,120

 

267,014

Life Sciences Tools & Services 0.1%

Albany Molecular Research, Inc.*

11,300

119,328

Kendle International, Inc.*

5,500

172,975

Pharmanet Development Group, Inc.*

5,500

121,385

 

413,688

Pharmaceuticals 3.0%

Abbott Laboratories

83,240

4,054,620

Eli Lilly & Co.

17,820

928,422

Hi-Tech Pharmacal Co., Inc.*

2,250

27,383

Johnson & Johnson

112,782

7,445,868

K-V Pharmaceutical Co. "A"*

2,400

57,072

Medicines Co.*

8,500

269,620

Noven Pharmaceuticals, Inc.*

8,700

221,415

Pain Therapeutics, Inc.*

17,700

157,530

Pfizer, Inc.

109,700

2,841,230

Sciele Pharma, Inc.*

10,100

242,400

SuperGen, Inc.*

3,800

19,304

Teva Pharmaceutical Industries Ltd. (ADR)

18,440

573,115

Valeant Pharmaceuticals International

12,600

217,224

ViroPharma, Inc.*

10,900

159,576

Wyeth

40,600

2,067,352

 

19,282,131

 


Shares

Value ($)

 

 

Industrials 6.0%

Aerospace & Defense 1.5%

EDO Corp.

2,400

56,976

Honeywell International, Inc.

36,500

1,651,260

L-3 Communications Holdings, Inc.

23,300

1,905,474

Orbital Sciences Corp.*

18,200

335,608

United Industrial Corp.

6,600

334,950

United Technologies Corp.

84,940

5,310,449

 

9,594,717

Air Freight & Logistics 0.4%

ABX Air, Inc.*

15,500

107,415

FedEx Corp.

19,380

2,105,056

 

2,212,471

Airlines 0.1%

Alaska Air Group, Inc.*

8,200

323,900

ExpressJet Holdings, Inc.*

14,500

117,450

Republic Airways Holdings, Inc.*

11,700

196,326

 

637,676

Building Products 0.0%

American Woodmark Corp.

7,500

313,875

Commercial Services & Supplies 0.4%

Administaff, Inc.

5,900

252,343

American Ecology Corp.

3,100

57,381

Casella Waste Systems, Inc. "A"*

800

9,784

Clean Harbors, Inc.*

4,200

203,322

Consolidated Graphics, Inc.*

4,700

277,629

Deluxe Corp.

15,500

390,600

Huron Consulting Group, Inc.*

700

31,738

IHS, Inc. "A"*

7,200

284,256

John H. Harland Co.

2,900

145,580

Kforce, Inc.*

16,800

204,456

Layne Christensen Co.*

6,800

223,244

McGrath Rentcorp.

700

21,441

Volt Information Sciences, Inc.*

5,100

256,071

Watson Wyatt Worldwide, Inc. "A"

2,300

103,845

 

2,461,690

Construction & Engineering 0.2%

EMCOR Group, Inc.*

7,000

397,950

Granite Construction, Inc.

7,200

362,304

Infrasource Services, Inc.*

8,700

189,399

Perini Corp.*

5,500

169,290

 

1,118,943

Electrical Equipment 0.5%

A.O. Smith Corp.

5,000

187,800

Acuity Brands, Inc.

400

20,816

Emerson Electric Co.

55,540

2,448,758

General Cable Corp.*

5,600

244,776

II-VI, Inc.*

9,800

273,812

 

3,175,962

Industrial Conglomerates 1.1%

General Electric Co.

182,240

6,781,150

Tredegar Corp.

4,000

90,440

 

6,871,590

Machinery 1.3%

Accuride Corp.*

27,300

307,398

Caterpillar, Inc.

22,170

1,359,686

Dover Corp.

17,600

862,752

Freightcar America, Inc.

5,900

327,155

Illinois Tool Works, Inc.

55,900

2,582,021

 


Shares

Value ($)

 

 

Ingersoll-Rand Co., Ltd. "A"

71,200

2,786,056

NACCO Industries, Inc. "A"

200

27,320

Wabtec Corp.

2,200

66,836

 

8,319,224

Road & Rail 0.5%

Burlington Northern Santa Fe Corp.

27,700

2,044,537

Celadon Group, Inc.*

1,400

23,450

Dollar Thrifty Automotive Group, Inc.*

8,900

405,929

Marten Transport Ltd.*

7,100

130,143

U.S. Xpress Enterprises, Inc. "A"*

11,700

192,699

USA Truck, Inc.*

14,500

232,725

 

3,029,483

Trading Companies & Distributors 0.0%

Electro Rent Corp.*

9,800

163,660

Information Technology 9.3%

Communications Equipment 1.6%

C-COR, Inc.*

21,300

237,282

Cisco Systems, Inc.*

173,770

4,749,134

Dycom Industries, Inc.*

13,200

278,784

Harris Corp.

28,400

1,302,424

InterDigital Communications Corp.*

8,500

285,175

Nokia Oyj (ADR)

94,400

1,918,208

QUALCOMM, Inc.

32,330

1,221,751

 

9,992,758

Computers & Peripherals 1.3%

Apple Computer, Inc.*

32,800

2,782,752

EMC Corp.*

130,230

1,719,036

Hewlett-Packard Co.

44,700

1,841,193

International Business Machines Corp.

21,240

2,063,466

Komag, Inc.*

6,500

246,220

 

8,652,667

Electronic Equipment & Instruments 0.3%

Daktronics, Inc.

7,000

257,950

Itron, Inc.*

5,700

295,488

Littelfuse, Inc.*

5,800

184,904

Mettler-Toledo International, Inc.*

10,900

859,465

Newport Corp.*

6,300

131,985

 

1,729,792

Internet Software & Services 0.7%

aQuantive, Inc.*

7,500

184,950

DealerTrack Holdings, Inc.*

6,800

200,056

eBay, Inc.*

41,860

1,258,730

Google, Inc. "A"*

2,640

1,215,667

InfoSpace, Inc.*

2,500

51,275

j2 Global Communications, Inc.*

6,100

166,225

RealNetworks, Inc.*

3,700

40,478

Sohu.com, Inc.*

4,200

100,800

United Online, Inc.

1,500

19,920

ValueClick, Inc.*

9,700

229,211

WebEx Communications, Inc.*

4,700

163,983

Websense, Inc.*

6,700

152,961

Yahoo!, Inc.*

41,960

1,071,659

 

4,855,915

IT Services 1.0%

Accenture Ltd. "A"

63,410

2,341,732

Covansys Corp.*

10,400

238,680

Fiserv, Inc.*

27,460

1,439,453

infoUSA, Inc.

20,100

239,391

 


Shares

Value ($)

 

 

ManTech International Corp. "A"*

6,600

243,078

Paychex, Inc.

37,200

1,470,888

SRA International, Inc. "A"*

1,100

29,414

StarTek, Inc.

8,300

112,382

Sykes Enterprises, Inc.*

2,400

42,336

 

6,157,354

Semiconductors & Semiconductor Equipment 2.2%

Actel Corp.*

11,800

214,288

Applied Materials, Inc.

94,900

1,750,905

Asyst Technologies, Inc.*

27,400

200,294

Broadcom Corp. "A"*

30,640

989,978

Brooks Automation, Inc.*

17,300

249,120

Credence Systems Corp.*

35,600

185,120

Diodes, Inc.*

6,000

212,880

Intel Corp.

220,700

4,469,175

Intevac, Inc.*

6,900

179,055

Linear Technology Corp.

41,550

1,259,796

Micrel, Inc.*

6,900

74,382

MIPS Technologies, Inc.*

22,100

183,430

OmniVision Technologies, Inc.*

13,700

187,005

RF Micro Devices, Inc.*

11,100

75,369

Supertex, Inc.*

5,200

204,100

Tessera Technologies, Inc.*

7,800

314,652

Texas Instruments, Inc.

105,430

3,036,384

 

13,785,933

Software 2.2%

Adobe Systems, Inc.*

41,650

1,712,648

Ansoft Corp.*

9,700

269,660

Blackbaud, Inc.

2,500

65,000

Electronic Arts, Inc.*

28,800

1,450,368

FalconStor Software, Inc.*

2,400

20,760

Kronos, Inc.*

8,400

308,616

Manhattan Associates, Inc.*

7,600

228,608

Microsoft Corp.

196,550

5,868,983

MicroStrategy, Inc. "A"*

2,122

241,929

NetScout Systems, Inc.*

6,500

53,950

SPSS, Inc.*

2,500

75,175

Symantec Corp.*

153,300

3,196,305

Ultimate Software Group, Inc.*

9,900

230,274

 

13,722,276

Materials 1.8%

Chemicals 1.2%

Dow Chemical Co.

62,600

2,500,244

E.I. du Pont de Nemours & Co.

40,300

1,963,013

Ecolab, Inc.

38,850

1,756,020

Georgia Gulf Corp.

13,600

262,616

H.B. Fuller Co.

13,300

343,406

Hercules, Inc.*

5,800

111,998

Pioneer Companies, Inc.*

11,400

326,724

Spartech Corp.

13,000

340,860

 

7,604,881

Containers & Packaging 0.4%

Caraustar Industries, Inc.*

18,200

147,238

Rock-Tenn Co. "A"

11,800

319,898

Sonoco Products Co.

57,900

2,203,674

 

2,670,810

Metals & Mining 0.2%

AK Steel Holding Corp.*

13,900

234,910

Century Aluminum Co.*

5,800

258,970

Chaparral Steel Co.

8,500

376,295

 


Shares

Value ($)

 

 

Hecla Mining Co.*

16,900

129,454

 

999,629

Paper & Forest Products 0.0%

Buckeye Technologies, Inc.*

18,000

215,640

Deltic Timber Corp.

600

33,468

Neenah Paper, Inc.

400

14,128

 

263,236

Telecommunication Services 1.4%

Diversified Telecommunication Services 1.3%

Alaska Communications Systems Group, Inc.

18,900

287,091

AT&T, Inc.

87,800

3,138,850

CT Communications, Inc.

12,700

291,084

General Communication, Inc. "A"*

12,400

195,052

Golden Telecom, Inc.

7,700

360,668

Verizon Communications, Inc.

113,000

4,208,120

 

8,480,865

Wireless Telecommunication Services 0.1%

Centennial Communications Corp.

26,700

191,973

Syniverse Holdings, Inc.*

3,300

49,467

USA Mobility, Inc.

6,400

143,168

 

384,608

Utilities 0.7%

Electric Utilities 0.4%

ALLETE, Inc.

700

32,578

FPL Group, Inc.

41,800

2,274,756

IDACORP, Inc.

2,200

85,030

Otter Tail Corp.

1,900

59,204

 

2,451,568

Gas Utilities 0.1%

Piedmont Natural Gas Co., Inc.

1,300

34,775

South Jersey Industries, Inc.

3,900

130,299

Southwest Gas Corp.

11,800

452,766

 

617,840

Independent Power Producers & Energy Traders 0.1%

TXU Corp.

13,160

713,404

Multi-Utilities 0.1%

Avista Corp.

6,000

151,860

PNM Resources, Inc.

7,000

217,700

 

369,560

Total Common Stocks (Cost $287,518,938)

377,247,436

 

Principal Amount ($)(a)

Value ($)

 

 

Corporate Bonds 13.9%

Consumer Discretionary 2.8%

AAC Group Holding Corp., 12.75%, 10/1/2012 (PIK)

72,702

77,428

Affinia Group, Inc., 9.0%, 11/30/2014

155,000

151,900

AMC Entertainment, Inc., 8.0%, 3/1/2014

235,000

233,237

American Achievement Corp., 8.25%, 4/1/2012

15,000

15,356

American Media Operations, Inc., Series B, 10.25%, 5/1/2009

60,000

58,125

Buffets, Inc., 144A, 12.5%, 11/1/2014

60,000

60,450

 

Principal Amount ($)(a)

Value ($)

 

 

Burlington Coat Factory Warehouse Corp., 144A, 11.125%, 4/15/2014

95,000

92,625

Cablevision Systems Corp., Series B, 9.87%**, 4/1/2009

60,000

63,300

Caesars Entertainment, Inc., 8.875%, 9/15/2008

105,000

109,462

Charter Communications Holdings LLC:

 

 

8.625%, 4/1/2009

10,000

9,700

9.625%, 11/15/2009

10,000

9,700

10.25%, 9/15/2010

490,000

512,662

Series B, 10.25%, 9/15/2010

145,000

151,344

11.0%, 10/1/2015

461,000

473,101

Comcast Cable Communications Holdings, Inc., 9.455%, 11/15/2022

220,000

284,886

Comcast Corp., 6.45%, 3/15/2037

645,000

645,348

Cooper-Standard Automotive, Inc., 8.375%, 12/15/2014

115,000

90,563

CSC Holdings, Inc.:

 

 

7.25%, 7/15/2008

80,000

80,700

7.875%, 12/15/2007

265,000

268,312

Series B, 8.125%, 7/15/2009

35,000

36,269

Series B, 8.125%, 8/15/2009

35,000

36,269

DaimlerChrysler NA Holding Corp.:

 

 

4.75%, 1/15/2008

750,000

743,161

Series E, 5.901%**, 10/31/2008

389,000

390,506

Denny's Corp. Holdings, Inc., 10.0%, 10/1/2012

30,000

31,650

Dex Media East LLC/Financial, 12.125%, 11/15/2012

823,000

906,329

EchoStar DBS Corp.:

 

 

6.625%, 10/1/2014

135,000

131,625

7.125%, 2/1/2016

100,000

100,000

Foot Locker, Inc., 8.5%, 1/15/2022

30,000

29,475

Ford Motor Co., 7.45%, 7/16/2031

95,000

74,575

French Lick Resorts & Casinos, 144A, 10.75%, 4/15/2014

340,000

317,900

General Motors Corp.:

 

 

7.4%, 9/1/2025

85,000

71,825

8.375%, 7/15/2033 (b)

310,000

286,750

Goodyear Tire & Rubber Co., 11.25%, 3/1/2011

550,000

607,750

Gregg Appliances, Inc., 9.0%, 2/1/2013

55,000

52,525

Hanesbrands, Inc., 144A, 8.735%**, 12/15/2014

75,000

76,313

Harrah's Operating Co., Inc., 5.625%, 6/1/2015

450,000

385,942

Hertz Corp.:

 

 

144A, 8.875%, 1/1/2014

220,000

230,450

144A, 10.5%, 1/1/2016

50,000

55,000

ION Media Networks, Inc., 144A, 11.624%**, 1/15/2013

90,000

91,125

Isle of Capri Casinos, Inc., 7.0%, 3/1/2014

315,000

313,425

Jacobs Entertainment, Inc., 9.75%, 6/15/2014

165,000

167,475

JC Penney Corp., Inc., 8.0%, 3/1/2010

500,000

532,362

Lear Corp.:

 

 

Series B, 5.75%, 8/1/2014

10,000

8,400

144A, 8.75%, 12/1/2016

75,000

72,469

Levi Strauss & Co., 10.122%**, 4/1/2012

10,000

10,263

 

Principal Amount ($)(a)

Value ($)

 

 

Liberty Media Corp.:

 

 

5.7%, 5/15/2013

20,000

18,843

8.25%, 2/1/2030

125,000

122,528

8.5%, 7/15/2029

160,000

160,873

Majestic Star Casino LLC, 9.5%, 10/15/2010

15,000

15,750

Mediacom Broadband LLC, 8.5%, 10/15/2015

10,000

10,125

Medimedia USA, Inc., 144A, 11.375%, 11/15/2014

45,000

47,138

Metaldyne Corp.:

 

 

10.0%, 11/1/2013

75,000

80,250

11.0%, 6/15/2012

35,000

35,875

MGM MIRAGE:

 

 

6.75%, 9/1/2012

40,000

39,400

8.375%, 2/1/2011

80,000

83,000

9.75%, 6/1/2007

145,000

146,812

MTR Gaming Group, Inc., Series B, 9.75%, 4/1/2010

160,000

168,800

NCL Corp., 10.625%, 7/15/2014

35,000

35,000

Norcraft Holdings/Capital, Step-up Coupon, 0% to 9/1/2008, 9.75% to 9/1/2012

245,000

207,025

Pinnacle Entertainment, Inc., 8.75%, 10/1/2013

95,000

100,700

Pokagon Gaming Authority, 144A, 10.375%, 6/15/2014

40,000

43,800

Premier Entertainment Biloxi LLC/Finance, 10.75%, 2/1/2012

575,000

592,250

PRIMEDIA, Inc.:

 

 

8.875%, 5/15/2011

105,000

107,100

10.749%**, 5/15/2010

260,000

270,400

Resorts International Hotel & Casino, Inc., 11.5%, 3/15/2009

560,000

577,500

Sinclair Broadcast Group, Inc.:

 

 

8.0%, 3/15/2012

115,000

118,737

8.75%, 12/15/2011

305,000

318,344

Sirius Satellite Radio, Inc., 9.625%, 8/1/2013

210,000

206,587

Six Flags, Inc., 9.75%, 4/15/2013

285,000

267,544

Station Casinos, Inc., 6.5%, 2/1/2014

125,000

111,094

TCI Communications, Inc., 8.75%, 8/1/2015

135,000

159,676

The Bon-Ton Department Stores, Inc., 10.25%, 3/15/2014

100,000

102,250

Time Warner, Inc., 5.875%, 11/15/2016

765,000

763,068

Travelport, Inc., 144A, 9.994%**, 9/1/2014

75,000

73,125

Trump Entertainment Resorts, Inc., 8.5%, 6/1/2015

395,000

393,025

TRW Automotive, Inc.:

 

 

11.0%, 2/15/2013

405,000

443,981

11.75%, 2/15/2013 EUR

75,000

111,008

United Auto Group, Inc.:

 

 

144A, 7.75%, 12/15/2016

75,000

75,375

9.625%, 3/15/2012

375,000

394,219

Wheeling Island Gaming, Inc., 10.125%, 12/15/2009

65,000

66,219

Wyndham Worldwide Corp., 144A, 6.0%, 12/1/2016

830,000

815,399

XM Satellite Radio, Inc., 9.75%, 5/1/2014

405,000

405,000

Young Broadcasting, Inc., 8.75%, 1/15/2014

585,000

506,756

 

17,342,608

 

Principal Amount ($)(a)

Value ($)

 

 

Consumer Staples 0.4%

CVS Corp., 5.75%, 8/15/2011

810,000

819,741

Del Laboratories, Inc., 8.0%, 2/1/2012

80,000

75,000

Delhaize America, Inc.:

 

 

8.05%, 4/15/2027

30,000

32,440

9.0%, 4/15/2031

420,000

498,668

Harry & David Holdings, Inc., 10.369%**, 3/1/2012

85,000

84,575

Kraft Foods, Inc., 6.25%, 6/1/2012

500,000

519,401

North Atlantic Trading Co., 9.25%, 3/1/2012

200,000

174,500

Viskase Co., Inc., 11.5%, 6/15/2011

480,000

480,000

 

2,684,325

Energy 0.7%

Belden & Blake Corp., 8.75%, 7/15/2012

405,000

415,125

Chaparral Energy, Inc., 8.5%, 12/1/2015

215,000

213,925

Chesapeake Energy Corp.:

 

 

6.25%, 1/15/2018

100,000

96,250

6.875%, 1/15/2016

285,000

287,494

7.75%, 1/15/2015

40,000

41,650

Complete Production Services, Inc., 144A, 8.0%, 12/15/2016

140,000

143,500

Delta Petroleum Corp., 7.0%, 4/1/2015

250,000

231,250

Dynegy Holdings, Inc.:

 

 

7.625%, 10/15/2026

250,000

242,500

8.375%, 5/1/2016

200,000

210,000

El Paso Production Holding Corp., 7.75%, 6/1/2013

170,000

177,862

Encore Acquisition Co., 6.0%, 7/15/2015

45,000

41,063

Frontier Oil Corp., 6.625%, 10/1/2011

65,000

64,837

NGC Corp. Capital Trust I, Series B, 8.316%, 6/1/2027

100,000

94,500

Peabody Energy Corp., 7.375%, 11/1/2016

60,000

63,900

Quicksilver Resources, Inc., 7.125%, 4/1/2016

55,000

53,763

Sabine Pass LNG LP:

 

 

144A, 7.25%, 11/30/2013

100,000

99,375

144A, 7.5%, 11/30/2016

100,000

99,625

Southern Natural Gas, 8.875%, 3/15/2010

340,000

356,691

Stone Energy Corp.:

 

 

6.75%, 12/15/2014

265,000

253,075

144A, 8.124%**, 7/15/2010

270,000

267,300

Transmeridian Exploration, Inc., 12.0%, 12/15/2010

150,000

144,375

Williams Companies, Inc.:

 

 

8.125%, 3/15/2012

575,000

622,437

8.75%, 3/15/2032

265,000

299,450

 

4,519,947

Financials 4.6%

Alamosa Delaware, Inc., 11.0%, 7/31/2010

125,000

135,073

Allstate Corp., 6.125%, 2/15/2012

1,000,000

1,035,815

Ashton Woods USA LLC, 9.5%, 10/1/2015

235,000

213,850

BCP Crystal Holdings Corp., 9.625%, 6/15/2014

30,000

33,150

 

Principal Amount ($)(a)

Value ($)

 

 

Buffalo Thunder Development Authority, 144A, 9.375%, 12/15/2014

45,000

45,675

Capital One III, 7.686%, 8/15/2036

1,525,000

1,727,152

Citadel Investment Group LLC, 144A, 6.25%, 12/15/2011

1,250,000

1,231,982

CNA Financial Corp., 6.5%, 8/15/2016

370,000

385,968

Duke Realty LP, 5.95%, 2/15/2017

1,250,000

1,268,077

E*TRADE Financial Corp.:

 

 

7.375%, 9/15/2013

80,000

83,200

7.875%, 12/1/2015

65,000

69,063

8.0%, 6/15/2011

140,000

146,300

ERP Operating LP:

 

 

5.375%, 8/1/2016

333,000

329,520

6.95%, 3/2/2011

211,000

223,433

Ford Motor Credit Co.:

 

 

7.25%, 10/25/2011

615,000

602,252

7.375%, 10/28/2009

1,170,000

1,172,492

7.875%, 6/15/2010

295,000

297,450

8.0%, 12/15/2016

100,000

98,815

8.11%**, 1/13/2012

100,000

99,092

GMAC LLC:

 

 

4.375%, 12/10/2007

134,000

132,135

6.125%, 2/1/2007 (b)

1,377,000

1,378,797

6.125%, 8/28/2007

622,000

622,122

6.875%, 9/15/2011

1,305,000

1,338,536

8.0%, 11/1/2031

569,000

653,251

GNC Parent Corp., 144A, 12.114%**, 12/1/2011 (PIK)

110,000

110,000

Health Care Property Investors, Inc., (REIT):

 

 

5.65%, 12/15/2013

1,215,000

1,198,623

5.95%, 9/15/2011

300,000

302,675

Hexion US Finance Corp., 144A, 9.75%, 11/15/2014

60,000

60,825

Idearc, Inc., 144A, 8.0%, 11/15/2016

355,000

360,325

iPayment, Inc., 9.75%, 5/15/2014

85,000

87,338

John Deere Capital Corp., 5.1%, 1/15/2013

1,000,000

982,529

JPMorgan Chase Capital XV, 5.875%, 3/15/2035

585,000

571,557

Lehman Brothers Holdings, Inc., 5.75%, 1/3/2017

625,000

632,999

Manufacturers & Traders Trust Co., 5.629%, 12/1/2021

1,250,000

1,231,401

Merrill Lynch & Co., Inc., 6.22%, 9/15/2026

380,000

391,577

MetLife, Inc., 6.4%, 12/15/2036

675,000

678,110

PNC Preferred Funding Trust, 144A, 6.517%, 12/31/2049 (b)

500,000

508,688

Popular North America, Inc., Series E, 3.875%, 10/1/2008

1,000,000

974,134

Poster Financial Group, Inc., 8.75%, 12/1/2011

290,000

300,875

R.H. Donnelly Finance Corp., 10.875%, 12/15/2012

330,000

359,700

Residential Capital LLC, 6.375%, 6/30/2010

1,630,000

1,648,970

Sally Holdings LLC, 144A, 9.25%, 11/15/2014

155,000

157,906

Simon Property Group LP, (REIT):

 

 

5.25%, 12/1/2016

1,005,000

979,253

6.1%, 5/1/2016

600,000

621,947

The Goldman Sachs Group, Inc., 5.95%, 1/15/2027

705,000

696,622

 

Principal Amount ($)(a)

Value ($)

 

 

Titan International, Inc., 144A, 8.0%, 1/15/2012

155,000

155,969

Triad Acquisition Corp., Series B, 11.125%, 5/1/2013

125,000

118,750

UCI Holding Co., Inc., 144A, 12.365%**, 12/15/2013 (PIK)

95,000

92,150

Universal City Development, 11.75%, 4/1/2010

380,000

407,075

USB Realty Corp., 144A, 6.091%, 12/22/2049

670,000

668,144

Verizon Global Funding Corp., 7.75%, 12/1/2030

170,000

199,406

Washington Mutual Preferred Funding Delaware, Series A-1, 144A, 6.534%, 3/29/2049

600,000

593,100

Washington Mutual Preferred Funding II, 144A, 6.665%, 12/31/2049

700,000

701,876

Wimar Opco LLC, 144A, 9.625%, 12/15/2014

155,000

153,450

 

29,269,174

Health Care 0.2%

HCA, Inc.:

 

 

6.5%, 2/15/2016

80,000

67,400

144A, 9.125%, 11/15/2014

120,000

128,250

144A, 9.25%, 11/15/2016

275,000

294,594

HEALTHSOUTH Corp.:

 

 

144A, 10.75%, 6/15/2016

190,000

204,487

144A, 11.354%**, 6/15/2014

30,000

31,950

Tenet Healthcare Corp., 9.25%, 2/1/2015

385,000

385,000

Wyeth, 6.5%, 2/1/2034

400,000

435,092

 

1,546,773

Industrials 1.0%

Aleris International, Inc., 144A, 9.0%, 12/15/2014

75,000

75,375

Allied Security Escrow Corp., 11.375%, 7/15/2011

130,000

133,250

Allied Waste North America, Inc., Series B, 9.25%, 9/1/2012

300,000

318,750

American Color Graphics, 10.0%, 6/15/2010

145,000

102,950

Browning-Ferris Industries:

 

 

7.4%, 9/15/2035

250,000

233,750

9.25%, 5/1/2021

140,000

148,400

Burlington Northern Santa Fe Corp., 6.2%, 8/15/2036

450,000

463,629

Case New Holland, Inc., 9.25%, 8/1/2011

345,000

365,269

Cenveo Corp., 7.875%, 12/1/2013

195,000

187,200

Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010

275,000

281,187

Congoleum Corp., 8.625%, 8/1/2008*

190,000

180,500

DRS Technologies, Inc.:

 

 

6.625%, 2/1/2016

35,000

35,263

7.625%, 2/1/2018

185,000

190,550

Education Management LLC, 144A, 8.75%, 6/1/2014

75,000

77,625

Esco Corp.:

 

 

144A, 8.625%, 12/15/2013

155,000

159,263

144A, 9.235%**, 12/15/2013

250,000

253,750

Iron Mountain, Inc., 8.75%, 7/15/2018

60,000

63,600

K. Hovnanian Enterprises, Inc.:

 

 

6.25%, 1/15/2016

270,000

255,150

 

Principal Amount ($)(a)

Value ($)

 

 

8.875%, 4/1/2012

295,000

299,425

Kansas City Southern:

 

 

7.5%, 6/15/2009

55,000

55,481

9.5%, 10/1/2008

530,000

553,850

Millennium America, Inc., 9.25%, 6/15/2008

120,000

123,900

Mobile Services Group, Inc., 144A, 9.75%, 8/1/2014

140,000

146,300

Owens Corning, Inc., 144A, 7.0%, 12/1/2036

742,000

749,272

Panolam Industries International, Inc., 144A, 10.75%, 10/1/2013

45,000

47,363

Rainbow National Services LLC, 144A, 10.375%, 9/1/2014

30,000

33,338

Riverdeep Bank, 11.063%, 12/15/2007

170,000

170,212

Ship Finance International Ltd., 8.5%, 12/15/2013

75,000

74,906

The Brickman Group Ltd., Series B, 11.75%, 12/15/2009

210,000

223,125

Williams Partners LP, 144A, 7.25%, 2/1/2017

75,000

76,500

Xerox Capital Trust I, 8.0%, 2/1/2027

65,000

66,381

 

6,145,514

Information Technology 0.4%

Freescale Semiconductor, Inc., 144A, 8.875%, 12/15/2014

75,000

74,719

L-3 Communications Corp.:

 

 

5.875%, 1/15/2015

335,000

323,275

Series B, 6.375%, 10/15/2015

115,000

113,850

Lucent Technologies, Inc., 6.45%, 3/15/2029

495,000

456,637

Sanmina-SCI Corp., 8.125%, 3/1/2016

220,000

212,850

SunGard Data Systems, Inc., 10.25%, 8/15/2015

280,000

298,900

UGS Corp., 10.0%, 6/1/2012

260,000

283,400

Unisys Corp., 7.875%, 4/1/2008

455,000

453,863

 

2,217,494

Materials 1.3%

ARCO Chemical Co., 9.8%, 2/1/2020

750,000

866,250

Associated Materials, Inc., Step-up Coupon, 0% to 3/1/2009, 11.25% to 3/1/2014

75,000

50,625

Chemtura Corp., 6.875%, 6/1/2016

145,000

139,563

Constar International, Inc., 11.0%, 12/1/2012

35,000

32,375

CPG International I, Inc.:

 

 

10.5%, 7/1/2013

255,000

259,781

12.39%**, 7/1/2012

95,000

96,900

Crystal US Holdings:

 

 

Series A, Step-up Coupon, 0% to 10/1/2009, 10% to 10/1/2014

305,000

260,775

Series B, Step-up Coupon, 0% to 10/1/2009, 10.5% to 10/1/2014

85,000

73,100

Equistar Chemical Funding, 10.625%, 5/1/2011

180,000

191,700

Exopac Holding Corp., 144A, 11.25%, 2/1/2014

250,000

263,125

GEO Specialty Chemicals, Inc., 13.36%**, 12/31/2009

491,000

405,075

Georgia-Pacific Corp., 144A, 7.125%, 1/15/2017

55,000

54,863

Greif, Inc., 8.875%, 8/1/2012

130,000

136,500

 

Principal Amount ($)(a)

Value ($)

 

 

Hexcel Corp., 6.75%, 2/1/2015

290,000

285,650

Huntsman LLC, 11.625%, 10/15/2010

392,000

428,260

International Coal Group, Inc., 10.25%, 7/15/2014

100,000

100,000

Koppers Holdings, Inc., Step-up Coupon, 0% to 11/15/2009, 9.875% to 11/15/2014

175,000

140,000

Lyondell Chemical Co., 10.5%, 6/1/2013

50,000

55,000

Massey Energy Co.:

 

 

6.625%, 11/15/2010

215,000

215,000

6.875%, 12/15/2013

110,000

103,400

Metals USA Holding Corp., 144A, 11.365%**, 1/15/2012

110,000

105,600

Momentive Performance, 144A, 9.75%, 12/1/2014

75,000

75,000

Monsanto Co., 4.0%, 5/15/2008

1,000,000

979,684

Mueller Holdings, Inc., Step-up Coupon, 0% to 4/15/2009, 14.75% to 4/15/2014

393,000

353,700

Neenah Foundry Co.:

 

 

144A, 9.5%, 1/1/2017

110,000

110,550

144A, 13.0%, 9/30/2013

40,000

40,000

NewMarket Corp., 144A, 7.125%, 12/15/2016

185,000

185,000

OM Group, Inc., 9.25%, 12/15/2011

120,000

125,550

Omnova Solutions, Inc., 11.25%, 6/1/2010

415,000

446,125

Oxford Automotive, Inc., 144A, 12.0%, 10/15/2010*

252,982

3,795

Radnor Holdings Corp., 11.0%, 3/15/2010*

40,000

100

Rockwood Specialties Group, Inc., 10.625%, 5/15/2011

61,000

64,965

The Mosaic Co.:

 

 

144A, 7.375%, 12/1/2014

185,000

189,856

144A, 7.625%, 12/1/2016

60,000

62,175

TriMas Corp., 9.875%, 6/15/2012

205,000

198,337

United States Steel Corp., 9.75%, 5/15/2010

153,000

162,754

Weyerhaeuser Co., 5.95%, 11/1/2008

600,000

604,797

Witco Corp., 6.875%, 2/1/2026

60,000

52,500

Wolverine Tube, Inc., 10.5%, 4/1/2009

135,000

109,350

 

8,027,780

Telecommunication Services 0.9%

American Cellular Corp., Series B, 10.0%, 8/1/2011

115,000

121,613

AT&T, Inc., 6.15%, 9/15/2034

500,000

491,783

Centennial Communications Corp., 10.0%, 1/1/2013

120,000

127,650

Cincinnati Bell, Inc.:

 

 

7.25%, 7/15/2013

335,000

346,725

8.375%, 1/15/2014

245,000

251,737

Dobson Cellular Systems, 9.875%, 11/1/2012

115,000

125,350

Dobson Communications Corp., 8.875%, 10/1/2013

110,000

112,063

Insight Midwest LP, 9.75%, 10/1/2009

23,000

23,374

Intelsat Corp., 144A, 9.0%, 6/15/2016

55,000

58,231

MetroPCS Wireless, Inc., 144A, 9.25%, 11/1/2014

115,000

120,175

 

Principal Amount ($)(a)

Value ($)

 

 

Nextel Communications, Inc., Series D, 7.375%, 8/1/2015

650,000

666,526

Qwest Corp., 7.25%, 9/15/2025

225,000

231,187

Rural Cellular Corp., 9.875%, 2/1/2010

140,000

148,925

Sprint Nextel Corp., 6.0%, 12/1/2016

805,000

784,575

SunCom Wireless Holdings, Inc., 8.5%, 6/1/2013

165,000

157,987

Ubiquitel Operating Co., 9.875%, 3/1/2011

100,000

108,000

US Unwired, Inc., Series B, 10.0%, 6/15/2012

175,000

192,500

Verizon Global Funding Corp., 6.875%, 6/15/2012

500,000

534,029

Verizon New Jersey, Inc., Series A, 5.875%, 1/17/2012

745,000

754,707

Windstream Corp., 144A, 8.625%, 8/1/2016

10,000

10,950

 

5,368,087

Utilities 1.6%

AES Corp., 144A, 8.75%, 5/15/2013

885,000

948,056

Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/2012

585,000

642,037

American Electric Power Co., Inc., Series C, 5.375%, 3/15/2010

1,000,000

999,074

CMS Energy Corp., 8.5%, 4/15/2011

530,000

576,375

Consumers Energy Co., Series F, 4.0%, 5/15/2010

1,590,000

1,519,784

Dominion Resources, Inc.:

 

 

Series A, 5.6%, 11/15/2016

770,000

763,734

Series E, 7.195%, 9/15/2014

750,000

822,983

DPL, Inc., 6.875%, 9/1/2011

500,000

525,051

Mirant Americas Generation LLC, 8.3%, 5/1/2011

60,000

61,500

Mirant North America LLC, 7.375%, 12/31/2013

60,000

60,900

Mission Energy Holding Co., 13.5%, 7/15/2008

745,000

821,362

Northern States Power Co., 6.25%, 6/1/2036

400,000

426,114

NRG Energy, Inc.:

 

 

7.25%, 2/1/2014

250,000

251,875

7.375%, 2/1/2016

515,000

517,575

PECO Energy Co., 5.95%, 10/1/2036

400,000

406,416

PSE&G Energy Holdings LLC, 10.0%, 10/1/2009

625,000

684,375

Regency Energy Partners LP, 144A, 8.375%, 12/15/2013

160,000

160,400

Sierra Pacific Resources:

 

 

6.75%, 8/15/2017

175,000

171,642

8.625%, 3/15/2014

33,000

35,431

 

10,394,684

Total Corporate Bonds (Cost $86,682,909)

87,516,386

 

Foreign Bonds — US$ Denominated 2.6%

Consumer Discretionary 0.3%

Dollarama Group Holdings LP, 144A, 11.12%**, 8/15/2012

75,000

74,438

Jafra Cosmetics International, Inc., 10.75%, 5/15/2011

440,000

470,250

Quebecor World, Inc., 144A, 9.75%, 1/15/2015

75,000

75,469

 

Principal Amount ($)(a)

Value ($)

 

 

Royal Caribbean Cruises Ltd., 8.75%, 2/2/2011

422,000

461,225

Shaw Communications, Inc., 8.25%, 4/11/2010

100,000

106,250

Telenet Group Holding NV, 144A, Step-up Coupon, 0% to 12/15/2008, 11.5% to 6/15/2014

394,000

355,092

Unity Media GmbH, 144A, 10.375%, 2/15/2015

75,000

72,844

Vitro SA de CV, Series A, 11.75%, 11/1/2013

35,000

38,325

 

1,653,893

Energy 0.3%

GAZ Capital (Gazprom), 144A, 6.212%, 11/22/2016

1,065,000

1,072,455

OPTI Canada, Inc., 144A, 8.25%, 12/15/2014

90,000

92,475

Pemex Project Funding Master Trust, 5.75%, 12/15/2015

750,000

744,750

Secunda International Ltd., 13.374%**, 9/1/2012

130,000

134,388

 

2,044,068

Financials 0.8%

Axa, 144A, 6.379%, 12/14/2049

1,025,000

1,012,047

Conproca SA de CV, Series REG S, 12.0%, 6/16/2010

405,000

467,775

Doral Financial Corp., 6.204%**, 7/20/2007

325,000

295,345

Inmarsat Finance II PLC, Step-up Coupon, 0% to 11/15/2008, 10.375% to 11/15/2012

90,000

82,913

New ASAT (Finance) Ltd., 9.25%, 2/1/2011

95,000

78,850

SMFG Preferred Capital, 144A, 6.078%, 1/29/2049

1,815,000

1,795,307

Svenska Handelsbanken AB, 144A, 7.125%, 3/29/2049

330,000

331,002

Xstrata Finance Canada, 144A, 5.8%, 11/15/2016

835,000

832,577

 

4,895,816

Health Care 0.0%

Biovail Corp., 7.875%, 4/1/2010

240,000

245,100

Industrials 0.2%

Bombardier, Inc., 144A, 8.0%, 11/15/2014

75,000

76,875

Kansas City Southern de Mexico:

 

 

144A, 7.625%, 12/1/2013

205,000

205,000

9.375%, 5/1/2012

190,000

202,825

12.5%, 6/15/2012

163,000

176,040

Navios Maritime Holdings, 144A, 9.5%, 12/15/2014

110,000

108,376

Stena AB, 9.625%, 12/1/2012

75,000

79,875

Tyco International Group SA, 6.375%, 10/15/2011

500,000

523,246

 

1,372,237

Information Technology 0.0%

Seagate Technology HDD Holdings, 6.8%, 10/1/2016

145,000

145,725

Materials 0.4%

Cascades, Inc., 7.25%, 2/15/2013

227,000

226,433

ISPAT Inland ULC, 9.75%, 4/1/2014

284,000

317,370

Novelis, Inc., 144A, Step-Up-Coupon, 8.25% to 1/4/2007, 7.25% to 2/15/2015

365,000

353,137

 

Principal Amount ($)(a)

Value ($)

 

 

Rhodia SA:

 

 

8.875%, 6/1/2011

97,000

102,335

10.25%, 6/1/2010

100,000

114,000

Tembec Industries, Inc., 8.625%, 6/30/2009

105,000

71,925

Vale Overseas Ltd., 6.875%, 11/21/2036

1,045,000

1,071,800

 

2,257,000

Sovereign Bonds 0.0%

Federative Republic of Brazil, 8.875%, 10/14/2019

95,000

115,900

Republic of Argentina, 5.59%**, 8/3/2012 (PIK)

190,000

134,645

 

250,545

Telecommunication Services 0.6%

Cell C Property Ltd., 144A, 11.0%, 7/1/2015

290,000

271,875

Embratel, Series B, 11.0%, 12/15/2008

34,000

37,315

Intelsat Bermuda Ltd., 144A, 11.25%, 6/15/2016

145,000

159,137

Intelsat Ltd., 5.25%, 11/1/2008

145,000

141,013

Millicom International Cellular SA, 10.0%, 12/1/2013

80,000

87,200

Mobifon Holdings BV, 12.5%, 7/31/2010

314,000

346,974

Nortel Networks Ltd.:

 

 

144A, 9.624%**, 7/15/2011

295,000

310,856

144A, 10.125%, 7/15/2013

135,000

145,800

144A, 10.75%, 7/15/2016

110,000

120,313

Stratos Global Corp., 9.875%, 2/15/2013

175,000

168,875

Telecom Italia Capital, 4.95%, 9/30/2014

470,000

435,428

Telefonica Emisiones SAU, 6.421%, 6/20/2016

720,000

742,765

Vodafone Group PLC, 5.0%, 12/16/2013

750,000

724,870

 

3,692,421

Total Foreign Bonds — US$ Denominated (Cost $16,438,904)

16,556,805

 

Foreign Bonds — Non US$ Denominated 0.2%

Consumer Discretionary 0.1%

Cirsa Capital Luxembourg, 144A, 7.875%, 7/15/2012 EUR

100,000

126,117

Unity Media GmbH, 8.75%, 2/15/2015 EUR

160,000

205,400

 

331,517

 

Financials 0.1%

Codere Finance Luxembourg SA, 144A, 8.25%, 6/15/2015 EUR

70,000

97,717

Louis No. 1 PLC:

 

 

144A, 8.5%, 12/1/2014 EUR

75,000

99,004

144A, 10.0%, 12/1/2016 EUR

50,000

66,332

Ono Finance II, 144A, 8.0%, 5/16/2014 EUR

50,000

67,983

 

331,036

Materials 0.0%

Rhodia SA, 144A, 6.242%**, 10/15/2013 EUR

95,000

125,342

 

Principal Amount ($)(a)

Value ($)

 

 

Sovereign Bonds 0.0%

Republic of Argentina, 7.82%, 12/31/2033, (PIK) EUR

110,598

153,367

Total Foreign Bonds — Non US$ Denominated (Cost $879,328)

941,262

 

Asset Backed 1.0%

Automobile Receivables 0.3%

Capital Auto Receivables Asset Trust, "B", Series 2006-1, 5.26%, 10/15/2010

566,000

564,817

Hertz Vehicle Financing LLC, "A6", Series 2005-2A, 144A, 5.08%, 11/25/2011

1,347,000

1,338,469

MMCA Automobile Trust, "B", Series 2002-2, 4.67%, 3/15/2010

16,478

16,455

 

1,919,741

Credit Card Receivables 0.2%

Providian Master Note Trust, "B1", Series 2006-B1A, 144A, 5.35%, 3/15/2013

1,075,000

1,079,031

Home Equity Loans 0.5%

Countrywide Asset-Backed Certificates, "1AF2", Series 2005-17, 5.363%, 5/25/2036

689,000

686,105

Credit-Based Asset Servicing and Securitization, "AF2", Series 2006-CB2, 5.501%, 12/25/2036

1,613,000

1,608,420

DB Master Finance LLC, "A2", Series 2006-1, 144A, 5.779%, 6/20/2031

1,280,000

1,295,918

 

3,590,443

Total Asset Backed (Cost $6,584,347)

6,589,215

 


Shares

Value ($)

 

 

Warrants 0.0%

MicroStrategy, Inc., Expiration 6/24/2007*

96

7

TravelCenters of America, Inc., Expiration 5/1/2009*

59

1,475

Total Warrants (Cost $251)

1,482

 

Preferred Stocks 0.0%

Financials

Farm Credit Bank of Texas, Series 1, 7.561% (Cost $233,533)

218,000

233,142

 

Convertible Preferred Stocks 0.0%

Consumer Discretionary

Convertible Preferred

ION Media Networks, Inc. 144A, 9.75%, (PIK) (Cost $83,525)

12

54,600

 

Principal Amount ($)(a)

Value ($)

 

 

US Government Sponsored Agencies 0.3%

Federal National Mortgage Association, 3.25%, 1/15/2008 (Cost $1,961,135)

2,000,000

1,960,982

 

Principal Amount ($)(a)

Value ($)

 

 

US Government Agency Sponsored Pass-Throughs 1.4%

Federal Home Loan Mortgage Corp., 6.0%, 8/1/2035

807,515

805,544

Federal National Mortgage Association:

 

 

4.5%, with various maturities from 7/1/2018 until 9/1/2035

4,332,393

4,119,408

5.5%, with various maturities from 11/1/2020 until 12/1/2033

3,169,632

3,151,525

6.0%, 1/1/2024

159,944

161,951

6.5%, 5/1/2017

106,555

109,132

8.0%, 9/1/2015

197,952

208,154

Total US Government Agency Sponsored Pass-Throughs (Cost $8,674,137)

8,555,714

 

Commercial and Non-Agency Mortgage-Backed Securities 12.0%

Adjustable Rate Mortgage Trust, "3A31", Series 2005-10, 5.425%**, 1/25/2036

1,000,000

985,855

Banc of America Mortgage Securities, "2A6", Series 2004-G, 4.657%**, 8/25/2034

2,275,000

2,245,682

Bear Stearns Commercial Mortgage Securities, "A3", Series 2006-T24, 5.531%, 10/12/2041

1,800,000

1,820,587

Citicorp Mortgage Securities, Inc., "2A1", Series 2006-5, 5.5%, 10/25/2021

8,803,096

8,748,932

Citigroup Commercial Mortgage Trust, "A5", Series 2004-C2, 4.733%, 10/15/2041

2,000,000

1,926,689

Citigroup Mortgage Loan Trust, Inc., "1CB2", Series 2004-NCM2, 6.75%, 8/25/2034

327,067

333,097

Countrywide Alternative Loan Trust:

 

 

"A1", Series 2004-1T1, 5.0%, 2/25/2034

640,999

632,979

"1A5", Series 2003-J1, 5.25%, 10/25/2033

658,869

653,210

"A8", Series 2005-J14, 5.5%,12/25/2035

3,733,000

3,599,720

"4A3", Series 2005-43, 5.742%**, 10/25/2035

805,044

800,432

"A1", Series 2004-35T2, 6.0%, 2/25/2035

710,720

710,539

"3A5", Series 2005-28CB, 6.0%, 8/25/2035

2,614,807

2,631,923

"1A4", Series 2006-43CB, 6.0%, 2/25/2037

1,400,000

1,411,430

Countrywide Home Loans, "A6", Series 2003-57, 5.5%, 1/25/2034

265,526

264,292

CS First Boston Mortgage Securities Corp.:

 

 

"A3", Series 2005-C5, 5.1%, 8/15/2038

2,000,000

1,979,324

"A4", Series 2001-CP4, 6.18%, 12/15/2035

2,000,000

2,067,529

DLJ Mortgage Acceptance Corp., "A1B", Series 1997-CF2, 144A, 6.82%, 10/15/2030

105,403

105,802

GMAC Commercial Mortgage Securities, Inc., "A3", Series 1997-C1, 6.869%, 7/15/2029

40,243

40,372

 

Principal Amount ($)(a)

Value ($)

 

 

Greenwich Capital Commercial Funding Corp., "A4", Series 2005-GG3, 4.799%, 8/10/2042

2,000,000

1,933,669

GS Mortgage Securities Corp. II:

 

 

"AAB", Series 2006-GG8, 5.535%, 11/10/2039

1,800,000

1,821,000

"A4", Series 2006-GG6, 5.553%, 4/10/2038

1,950,000

1,979,999

GSR Mortgage Loan Trust:

 

 

"4A5", Series 2005-AR6, 4.551%**, 9/25/2035

1,025,000

1,005,932

"2A1", Series 2006-5F, 6.0%, 6/25/2036

1,733,795

1,744,975

JPMorgan Alternative Loan Trust, "2A4", Series 2006-S1, 5.5%, 2/25/2021

3,084,600

3,073,476

JPMorgan Chase Commercial Mortgage Securities Corp.:

 

 

"A4", Series 2005-LDP2, 4.738%, 7/15/2042

2,000,000

1,920,544

"A6", Series 2004-CBX, 4.899%, 1/12/2037

2,000,000

1,945,027

"A3", Series 2001-CIBC, 6.26%, 3/15/2033

2,138,068

2,203,845

LB-UBS Commercial Mortgage Trust:

 

 

"A2", Series 2004-C2, 3.246%, 3/15/2029

1,900,000

1,824,368

"A2", Series 2005-C2, 4.821%, 4/15/2030

165,000

162,886

"A2", Series 2006-C7, 5.3%, 11/15/2038

880,000

882,363

Master Alternative Loans Trust, "5A1", Series 2005-1, 5.5%, 1/25/2020

1,003,895

996,682

Merrill Lynch/Countrywide Commercial Mortgage Trust, "A2", Series 2006-4, 5.112%, 12/12/2049

795,000

788,977

Morgan Stanley Capital I:

 

 

"A4", Series 2005-T17, 4.52%, 12/13/2041

2,100,000

2,035,358

"A2", Series 2006-T21, 5.09%, 10/12/2052

1,079,000

1,073,706

Structured Adjustable Rate Mortgage Loan Trust:

 

 

"6A3", Series 2005-21, 5.4%, 11/25/2035

900,000

880,667

"1A1", Series 2005-17, 5.724%**, 8/25/2035

1,367,078

1,365,141

Structured Asset Securities Corp., "4A1", Series 2005-6, 5.0%, 5/25/2035

163,991

157,738

Wachovia Bank Commercial Mortgage Trust:

 

 

"APB", Series 2006-C23, 5.446%, 1/15/2045

2,100,000

2,111,581

"A4", Series 2006-C25, 5.775%**, 5/15/2043

1,600,000

1,653,904

Washington Mutual:

 

 

"A6", Series 2004-AR4, 3.802%**, 6/25/2034

190,000

183,437

"A6", Series 2003-AR10, 4.063%**, 10/25/2033

1,620,000

1,589,048

"1A6", Series 2005-AR12, 4.838%**, 10/25/2035

1,880,000

1,879,555

"1A3", Series 2005-AR16, 5.113%**, 12/25/2035

1,005,000

999,566

 

Principal Amount ($)(a)

Value ($)

 

 

Wells Fargo Mortgage Backed Securities Trust:

 

 

"4A2", Series 2005-AR16, 4.992%**, 10/25/2035

1,470,000

1,452,606

"A3", Series 2006-1, 5.0%, 3/25/2021

1,827,160

1,784,336

"2A3", Series 2006-AR8, 5.241%, 4/25/2036

5,081,691

5,043,497

Total Commercial and Non-Agency Mortgage-Backed Securities (Cost $75,585,834)

75,452,277

 

Collateralized Mortgage Obligations 2.5%

Fannie Mae Whole Loan, "1A1", Series 2004-W15, 6.0%, 8/25/2044

851,952

855,133

Federal Home Loan Mortgage Corp.:

 

 

"PE", Series 2898, 5.0%, 5/15/2033

1,715,000

1,645,837

"KD", Series 2915, 5.0%, 9/15/2033

1,177,000

1,129,380

"KG", Series 2987, 5.0%, 12/15/2034

1,360,000

1,300,181

"DB", Series 3152, 6.0%, 11/15/2030

9,387,000

9,495,380

"H", Series 2278, 6.5%, 1/15/2031

27,746

28,279

Federal National Mortgage Association:

 

 

"NE", Series 2004-52, 4.5%, 7/25/2033

1,118,000

1,048,897

"HM", Series 2002-36, 6.5%, 12/25/2029

14,259

14,224

"C", Series 1997-M5, 6.74%, 8/25/2007

390,000

391,420

Total Collateralized Mortgage Obligations (Cost $16,080,841)

15,908,731

 

US Treasury Obligations 2.6%

US Treasury Bill, 4.95%***1/18/2007 (c)

675,000

673,422

US Treasury Bond, 4.5%, 2/15/2036 (a)

2,338,000

2,223,293

US Treasury Notes:

 

 

4.625%, 11/15/2016

575,000

571,227

4.625%, 10/31/2011

800,000

797,093

4.625%, 11/30/2008 (b)

2,250,000

2,241,826

4.5%, 11/30/2011 (b)

8,465,000

8,389,611

4.875%, 5/15/2009

530,000

531,160

4.875%, 8/15/2009

1,000,000

1,003,008

Total US Treasury Obligations (Cost $16,510,300)

16,430,640

 


Units

Value ($)

 

 

Other Investments 0.1%

Hercules, Inc., (Bond Unit), 6.5%, 6/30/2029

170,000

145,350

IdleAire Technologies Corp. (Bond Unit), 144A, Step-up Coupon, 0% to 6/15/2008, 13.0% to 12/15/2012

270,000

202,500

Total Other Investments (Cost $319,379)

347,850

 


Shares

Value ($)

 

 

Securities Lending Collateral 2.2%

Daily Assets Fund Institutional, 5.34% (d) (e) (Cost $13,693,810)

13,693,810

13,693,810

 

Cash Equivalents 3.4%

Cash Management QP Trust, 5.46% (f) (Cost $21,755,244)

21,755,244

21,755,244

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $553,002,415)+

102.0

643,245,576

Other Assets and Liabilities, Net

(2.0)

(12,448,489)

Net Assets

100.0

630,797,087

* Non-income producing security. In the case of a bond, generally denotes that the issuer has defaulted on the payment of principal or the interest or has filed for bankruptcy. The following table represents bonds that are in default:

Securities

Coupon

Maturity Date

Principal Amount

Acquisition Cost ($)

Value ($)

Congoleum Corp.

8.63%

8/01/2008

190,000

USD

190,156

180,500

Oxford Automotive, Inc.

12%

10/15/2010

252,982

USD

22,402

3,795

Radnor Holdings Corp.

11%

3/15/2010

40,000

USD

27,743

100

 

 

 

 

 

240,301

184,395

** Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2006.
*** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $558,865,963. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $84,379,613. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $96,073,617 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $11,694,004.
(a) Principal amount stated in US dollars unless otherwise noted.
(b) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $13,515,284 which is 2.1% of net assets.
(c) At December 31, 2006, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(d) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(e) Represents a portion of collateral held in connection with securities lending.
(f) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

ADR: American Depositary Receipt

PIK: Denotes that all or a portion of the income is paid in-kind.

REIT: Real Estate Investment Trust

Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association and Federal Home Loan Corp. issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.

At December 31, 2006, open futures contracts purchased were as follows:

Futures

Expiration Date

Contracts

Aggregated Face Value ($)

Value ($)

Unrealized Appreciation/ (Depreciation) ($)

10 Year Federal Republic of Germany Bond

3/8/2007

27

4,236,028

4,135,466

(100,562)

10 Year Japanese Government Bond

3/9/2007

5

5,638,956

5,632,116

(6,840)

Russell Mini 2000 Index Futures

3/16/2007

25

1,981,834

1,987,250

5,416

10Year US Treasury Note

3/21/2007

31

3,374,977

3,331,531

(43,446)

Total net unrealized depreciation

(145,432)

At December 31, 2006, the open futures contracts sold were as follows:

Futures

Expiration Date

Contracts

Aggregated Face Value ($)

Value ($)

Unrealized Appreciation ($)

10 Year Canada Government Bond

3/21/2007

5

492,755

488,016

4,739

2 Year Federal Republic of Germany Bond

3/8/2007

44

6,041,043

3,009,475

31,568

2 Year US Treasury Note

3/30/2007

22

4,505,121

4,488,688

16,433

10 Year Australian Bond

3/15/2007

44

3,574,261

3,505,623

68,638

United Kingdom Treasury Bond

3/28/2007

16

3,431,005

3,387,498

43,507

Total net unrealized appreciation

164,885

At December 31, 2006, the open credit default swap contract sold was as follows:

Effective/Expiration Date

Notional Amount ($)

Cash Flows Received by the Portfolio

Underlying Debt Obligation

Unrealized Appreciation ($)

9/27/2006-12/20/2011

700,000+

Fixed — 3.25%

Dow Jones CDX High Yield

23,075

Total net unrealized appreciation

23,075

Counterparty:
+ JPMorgan Chase

As of December 31, 2006, the Portfolio had the following open forward foreign currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement Date

 

Unrealized Appreciation ($)

USD

805,926

 
 AUD

1,062,890

 

1/29/2007

 

32,461

USD

1,969,519

 
 EUR

1,557,000

 

1/29/2007

 

88,854

USD

2,609,070

 
 GBP

1,389,000

 

1/29/2007

 

111,157

USD

198,630

 
 GBP

104,000

 

1/29/2007

 

5,045

JPY

516,997,000

 
 USD

4,396,532

 

1/29/2007

 

34,655

JPY

44,596,000

 
 USD

385,021

 

1/29/2007

 

8,767

USD

652,010

 
 SEK

4,660,437

 

1/29/2007

 

29,556

USD

2,748,794

 
 SGD

4,300,488

 

1/29/2007

 

59,347

EUR

125,000

 
 USD

167,109

 

2/12/2007

 

1,765

EUR

397,450

 
 USD

527,589

 

2/12/2007

 

1,863

Total unrealized appreciation

373,470

Contracts to Deliver

 

In Exchange For

 

Settlement Date

 

Unrealized Depreciation ($)

EUR

95,000

 
 USD

121,211

 

1/5/2007

 

(4,226)

EUR

15,000

 
 USD

18,918

 

1/12/2007

 

(895)

USD

502,437

 
 CAD

564,548

 

1/29/2007

 

(17,754)

CHF

4,112,000

 
 USD

3,279,107

 

1/29/2007

 

(104,957)

NOK

6,548,000

 
 USD

993,627

 

1/29/2007

 

(58,024)

CHF

1,019,000

 
 USD

824,647

 

1/29/2007

 

(13,962)

EUR

75,000

 
 USD

95,724

 

2/5/2007

 

(3,453)

EUR

50,000

 
 USD

63,870

 

2/9/2007

 

(2,259)

EUR

52,000

 
 USD

66,890

 

2/12/2007

 

(1,894)

EUR

746,000

 
 USD

956,954

 

2/19/2007

 

(29,267)

Total unrealized depreciation

(236,691)

Currency Abbreviations

AUD Australian Dollar
CAD Canadian Dollar
CHF Swiss Franc
EUR Euro
GBP British Pound
JPY Japanese Yen
NOK Norwegian Krona
SEK Swedish Krona
SGD Singapore Dollar
USD United States Dollar

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $517,553,361) — including $13,515,284 of securities loaned

$ 607,796,522

Investment in Daily Assets Fund Institutional (cost $13,693,810)*

13,693,810

Investment in Cash Management QP Trust (cost $21,755,244)

21,755,244

Total investments in securities, at value (cost $553,002,415)

643,245,576

Cash*

202,000

Foreign currency, at value (cost $801,785)

805,258

Receivable for investments sold

8,445,798

Dividends receivable

368,574

Interest receivable

2,534,973

Unrealized appreciation on forward foreign currency exchange contracts

373,470

Unrealized appreciation on credit default swap contracts

23,075

Foreign taxes recoverable

117

Receivable for Portfolio shares sold

14,184

Other assets

19,138

Total assets

656,032,163

Liabilities

Due to custodian

16,350

Payable for investments purchased

10,200,872

Payable for Portfolio shares redeemed

306,469

Payable upon return of securities loaned

13,895,810

Payable for daily variation margin on open futures contracts

36,827

Unrealized depreciation on forward foreign currency exchange contracts

236,691

Net payable on closed forward foreign currency exchange contracts

13,576

Accrued management fee

208,446

Other accrued expenses and payables

320,035

Total liabilities

25,235,076

Net assets, at value

$ 630,797,087

Net Assets

Net assets consist of:
Undistributed net investment income

19,394,367

Net unrealized appreciation (depreciation) on:

Investments

90,243,161

Futures

19,453

Credit default swaps

23,075

Foreign currency related transactions

136,460

Accumulated net realized gain (loss)

(56,019,260)

Paid-in capital

576,999,831

Net assets, at value

$ 630,797,087

Class A

Net Asset Value, offering and redemption price per share ($600,377,515 ÷ 24,544,133 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 24.46

Class B

Net Asset Value, offering and redemption price per share ($30,419,572 ÷ 1,244,941 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 24.43

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $26,228)

$ 6,477,972

Interest

14,333,953

Interest — Cash Management QP Trust

1,334,376

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

45,437

Other income**

651,306

Total Income

22,843,044

Expenses:
Management fee

2,967,510

Custodian fees

62,364

Distribution service fees (Class B)

80,542

Record keeping fees (Class B)

42,949

Auditing

49,340

Legal

20,042

Trustees' fees and expenses

93,100

Reports to shareholders

268,789

Other

117,385

Total expenses before expense reductions

3,702,021

Expense reductions

(257,475)

Total expenses after expense reductions

3,444,546

Net investment income (loss)

19,398,498

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

26,546,142

Futures

485,838

Credit default swaps

117,334

Foreign currency related transactions

524,136

Net increase from payments by affiliates and net losses realized on trades executed incorrectly and the disposal of investments in violation of restrictions

—

 

27,673,450

Net unrealized appreciation (depreciation) during the period on:
Investments

15,850,348

Futures

124,089

Credit default swaps

23,075

Foreign currency related transactions

72,434

 

16,069,946

Net gain (loss) on investment transactions

43,743,396

Net increase (decrease) in net assets resulting from operations

$ 63,141,894

** Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 19,398,498

$ 18,012,229

Net realized gain (loss) on investment transactions

27,673,450

16,385,204

Net unrealized appreciation (depreciation) during the period on investment and foreign currency transactions

16,069,946

(2,011,011)

Net increase (decrease) in net assets resulting from operations

63,141,894

32,386,422

Distributions to shareholders from:
Net investment income:

Class A

(15,934,054)

(14,467,177)

Class B

(705,320)

(715,158)

Portfolio share transactions:

Class A

Proceeds from shares sold

7,544,406

6,832,194

Net assets acquired in tax free reorganization

—

118,997,707

Reinvestment of distributions

15,934,054

14,467,177

Cost of shares redeemed

(120,785,402)

(125,051,390)

Net increase (decrease) in net assets from Class A share transactions

(97,306,942)

15,245,688

Class B

Proceeds from shares sold

1,059,376

5,663,125

Reinvestment of distributions

705,320

715,158

Cost of shares redeemed

(7,245,826)

(6,295,649)

Net increase (decrease) in net assets from Class B share transactions

(5,481,130)

82,634

Increase (decrease) in net assets

(56,285,552)

32,532,409

Net assets at beginning of period

687,082,639

654,550,230

Net assets at end of period (including undistributed net investment income of $19,394,367 and $16,253,135, respectively)

$ 630,797,087

$ 687,082,639

Other Information

Class A

Shares outstanding at beginning of period

28,729,438

27,789,320

Shares sold

324,532

311,313

Shares issued in tax free reorganization

—

5,591,767

Shares issued to shareholders in reinvestment of distributions

696,418

672,579

Shares redeemed

(5,206,255)

(5,635,541)

Net increase (decrease) in Class A shares

(4,185,305)

940,118

Shares outstanding at end of period

24,544,133

28,729,438

Class B

Shares outstanding at beginning of period

1,479,683

1,477,597

Shares sold

45,760

254,860

Shares issued to shareholders in reinvestment of distributions

30,773

33,201

Shares redeemed

(311,275)

(285,975)

Net increase (decrease) in Class B shares

(234,742)

2,086

Shares outstanding at end of period

1,244,941

1,479,683

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 22.75

$ 22.37

$ 21.32

$ 18.66

$ 22.57

Income (loss) from investment operations:

Net investment income (loss)a

.69d

.59

.47

.37

.47

Net realized and unrealized gain (loss) on investment transactions

1.60

.34

.93

2.90

(3.81)

Total from investment operations

2.29

.93

1.40

3.27

(3.34)

Less distributions from:

Net investment income

(.58)

(.55)

(.35)

(.61)

(.57)

Net asset value, end of period

$ 24.46

$ 22.75

$ 22.37

$ 21.32

$ 18.66

Total Return (%)

10.24b,d

4.30b

6.64

18.10

(15.17)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

600

653

622

667

640

Ratio of expenses before expense reduction (%)

.55

.55

.59

.59

.58

Ratio of expenses after expense reduction (%)

.51

.53

.59

.59

.58

Ratio of net investment income (%)

2.99d

2.66

2.18

1.88

2.32

Portfolio turnover rate (%)

108

121c

131c

102c

140

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.
c The portfolio turnover rate including mortgage dollar roll transactions was 122%, 140% and 108% for the periods ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
d Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.024 per share and an increase in the ratio of net investment income of 0.10%. Excluding this non-recurring income, total return would have been 0.10% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 22.72

$ 22.33

$ 21.28

$ 18.64

$ 19.46

Income (loss) from investment operations:

Net investment income (loss)b

.60e

.51

.39

.28

.18

Net realized and unrealized gain (loss) on investment transactions

1.60

.35

.92

2.92

(1.00)

Total from investment operations

2.20

.86

1.31

3.20

(.82)

Less distributions from:

Net investment income

(.49)

(.47)

(.26)

(.56)

—

Net asset value, end of period

$ 24.43

$ 22.72

$ 22.33

$ 21.28

$ 18.64

Total Return (%)

9.82c,e

3.90c

6.26

17.66

(4.21)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

30

34

33

21

.8

Ratio of expenses before expense reductions (%)

.93

.95

.97

.99

.86*

Ratio of expenses after expense reductions (%)

.89

.91

.97

.99

.86*

Ratio of net investment income (%)

2.61e

2.28

1.80

1.48

1.96*

Portfolio turnover rate (%)

108

121d

131d

102d

140

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d The portfolio turnover rate including mortgage dollar roll transactions was 122%, 140% and 108% for the periods ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
e Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.024 per share and an increase in the ratio of net investment income of 0.10%. Excluding this non-recurring income, total return would have been 0.10% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Blue Chip VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. It may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS Blue Chip VIP from 5/1/1997 to 12/31/2006

[] DWS Blue Chip VIP — Class A

[] Russell 1000® Index

The Russell 1000® Index is an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which measures the performance of the 3,000 largest US companies based on total market capitalization. The Russell 1000 Index represents approximately 92% of the total market capitalization of the Russell 3000 Index.

Index returns assume reinvestment of dividends and unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1580

 

Yearly periods ended December 31

 

Comparative Results

DWS Blue Chip VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$11,565

$14,769

$14,637

$18,062

Average annual total return

15.65%

13.88%

7.92%

6.31%

Russell 1000 Index
 Growth of $10,000

$11,546

$13,669

$13,910

$21,406

Average annual total return

15.46%

10.98%

6.82%

8.19%

DWS Blue Chip VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$11,519

$14,599

$16,832

Average annual total return

 

15.19%

13.44%

12.28%

Russell 1000 Index
 Growth of $10,000

 

$11,546

$13,669

$15,955

Average annual total return

 

15.46%

10.98%

10.94%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 1997. Index returns began on April 30, 1997.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Blue Chip VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,110.60

 

$ 1,108.70

 

Expenses Paid per $1,000*

$ 3.88

 

$ 5.90

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.53

 

$ 1,019.61

 

Expenses Paid per $1,000*

$ 3.72

 

$ 5.65

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Blue Chip VIP

.73%

 

1.11%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Blue Chip VIP

For the 12 months ended December 31, 2006, the DWS Blue Chip VIP posted a return of 15.65% (Class A shares, unadjusted for contract charges), outperforming the Russell 1000® Index, which returned 15.46%.

The materials, media, and insurance industry groups were the top contributors to relative performance. Within the materials group, Phelps Dodge Corp.* and NuCor Corp. were top contributors. Phelps Dodge benefited from significantly higher copper prices throughout the year and was acquired in November by Freeport-McMoRan at a 33% premium to its then current share price. NuCor benefited from better-than-expected sales volumes, lower inventory costs, and increased share buybacks.

Overweight positions in The Goldman Sachs Group, Inc. and ExxonMobil Corp. added to relative performance. Goldman Sachs reported outstanding earnings, benefiting from the sale of its stake in the New York Stock Exchange, robust global capital markets and strong performance from its proprietary trading business.1 ExxonMobil's earnings exceeded expectations, largely as a result of higher oil prices.

The software and services, food beverage and tobacco, and health care equipment and services industry groups detracted most from relative performance. Within health care equipment and services, UnitedHealth Group, Inc.* was the main detractor from relative return. This leading provider of health care services experienced share price declines as a result of a stock option backdating scandal and subsequent management changes.

A position in Intel Corp.* detracted from relative return, as the stock price responded negatively to competitive pressures and investor concerns about inventory levels. Another detractor was poultry producer Pilgrim's Pride Corp., which experienced earnings declines because of weak international demand and falling prices; this stock has been sold.

Robert Wang, Jin Chen, CFA and Julie Abbett

Portfolio Managers, Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. It may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Russell 1000 Index is an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which measures the performance of the 3,000 largest US companies based on total market capitalization. The Russell 1000 Index represents approximately 92% of the total market capitalization of the Russell 3000 Index.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

* As of December 31, 2006, the positions were sold.
1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Blue Chip VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

99%

98%

Cash Equivalents

1%

2%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Financials

20%

19%

Consumer Discretionary

14%

13%

Health Care

13%

15%

Information Technology

13%

17%

Industrials

11%

10%

Energy

10%

9%

Consumer Staples

7%

8%

Telecommunication Services

5%

2%

Materials

4%

4%

Utilities

3%

3%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 33. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Blue Chip VIP

 


Shares

Value ($)

 

 

Common Stocks 98.7%

Consumer Discretionary 13.8%

Hotels Restaurants & Leisure 2.4%

Brinker International, Inc.

40,500

1,221,480

Darden Restaurants, Inc.

56,400

2,265,588

Starbucks Corp.*

128,600

4,555,012

YUM! Brands, Inc.

7,300

429,240

 

8,471,320

Leisure Equipment & Products 0.1%

Hasbro, Inc.

13,300

362,425

Media 4.7%

McGraw-Hill Companies, Inc.

87,400

5,944,948

Omnicom Group, Inc.

29,800

3,115,292

The DIRECTV Group, Inc.*

211,500

5,274,810

Walt Disney Co.

73,000

2,501,710

 

16,836,760

Multiline Retail 3.2%

Dollar Tree Stores, Inc.*

87,500

2,633,750

Federated Department Stores, Inc.

114,600

4,369,698

Kohl's Corp.*

22,700

1,553,360

Nordstrom, Inc.

62,800

3,098,552

 

11,655,360

Specialty Retail 1.6%

AnnTaylor Stores Corp.*

57,800

1,898,152

Office Depot, Inc.*

97,100

3,706,307

 

5,604,459

Textiles, Apparel & Luxury Goods 1.8%

Coach, Inc.*

55,700

2,392,872

Jones Apparel Group, Inc.

123,600

4,131,948

 

6,524,820

Consumer Staples 6.9%

Beverages 1.5%

Pepsi Bottling Group, Inc.

38,800

1,199,308

PepsiCo, Inc.

64,000

4,003,200

 

5,202,508

Food & Staples Retailing 1.4%

Kroger Co.

214,500

4,948,515

Safeway, Inc.

5,500

190,080

 

5,138,595

Food Products 1.7%

ConAgra Foods, Inc.

66,900

1,806,300

General Mills, Inc.

71,300

4,106,880

Smithfield Foods, Inc.*

12,900

331,014

 

6,244,194

Household Products 1.0%

Colgate-Palmolive Co.

53,800

3,509,912

Personal Products 0.6%

Estee Lauder Companies, Inc. "A"

55,500

2,265,510

Tobacco 0.7%

Altria Group, Inc.

28,300

2,428,706

 


Shares

Value ($)

 

 

Energy 9.7%

Energy Equipment & Services 0.8%

Superior Energy Services, Inc.*

13,800

450,984

Tidewater, Inc.

9,800

473,928

Unit Corp.*

44,000

2,131,800

 

3,056,712

Oil, Gas & Consumable Fuels 8.9%

Chevron Corp.

107,400

7,897,122

ConocoPhillips

69,200

4,978,940

Denbury Resources, Inc.*

89,600

2,489,984

Devon Energy Corp.

38,900

2,609,412

ExxonMobil Corp.

92,540

7,091,341

Noble Energy, Inc.

6,800

333,676

Range Resources Corp.

41,300

1,134,098

Valero Energy Corp.

67,200

3,437,952

W&T Offshore, Inc.

24,000

737,280

XTO Energy, Inc.

26,501

1,246,872

 

31,956,677

Financials 19.6%

Capital Markets 5.2%

Lehman Brothers Holdings, Inc.

41,700

3,257,604

Merrill Lynch & Co., Inc.

81,000

7,541,100

Morgan Stanley

16,300

1,327,309

The Goldman Sachs Group, Inc.

33,100

6,598,485

 

18,724,498

Commercial Banks 2.7%

US Bancorp.

59,900

2,167,781

Wells Fargo & Co.

215,600

7,666,736

 

9,834,517

Diversified Financial Services 6.4%

Bank of America Corp.

215,700

11,516,223

Citigroup, Inc.

30,900

1,721,130

JPMorgan Chase & Co.

198,000

9,563,400

 

22,800,753

Insurance 3.3%

Chubb Corp.

6,800

359,788

CNA Financial Corp.*

26,700

1,076,544

Loews Corp.

31,000

1,285,570

MetLife, Inc.

52,100

3,074,421

Philadelphia Consolidated Holding Corp.*

106,100

4,727,816

W.R. Berkley Corp.

38,400

1,325,184

 

11,849,323

Real Estate Investment Trusts 2.0%

AvalonBay Communities, Inc. (REIT)

1,900

247,095

Boston Properties, Inc. (REIT)

3,100

346,828

Camden Property Trust (REIT)

1,300

96,005

Equity Residential (REIT)

22,700

1,152,025

Hospitality Properties Trust (REIT)

8,700

413,511

iStar Financial, Inc. (REIT)

3,000

143,460

Mack-Cali Realty Corp. (REIT)

1,700

86,700

ProLogis (REIT)

19,400

1,178,938

Public Storage, Inc. (REIT)

5,400

526,500

Rayonier, Inc. (REIT)

4,600

188,830

 


Shares

Value ($)

 

 

Regency Centers Corp. (REIT)

1,400

109,438

Simon Property Group, Inc. (REIT)

14,900

1,509,221

The Macerich Co. (REIT)

2,500

216,425

Vornado Realty Trust (REIT)

8,700

1,057,050

 

7,272,026

Health Care 12.9%

Biotechnology 1.5%

Amgen, Inc.*

79,200

5,410,152

Health Care Equipment & Supplies 1.4%

Baxter International, Inc.

10,600

491,734

Becton, Dickinson & Co.

25,000

1,753,750

Hillenbrand Industries, Inc.

28,400

1,616,812

Kinetic Concepts, Inc.*

27,300

1,079,715

 

4,942,011

Health Care Providers & Services 3.3%

AmerisourceBergen Corp.

37,300

1,677,008

Humana, Inc.*

62,800

3,473,468

Manor Care, Inc.

9,600

450,432

McKesson Corp.

92,200

4,674,540

Sierra Health Services, Inc.*

47,800

1,722,712

 

11,998,160

Life Sciences Tools & Services 0.1%

Applera Corp. — Applied Biosystems Group

5,100

187,119

Pharmaceuticals 6.6%

Abbott Laboratories

136,500

6,648,915

Abraxis Bioscience, Inc.* (a)

19,700

538,598

Endo Pharmaceuticals Holdings, Inc.*

12,900

355,782

Merck & Co., Inc.

63,200

2,755,520

Mylan Laboratories, Inc.

175,600

3,504,976

Pfizer, Inc.

344,850

8,931,615

Schering-Plough Corp.

44,000

1,040,160

 

23,775,566

Industrials 11.3%

Aerospace & Defense 5.6%

Boeing Co.

76,900

6,831,796

Honeywell International, Inc.

23,400

1,058,616

Lockheed Martin Corp.

67,800

6,242,346

Raytheon Co.

111,800

5,903,040

 

20,035,798

Airlines 0.7%

Continental Airlines, Inc. "B"*

60,300

2,487,375

Commercial Services & Supplies 1.6%

Allied Waste Industries, Inc.*

27,300

335,517

Waste Management, Inc.

145,000

5,331,650

 

5,667,167

Industrial Conglomerates 1.3%

Carlisle Companies, Inc.

4,600

361,100

General Electric Co.

114,100

4,245,661

 

4,606,761

Machinery 1.0%

Cummins, Inc.

10,700

1,264,526

PACCAR, Inc.

6,500

421,850

Parker Hannifin Corp.

16,100

1,237,768

Toro Co.

14,300

666,809

 

3,590,953

 


Shares

Value ($)

 

 

Road & Rail 1.1%

Laidlaw International, Inc.

16,000

486,880

Ryder System, Inc.

73,000

3,727,380

 

4,214,260

Information Technology 12.5%

Communications Equipment 1.0%

Cisco Systems, Inc.*

8,000

218,640

Corning, Inc.*

175,600

3,285,476

 

3,504,116

Computers & Peripherals 3.5%

Hewlett-Packard Co.

172,100

7,088,799

Lexmark International, Inc. "A"*

51,100

3,740,520

Western Digital Corp.*

80,900

1,655,214

 

12,484,533

Electronic Equipment & Instruments 0.3%

Amphenol Corp. "A"

3,200

198,656

AVX Corp.

14,600

215,934

Tech Data Corp.*

22,400

848,288

 

1,262,878

Internet Software & Services 1.2%

eBay, Inc.*

8,100

243,567

Google, Inc. "A"*

6,400

2,947,072

Yahoo!, Inc.*

46,200

1,179,948

 

4,370,587

IT Services 1.0%

Acxiom Corp.

133,800

3,431,970

Semiconductors & Semiconductor Equipment 2.8%

Atmel Corp.*

116,500

704,825

Fairchild Semiconductor International, Inc.*

57,800

971,618

MEMC Electronic Materials, Inc.*

57,200

2,238,808

Micron Technology, Inc.*

220,200

3,073,992

National Semiconductor Corp.

135,600

3,078,120

 

10,067,363

Software 2.7%

BEA Systems, Inc.*

229,100

2,882,078

BMC Software, Inc.*

14,700

473,340

Cadence Design Systems, Inc.*

30,000

537,300

FactSet Research Systems, Inc.

24,800

1,400,704

Microsoft Corp.

121,500

3,627,990

Symantec Corp.*

38,600

804,810

 

9,726,222

Materials 4.3%

Chemicals 1.7%

Celanese Corp. "A"

96,900

2,507,772

Lyondell Chemical Co.

140,900

3,602,813

Westlake Chemical Corp.

5,500

172,590

 

6,283,175

Metals & Mining 2.4%

Carpenter Technology Corp.

19,100

1,958,132

Commercial Metals Co.

23,500

606,300

Nucor Corp.

57,100

3,121,086

United States Steel Corp.

38,000

2,779,320

 

8,464,838

Paper & Forest Products 0.2%

International Paper Co.

15,800

538,780

 


Shares

Value ($)

 

 

Telecommunication Services 4.5%

Diversified Telecommunication Services 4.4%

AT&T, Inc.

234,400

8,379,800

Verizon Communications, Inc.

202,200

7,529,928

 

15,909,728

Wireless Telecommunication Services 0.1%

United States Cellular Corp.*

5,700

396,663

Utilities 3.2%

Electric Utilities 2.9%

Entergy Corp.

7,700

710,864

Exelon Corp.

93,000

5,755,770

FirstEnergy Corp.

68,600

4,136,580

 

10,603,214

Independent Power Producers & Energy Traders 0.1%

AES Corp.*

8,400

185,136

TXU Corp.

1,800

97,578

 

282,714

Multi-Utilities 0.2%

Sempra Energy

13,200

739,728

Total Common Stocks (Cost $318,591,164)

354,720,906

 

Principal Amount ($)

Value ($)

 

 

US Treasury Obligations 0.2%

US Treasury Bill, 4.95%**, 1/18/2007 (b) (Cost $768,200)

770,000

768,200

 


Shares

Value ($)

 

 

Securities Lending Collateral 0.1%

Daily Assets Fund Institutional, 5.34% (c) (d) (Cost $483,575)

483,575

483,575

 

Cash Equivalents 1.2%

Cash Management QP Trust, 5.46% (e) (Cost $4,154,374)

4,154,374

4,154,374

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $323,997,313)+

100.2

360,127,055

Other Assets and Liabilities, Net

(0.2)

(692,641)

Net Assets

100.0

359,434,414

* Non-income producing security.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $324,693,489. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $35,433,566. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $40,348,146 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $4,914,580.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $458,396 which is 0.1% of net assets.
(b) At December 31, 2006, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(c) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(d) Represents collateral held in connection with securities lending.
(e) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

REIT: Real Estate Investment Trust

At December 31, 2006, open futures contracts purchased were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Appreciation ($)

S&P 500 Index

3/15/2007

13

4,625,219

4,642,300

17,081

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $319,359,364 — including $458,396 of securities loaned)

$ 355,489,106

Investment in Daily Assets Fund Institutional (cost $483,575)*

483,575

Investment in Cash Management QP Trust (cost $4,154,374)

4,154,374

Total investments in securities, at value (cost $323,997,313)

360,127,055

Dividends receivable

356,146

Interest receivable

21,749

Receivable for Portfolio shares sold

7,008

Other assets

10,496

Total assets

360,522,454

Liabilities

Payable for Portfolio shares redeemed

278,266

Payable upon return of securities loaned

483,575

Payable for daily variation margin on open futures contracts

17,550

Accrued management fee

195,059

Other accrued expenses and payables

113,590

Total liabilities

1,088,040

Net assets, at value

$ 359,434,414

Net Assets

Net assets consist of:
Undistributed net investment income

3,565,164

Net unrealized appreciation (depreciation) on:

Investments

36,129,742

Futures

17,081

Accumulated net realized gain (loss)

39,103,387

Paid-in capital

280,619,040

Net assets, at value

$ 359,434,414

Class A

Net Asset Value, offering and redemption price per share ($313,897,419 ÷ 19,412,716 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 16.17

Class B

Net Asset Value, offering and redemption price per share ($45,536,995 ÷ 2,824,828 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 16.12

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends

$ 5,850,273

Interest

35,409

Interest — Cash Management QP Trust

295,964

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

31,356

Other income**

73,817

Total Income

6,286,819

Expenses:
Management fee

2,228,613

Custodian fees

19,969

Distribution service fees (Class B)

112,577

Record keeping fees (Class B)

59,973

Auditing

47,391

Legal

14,267

Trustees' fees and expenses

27,593

Reports to shareholders

91,157

Other

20,027

Total expenses before expense reductions

2,621,567

Expense reductions

(4,810)

Total expenses after expense reductions

2,616,757

Net investment income (loss)

3,670,062

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

39,885,662

Futures

696,593

 

40,582,255

Net unrealized appreciation (depreciation) during the period on:
Investments

5,820,360

Futures

64,304

 

5,884,664

Net gain (loss) on investment transactions

46,466,919

Net increase (decrease) in net assets resulting from operations

$ 50,136,981

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 3,670,062

$ 3,107,588

Net realized gain (loss) on investment transactions

40,582,255

34,896,786

Net unrealized appreciation (depreciation) during the period on investment transactions

5,884,664

(6,225,182)

Net increase (decrease) in net assets resulting from operations

50,136,981

31,779,192

Distributions to shareholders from:
Net investment income:

Class A

(2,723,182)

(2,673,957)

Class B

(213,761)

(231,257)

Net realized gain:

Class A

(15,496,612)

—

Class B

(2,298,427)

—

Portfolio share transactions:

Class A

Proceeds from shares sold

28,436,502

25,386,809

Reinvestment of distributions

18,219,794

2,673,957

Cost of shares redeemed

(52,068,358)

(42,221,426)

Net increase (decrease) in net assets from Class A share transactions

(5,412,062)

(14,160,660)

Class B

Proceeds from shares sold

8,559,228

13,487,197

Reinvestment of distributions

2,512,188

231,257

Cost of shares redeemed

(13,802,899)

(9,951,414)

Net increase (decrease) in net assets from Class B share transactions

(2,731,483)

3,767,040

Increase (decrease) in net assets

21,261,454

18,480,358

Net assets at beginning of period

338,172,960

319,692,602

Net assets at end of period (including undistributed net investment income of $3,565,164 and $2,849,527, respectively)

$ 359,434,414

$ 338,172,960

Other Information

Class A

Shares outstanding at beginning of period

19,752,422

20,734,323

Shares sold

1,871,977

1,864,296

Shares issued to shareholders in reinvestment of distributions

1,231,899

198,218

Shares redeemed

(3,443,582)

(3,044,415)

Net increase (decrease) in Class A shares

(339,706)

(981,901)

Shares outstanding at end of period

19,412,716

19,752,422

Class B

Shares outstanding at beginning of period

2,986,497

2,700,912

Shares sold

566,366

979,006

Shares issued to shareholders in reinvestment of distributions

169,857

17,156

Shares redeemed

(897,892)

(710,577)

Net increase (decrease) in Class B shares

(161,669)

285,585

Shares outstanding at end of period

2,824,828

2,986,497

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 14.88

$ 13.65

$ 11.84

$ 9.37

$ 12.07

Income (loss) from investment operations:

Net investment income (loss)a

.17b

.14

.13

.08

.07

Net realized and unrealized gain (loss) on investment transactions

2.07

1.22

1.76

2.45

(2.73)

Total from investment operations

2.24

1.36

1.89

2.53

(2.66)

Less distributions from:

Net investment income

(.14)

(.13)

(.08)

(.06)

(.04)

Net realized gain on investment transactions

(.81)

—

—

—

—

Total distributions

(.95)

(.13)

(.08)

(.06)

(.04)

Net asset value, end of period

$ 16.17

$ 14.88

$ 13.65

$ 11.84

$ 9.37

Total Return (%)

15.65b

10.06

16.04

27.25

(22.11)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

314

294

283

242

174

Ratio of expenses (%)

.71

.70

.70

.71

.69

Ratio of net investment income (%)

1.12b

1.00

1.08

.82

.65

Portfolio turnover rate (%)

226

288

249

182

195

a Based on average shares outstanding during the period.
b Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.003 per share and an increase in the ratio of net investment income of 0.02%. Excluding this non-recurring income, total return would have been 0.02% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 14.83

$ 13.60

$ 11.80

$ 9.35

$ 10.28

Income (loss) from investment operations:

Net investment income (loss)b

.11c

.09

.09

.04

.03

Net realized and unrealized gain (loss) on investment transactions

2.07

1.22

1.74

2.45

(.96)

Total from investment operations

2.18

1.31

1.83

2.49

(.93)

Less distributions from:

Net investment income

(.08)

(.08)

(.03)

(.04)

—

Net realized gain on investment transactions

(.81)

—

—

—

—

Total distributions

(.89)

(.08)

(.03)

(.04)

—

Net asset value, end of period

$ 16.12

$ 14.83

$ 13.60

$ 11.80

$ 9.35

Total Return (%)

15.19c

9.68

15.55

26.76

(9.05)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

46

44

37

17

.4

Ratio of expenses (%)

1.09

1.09

1.08

1.10

.94*

Ratio of net investment income (%)

.74c

.61

.70

.43

.61*

Portfolio turnover rate (%)

226

288

249

182

195

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.003 per share and an increase in the ratio of net investment income of 0.02%. Excluding this non-recurring income, total return would have been 0.02% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Conservative Allocation VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Diversification does not eliminate risk. The underlying portfolios invest in individual equity and bond funds whose yields and market values fluctuate, so that your investment may be worth more or less that its original cost. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Conservative Allocation VIP from 8/16/2004 to 12/31/2006

[] DWS Conservative Allocation VIP — Class B

[] Lehman Brothers Aggregate Bond Index

The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of all dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1570

 

 

 

Comparative Results

DWS Conservative Allocation VIP

1-Year

Life of Portfolio*

Class B

Growth of $10,000

$10,881

$12,106

Average annual total return

8.81%

8.41%

Lehman Brothers Aggregate Bond Index
 Growth of $10,000

$10,433

$10,818

Average annual total return

4.33%

3.43%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on August 16, 2004. Index returns began on August 31, 2004.

Information About Your Portfolio's Expenses

DWS Conservative Allocation VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In addition to the ongoing expenses which the Portfolio bears directly, the Portfolio's shareholders indirectly bear the expense of the Underlying DWS Portfolios in which the Portfolio invests. The Portfolio's estimated indirect expense from investing in the Underlying DWS Portfolios is based on its allocation of Underlying DWS Portfolios. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Direct Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,070.40

Expenses Paid per $1,000*

 

$ 3.97

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,021.37

Expenses Paid per $1,000*

 

$ 3.87

Direct Portfolio Expenses and Estimated Indirect Underlying DWS Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,070.40

Expenses Paid per $1,000**

 

$ 7.15

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,018.30

Expenses Paid per $1,000**

 

$ 6.97

* Expenses are equal to the Portfolio's annualized expense ratio for the share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
** Expenses are equal to the Portfolio's annualized expense ratio for the share class plus the estimated indirect expense from investing in underlying portfolios in which the Portfolio invests, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

 

Class B

Direct Portfolio Expense Ratio

 

.76%

Estimated Indirect Expenses of Underlying DWS Portfolios

 

.61%

Estimated Net Annual Portfolio and Underlying DWS Portfolios Expenses

 

1.37%

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Conservative Allocation VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. All major asset classes — equities, bonds and cash — had positive returns for the year. Most equity indexes had double digit returns, while bond returns, except for high yield, were in single digits. Within the equity market, small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years. Comparison of Russell Growth and Russell Value indexes reveals that value stocks performed better than growth stocks in all size categories.

For the 12 months ended December 31, 2006, DWS Conservative Allocation VIP had a return of 8.81% (Class B shares, unadjusted for contract charges), as compared to the 4.33% return of its benchmark, the Lehman Brothers Aggregate Bond (LBAB) Index. Since this Portfolio invests in stock and bond portfolios in several different categories, performance is analyzed by comparing the Portfolio's return with indexes that represent each asset class. Since this Portfolio invests in a blend of equity and bond portfolios, its return was above that of its major bond benchmarks but below that of its equity benchmarks.

The Portfolio's allocation between equity and fixed income portfolios remained close to its target of 40% equity and 60% fixed income during 2006, but with equities overweighted throughout the year.1 This overweight was positive for returns, as equities outperformed fixed income. Positions in international equities contributed to absolute performance, since international equities (as measured by the MSCI EAFE® Index) outperformed US equities.

In the fixed income portion of the Portfolio, a position in high-yield bonds and an overweight in cash equivalents, with a corresponding underweight in investment-grade portfolios, was positive for performance, as short-term interest rates continued to rise, providing attractive returns on cash equivalents.

Inna Okounkova Robert Wang
Portfolio Managers, Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividends and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Diversification does not eliminate risk. The underlying portfolios invest in individual equity and bond funds whose yields and market values fluctuate, so that your investment may be worth more or less that its original cost. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

The MSCI EAFE® (Morgan Stanley Capital International Europe-Australasia-Far East) Index is composed of approximately 1,100 companies in 20 countries in Europe and the Pacific Basin. The objective of the index is to reflect the movements of stock markets in these countries by representing an unmanaged (indexed) portfolio within each country. The index is calculated in US dollars and is constructed to represent about 60% of market capitalization in each country.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Conservative Allocation VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Equity Funds

42%

43%

Fixed Income — Bond Funds

42%

38%

Fixed Income — Money Market Funds

16%

19%

 

100%

100%

Asset allocation is subject to change.

For more complete details about the Portfolio's investment portfolio, see page 44. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Conservative Allocation VIP

 


Shares

Value ($)

 

 

Equity Funds 41.9%

DWS Blue Chip VIP "A"

286,884

4,638,911

DWS Capital Growth VIP "A"

92,233

1,682,331

DWS Davis Venture Value VIP "A"

180,586

2,573,350

DWS Dreman High Return Equity VIP "A"

97,316

1,461,689

DWS Dreman Small Mid Cap Value VIP "A"

98,589

2,260,649

DWS Global Opportunities VIP "A"

689

12,490

DWS Global Thematic VIP "A"

3,366

58,534

DWS Growth & Income VIP "A"

449,713

4,919,859

DWS International Select Equity VIP "A"

670

10,936

DWS International VIP "A"

173,860

2,333,201

DWS Large Cap Value VIP "A"

222,910

4,003,471

DWS Mid Cap Growth VIP "A"

1,840

23,113

DWS RREEF Real Estate Securities VIP "A"

27,983

627,379

DWS Small Cap Growth VIP "A"

20,698

293,709

Total Equity Funds (Cost $22,085,018)

24,899,622

 

 


Shares

Value ($)

 

 

Fixed Income — Bond Funds 42.0%

DWS Core Fixed Income VIP "A"

1,910,792

22,661,988

DWS Government & Agency Securities VIP "A"

421

5,170

DWS High Income VIP "A"

219,978

1,843,415

DWS Strategic Income VIP "A"

38,723

456,933

Total Fixed Income — Bond Funds (Cost $24,476,133)

24,967,506

 

Fixed Income — Money Market Funds 16.1%

Cash Management QP Trust (Cost $9,561,262)

9,561,262

9,561,262

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $56,122,413)+

100.0

59,428,390

Other Assets and Liabilities, Net

0.0

19,655

Net Assets

100.0

59,448,045

+ The cost for federal income tax purposes was $56,377,932. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $3,050,458. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $3,050,458 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $0.

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in Underlying Affiliated Portfolios, at value (cost $46,561,151)

$ 49,867,128

Investment in Cash Management QP Trust (cost $9,561,262)

9,561,262

Total investments in securities, at value (cost $56,122,413)

59,428,390

Receivable for Portfolio shares sold

77,545

Interest receivable

44,431

Other assets

1,747

Total assets

59,552,113

Liabilities

Payable for Portfolio shares redeemed

7,102

Accrued management fee

2,797

Other accrued expenses and payables

94,169

Total liabilities

104,068

Net assets, at value

$ 59,448,045

Net Assets

Net assets consist of:
Undistributed net investment income

1,167,917

Net unrealized appreciation (depreciation) on investments

3,305,977

Accumulated net realized gain (loss)

1,329,894

Paid-in capital

53,644,257

Net assets, at value

$ 59,448,045

Class B

Net Asset Value, offering and redemption price per share ($59,448,045 ÷ 5,014,229 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.86

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Income distributions from Underlying Affiliated Portfolios

$ 919,268

Interest — Cash Management QP Trust

454,194

Total Income

1,373,462

Expenses:
Management fee

78,016

Custodian and accounting fees

54,150

Distribution service fees (Class B)

130,027

Record keeping fees (Class B)

73,785

Auditing

37,433

Legal

13,542

Trustees' fees and expenses

12,389

Reports to shareholders

8,261

Other

2,929

Total expenses before expense reductions

410,532

Expense reductions

(26,005)

Total expenses after expense reductions

384,527

Net investment income (loss)

988,935

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

1,022,229

Capital gain distributions from Underlying Affiliated Portfolios

615,807

 

1,638,036

Net unrealized appreciation (depreciation) during the period on investments

1,998,503

Net gain (loss) on investment transactions

3,636,539

Net increase (decrease) in net assets resulting from operations

$ 4,625,474

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 988,935

$ 495,860

Net realized gain (loss) on investment transactions

1,638,036

344,656

Net unrealized appreciation (depreciation) during the period on investment transactions

1,998,503

667,693

Net increase (decrease) in net assets resulting from operations

4,625,474

1,508,209

Distributions to shareholders from:
Net investment income:

Class B

(596,935)

—

Net realized gains:

Class B

(265,258)

(50,006)

Portfolio share transactions:

Class B

Proceeds from shares sold

20,047,242

34,270,431

Net assets acquired in tax-free reorganization

13,389,187

—

Reinvestment of distributions

862,193

50,006

Cost of shares redeemed

(24,685,440)

(3,329,092)

Net increase (decrease) in net assets from Class B share transactions

9,613,182

30,991,345

Increase (decrease) in net assets

13,376,463

32,449,548

Net assets at beginning of period

46,071,582

13,622,034

Net assets at end of period (including undistributed net investment income of $1,167,917 and $595,467, respectively)

$ 59,448,045

$ 46,071,582

Other Information

Class B

Shares outstanding at beginning of period

4,149,791

1,277,644

Shares sold

1,769,912

3,174,980

Shares issued in tax-free reorganization

1,177,592

—

Shares issued to shareholders in reinvestment of distributions

77,188

4,753

Shares redeemed

(2,160,254)

(307,586)

Net increase (decrease) in Class B shares

864,438

2,872,147

Shares outstanding at end of period

5,014,229

4,149,791

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class B

Years Ended December 31,

2006

2005

2004a

Selected Per Share Data

Net asset value, beginning of period

$ 11.10

$ 10.66

$ 10.00

Income (loss) from investment operations:

Net investment income (loss)b

.22

.19

(.03)

Net realized and unrealized gain (loss) on investment transactions

.74

.28

.69

Total from investment operations

.96

.47

.66

Less distributions from:

Net investment income

(.14)

—

—

Net realized gain on investment transactions

(.06)

(.03)

—

Total distributions

(.20)

(.03)

—

Net asset value, end of period

$ 11.86

$ 11.10

$ 10.66

Total Return (%)c,d

8.81

4.38

6.60**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

59

46

14

Ratio of expenses before expense reductions (%)e

.79

.94

2.96*

Ratio of expenses after expense reductions (%)e

.74

.75

.75*

Ratio of net investment income (%)

1.90

1.73

(.67)*

Portfolio turnover rate (%)

31

27

18

a For the period from August 16, 2004 (commencement of operations) to December 31, 2004.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Total return would have been lower if the Advisor had not reduced certain of the Underlying Portfolios' expenses.
e The Portfolio invests in other DWS Portfolios and bears its proportionate share of fees and expenses incurred by the Underlying DWS Portfolios in which the Portfolio is invested.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Core Fixed Income VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Investments by the Portfolio in lower-rated bonds present greater risk to principal and income than investments in higher-quality securities. This Portfolio invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation and changes in political/economic conditions and market risks. All of these factors may result in greater share price volatility. Please see this Portfolio's prospectus for specific details regarding its investments and risk profile.

A Treasury's guarantee relates only to the prompt payment of principal and interest and does not remove market risks if the investment is sold prior to maturity.

Growth of an Assumed $10,000 Investment in DWS Core Fixed Income VIP

[] DWS Core Fixed Income VIP — Class A

[] Lehman Brothers Aggregate Bond Index

The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of Treasury issues, agency issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1560

 

Yearly periods ended December 31

 

Comparative Results

DWS Core Fixed Income VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$10,426

$11,143

$12,653

$16,944

Average annual total return

4.26%

3.67%

4.82%

5.41%

Lehman Brothers Aggregate Bond Index
 Growth of $10,000

$10,433

$11,150

$12,798

$18,313

Average annual total return

4.33%

3.70%

5.06%

6.24%

DWS Core Fixed Income VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$10,389

$11,016

$12,150

Average annual total return

 

3.89%

3.28%

4.43%

Lehman Brothers Aggregate Bond Index
 Growth of $10,000

 

$10,433

$11,150

$12,331

Average annual total return

 

4.33%

3.70%

4.77%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Core Fixed Income VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,049.60

 

$ 1,047.80

 

Expenses Paid per $1,000*

$ 3.56

 

$ 5.57

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.73

 

$ 1,019.76

 

Expenses Paid per $1,000*

$ 3.52

 

$ 5.50

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Core Fixed Income VIP

.69%

 

1.08%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Core Fixed Income VIP

The year 2006 was a tale of two halves. After rising an average of 0.73% along the curve during the first half of 2006, Treasury yields dropped roughly 0.39% across all maturities during the latter half. The benchmark 10-year Treasury yield ended at 4.70%. After 17 consecutive rate hikes, including four early in 2006, the US Federal Reserve Bank (the Fed) left rates unchanged at its last four meetings. The pause in Fed tightening combined with generally tighter spreads to lift all non-Treasury sectors to positive returns.

During the 12-month period ended December 31, 2006, the Portfolio provided a total return of 4.26% (Class A shares, unadjusted for contract charges) compared with the 4.33% return of its benchmark, the Lehman Brothers Aggregate Bond Index.

Security selection within the corporate sector added value, particularly an overweight to BBB issues including the telecommunications and homebuilding sectors.1,2 Our holdings in the finance sector, which emphasize bank and insurance hybrid capital securities, also made a material contribution to returns. In the residential mortgage sector, our overweight helped returns. However, this was offset by the fact that our Portfolio is less sensitive to prepayment risk than the benchmark; interest rate volatility declined over the period, favoring more prepayment-sensitive issues.3 In asset backed securities (ABS), our holdings remain concentrated in short duration home equity securities where the total rate of return advantage relative to treasuries remains compelling. Home equity securities were the second best performing ABS sector and our overweight there contributed to performance. In commercial mortgage backed securities (CMBS), we sold into swap spread strength, but maintained exposure to specific bonds that we believe have outsized return potential.4 Our market weighting in CMBS benefited results. Sovereign debt led the non-corporate component of the credit index in performance and our underweight to these securities dampened returns.

Gary W. Bartlett, CFA J. Christopher Gagnier Daniel R. Taylor, CFA
Warren S. Davis, III William T. Lissenden Timothy C. Vile, CFA
Thomas J. Flaherty
Portfolio Managers, Aberdeen Asset Management Inc., Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Investments by the Portfolio in lower-rated bonds present greater risk to principal and income than investments in higher-quality securities. This Portfolio invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation and changes in political/economic conditions and market risks. All of these factors may result in greater share price volatility. Please see this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged index representing domestic taxable investment-grade bonds, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities with average maturities of one year or more.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.
2 The credit quality of a bond is an assessment of the likelihood that the issuer will default on scheduled payments of principal and interest.
3 Prepayment risk refers to the risk that loans that underly a mortgage-backed security will be refinanced, forcing holders of the security to reinvest the principal returned at a lower rate.
4 The swap spread is the difference between the the fixed rate that it is necessary to offer in exchange for obtaining a floating rate payment (the "swap rate"), and the yield on government bonds of equal maturity.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Core Fixed Income VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Commercial and Non-Agency Mortgage Backed Securities

29%

18%

Corporate Bonds

13%

15%

Collateralized Mortgage Obligations

13%

21%

US Government Agency Sponsored Pass-Throughs

12%

9%

US Treasury Obligations

10%

15%

Asset Backed

10%

7%

Foreign Bonds — US$ Denominated

6%

5%

Municipal Bonds and Notes

5%

5%

Cash Equivalents

2%

5%

 

100%

100%

Corporate and Foreign Bonds Diversification
(Excludes Cash Equivalents and Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Financials

48%

38%

Utilities

20%

13%

Consumer Discretionary

12%

17%

Energy

9%

7%

Telecommunication Services

8%

9%

Industrials

2%

6%

Materials

1%

8%

Health Care

—

2%

 

100%

100%

Quality (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

US Government and Agencies

35%

45%

AAA*

45%

32%

AA

—

2%

A

7%

7%

BBB

11%

12%

BB

2%

2%

 

100%

100%

* Includes cash equivalents

Effective Maturity (Excludes Cash Equivalents and Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Under 1 year

9%

10%

1-4.99 years

37%

34%

5-9.99 years

39%

43%

10-14.99 years

5%

4%

15 years or greater

10%

9%

 

100%

100%

Asset allocation, corporate and foreign bonds diversification, quality and effective maturity are subject to change.

Weighted average effective maturity: 6.9 years and 5.4 years, respectively.

The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Portfolio's quality does not remove market risk.

For more complete details about the Portfolio's investment portfolio, see page 53. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Core Fixed Income VIP

 

Principal Amount ($)

Value ($)

 

 

Corporate Bonds 13.3%

Consumer Discretionary 2.2%

Comcast Cable Holdings LLC, 10.125%, 4/15/2022

363,000

484,451

Comcast Corp., 5.875%, 2/15/2018

450,000

445,165

DaimlerChrysler NA Holding Corp., Series E, 5.901%*, 10/31/2008

1,535,000

1,540,944

TCI Communications, Inc., 8.75%, 8/1/2015

848,000

1,003,002

Tele-Communications, Inc., 9.875%, 6/15/2022

250,000

328,989

Time Warner, Inc.:

 

 

7.57%, 2/1/2024

243,000

267,040

7.625%, 4/15/2031

543,000

606,618

7.7%, 5/1/2032

617,000

696,157

Viacom, Inc.:

 

 

5.75%, 4/30/2011

830,000

830,424

6.875%, 4/30/2036

1,697,000

1,677,788

 

7,880,578

Energy 1.2%

Anadarko Petroleum Corp., 6.45%, 9/15/2036

935,000

944,814

Chesapeake Energy Corp.:

 

 

6.375%, 6/15/2015

262,000

259,380

6.875%, 1/15/2016

184,000

185,610

Constellation Energy Group, 7.6%, 4/1/2032

415,000

484,732

Enterprise Products Operating LP:

 

 

Series B, 5.0%, 3/1/2015 (a)

517,000

487,490

7.5%, 2/1/2011

580,000

618,535

Sempra Energy, 4.621%, 5/17/2007

1,510,000

1,504,239

 

4,484,800

Financials 5.1%

American General Finance Corp., Series I, 4.875%, 5/15/2010 (a)

3,929,000

3,885,286

Dresdner Funding Trust I, 144A, 8.151%, 6/30/2031

985,000

1,186,384

Erac USA Finance Co.:

 

 

144A, 5.9%, 11/15/2015

290,000

293,018

144A, 8.0%, 1/15/2011

1,346,000

1,467,832

ERP Operating LP, 6.95%, 3/2/2011

112,000

118,600

Farmers Insurance Exchange, 144A, 8.625%, 5/1/2024

940,000

1,127,490

Mangrove Bay Pass-Through Trust, 144A, 6.102%, 7/15/2033

1,310,000

1,277,826

Merrill Lynch & Co., Inc., 6.05%, 5/16/2016

1,400,000

1,449,058

Nelnet, Inc., 7.4%, 9/29/2036

445,000

458,242

Reinsurance Group of America, Inc., 6.75%, 12/15/2065

875,000

874,487

Suntrust Preferred Capital I, 5.853%, 12/15/2011

1,330,000

1,340,152

United Dominion Realty Trust, Inc., Series E, (REIT), 3.9%, 3/15/2010

345,000

333,034

Wachovia Capital Trust III, 5.8%, 3/15/2042

2,290,000

2,308,904

 

Principal Amount ($)

Value ($)

 

 

Western Union Co., 144A, 6.2%, 11/17/2036

1,125,000

1,056,786

ZFS Finance USA Trust I, 144A, 6.15%, 12/15/2065

1,000,000

1,014,810

 

18,191,909

Industrials 0.3%

D.R. Horton, Inc., 5.375%, 6/15/2012

487,000

471,026

K. Hovnanian Enterprises, Inc., 8.625%, 1/15/2017 (a)

726,000

773,190

 

1,244,216

Telecommunication Services 0.8%

AT&T, Inc., 5.875%, 2/1/2012

1,333,000

1,358,103

Embarq Corp., 7.995%, 6/1/2036

550,000

572,344

Sprint Nextel Corp., 6.0%, 12/1/2016

1,035,000

1,008,739

 

2,939,186

Utilities 3.7%

Baltimore Gas & Electric Co., 144A, 6.35%, 10/1/2036

425,000

433,850

Centerior Energy Corp., Series B, 7.13%, 7/1/2007

1,490,000

1,501,717

Commonwealth Edison Co., Series 98, 6.15%, 3/15/2012

980,000

999,312

Consumers Energy Co.:

 

 

Series F, 4.0%, 5/15/2010

1,655,000

1,581,914

5.0%, 2/15/2012

145,000

141,459

Dominion Resources, Inc.:

 

 

Series 06-B, 6.3%, 9/30/2066

560,000

562,565

7.5%, 6/30/2066

1,845,000

1,983,827

Energy East Corp., 6.75%, 7/15/2036

1,145,000

1,208,083

Entergy Louisiana LLC, 6.3%, 9/1/2035

285,000

280,551

Entergy Mississippi, Inc., 5.92%, 2/1/2016

400,000

396,224

Nevada Power Co., Series N, 6.65%, 4/1/2036

1,470,000

1,527,092

Pedernales Electric Cooperative, Series 2002-A, 144A, 6.202%, 11/15/2032

1,715,000

1,817,248

WPS Resources Corp., 6.11%, 12/1/2066

735,000

729,677

 

13,163,519

Total Corporate Bonds (Cost $47,701,036)

47,904,208

 

Foreign Bonds — US$ Denominated 5.6%

Energy 0.5%

GAZ Capital (Gazprom), 144A, 6.212%, 11/22/2016

1,661,000

1,672,627

Financials 3.9%

Banco Mercantil del Norte SA, Series A, 144A, 6.862%, 10/13/2021

610,000

616,570

ChinaTrust Commercial Bank, 144A, 5.625%, 12/29/2049

1,002,000

971,821

Corp. Andina de Fomento, 5.75%, 1/12/2017

510,000

512,382

 

Principal Amount ($)

Value ($)

 

 

Mantis Reef Ltd., 144A, 4.692%, 11/14/2008

2,120,000

2,092,779

Mizuho Financial Group, (Cayman), 8.375%, 12/29/2049

1,995,000

2,107,917

MUFG Capital Finance 1 Ltd., 6.346%, 7/29/2049

2,550,000

2,587,964

Oil Insurance Ltd., 144A, 7.558%, 12/29/2049

2,890,000

2,989,561

Royal Bank of Scotland Group PLC, Series 1, 9.118%, 3/31/2049

745,000

825,338

Sumitomo Mitsui Banking Corp., 144A, 5.625%, 7/29/2049

1,525,000

1,490,747

 

14,195,079

Information Technology 0.1%

Seagate Technology HDD Holdings:

 

 

6.375%, 10/1/2011

160,000

160,000

6.8%, 10/1/2016

245,000

246,225

 

406,225

Materials 0.4%

Celulosa Arauco y Constitucion SA, 5.625%, 4/20/2015

1,295,000

1,272,779

Telecommunication Services 0.7%

Telecom Italia Capital:

 

 

4.0%, 1/15/2010

466,000

444,980

4.95%, 9/30/2014

816,000

755,976

5.25%, 11/15/2013

1,386,000

1,321,536

 

2,522,492

Total Foreign Bonds — US$ Denominated (Cost $19,920,023)

20,069,202

 

Asset Backed 9.3%

Automobile Receivables 0.0%

MMCA Automobile Trust,"B", Series 2002-2, 4.67%, 3/15/2010

106,283

106,135

Home Equity Loans 9.3%

Ameriquest Mortgage Securities, Inc.,"A5", Series 2004-FR1, 4.455%, 5/25/2034

2,450,000

2,408,409

Citigroup Mortgage Loan Trust, Inc.,"A1", Series 2006-WFH4, 5.4%*, 11/25/2036

2,532,387

2,532,426

Countrywide Asset-Backed Certificates:

 

 

"AF2", Series 2005-7, 4.367%, 11/25/2035

2,038,042

2,018,771

"A1", Series 2006-S6, 5.43%*, 3/25/2034

1,714,033

1,714,113

"A6", Series 2006-S6, 5.657%, 3/25/2034

1,840,000

1,836,826

"A6", Series 2006-15, 5.826%, 10/25/2046

1,495,000

1,516,289

"1AF6", Series 2006-11, 6.15%, 9/25/2046

1,830,000

1,876,971

Encore Credit Receivables NIM Trust,"NOTE", Series 2005-4, 144A, 4.5%, 1/25/2036

130,408

130,067

Household Home Equity Loan Trust,"A1F", Series 2006-3, 5.98%, 3/20/2036

2,431,881

2,430,104

JPMorgan Mortgage Acquisition Corp.,"A2", Series 2006-CH1, 5.37%*, 7/25/2036

2,505,208

2,505,040

 

Principal Amount ($)

Value ($)

 

 

Merrill Lynch Mortgage Investors Trust,"A1A", Series 2005-NCB, 5.451%, 7/25/2036

346,747

345,304

New Century Home Equity Loan Trust,"A2", Series 2005-A, 4.461%, 8/25/2035

1,249,377

1,238,759

Novastar NIM Trust,"NOTE", Series 2005-N1, 144A, 4.777%, 10/26/2035

149,481

149,182

Option One Mortgage Loan Trust,"2A1", Series 2006-3, 5.36%*, 2/25/2037

2,581,906

2,581,744

Popular ABS Mortgage Pass-Through Trust,"AF2", Series 2005-2, 4.415%, 4/25/2035

2,450,000

2,425,401

Residential Asset Securities Corp.,"AI1", Series 2006-KS3, 5.42%*, 4/25/2036

1,389,684

1,390,037

Residential Funding Mortgage Securities II,"A1" Series 2006-HI4, 5.45%*, 9/25/2036

2,575,941

2,576,055

Securitized Asset Backed NIM Trust,"NIM", Series 2005-FR4, 144A, 6.0%, 1/25/2036

725,436

723,378

Terwin Mortgage Trust,"AF2", Series 2005-14HE, 4.849%, 8/25/2036

3,094,000

3,058,273

 

33,457,149

Total Asset Backed (Cost $33,535,071)

33,563,284

 


Shares

Value ($)

 

 

Preferred Stocks 0.2%

Arch Capital Group Ltd., 8.0%

7,384

195,907

BAC Capital Trust XI, 6.6250

330,000

356,131

Total Preferred Stocks (Cost $515,839)

552,038

 

Principal Amount ($)

Value ($)

 

 

US Government Agency Sponsored Pass-Throughs 12.0%

Federal Home Loan Mortgage Corp.:

 

 

6.0%, with various maturities from 12/1/2025 until 12/1/2034

2,687,549

2,714,726

7.0%, 10/1/2036

861,230

883,479

Federal National Mortgage Association:

 

 

4.5%, with various maturities from 6/1/2019 until 10/1/2033

5,956,755

5,672,534

5.0%, with various maturities from 4/1/2025 until 2/1/2034

3,225,888

3,135,446

5.5%, with various maturities from 7/1/2024 until 4/1/2036

10,901,605

10,817,776

6.0%, with various maturities from 6/1/2016 until 4/1/2024 (f)

5,745,699

5,823,858

6.31%, 6/1/2008

1,500,000

1,506,572

6.5%, with various maturities from 3/1/2017 until 8/1/2036

9,467,683

9,649,069

7.0%, 9/1/2036

1,793,313

1,840,761

7.13%, 1/1/2012

1,084,784

1,075,918

8.0%, 9/1/2015

35,656

37,494

Total US Government Agency Sponsored Pass-Throughs (Cost $43,493,095)

43,157,633

 

Principal Amount ($)

Value ($)

 

 

Commercial and Non-Agency Mortgage-Backed Securities 28.9%

Adjustable Rate Mortgage Trust:

 

 

"3A31", Series 2005-10, 5.425%, 1/25/2036

1,265,000

1,247,106

"1A4", Series 2006-2, 5.77%*, 5/25/2036

1,705,000

1,727,810

Banc of America Commercial Mortgage, Inc.,"A4", Series 2005-5, 5.115%, 10/10/2045

2,635,000

2,595,220

Banc of America Mortgage Securities,"1A20", Series 2005-3, 5.5%, 4/25/2035

1,840,000

1,833,494

Bear Stearns Adjustable Rate Mortgage Trust:

 

 

"2A2", Series 2005-4, 4.567%*, 8/25/2035

1,720,000

1,681,592

"A1", Series 2006-1, 4.625%*, 2/25/2036

4,072,238

4,001,046

Chase Commercial Mortgage Securities Corp., Class"A2", Series 1998-2, 6.39%, 11/18/2030

1,792,725

1,818,072

Chase Mortgage Finance Corp.,"3A1", Series 2005-A1, 5.271%*, 12/25/2035

2,705,726

2,682,201

Citicorp Mortgage Securities, Inc.:

 

 

"A4", Series 2003-3, 5.5%, 3/25/2033

431,543

429,452

"1A1", Series 2004-8, 5.5%, 10/25/2034

1,156,754

1,151,843

Citigroup Commercial Mortgage Trust:

 

 

"ASB", Series 2006-C5, 5.413%, 10/15/2049

1,785,000

1,792,044

"ASB", Series 2006-C4, 5.72%, 3/15/2049

1,805,000

1,849,834

Citigroup Mortgage Loan Trust, Inc.:

 

 

"2A1", Series 2006-AR1, 4.7%*, 3/25/2036

1,355,212

1,329,947

"1A1", Series 2006-AR1, 4.9%*, 10/25/2035

466,414

461,620

"1A2", Series 2006-AR2, 5.548%, 3/25/2036

2,315,998

2,313,812

"1A3A", Series 2006-AR5, 5.94%*, 7/25/2036

1,665,251

1,681,682

"1CB2", Series 2004-NCM2, 6.75%, 8/25/2034

1,134,971

1,155,898

CitiMortgage Alternative Loan Trust,"A1", Series 2006-A2, 6.0%, 5/25/2036

1,793,867

1,805,777

Countrywide Alternative Loan Trust:

 

 

"A2", Series 2003-6T2, 5.0%, 6/25/2033

490,836

488,193

"A2", Series 2003-21T1, 5.25%, 12/25/2033

1,293,989

1,281,335

"A6", Series 2004-14T2, 5.5%, 8/25/2034

1,260,797

1,252,383

"7A1", Series 2004-J2, 6.0%, 12/25/2033

295,955

296,417

"1A1", Series 2004-J1, 6.0%, 2/25/2034

229,571

228,442

GE Capital Commercial Mortgage Corp.,"AAB", Series 2005-C3, 4.94%, 7/10/2045

955,000

937,042

GMAC Mortgage Corp. Loan Trust,"A1", Series 2006-J1, 5.75%, 4/25/2036

3,370,261

3,376,232

 

Principal Amount ($)

Value ($)

 

 

Greenwich Capital Commercial Funding Corp.,"AAB", Series 2006-GG7, 5.912%, 7/10/2038

1,115,000

1,157,563

GS Mortgage Securities Corp. II:

 

 

"A4", Series 2005-GG4, 4.761%, 7/10/2039

2,705,000

2,602,022

"C", Series 1998-C1, 6.91%, 10/18/2030

1,260,000

1,286,922

Indymac Inda Mortgage Loan Trust,"1A1", Series 2006-AR3, 5.397%, 12/25/2036

2,128,541

2,119,266

JPMorgan Chase Commercial Mortgage Securities Corp.,"A4", Series 2005-LDP5, 5.179%, 12/15/2044

3,305,000

3,292,937

JPMorgan Mortgage Trust:

 

 

"7A1", Series 2006-A3, 4.581%, 4/25/2035

3,296,995

3,240,827

"2A4L", Series 2006-A6, 5.582%, 10/25/2036

1,840,000

1,833,056

"2A4", Series 2006-A2, 5.766%, 4/25/2036

2,565,000

2,602,073

LB-UBS Commercial Mortgage Trust,"A4", Series 2005-C7, 5.197%, 11/15/2030

1,525,000

1,511,887

Lehman Mortgage Trust:

 

 

"3A3", Series 2006-1, 5.5%, 2/25/2036

1,860,000

1,863,005

"1A10", Series 2006-3, 6.0%, 7/25/2036

1,786,217

1,799,551

Master Alternative Loans Trust:

 

 

"5A1", Series 2005-1, 5.5%, 1/25/2020

600,816

596,499

"5A1", Series 2005-2, 6.5%, 12/25/2034

195,404

197,419

"8A1", Series 2004-3, 7.0%, 4/25/2034

84,415

84,506

Master Asset Securitization Trust,"2A7", Series 2003-9, 5.5%, 10/25/2033

1,205,832

1,180,961

Merrill Lynch Mortgage Investors Trust,"A2", Series 2005-A5, 4.566%, 6/25/2035

210,000

204,294

Mortgage Capital Funding, Inc.,"A2", Series 1998-MC3, 6.337%, 11/18/2031

981,532

988,926

Residential Accredit Loans, Inc.:

 

 

"CB", Series 2004-QS2, 5.75%, 2/25/2034

790,368

783,453

"A2", Series 2006-QS4, 6.0%, 4/25/2036

2,672,805

2,678,688

Structured Adjustable Rate Mortgage Loan Trust:

 

 

"6A3", Series 2005-21, 5.4%, 11/25/2035

1,485,000

1,453,100

"2A1", Series 2006-1, 5.648%, 2/25/2036

1,500,630

1,500,015

"1A1", Series 2005-18, 5.672%, 9/25/2035

1,216,773

1,217,815

Structured Asset Securities Corp.,"4A1", Series 2005-6, 5.0%, 5/25/2035

791,954

761,761

Wachovia Mortgage Loan Trust LLC,"3A1", Series 2005-B, 5.158%*, 10/20/2035

2,544,300

2,518,931

Washington Mutual:

 

 

"2A1", Series 2002-S8, 4.5%, 1/25/2018

219,604

218,290

"A1", Series 2003-S7, 4.5%, 8/25/2018

1,926,912

1,857,274

 

Principal Amount ($)

Value ($)

 

 

"1A3", Series 2005-AR16, 5.113%, 12/25/2035

1,660,000

1,651,025

"1A1", Series 2006-AR16, 5.634%*, 12/25/2036

2,714,606

2,716,117

"1A4", Series 2006-AR8, 5.928%, 8/25/2046

2,397,723

2,415,083

Wells Fargo Mortgage Backed Securities Trust:

 

 

"1A6", Series 2003-1, 4.5%, 2/25/2018

109,621

108,992

"4A2", Series 2005-AR16, 4.991%, 10/25/2035

2,385,000

2,356,779

"2A5", Series 2006-AR2, 5.088%*, 3/25/2036

5,472,190

5,439,241

"A4", Series 2005-AR14, 5.387%*, 8/25/2035

1,700,000

1,672,795

"A1", Series 2006-3, 5.5%, 3/25/2036

2,250,653

2,242,423

"A6", Series 2006-AR11, 5.539%, 8/25/2036

2,750,000

2,764,404

"2A5", Series 2006-AR1, 5.561%*, 3/25/2036

1,700,000

1,688,366

"1A3", Series 2006-6, 5.75%, 5/25/2036

1,939,294

1,942,144

Total Commercial and Non-Agency Mortgage-Backed Securities (Cost $103,558,839)

103,966,904

 

Collateralized Mortgage Obligations 13.1%

Fannie Mae Whole Loan:

 

 

"A2", Series 2004-W4, 5.0%, 6/25/2034

1,977,397

1,956,747

"1A1", Series 2004-W15, 6.0%, 8/25/2044

1,247,891

1,252,550

Federal Home Loan Mortgage Corp.:

 

 

"KB", Series 2552, 4.25%, 6/15/2027

736,597

729,914

"LN", Series 3145, 4.5%, 10/15/2034

1,910,000

1,842,655

"HG", Series 2543, 4.75%, 9/15/2028

669,200

663,790

"PE", Series 2721, 5.0%, 1/15/2023

135,000

129,595

"EW", Series 2545, 5.0%, 3/15/2029

1,097,817

1,089,203

"BG", Series 2640, 5.0%, 2/15/2032

2,060,000

1,992,439

"PD", Series 2783, 5.0%, 1/15/2033

1,283,000

1,235,194

"TE", Series 2780, 5.0%, 1/15/2033

1,785,000

1,720,661

"NE", Series 2802, 5.0%, 2/15/2033

2,640,000

2,544,207

"OE", Series 2840, 5.0%, 2/15/2033

2,780,000

2,669,245

"PD", Series 2890, 5.0%, 3/15/2033

1,485,000

1,426,519

"OG", Series 2889, 5.0%, 5/15/2033

1,770,000

1,702,099

"PE", Series 2898, 5.0%, 5/15/2033

860,000

825,318

"XD", Series 2941, 5.0%, 5/15/2033

1,055,000

1,010,797

"PE", Series 2864, 5.0%, 6/15/2033

2,275,000

2,190,293

"UE", Series 2911, 5.0%, 6/15/2033

3,055,000

2,929,075

 

Principal Amount ($)

Value ($)

 

 

"BG", Series 2869, 5.0%, 7/15/2033

335,000

321,968

"KD", Series 2915, 5.0%, 9/15/2033

1,341,000

1,286,744

"NE", Series 2921, 5.0%, 9/15/2033

2,275,000

2,182,860

"QE", Series 2991, 5.0%, 8/15/2034

2,530,000

2,420,030

"PE", Series 2378, 5.5%, 11/15/2016

1,647,970

1,652,889

"CH", Series 2390, 5.5%, 12/15/2016

440,000

439,215

"PE", Series 2512, 5.5%, 2/15/2022

45,000

45,250

"YA", Series 2841, 5.5%, 7/15/2027

1,937,600

1,938,472

"PE", Series 2165, 6.0%, 6/15/2029

1,762,580

1,777,468

Federal National Mortgage Association:

 

 

"PE", Series 2005-44, 5.0%, 7/25/2033

650,000

621,673

"QD", Series 2005-29, 5.0%, 8/25/2033

435,000

415,582

"HE", Series 2005-22, 5.0%, 10/25/2033

1,540,000

1,472,401

"PG", Series 2002-3, 5.5%, 2/25/2017

500,000

501,184

"QC", Series 2002-11, 5.5%, 3/25/2017

640,000

641,027

"VD", Series 2002-56, 6.0%, 4/25/2020

43,831

43,746

"PH", Series 1999-19, 6.0%, 5/25/2029

1,754,010

1,776,561

"Z", Series 2001-14, 6.0%, 5/25/2031

1,114,066

1,127,423

"A2", Series 1998-M6, 6.32%, 8/15/2008

448,813

453,828

"HM", Series 2002-36, 6.5%, 12/25/2029

10,998

10,971

Total Collateralized Mortgage Obligations (Cost $47,843,408)

47,039,593

 

Municipal Bonds and Notes 5.1%

Brockton, MA, General Obligation, Economic Development, Series A, 6.45%, 5/1/2017 (b)

1,530,000

1,623,605

Illinois, Higher Education Revenue, 7.05%, 7/1/2009 (b)

1,410,000

1,471,843

Indiana, Bond Bank Revenue, School Severance Funding, Series 11, 6.01%, 7/15/2021 (b)

1,965,000

2,018,762

Jersey City, NJ, Municipal Utilities Authority, Water Revenue, 4.55%, 5/15/2012 (b)

1,000,000

971,660

Jicarilla, NM, Sales & Special Tax Revenue, Apache Nation Revenue, 144A, 5.2%, 12/1/2013

945,000

927,224

Los Angeles, CA, Community Redevelopment Agency, Financing Authority Revenue, Bunker Hill Project, 5.83%, 12/1/2017 (b)

2,500,000

2,570,850

Menasha, WI, Anticipation Notes, Series B, 5.65%, 9/1/2009

1,310,000

1,315,096

 

Principal Amount ($)

Value ($)

 

 

Michigan, Western Michigan University Revenue, 4.41%, 11/15/2014 (b)

1,130,000

1,094,190

New York, General Obligation, Environmental Facilities Corp., 4.95%, 1/1/2013 (b)

1,500,000

1,483,530

Oklahoma City, OK, Airport Revenue, 5.2%, 10/1/2012 (b)

1,430,000

1,425,453

Oregon, School Board Association Taxable — Pension, 4.668%, 6/30/2020 (b)

1,135,000

1,065,924

Portland, OR, River District, Urban Renewal & Redevelopment, Series B, 3.35%, 6/15/2010 (b)

1,550,000

1,466,734

Trenton, NJ, School District General Obligation, 4.3%, 4/1/2011 (b)

1,040,000

1,003,954

Total Municipal Bonds and Notes (Cost $18,443,220)

18,438,825

 

US Treasury Obligations 10.2%

US Treasury Bonds:

 

 

6.0%, 2/15/2026 (a)

18,422,000

20,893,145

8.125%, 8/15/2019 (a)

8,766,000

11,452,639

 

Principal Amount ($)

Value ($)

 

 

US Treasury Notes:

 

 

3.25%, 8/15/2007 (a)

942,000

931,808

4.25%, 11/15/2013 (a)

3,571,000

3,476,703

Total US Treasury Obligations (Cost $37,646,991)

36,754,295

 


Shares

Value ($)

 

 

Securities Lending Collateral 11.0%

Daily Assets Fund Institutional, 5.34% (c) (d) (Cost $39,550,113)

39,550,113

39,550,113

 

Cash Equivalents 2.3%

Cash Management QP Trust, 5.46% (e) (Cost $8,043,491)

8,043,491

8,043,491

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $400,251,126)+

111.0

399,039,586

Other Assets and Liabilities, Net

(11.0)

(39,690,364)

Net Assets

100.0

359,349,222

* Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2006.
+ The cost for federal income tax purposes was $400,276,243. At December 31, 2006, net unrealized depreciation for all securities based on tax cost was $1,236,657. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $2,384,640 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $3,621,297.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $38,738,935 which is 10.8% of net assets.
(b) Bond is insured by one of these companies:

Insurance Coverage

As a % of Total Investment Portfolio

Ambac Financial Group

1.6

Financial Guaranty Insurance Co.

1.0

Financial Security Assurance Inc.

0.7

MBIA Corp.

0.3

XL Capital Insurance

0.5

(c) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(d) Represents collateral held in connection with securities lending.
(e) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(f) Mortgage dollar rolls included.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. issues which have similar coupon rates have been aggregated for presentation purposes in the investment portfolio.

REIT: Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $352,657,522) — including $38,738,935 of securities loaned

$ 351,445,982

Investment in Daily Assets Fund Institutional (cost $39,550,113)*

39,550,113

Investment in Cash Management QP Trust (cost $8,043,491)

8,043,491

Total investments in securities, at value (cost $400,251,126)

399,039,586

Cash

376,589

Interest receivable

3,149,913

Receivable for Portfolio shares sold

921,306

Other assets

11,040

Total assets

403,498,434

Liabilities

Payable upon return of securities loaned

39,550,113

Payable for investments purchased — mortgage dollar rolls

4,157,180

Payable for Portfolio shares redeemed

62,917

Accrued management fee

175,291

Other accrued expenses and payables

203,711

Total liabilities

44,149,212

Net assets, at value

$ 359,349,222

Net Assets

Net assets consist of:
Undistributed net investment income

15,361,420

Net unrealized appreciation (depreciation) on investments

(1,211,540)

Accumulated net realized gain (loss)

(3,837,892)

Paid-in capital

349,037,234

Net assets, at value

$ 359,349,222

Class A

Net Asset Value, offering and redemption price per share ($276,869,712 ÷ 23,346,010 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.86

Class B

Net Asset Value, offering and redemption price per share ($82,479,510 ÷ 6,968,915 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.84

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Interest

$ 18,050,193

Interest — Cash Management QP Trust

508,577

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

48,204

Dividends

18,382

Total Income

18,625,356

Expenses:
Management fee

2,124,452

Custodian fees

20,009

Distribution service fees (Class B)

212,516

Record keeping fees (Class B)

117,989

Auditing

47,905

Legal

10,692

Trustees' fees and expenses

25,287

Reports to shareholders

141,507

Other

48,071

Total expenses before expense reductions

2,748,428

Expense reductions

(4,960)

Total expenses after expense reductions

2,743,468

Net investment income

15,881,888

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

(3,380,379)

Net unrealized appreciation (depreciation) during the period on investments

2,452,304

Net gain (loss) on investment transactions

(928,075)

Net increase (decrease) in net assets resulting from operations

$ 14,953,813

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income

$ 15,881,888

$ 12,079,996

Net realized gain (loss) on investment transactions

(3,380,379)

(353,676)

Net unrealized appreciation (depreciation) during the period on investment transactions

2,452,304

(5,057,842)

Net increase (decrease) in net assets resulting from operations

14,953,813

6,668,478

Distributions to shareholders from:
Net investment income:

Class A

(9,250,155)

(7,365,945)

Class B

(2,794,336)

(2,666,763)

Net realized gains:

Class A

(40,873)

(1,950,232)

Class B

(13,997)

(794,464)

Portfolio share transactions:

Class A

Proceeds from shares sold

91,229,471

81,598,580

Reinvestment of distributions

9,291,028

9,316,177

Cost of shares redeemed

(77,798,091)

(45,087,748)

Net increase (decrease) in net assets from Class A share transactions

22,722,408

45,827,009

Class B

Proceeds from shares sold

10,023,723

9,590,439

Reinvestment of distributions

2,808,333

3,461,227

Cost of shares redeemed

(19,326,554)

(10,890,122)

Net increase (decrease) in net assets from Class B share transactions

(6,494,498)

2,161,544

Increase (decrease) in net assets

19,082,362

41,879,627

Net assets at beginning of period

340,266,860

298,387,233

Net assets at end of period (including undistributed net investment income of $15,361,420 and $11,525,027, respectively)

$ 359,349,222

$ 340,266,860

Other Information

Class A

Shares outstanding at beginning of period

21,303,867

17,397,738

Shares sold

7,951,409

6,905,327

Shares issued to shareholders in reinvestment of distributions

821,488

808,696

Shares redeemed

(6,730,754)

(3,807,894)

Net increase (decrease) in Class A shares

2,042,143

3,906,129

Shares outstanding at end of period

23,346,010

21,303,867

Class B

Shares outstanding at beginning of period

7,523,292

7,335,272

Shares sold

863,400

808,980

Shares issued to shareholders in reinvestment of distributions

248,086

300,193

Shares redeemed

(1,665,863)

(921,153)

Net increase (decrease) in Class B shares

(554,377)

188,020

Shares outstanding at end of period

6,968,915

7,523,292

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Date

Net asset value, beginning of period

$ 11.81

$ 12.07

$ 12.16

$ 11.98

$ 11.48

Income (loss) from investment operations:

Net investment incomea

.53

.47

.50

.45

.53

Net realized and unrealized gain (loss) on investment transactions

(.05)

(.21)

.05

.14

.37

Total from investment operations

.48

.26

.55

.59

.90

Less distributions from:

Net investment income

(.43)

(.41)

(.43)

(.41)

(.40)

Net realized gain on investment transactions

(.00)*

(.11)

(.21)

—

—

Total distributions

(.43)

(.52)

(.64)

(.41)

(.40)

Net asset value, end of period

$ 11.86

$ 11.81

$ 12.07

$ 12.16

$ 11.98

Total Return (%)

4.26

2.25

4.53

5.13

8.01

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

277

252

210

201

216

Ratio of expenses (%)

.68

.67

.66

.66

.65

Ratio of net investment income (%)

4.56

3.96

4.18

3.75

4.57

Portfolio turnover rate (%)

183b

164b

185b

229b

267

a Based on average shares outstanding during the period.
b The portfolio turnover rate including mortgage dollar roll transactions was 198%, 241%, 176%, 204% and 265% for the years ended December 31, 2006, December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
* Amount is less than $.005

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 11.78

$ 12.04

$ 12.13

$ 11.96

$ 11.36

Income (loss) from investment operations:

Net investment incomeb

.49

.42

.45

.40

.27

Net realized and unrealized gain (loss) on investment transactions

(.05)

(.21)

.05

.15

.33

Total from investment operations

.44

.21

.50

.55

.60

Less distributions from:

Net investment income

(.38)

(.36)

(.38)

(.38)

—

Net realized gain on investment transactions

(.00)***

(.11)

(.21)

—

—

Total distributions

(.38)

(.47)

(.59)

(.38)

—

Net asset value, end of period

$ 11.84

$ 11.78

$ 12.04

$ 12.13

$ 11.96

Total Return (%)

3.89

1.85

4.10

4.76

5.28**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

82

89

88

45

2

Ratio of expenses (%)

1.07

1.07

1.03

1.05

.92*

Ratio of net investment income (%)

4.17

3.56

3.81

3.36

4.69*

Portfolio turnover rate (%)

183c

164c

185c

229c

267

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c The portfolio turnover rate including mortgage dollar roll transactions was 198%, 241%, 176%, 204% and 265% for the years ended December 31, 2006, December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
* Annualized
** Not annualized
*** Amount is less than $.005

Performance Summary December 31, 2006

DWS Davis Venture Value VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio is subject to stock market and equity risks, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Davis Venture Value VIP from 5/1/2001 to 12/31/2006

[] DWS Davis Venture Value VIP — Class A

[] Russell 1000® Value Index

Russell 1000® Value Index is an unmanaged index, which consists of those stocks in the Russell 1000® Index with lower price-to-book ratios and lower forecasted-growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1550

 

Yearly periods ended December 31

 

Comparative Results

DWS Davis Venture Value VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$11,484

$14,080

$15,395

$14,625

Average annual total return

14.84%

12.08%

9.01%

6.94%

Russell 1000 Value Index
 Growth of $10,000

$12,225

$15,245

$16,746

$16,009

Average annual total return

22.25%

15.09%

10.86%

8.66%

DWS Davis Venture Value VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$11,434

$13,915

$16,867

Average annual total return

 

14.34%

11.64%

12.33%

Russell 1000 Value Index
 Growth of $10,000

 

$12,225

$15,245

$17,586

Average annual total return

 

22.25%

15.09%

13.37%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 2001. Index returns began on April 30, 2001.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Davis Venture Value VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,114.20

 

$ 1,111.80

 

Expenses Paid per $1,000*

$ 4.53

 

$ 6.60

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.92

 

$ 1,018.95

 

Expenses Paid per $1,000*

$ 4.33

 

$ 6.31

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Davis Venture Value VIP

.85%

 

1.24%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Davis Venture Value VIP

For the 12 months ended December 31, 2006, the DWS Davis Venture Value VIP returned 14.84% (Class A shares, unadjusted for contract charges), compared to its benchmark, the Russel 1000® Value Index, which returned 22.25%.

Consumer discretionary companies were the most important contributors to the Portfolio's performance over the 12-month period. Comcast Corp. and Harley-Davidson, Inc. were among the top contributors to performance. Apollo Group, Inc. (purchased in March 2006) and H&R Block, Inc. were among the top detractors from performance. Diversified financial and consumer staple companies also made important contributions to performance. Two diversified financial companies, JPMorgan Chase & Co. and American Express Co., and one consumer staples company, Altria Group, Inc., were among the top contributors to performance. A consumer staples company, The Hershey Co., was among the top detractors from performance.

The Portfolio's largest investment was in insurance companies. While insurance companies had positive returns, they trailed the Index. Berkshire Hathaway, Inc. and Loews Corp. were among the top contributors to performance. Progressive Corp. and Transatlantic Holdings, Inc. were among the top detractors from performance.

The Portfolio's investments in telecommunication service and energy companies also contributed to the Portfolio underperforming the Index over the 12-month period. One energy company, ConocoPhillips was among the top contributors to performance. One telecommunication services company, Sprint Nextel Corp. (purchased in March 2006), and an energy company, EOG Resources, Inc., were among the top detractors from performance.

Christopher C. Davis
Kenneth Charles Feinberg

Portfolio Managers
Davis Selected Advisers, L.P., Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Risk Considerations

The Portfolio is subject to stock market and equity risks, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Russell 1000 Value Index is an unmanaged index, which consists of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted-growth values.

Index returns assume the reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

In this report, Davis Selected Advisers makes candid statements and observations regarding economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. All investments involve some degree of risk, and there can be no assurance that the investment strategies will be successful. Market values will vary so that an investor may experience a gain or a loss.

Portfolio Summary

DWS Davis Venture Value VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

99%

99%

Cash Equivalents

1%

1%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Financials

38%

45%

Consumer Staples

14%

15%

Consumer Discretionary

14%

8%

Energy

12%

11%

Industrials

7%

8%

Information Technology

5%

4%

Materials

4%

4%

Health Care

4%

4%

Telecommunication Services

2%

1%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 68. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Davis Venture Value VIP

 


Shares

Value ($)

 

 

Common Stocks 98.8%

Consumer Discretionary 13.7%

Automobiles 2.0%

Harley-Davidson, Inc. (a)

119,200

8,400,024

Diversified Consumer Services 1.3%

Apollo Group, Inc. "A"* (a)

27,900

1,087,263

H&R Block, Inc.

197,000

4,538,880

 

5,626,143

Household Durables 0.2%

Hunter Douglas NV

12,563

1,010,440

Internet & Catalog Retail 1.4%

Amazon.com, Inc.* (a)

70,900

2,797,714

Expedia, Inc.*

26,499

555,949

IAC/InterActiveCorp.* (a)

26,699

992,135

Liberty Media Holding Corp. — Interactive "A"*

65,500

1,412,835

 

5,758,633

Media 7.3%

Comcast Corp. Special "A"*

341,100

14,285,268

Gannett Co., Inc.

18,100

1,094,326

Lagardere S.C.A.

48,500

3,898,381

Liberty Media Holding Corp. — Capital "A"*

12,960

1,269,821

News Corp. "A"

341,700

7,339,716

NTL, Inc. (a)

78,632

1,984,672

WPP Group PLC (ADR) (a)

16,600

1,124,484

 

30,996,668

Multiline Retail 0.2%

Sears Holdings Corp.*

6,200

1,041,166

Specialty Retail 1.3%

Bed Bath & Beyond, Inc.*

58,900

2,244,090

CarMax, Inc.*

23,200

1,244,216

Lowe's Companies, Inc.

67,900

2,115,085

 

5,603,391

Consumer Staples 14.0%

Beverages 2.1%

Diageo PLC (ADR)

69,700

5,527,907

Heineken Holding NV

84,000

3,407,225

 

8,935,132

Food & Staples Retailing 5.4%

Costco Wholesale Corp.

291,500

15,411,605

Wal-Mart Stores, Inc.

166,600

7,693,588

 

23,105,193

Food Products 0.6%

The Hershey Co. (a)

48,200

2,400,360

Household Products 1.1%

Procter & Gamble Co.

72,800

4,678,856

Personal Products 0.4%

Avon Products, Inc.

50,100

1,655,304

Tobacco 4.4%

Altria Group, Inc.

220,800

18,949,056

 


Shares

Value ($)

 

 

Energy 11.9%

Energy Equipment & Services 0.8%

Transocean, Inc.*

43,200

3,494,448

Oil, Gas & Consumable Fuels 11.1%

Canadian Natural Resources Ltd.

31,900

1,698,037

China Coal Energy Co. "H"*

1,478,200

963,511

ConocoPhillips

262,720

18,902,704

Devon Energy Corp.

136,900

9,183,252

EOG Resources, Inc.

115,100

7,187,995

Occidental Petroleum Corp.

184,200

8,994,486

 

46,929,985

Financials 37.7%

Capital Markets 2.5%

Ameriprise Financial, Inc.

89,620

4,884,290

Mellon Financial Corp.

45,200

1,905,180

Morgan Stanley

38,200

3,110,626

State Street Corp.

12,100

816,024

 

10,716,120

Commercial Banks 8.3%

Commerce Bancorp, Inc. (a)

71,800

2,532,386

HSBC Holdings PLC

663,524

12,091,271

Wachovia Corp.

180,387

10,273,039

Wells Fargo & Co.

297,200

10,568,432

 

35,465,128

Consumer Finance 4.5%

American Express Co.

316,900

19,226,323

Diversified Financial Services 7.7%

Citigroup, Inc.

172,300

9,597,110

JPMorgan Chase & Co.

361,684

17,469,337

Moody's Corp.

82,900

5,725,074

 

32,791,521

Insurance 14.7%

Ambac Financial Group, Inc.

3,100

276,117

American International Group, Inc.

265,200

19,004,232

Aon Corp.

75,900

2,682,306

Berkshire Hathaway, Inc. "B"*

4,114

15,081,924

Chubb Corp.

21,100

1,116,401

Loews Corp.

215,200

8,924,344

Markel Corp.*

800

384,080

Principal Financial Group, Inc.

24,700

1,449,890

Progressive Corp.

368,100

8,915,382

Sun Life Financial, Inc.

15,200

643,720

Transatlantic Holdings, Inc. (a)

62,537

3,883,548

 

62,361,944

Health Care 3.7%

Health Care Providers & Services

Cardinal Health, Inc.

60,300

3,885,129

Caremark Rx, Inc.

96,350

5,502,548

Express Scripts, Inc.*

22,700

1,625,320

UnitedHealth Group, Inc.

83,500

4,486,455

 

15,499,452

Industrials 7.0%

Air Freight & Logistics 0.5%

United Parcel Service, Inc. "B"

26,800

2,009,464

 


Shares

Value ($)

 

 

Commercial Services & Supplies 1.0%

D&B Corp.*

49,900

4,131,221

Industrial Conglomerates 4.2%

Tyco International Ltd.

587,362

17,855,805

Road & Rail 0.3%

Kuehne & Nagel International AG (Registered)

20,820

1,514,633

Transportation Infrastructure 1.0%

China Merchants Holdings International Co., Ltd

729,579

2,993,342

Cosco Pacific Ltd.

562,600

1,311,884

 

4,305,226

Information Technology 5.0%

Communications Equipment 0.2%

Nokia Oyj (ADR)

48,500

985,520

Computers & Peripherals 1.3%

Dell, Inc.*

107,000

2,684,630

Hewlett-Packard Co.

67,800

2,792,682

 

5,477,312

IT Services 1.3%

Iron Mountain, Inc.* (a)

128,300

5,303,922

Software 2.2%

Microsoft Corp.

319,300

9,534,298

Materials 4.2%

Construction Materials 1.5%

Martin Marietta Materials, Inc.

33,500

3,480,985

Vulcan Materials Co.

33,800

3,037,606

 

6,518,591

 


Shares

Value ($)

 

 

Containers & Packaging 2.2%

Sealed Air Corp. (a)

143,900

9,341,988

Metals & Mining 0.5%

BHP Billiton PLC

50,300

929,285

Rio Tinto PLC

18,700

993,533

 

1,922,818

Telecommunication Services 1.6%

Wireless Telecommunication Services

SK Telecom Co., Ltd. (ADR)

83,700

2,216,376

Sprint Nextel Corp.

251,100

4,743,279

 

6,959,655

Total Common Stocks (Cost $283,210,633)

420,505,740

 

Securities Lending Collateral 3.6%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $15,439,054)

15,439,054

15,439,054

 

Cash Equivalents 1.4%

Cash Management QP Trust, 5.46% (d) (Cost $5,752,421)

5,752,421

5,752,421

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $304,402,108)+

103.8

441,697,215

Other Assets and Liabilities, Net

(3.8)

(16,047,726)

Net Assets

100.0

425,649,489

* Non-income producing security.
+ The cost for federal income tax purposes was $305,032,994. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $136,664,221. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $139,895,845 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $3,231,624.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $14,973,349 which is 3.5% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $283,210,633) — including $14,973,349 of securities loaned

$ 420,505,740

Investment in Daily Assets Fund Institutional (cost $15,439,054)*

15,439,054

Investment in Cash Management QP Trust (cost $5,752,421)

5,752,421

Total investments in securities, at value (cost $304,402,108)

441,697,215

Foreign currency, at value (cost $1,686)

1,776

Dividends receivable

557,516

Interest receivable

27,274

Foreign taxes recoverable

4,180

Receivable for Portfolio shares sold

10,519

Other assets

11,156

Total assets

442,309,636

Liabilities

Payable for Portfolio shares redeemed

666,528

Payable upon return of securities loaned

15,439,054

Payable for investments purchased

122,791

Accrued management fee

308,112

Other accrued expenses and payables

123,662

Total liabilities

16,660,147

Net assets, at value

$ 425,649,489

Net Assets

Net assets consist of:
Undistributed net investment income

2,670,607

Net unrealized appreciation (depreciation) on:

Investments

137,295,107

Foreign currency related transactions

29

Accumulated net realized gain (loss)

4,679,830

Paid-in capital

281,003,916

Net assets, at value

$ 425,649,489

Class A

Net Asset Value, offering and redemption price per share ($346,049,895 ÷ 24,284,177 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 14.25

Class B

Net Asset Value, offering and redemption price per share ($79,599,594 ÷ 5,597,014 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 14.22

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $43,756)

$ 6,206,007

Interest — Cash Management QP Trust

257,996

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

18,750

Total Income

6,482,753

Expenses:
Management fee

3,764,933

Custodian and accounting fees

123,420

Distribution service fees (Class B)

195,529

Record keeping fees (Class B)

103,486

Auditing

46,295

Legal

12,904

Trustees' fees and expenses

30,194

Reports to shareholders

67,623

Other

34,680

Total expenses before expense reductions

4,379,064

Expense reductions

(671,341)

Total expenses after expense reductions

3,707,723

Net investment income (loss)

2,775,030

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

11,081,136

Foreign currency related transactions

(20,949)

 

11,060,187

Net unrealized appreciation (depreciation) during the period on:
Investments

41,764,735

Foreign currency related transactions

11,573

 

41,776,308

Net gain (loss) on investment transactions

52,836,495

Net increase (decrease) in net assets resulting from operations

$ 55,611,525

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 2,775,030

$ 2,485,779

Net realized gain (loss) on investment transactions

11,060,187

1,821,140

Net unrealized appreciation (depreciation) during the period on investment transactions

41,776,308

29,208,587

Net increase (decrease) in net assets resulting from operations

55,611,525

33,515,506

Distributions to shareholders from:
Net investment income:

Class A

(2,082,948)

(2,091,774)

Class B

(214,549)

(260,311)

Portfolio share transactions:

Class A

Proceeds from shares sold

23,381,717

36,365,583

Reinvestment of distributions

2,082,948

2,091,774

Cost of shares redeemed

(31,847,982)

(22,500,564)

Net increase (decrease) in net assets from Class A share transactions

(6,383,317)

15,956,793

Class B

Proceeds from shares sold

6,563,580

11,711,444

Reinvestment of distributions

214,549

260,311

Cost of shares redeemed

(15,502,095)

(6,187,073)

Net increase (decrease) in net assets from Class B share transactions

(8,723,966)

5,784,682

Increase (decrease) in net assets

38,206,745

52,904,896

Net assets at beginning of period

387,442,744

334,537,848

Net assets at end of period (including undistributed net investment income of $2,670,607 and $2,254,802, respectively)

$ 425,649,489

$ 387,442,744

Other Information

Class A

Shares outstanding at beginning of period

24,763,248

23,386,408

Shares sold

1,802,609

3,107,848

Shares issued to shareholders in reinvestment of distributions

163,496

184,135

Shares redeemed

(2,445,176)

(1,915,143)

Net increase (decrease) in Class A shares

(479,071)

1,376,840

Shares outstanding at end of period

24,284,177

24,763,248

Class B

Shares outstanding at beginning of period

6,263,092

5,765,180

Shares sold

509,107

1,002,803

Shares issued to shareholders in reinvestment of distributions

16,827

22,895

Shares redeemed

(1,192,012)

(527,786)

Net increase (decrease) in Class B shares

(666,078)

497,912

Shares outstanding at end of period

5,597,014

6,263,092

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 12.49

$ 11.48

$ 10.31

$ 7.99

$ 9.50

Income (loss) from investment operations:

Net investment income (loss)a

.10

.09

.08

.06

.05

Net realized and unrealized gain (loss) on investment transactions

1.74

1.01

1.14

2.31

(1.55)

Total from investment operations

1.84

1.10

1.22

2.37

(1.50)

Less distributions from:

Net investment income

(.08)

(.09)

(.05)

(.05)

(.01)

Net asset value, end of period

$ 14.25

$ 12.49

$ 11.48

$ 10.31

$ 7.99

Total Return (%)

14.84b

9.64b

11.83

29.84

(15.79)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

346

309

268

220

160

Ratio of expenses before expense reductions (%)

1.02

1.02

1.05

1.01

1.02

Ratio of expenses after expense reductions (%)

.85

.96

1.05

1.01

1.02

Ratio of net investment income (%)

.77

.78

.74

.62

.62

Portfolio turnover rate (%)

16

8

3

7

22

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 12.47

$ 11.46

$ 10.29

$ 7.98

$ 8.52

Income (loss) from investment operations:

Net investment income (loss)b

.05

.04

.04

.02

.04

Net realized and unrealized gain (loss) on investment transactions

1.73

1.01

1.13

2.32

(.58)

Total from investment operations

1.78

1.05

1.17

2.34

(.54)

Less distributions from:

Net investment income

(.03)

(.04)

(.00)***

(.03)

—

Net asset value, end of period

$ 14.22

$ 12.47

$ 11.46

$ 10.29

$ 7.98

Total Return (%)

14.34c

9.23c

11.42

29.42

(6.34)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

80

78

66

29

.8

Ratio of expenses before expense reductions (%)

1.40

1.41

1.44

1.40

1.27*

Ratio of expenses after expense reductions (%)

1.23

1.34

1.44

1.40

1.27*

Ratio of net investment income (%)

.39

.40

.36

.23

1.06*

Portfolio turnover rate (%)

16

8

3

7

22

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
*** Amount is less than $.005.

Performance Summary December 31, 2006

DWS Dreman High Return Equity VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

Portfolio returns shown for all periods for Class B shares reflect a waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Dreman High Return Equity VIP from 5/4/1998 to 12/31/2006

[] DWS Dreman High Return Equity VIP — Class A

[] S&P 500® Index

The Standard & Poor's 500® (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1540

 

Yearly periods ended December 31

 

Comparative Results

DWS Dreman High Return Equity VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$11,874

$14,601

$15,803

$19,167

Average annual total return

18.74%

13.45%

9.58%

7.81%

S&P 500 Index
 Growth of $10,000

$11,579

$13,470

$13,503

$14,624

Average annual total return

15.79%

10.44%

6.19%

4.48%

DWS Dreman High Return Equity VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$11,821

$14,428

$17,361

Average annual total return

 

18.21%

13.00%

13.06%

S&P 500 Index
 Growth of $10,000

 

$11,579

$13,470

$15,549

Average annual total return

 

15.79%

10.44%

10.31%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 4, 1998. Index returns began on April 30, 1998.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Dreman High Return Equity VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses for Class B shares; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,139.60

 

$ 1,137.50

 

Expenses Paid per $1,000*

$ 4.15

 

$ 6.20

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.32

 

$ 1,019.41

 

Expenses Paid per $1,000*

$ 3.92

 

$ 5.85

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Dreman High Return Equity VIP

.77%

 

1.15%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Dreman High Return Equity VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. The broad equity market, as measured by the Standard & Poor's 500® (S&P 500) Index, had a return of 15.79% for the period. Value stocks, as measured by the Russell 1000® Value Index, performed better than growth stocks, as measured by the Russell 1000® Growth Index. With a return of 18.74% (Class A shares, unadjusted for contract charges), the Dreman High Return Equity VIP Portfolio outperformed its benchmark, the S&P 500 Index.

A major contributor to return was a significant concentration in tobacco stocks. Two of the Portfolio's top 10 holdings are Altria Group, Inc., which owns Philip Morris, Marlboro and other leading domestic and international brands, and UST, Inc., the leader in smokeless tobacco in the United States. These tobacco stocks have great brands and high yields, which provide some cushion from market fluctuations. Through much of the year we also had a position in Reynolds American, Inc.; this stock was originally purchased in 2000 and sold during 2006 providing almost a ten-fold return. Also positive was stock selection in the health care sector, where Merck & Co., Inc. and Laboratory Corp. of America Holdings* were particularly strong. An overweight in the energy sector detracted from performance, as prices of some energy stocks dropped in response to lower oil prices.1 However, several energy stocks, including Chevron Corp. and ConocoPhillips were among our best performing holdings.

Performance was hurt by stock selection in financials. Two large holdings, Freddie Mac and American International Group, Inc. (AIG), performed poorly because of concerns about accounting irregularities that required earnings restatements. However, Fannie Mae, which hurt performance in prior periods, was a major contributor to performance over the last 12 months. Another negative in the financials sector was Washington Mutual, Inc., which performed well early in 2006, but has weakened on investor concerns about the profitability of its big mortgage business in a weakening housing market.

David N. Dreman F. James Hutchinson E. Clifton Hoover, Jr.
Lead Portfolio Manager Portfolio Managers
Dreman Value Management L.L.C., Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

The Portfolio may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

The Standard & Poor's 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

* As of December 31, 2006, the positions were sold.
1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Dreman High Return Equity VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

98%

94%

Cash Equivalents

2%

6%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Financials

30%

29%

Energy

21%

21%

Consumer Staples

16%

19%

Health Care

16%

17%

Consumer Discretionary

7%

6%

Industrials

7%

5%

Information Technology

2%

3%

Telecommunication Services

1%

—

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 79. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Dreman High Return Equity VIP

 


Shares

Value ($)

 

 

Common Stocks 98.3%

Consumer Discretionary 7.0%

Multiline Retail 1.0%

Federated Department Stores, Inc.

309,710

11,809,242

Specialty Retail 6.0%

Borders Group, Inc.

712,900

15,933,315

Home Depot, Inc.

766,100

30,766,576

Lowe's Companies, Inc.

278,200

8,665,930

Staples, Inc.

599,347

16,002,565

 

71,368,386

Consumer Staples 15.8%

Food & Staples Retailing 0.5%

Safeway, Inc.

157,450

5,441,472

Tobacco 15.3%

Altria Group, Inc.

1,341,420

115,120,665

Imperial Tobacco Group PLC (ADR)

113,745

8,989,267

UST, Inc.

976,440

56,828,808

 

180,938,740

Energy 20.5%

Oil, Gas & Consumable Fuels

Anadarko Petroleum Corp.

277,300

12,068,096

Apache Corp.

341,300

22,699,863

Chevron Corp.

576,060

42,357,692

ConocoPhillips

1,297,294

93,340,303

Devon Energy Corp.

615,300

41,274,324

El Paso Corp.

402,410

6,148,825

EnCana Corp.

156,300

7,181,985

Occidental Petroleum Corp.

365,900

17,866,897

 

242,937,985

Financials 28.7%

Commercial Banks 4.9%

KeyCorp.

351,500

13,367,545

PNC Financial Services Group, Inc.

202,400

14,985,696

US Bancorp.

317,700

11,497,563

Wachovia Corp.

303,400

17,278,630

 

57,129,434

Diversified Financial Services 4.6%

Bank of America Corp.

623,736

33,301,265

CIT Group, Inc.

77,700

4,333,329

Citigroup, Inc.

160,900

8,962,130

JPMorgan Chase & Co.

158,864

7,673,131

 

54,269,855

Insurance 2.9%

American International Group, Inc.

129,000

9,244,140

Chubb Corp.

163,300

8,640,203

Hartford Financial Services Group, Inc.

130,288

12,157,173

The St. Paul Travelers Companies, Inc.

84,405

4,531,705

 

34,573,221

 


Shares

Value ($)

 

 

Thrifts & Mortgage Finance 16.3%

Fannie Mae

1,069,973

63,545,696

Freddie Mac

948,941

64,433,094

Sovereign Bancorp, Inc.

728,930

18,507,533

Washington Mutual, Inc.

1,021,375

46,462,349

 

192,948,672

Health Care 15.2%

Health Care Equipment & Supplies 0.6%

Zimmer Holdings, Inc.*

96,400

7,555,832

Health Care Providers & Services 5.5%

Aetna, Inc.

502,000

21,676,360

Quest Diagnostics, Inc.

52,100

2,761,300

UnitedHealth Group, Inc.

758,700

40,764,951

 

65,202,611

Pharmaceuticals 9.1%

Bristol-Myers Squibb Co.

436,660

11,492,891

Johnson & Johnson

55,000

3,631,100

Merck & Co., Inc.

627,995

27,380,582

Pfizer, Inc.

1,180,830

30,583,497

Wyeth

674,000

34,320,080

 

107,408,150

Industrials 6.8%

Aerospace & Defense 0.2%

United Technologies Corp.

31,500

1,969,380

Air Freight & Logistics 0.5%

FedEx Corp.

53,800

5,843,756

Industrial Conglomerates 6.1%

3M Co.

457,400

35,645,182

General Electric Co.

398,150

14,815,161

Tyco International Ltd.

720,205

21,894,232

 

72,354,575

Information Technology 2.2%

IT Services 1.7%

Electronic Data Systems Corp.

713,340

19,652,517

Software 0.5%

Microsoft Corp.

208,800

6,234,768

Materials 0.0%

Chemicals

Tronox, Inc. "B"

590

9,316

Telecommunication Services 1.2%

Diversified Telecommunication Services

Verizon Communications, Inc.

383,300

14,274,092

Utilities 0.9%

Independent Power Producers & Energy Traders

TXU Corp.

201,500

10,923,315

Total Common Stocks (Cost $855,723,966)

1,162,845,319

 

Cash Equivalents 1.6%

Cash Management QP Trust, 5.46% (a) (Cost $19,558,908)

19,558,908

19,558,908

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $ 875,282,874)+

99.9

1,182,404,227

Other Assets and Liabilities, Net

0.1

937,086

Net Assets

100.0

1,183,341,313

* Non-income producing security.
+ The cost for federal income tax purposes was $878,577,006. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $303,827,221. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $315,571,764 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $11,744,543.
(a) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt.

At December 31, 2006, open futures contracts purchased were as follows:

Futures

Expiration Date

Contracts

Aggregated Face Value ($)

Value ($)

Unrealized Appreciation ($)

S&P 500 Index

3/15/2007

35

12,409,898

12,498,500

88,602

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $855,723,966)

$ 1,162,845,319

Investment in Cash Management QP Trust (cost $19,558,908)

19,558,908

Total investments in securities, at value (cost $875,282,874)

1,182,404,227

Cash

14,000

Dividends receivable

2,136,286

Interest receivable

132,249

Margin Deposit

560,000

Receivable for Portfolio shares sold

79,796

Other assets

37,451

Total assets

1,185,364,009

Liabilities

Payable for Portfolio shares redeemed

968,080

Payable for daily variation margin on open futures contracts

47,405

Payable for investments purchased

18,792

Accrued management fee

708,109

Other accrued expenses and payables

280,310

Total liabilities

2,022,696

Net assets, at value

$ 1,183,341,313

Net Assets

Net assets consist of:
Undistributed net investment income

15,397,382

Net unrealized appreciation (depreciation) on:

Investments

307,121,353

Futures

88,602

Accumulated net realized gain (loss)

5,948,661

Paid-in capital

854,785,315

Net assets, at value

$ 1,183,341,313

Class A

Net Asset Value, offering and redemption price per share ($992,361,654 ÷ 66,083,197 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 15.02

Class B

Net Asset Value, offering and redemption price per share ($190,979,659 ÷ 12,713,676 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 15.02

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $6,704)

$ 25,028,937

Interest — Cash Management QP Trust

1,257,818

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

4,550

Total Income

26,291,305

Expenses:
Management fee

7,237,569

Custodian and accounting fees

184,894

Distribution service fees (Class B)

380,314

Record keeping fees (Class B)

210,674

Auditing

54,427

Legal

30,163

Trustees' fees and expenses

44,521

Reports to shareholders

126,652

Other

48,063

Total expenses before expense reductions

8,317,277

Expense reductions

(21,690)

Total expenses after expense reductions

8,295,587

Net investment income (loss)

17,995,718

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

56,834,612

Futures

2,090,201

Net increase from payments by affiliates and net losses realized on a trade executed incorrectly and the disposal of investments in violation of restrictions

—

 

58,924,813

Net unrealized appreciation (depreciation) during the period on:
Investments

98,302,066

Futures

583,916

 

98,885,982

Net gain (loss) on investment transactions

157,810,795

Net increase (decrease) in net assets resulting from operations

$ 175,806,513

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 17,995,718

$ 15,850,183

Net realized gain (loss) on investment transactions

58,924,813

13,990,869

Net unrealized appreciation (depreciation) during the period on investment transactions

98,885,982

37,872,457

Net increase (decrease) in net assets resulting from operations

175,806,513

67,713,509

Distributions to shareholders from:
Net investment income:

Class A

(16,100,036)

(13,347,076)

Class B

(1,938,310)

(1,660,448)

Net realized gains:

Class A

(37,221,919)

—

Class B

(7,173,691)

—

Portfolio share transactions:

Class A

Proceeds from shares sold

40,524,596

39,914,209

Net assets acquired in tax-free reorganization

137,231,257

—

Reinvestment of distributions

53,321,955

13,347,076

Cost of shares redeemed

(119,759,898)

(60,039,081)

Net increase (decrease) in net assets from Class A share transactions

111,317,910

(6,777,796)

Class B

Proceeds from shares sold

53,270,899

18,573,514

Net assets acquired in tax-free reorganization

47,215,059

—

Reinvestment of distributions

9,112,001

1,660,448

Cost of shares redeemed

(71,564,607)

(9,785,758)

Net increase (decrease) in net assets from Class B share transactions

38,033,352

10,448,204

Increase (decrease) in net assets

262,723,819

56,376,393

Net assets at beginning of period

920,617,494

864,241,101

Net assets at end of period (including undistributed net investment income of $15,397,382 and $15,440,258, respectively)

$ 1,183,341,313

$ 920,617,494

Other Information

Class A

Shares outstanding at beginning of period

58,564,793

59,052,129

Shares sold

2,833,575

3,118,474

Shares issued in tax-free reorganization

9,458,080

—

Shares issued to shareholders in reinvestment of distributions

3,653,359

1,067,766

Shares redeemed

(8,426,610)

(4,673,576)

Net increase (decrease) in Class A shares

7,518,404

(487,336)

Shares outstanding at end of period

66,083,197

58,564,793

Class B

Shares outstanding at beginning of period

10,109,241

9,286,484

Shares sold

3,689,964

1,454,485

Shares issued in tax-free reorganization

3,256,256

—

Shares issued to shareholders in reinvestment of distributions

620,552

132,624

Shares redeemed

(4,962,337)

(764,352)

Net increase (decrease) in Class B shares

2,604,435

822,757

Shares outstanding at end of period

12,713,676

10,109,241

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 13.41

$ 12.65

$ 11.29

$ 8.76

$ 10.81

Income (loss) from investment operations:

Net investment income (loss)a

.27

.24

.23

.20

.21

Net realized and unrealized gain (loss) on investment transactions

2.21

.75

1.32

2.53

(2.13)

Total from investment operations

2.48

.99

1.55

2.73

(1.92)

Less distributions from:

Net investment income

(.28)

(.23)

(.19)

(.20)

(.09)

Net realized gain on investment transactions

(.59)

—

—

—

(.04)

Total distributions

(.87)

(.23)

(.19)

(.20)

(.13)

Net asset value, end of period

$ 15.02

$ 13.41

$ 12.65

$ 11.29

$ 8.76

Total Return (%)

18.74

7.92

13.95

32.04

(18.03)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

992

785

747

672

510

Ratio of expenses (%)

.77

.78

.78

.79

.79

Ratio of net investment income (%)

1.87

1.84

1.96

2.14

2.21

Portfolio turnover rate (%)

20

10

9

18

17

a Based on average shares outstanding during the period.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 13.39

$ 12.63

$ 11.27

$ 8.75

$ 9.57

Income (loss) from investment operations:

Net investment income (loss)b

.22

.19

.18

.16

.18

Net realized and unrealized gain (loss) on investment transactions

2.19

.75

1.33

2.53

(1.00)

Total from investment operations

2.41

.94

1.51

2.69

(.82)

Less distributions from:

Net investment income

(.19)

(.18)

(.15)

(.17)

—

Net realized gain on investment transactions

(.59)

—

—

—

—

Total distributions

(.78)

(.18)

(.15)

(.17)

—

Net asset value, end of period

$ 15.02

$ 13.39

$ 12.63

$ 11.27

$ 8.75

Total Return (%)

18.21c

7.51

13.53

31.60

(8.57)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

191

135

117

66

2

Ratio of expenses before expense reduction (%)

1.16

1.17

1.16

1.18

1.05*

Ratio of expenses after expense reduction (%)

1.16

1.17

1.16

1.18

1.05*

Ratio of net investment income (%)

1.48

1.45

1.58

1.75

4.30*

Portfolio turnover rate (%)

20

10

9

18

17

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Dreman Small Mid Cap Value VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk. Stocks of small and medium-sized companies involve greater risk than securities of larger, more-established companies, as they often have limited product lines, markets or financial resources and may be exposed to more erratic and abrupt market movements. Mid-cap company stocks tend to experience steeper price fluctuations — down as well as up — than stocks of larger companies. Mid-cap company stocks are typically less liquid than large company stocks. The Portfolio may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political, or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS Dreman Small Mid Cap Value VIP

[] DWS Dreman Small Mid Cap Value VIP — Class A

[] Russell 2000® Value Index

[] Russell 2500™ Value Index+

The Russell 2000® Value Index is an unmanaged index which measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Value Index is an unmanaged Index of those securities in the Russell 3000® Index with a lower price-to-book and lower forecasted growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1530

 

Yearly periods ended December 31

 

Comparative Results

DWS Dreman Small Mid Cap Value VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$12,506

$17,376

$21,878

$29,749

Average annual total return

25.06%

20.22%

16.95%

11.52%

Russell 2500 Value Index+
 Growth of $10,000

$12,018

$15,742

$20,562

$36,108

Average annual total return

20.18%

16.33%

15.51%

13.70%

Russell 2000 Value Index
 Growth of $10,000

$12,348

$15,805

$20,443

$34,772

Average annual total return

23.48%

16.48%

15.37%

13.27%

DWS Dreman Small Mid Cap Value VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$12,459

$17,169

$20,441

Average annual total return

 

24.59%

19.74%

17.24%

Russell 2500 Value Index+
 Growth of $10,000

 

$12,018

$15,742

$19,635

Average annual total return

 

20.18%

16.33%

16.18%

Russell 2000 Value Index
 Growth of $10,000

 

$12,348

$15,805

$19,060

Average annual total return

 

23.48%

16.48%

15.41%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.
+ On November 3, 2006, the Russell 2500 Value Index replaced the Russell 2000 Value Index as the Portfolio's benchmark index because the Advisor believes it is more appropriate to measure the portfolio's performance against the Russell 2500 Value as it more accurately reflects the portfolio's new investment strategy. Prior to November 3, 2006, the Portfolio was named DWS Dreman Small Cap Value VIP and operated with a different investment strategy.

Information About Your Portfolio's Expenses

DWS Dreman Small Mid Cap Value VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,106.70

 

$ 1,104.20

 

Expenses Paid per $1,000*

$ 4.14

 

$ 6.21

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.27

 

$ 1,019.31

 

Expenses Paid per $1,000*

$ 3.97

 

$ 5.96

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Dreman Small Mid Cap Value VIP

.78%

 

1.17%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Dreman Small Mid Cap Value VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. Returns of all major asset classes — equities, bonds and cash — were positive for the year, and most equity indexes had double digit returns. Within the equity market, small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years. Comparison of Russell Growth and Russell Value indexes reveals that value stocks performed better than growth stocks in all size categories.

The DWS Dreman Small Mid Cap VIP (Class A shares, unadjusted for contract charges) had a return of 25.06% for the year, outperforming its benchmark, the Russell 2500™ Value Index, which had a return of 20.18%. Overweights and stock selection in the industrials and materials sectors were major factors in the Portfolio's strong performance, as many of these companies benefited from positive trends in business investment.1 Holdings that performed especially well include General Cable Corp., a producer of electrical and data cable; Oregon Steel Mills, Inc., which makes steel pipe for energy and water infrastructure; RTI International Metals, Inc., a titanium processor; EMCOR Group, Inc., which produces systems for mechanical and electrical construction and energy infrastructure; and Terex Corp., which manufactures trucks, farm machinery and mining equipment.

The biggest detractor from performance was stock selection in health care. Health care holdings that performed poorly included Odyssey HealthCare, Inc., Kinetic Concepts, Inc. and Allied Healthcare International, Inc.* Positioning in the energy sector also hurt performance, as many of these stocks were hurt by falling oil prices, which we regard as a temporary phenomenon.

David N. Dreman Mark Roach

Co-Lead Portfolio Managers
Dreman Value Management, L.L.C., Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk. Stocks of small and medium-sized companies involve greater risk than securities of larger, more-established companies, as they often have limited product lines, markets or financial resources and may be exposed to more erratic and abrupt market movements. Mid-cap company stocks tend to experience steeper price fluctuations — down as well as up — than stocks of larger companies. Mid-cap company stocks are typically less liquid than large company stocks. The Portfolio may focus its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

The Russell 2500 Value Index is an unmanaged Index of those securities in the Russell 3000 index with a lower price-to-book and lower forecasted growth values.

The unmanaged Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly in an index.

* As of December 31, 2006, the positions were sold.
1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Dreman Small Mid Cap Value VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Common Stocks

95%

96%

Cash Equivalents

4%

2%

Closed-End Investment Company

1%

1%

Corporate Bonds

—

1%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Industrials

26%

25%

Financials

22%

20%

Information Technology

11%

8%

Energy

10%

16%

Health Care

9%

9%

Materials

8%

8%

Utilities

5%

8%

Consumer Discretionary

5%

3%

Consumer Staples

3%

3%

Telecommunications Services

1%

—

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 89. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Dreman Small Mid Cap Value VIP

 


Shares

Value ($)

 

 

Common Stocks 95.0%

Consumer Discretionary 4.5%

Diversified Consumer Services 0.2%

Nobel Learning Communities, Inc.*

121,300

1,389,491

Hotels Restaurants & Leisure 1.1%

Bally Technologies, Inc.*

123,300

2,303,244

Penn National Gaming, Inc.*

92,500

3,849,850

Pinnacle Entertainment, Inc.*

20,500

679,370

Shuffle Master, Inc.*

16,300

427,060

 

7,259,524

Media 0.5%

Lakes Entertainment, Inc.*

308,700

3,330,873

Multiline Retail 0.3%

Conn's, Inc.*

71,900

1,673,113

Specialty Retail 1.1%

bebe stores, inc.

68,800

1,361,552

Payless ShoeSource, Inc.*

169,600

5,566,272

 

6,927,824

Textiles, Apparel & Luxury Goods 1.3%

Phillips-Van Heusen Corp.

81,100

4,068,787

Wolverine World Wide, Inc.

153,450

4,376,394

 

8,445,181

Consumer Staples 3.3%

Food & Staples Retailing 0.4%

Nash Finch Co.

86,700

2,366,910

Food Products 2.5%

Chiquita Brands International, Inc.

235,400

3,759,338

Ralcorp Holdings, Inc.*

118,600

6,035,554

The J.M. Smucker Co.

136,100

6,596,767

 

16,391,659

Household Products 0.4%

Church & Dwight Co., Inc.

57,600

2,456,640

Tobacco 0.0%

Vector Group Ltd.

1

18

Energy 9.2%

Energy Equipment & Services 4.4%

Atwood Oceanics, Inc.*

146,600

7,179,002

Grant Prideco, Inc.*

108,500

4,315,045

Hercules Offshore, Inc.*

69,300

2,002,770

Matrix Service Co.*

139,500

2,245,950

Oil States International, Inc.*

81,600

2,629,968

Superior Energy Services, Inc.*

136,400

4,457,552

Todco*

87,900

3,003,543

Willbros Group, Inc.*

140,000

2,646,000

 

28,479,830

Oil, Gas & Consumable Fuels 4.8%

Carrizo Oil & Gas, Inc.*

37,300

1,082,446

Delta Petroleum Corp.*

44,200

1,023,672

Energy Metals Corp.*

520,000

4,503,709

Helix Energy Solutions Group, Inc.*

112,400

3,525,988

NGP Capital Resources Co.

52,975

887,331

Parallel Petroleum Corp.*

211,200

3,710,784

Petrohawk Energy Corp.*

314,500

3,616,750

 


Shares

Value ($)

 

 

Pinnacle Gas Resources, Inc. 144A*

241,000

2,615,332

Rosetta Resources, Inc. 144A*

68,400

1,277,028

Uranium Resources, Inc.*

1,622,125

9,408,325

 

31,651,365

Financials 21.2%

Capital Markets 1.3%

Apollo Investment Corp.

246,500

5,521,600

Hercules Technology Growth Capital, Inc.

110,667

1,577,005

Waddell & Reed Financial, Inc. "A"

56,700

1,551,312

 

8,649,917

Commercial Banks 2.1%

AmericanWest Bancorp.

86,200

2,087,764

Centennial Bank Holdings, Inc.

400,000

3,784,000

MB Financial, Inc.

4,600

173,006

Patriot National Bancorp, Inc.

29,300

769,125

Sterling Financial Corp.

73,773

2,494,265

UCBH Holdings, Inc.

236,600

4,154,696

 

13,462,856

Consumer Finance 0.1%

ASTA Funding, Inc.

31,200

949,728

Diversified Financial Services 0.2%

CMET Finance Holdings, Inc.

7,200

113,760

Prospect Energy Corp.

80,256

1,374,785

 

1,488,545

Insurance 6.7%

Allied World Assurance Holdings Ltd.

7,700

335,951

AmCOMP, Inc.*

88,700

974,813

Amerisafe, Inc.*

241,500

3,733,590

Arch Capital Group Ltd.*

124,200

8,397,162

CastlePoint Holdings Ltd. 144A

436,100

4,797,100

Endurance Specialty Holdings Ltd.

103,100

3,771,398

KMG America Corp.*

35,800

343,322

Odyssey Re Holdings Corp.

180,500

6,732,650

Platinum Underwriters Holdings Ltd.

82,100

2,540,174

ProCentury Corp.

192,800

3,566,800

Selective Insurance Group, Inc.

68,100

3,901,449

Tower Group, Inc.

151,600

4,710,212

 

43,804,621

Real Estate Investment Trusts 8.9%

Annaly Capital Management, Inc. (REIT)

278,100

3,868,371

Capital Lease Funding, Inc. (REIT)

324,100

3,759,560

CBRE Realty Finance, Inc. (REIT)

36,600

574,986

CBRE Realty Finance, Inc. (REIT) 144A

200,000

3,142,000

FBR Capital Markets Corp. (REIT) 144A*

95,600

1,434,000

Friedman, Billings, Ramsey Group, Inc. "A" (REIT)

27,800

222,400

Jer Investors Trust, Inc. (REIT)

320,100

6,616,467

KKR Financial Corp. (REIT)

491,150

13,157,909

MFA Mortgage Investments, Inc. (REIT)

498,000

3,829,620

 


Shares

Value ($)

 

 

MortgageIT Holdings, Inc. (REIT)

287,800

4,245,050

Newcastle Investment Corp. (REIT)

238,300

7,463,556

NovaStar Financial, Inc. (REIT)

302,200

8,053,630

Vintage Wine Trust, Inc. (REIT) 144A

280,700

1,684,200

 

58,051,749

Real Estate Management & Development 0.6%

Thomas Properties Group, Inc.

229,100

3,658,727

Thrifts & Mortgage Finance 1.3%

BankUnited Financial Corp. "A"

64,900

1,814,604

NewAlliance Bancshares, Inc.

255,200

4,185,280

PFF Bancorp., Inc.

63,500

2,191,385

 

8,191,269

Health Care 8.3%

Health Care Equipment & Supplies 2.0%

Adeza Biomedical Corp.*

117,000

1,744,470

Kinetic Concepts, Inc.*

162,300

6,418,965

The Cooper Companies, Inc.

104,500

4,650,250

 

12,813,685

Health Care Providers & Services 4.6%

Centene Corp.*

121,100

2,975,427

Healthspring, Inc.*

266,700

5,427,345

Kindred Healthcare, Inc.*

80,500

2,032,625

LifePoint Hospitals, Inc.*

188,568

6,354,742

Odyssey HealthCare, Inc.*

255,200

3,383,952

Option Care, Inc.

237,500

3,384,375

Pediatrix Medical Group, Inc.*

133,300

6,518,370

 

30,076,836

Life Sciences Tools & Services 1.3%

Charles River Laboratories International, Inc.*

111,400

4,818,050

PerkinElmer, Inc.

172,400

3,832,452

 

8,650,502

Pharmaceuticals 0.4%

Perrigo Co.

129,400

2,238,620

Industrials 24.5%

Aerospace & Defense 4.7%

Argon ST, Inc.*

105,900

2,281,086

BE Aerospace, Inc.*

189,400

4,863,792

CAE, Inc.

628,800

5,772,384

DRS Technologies, Inc.

104,800

5,520,864

EDO Corp.

142,500

3,382,950

Herley Industries, Inc.*

61,800

1,000,542

K&F Industries Holdings, Inc.*

213,400

4,846,314

Triumph Group, Inc.

49,700

2,605,771

 

30,273,703

Air Freight & Logistics 0.5%

ABX Air, Inc.*

507,900

3,519,747

Building Products 0.2%

NCI Building Systems, Inc.*

28,600

1,480,050

Commercial Services & Supplies 2.0%

Administaff, Inc.

46,800

2,001,636

American Ecology Corp.

151,900

2,811,669

Clean Harbors, Inc.*

51,800

2,507,638

Covanta Holding Corp.*

93,100

2,051,924

WCA Waste Corp.*

471,300

3,784,539

 

13,157,406

 


Shares

Value ($)

 

 

Construction & Engineering 8.1%

Chicago Bridge & Iron Co., NV (New York Shares)

204,400

5,588,296

EMCOR Group, Inc.*

136,800

7,777,080

Foster Wheeler Ltd.*

223,950

12,348,603

Granite Construction, Inc.

76,300

3,839,416

Insituform Technologies, Inc. "A"*

186,100

4,812,546

Perini Corp.*

139,100

4,281,498

Shaw Group, Inc.*

127,600

4,274,600

Sterling Construction Co., Inc.*

112,000

2,437,120

Washington Group International, Inc.*

119,300

7,132,947

 

52,492,106

Electrical Equipment 3.6%

General Cable Corp.*

382,500

16,719,075

Genlyte Group, Inc.*

52,000

4,061,720

Thomas & Betts Corp.*

52,600

2,486,928

 

23,267,723

Industrial Conglomerates 0.4%

Walter Industries, Inc.

102,300

2,767,215

Machinery 3.6%

ESCO Technologies, Inc.*

24,200

1,099,648

Harsco Corp.

61,300

4,664,930

Mueller Water Products, Inc. "A"

168,600

2,507,082

Mueller Water Products, Inc. "B"*

169,044

2,518,755

Terex Corp.*

89,100

5,754,078

Valmont Industries, Inc.

48,500

2,691,265

Watts Water Technologies, Inc. "A"

108,300

4,452,213

 

23,687,971

Road & Rail 0.8%

Genesee & Wyoming, Inc.*

193,325

5,072,848

Trading Companies & Distributors 0.6%

WESCO International, Inc.*

67,600

3,975,556

Information Technology 10.3%

Communications Equipment 2.8%

Black Box Corp.

129,100

5,420,909

Coleman Cable, Inc.*

117,000

1,872,000

CommScope, Inc.*

354,800

10,814,304

 

18,107,213

Computers & Peripherals 1.2%

Avid Technology, Inc.*

88,100

3,282,606

Hypercom Corp.*

397,000

2,520,950

Komag, Inc.*

60,700

2,299,316

 

8,102,872

Electronic Equipment & Instruments 3.2%

Aeroflex, Inc.*

361,000

4,230,920

Anixter International, Inc.*

151,800

8,242,740

Mettler-Toledo International, Inc.*

71,400

5,629,890

Scansource, Inc.*

95,400

2,900,160

 

21,003,710

Internet Software & Services 0.5%

Corillian Corp.*

163,100

614,887

Openwave Systems, Inc.*

267,800

2,471,794

 

3,086,681

IT Services 1.4%

CACI International, Inc. "A"*

77,300

4,367,450

Covansys Corp.*

199,700

4,583,115

 

8,950,565

 


Shares

Value ($)

 

 

Semiconductors & Semiconductor Equipment 0.8%

Exar Corp.*

209,100

2,718,300

MKS Instruments, Inc.*

105,300

2,377,674

 

5,095,974

Software 0.4%

Secure Computing Corp.*

214,600

1,407,776

Sonic Solutions*

87,300

1,422,990

 

2,830,766

Materials 8.0%

Chemicals 1.1%

Agrium, Inc.

130,500

4,109,445

CF Industries Holdings, Inc.

43,600

1,117,904

Terra Industries, Inc.*

180,300

2,159,994

 

7,387,343

Construction Materials 0.9%

Headwaters, Inc.*

98,800

2,367,248

Texas Industries, Inc.

48,700

3,128,001

 

5,495,249

Metals & Mining 6.0%

Century Aluminum Co.*

79,300

3,540,745

Goldcorp, Inc.

91,950

2,615,058

Metal Management, Inc.

38,500

1,457,225

Northern Orion Resources, Inc.*

655,400

2,398,764

Northwest Pipe Co.*

86,200

2,898,044

Oregon Steel Mills, Inc.*

120,900

7,545,369

Pan American Silver Corp.*

174,700

4,397,199

RTI International Metals, Inc.*

148,300

11,600,026

Stillwater Mining Co.*

92,800

1,159,072

Worthington Industries, Inc.

94,100

1,667,452

 

39,278,954

Telecommunication Services 0.5%

Diversified Telecommunication Services

Alaska Communications Systems Group, Inc.

133,400

2,026,346

DataPath, Inc. 144A*

161,700

1,536,150

 

3,562,496

 


Shares

Value ($)

 

 

Utilities 5.2%

Electric Utilities 0.8%

Allegheny Energy, Inc.*

64,000

2,938,240

Sierra Pacific Resources*

145,600

2,450,448

 

5,388,688

Gas Utilities 1.8%

ONEOK, Inc.

112,400

4,846,688

Southern Union Co.

232,091

6,486,943

 

11,333,631

Independent Power Producers & Energy Traders 1.5%

Dynegy, Inc. "A"*

792,100

5,734,804

Mirant Corp.*

122,338

3,862,211

 

9,597,015

Multi-Utilities 1.1%

CMS Energy Corp.*

106,200

1,773,540

TECO Energy, Inc.

132,900

2,289,867

WPS Resources Corp.

60,700

3,279,621

 

7,343,028

Total Common Stocks (Cost $452,995,362)

618,667,993

 

Closed End Investment Company 0.7%

Tortoise Energy Infrastructure Corp. (Cost $3,307,184)

131,100

4,560,969

 

Cash Equivalents 4.3%

Cash Management QP Trust, 5.46% (a) (Cost $28,165,850)

28,165,850

28,165,850

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $484,468,396)+

100.0

651,394,812

Other Assets and Liabilities, Net

0.0

299,749

Net Assets

100.0

651,694,561

* Non-income producing security.
+ The cost for federal income tax purposes was $486,447,876. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $164,946,936. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $177,034,639 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $12,087,703.
(a) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

REIT: Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $456,302,546)

$ 623,228,962

Investment in Cash Management QP Trust (cost $28,165,850)

28,165,850

Total investments in securities, at value (cost $484,468,396)

651,394,812

Cash

30,903

Receivable for investments sold

2,482,732

Dividends receivable

703,230

Interest receivable

109,817

Receivable for Portfolio shares sold

20,740

Foreign taxes recoverable

1,288

Other assets

18,024

Total assets

654,761,546

Liabilities

Payable for investments purchased

1,777,073

Payable for Portfolio shares redeemed

705,290

Accrued management fee

393,752

Other accrued expenses and payables

190,870

Total liabilities

3,066,985

Net assets, at value

$ 651,694,561

Net Assets

Net assets consist of:
Undistributed net investment income

3,855,010

Net unrealized appreciation (depreciation) on:

Investments

166,926,416

Foreign currency related transactions

(46)

Accumulated net realized gain (loss)

91,530,662

Paid-in capital

389,382,519

Net assets, at value

$ 651,694,561

Class A

Net Asset Value, offering and redemption price per share ($561,813,420 ÷ 24,500,577 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 22.93

Class B

Net Asset Value, offering and redemption price per share ($89,881,141 ÷ 3,927,983 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 22.88

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $11,307)

$ 8,471,891

Interest — Cash Management QP Trust

852,624

Total Income

9,324,515

Expenses:
Management fee

4,646,491

Custodian fees

26,587

Distribution service fees (Class B)

222,240

Record keeping fees (Class B)

121,190

Auditing

50,587

Legal

14,913

Trustees' fees and expenses

42,849

Reports to shareholders

93,589

Other

36,535

Total expenses before expense reductions

5,254,981

Expense reductions

(9,352)

Total expenses after expense reductions

5,245,629

Net investment income (loss)

4,078,886

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

91,467,640

Foreign currency related transactions

(4,973)

 

91,462,667

Net unrealized appreciation (depreciation) during the period on:
Investments

42,123,168

Foreign currency related transactions

(4)

 

42,123,164

Net gain (loss) on investment transactions

133,585,831

Net increase (decrease) in net assets resulting from operations

$ 137,664,717

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 4,078,886

$ 4,907,111

Net realized gain (loss) on investment transactions

91,462,667

48,534,771

Net unrealized appreciation (depreciation) during the period on investment transactions

42,123,164

198,792

Net increase (decrease) in net assets resulting from operations

137,664,717

53,640,674

Distributions to shareholders from:
Net investment income:

Class A

(4,273,776)

(3,388,867)

Class B

(345,890)

(268,871)

Distributions to shareholders from:
Net realized gains:

Class A

(41,452,231)

(41,035,260)

Class B

(7,012,173)

(6,476,182)

Portfolio share transactions:

Class A

Proceeds from shares sold

35,405,526

48,442,270

Reinvestment of distributions

45,726,007

44,424,127

Cost of shares redeemed

(84,469,976)

(69,095,690)

Net increase (decrease) in net assets from Class A share transactions

(3,338,443)

23,770,707

Class B

Proceeds from shares sold

5,496,550

12,290,754

Reinvestment of distributions

7,358,063

6,745,052

Cost of shares redeemed

(17,725,542)

(7,563,486)

Net increase (decrease) in net assets from Class B share transactions

(4,870,929)

11,472,320

Increase (decrease) in net assets

76,371,275

37,714,521

Net assets at beginning of period

575,323,286

537,608,765

Net assets at end of period (including undistributed net investment income of $3,855,010 and $4,399,454, respectively)

$ 651,694,561

$ 575,323,286

Other Information

Class A

Shares outstanding at beginning of period

24,658,095

23,288,245

Shares sold

1,671,537

2,554,460

Shares issued to shareholders in reinvestment of distributions

2,176,393

2,463,900

Shares redeemed

(4,005,448)

(3,648,510)

Net increase (decrease) in Class A shares

(157,518)

1,369,850

Shares outstanding at end of period

24,500,577

24,658,095

Class B

Shares outstanding at beginning of period

4,153,458

3,531,644

Shares sold

258,137

641,746

Shares issued to shareholders in reinvestment of distributions

349,884

373,894

Shares redeemed

(833,496)

(393,826)

Net increase (decrease) in Class B shares

(225,475)

621,814

Shares outstanding at end of period

3,927,983

4,153,458

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 19.98

$ 20.05

$ 16.06

$ 11.66

$ 13.21

Income (loss) from investment operations:

Net investment income (loss)a

.15

.19

.17

.19

.17

Net realized and unrealized gain (loss) on investment transactions

4.69

1.67

3.98

4.55

(1.67)

Total from investment operations

4.84

1.86

4.15

4.74

(1.50)

Less distributions from:

Net investment income

(.18)

(.15)

(.16)

(.15)

(.05)

Net realized gain on investment transactions

(1.71)

(1.78)

—

(.19)

—

Total distributions

(1.89)

(1.93)

(.16)

(.34)

(.05)

Net asset value, end of period

$ 22.93

$ 19.98

$ 20.05

$ 16.06

$ 11.66

Total Return (%)

25.06

10.25

26.03

42.15

(11.43)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

562

493

467

354

250

Ratio of expenses (%)

.79

.79

.79

.80

.81

Ratio of net investment income (%)

.71

.96

.96

1.46

1.28

Portfolio turnover rate (%)

52

61

73

71

86

a Based on average shares outstanding during the period.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 19.93

$ 20.01

$ 16.03

$ 11.65

$ 13.86

Income (loss) from investment operations:

Net investment income (loss)b

.07

.11

.10

.13

.17

Net realized and unrealized gain (loss) on investment transactions

4.67

1.66

3.97

4.56

(2.38)

Total from investment operations

4.74

1.77

4.07

4.69

(2.21)

Less distributions from:

Net investment income

(.08)

(.07)

(.09)

(.12)

—

Net realized gain on investment transactions

(1.71)

(1.78)

—

(.19)

—

Total distributions

(1.79)

(1.85)

(.09)

(.31)

—

Net asset value, end of period

$ 22.88

$ 19.93

$ 20.01

$ 16.03

$ 11.65

Total Return (%)

24.59

9.78

25.52

41.65

(15.95)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

90

83

71

32

1

Ratio of expenses (%)

1.17

1.19

1.16

1.19

1.06*

Ratio of net investment income (%)

.33

.56

.59

1.07

3.01*

Portfolio turnover rate (%)

52

61

73

71

86

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Global Thematic VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Please keep in mind that high double-digit returns were primarily achieved during favorable market conditions. Investors should not expect that such favorable returns can be consistently achieved. A Portfolio's performance, especially for very short time periods, should not be the sole factor in making your investment decision.

Growth of an Assumed $10,000 Investment in DWS Global Thematic VIP from 5/5/1998 to 12/31/2006

[] DWS Global Thematic VIP — Class A

[] MSCI World Index

The Morgan Stanley Capital International (MSCI) World Index is an unmanaged capitalization weighted measure of global stock markets including the US, Canada, Europe, Australia and the Far East. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1520

 

Yearly periods ended December 31

 

Comparative Results

DWS Global Thematic VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$13,014

$18,362

$19,972

$20,236

Average annual total return

30.14%

22.45%

14.84%

8.49%

MSCI World Index
 Growth of $10,000

$12,007

$15,081

$16,082

$15,630

Average annual total return

20.07%

14.68%

9.97%

5.29%

DWS Global Thematic VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$12,965

$18,158

$21,018

Average annual total return

 

29.65%

22.00%

17.97%

MSCI World Index
 Growth of $10,000

 

$12,007

$15,081

$17,636

Average annual total return

 

20.07%

14.68%

13.44%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 5, 1998. Index returns began on April 30, 1998.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Global Thematic VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,173.40

 

$ 1,171.20

 

Expenses Paid per $1,000*

$ 5.70

 

$ 7.83

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,019.96

 

$ 1,018.00

 

Expenses Paid per $1,000*

$ 5.30

 

$ 7.27

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Global Thematic VIP

1.04%

 

1.43%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31 2006

DWS Global Thematic VIP

The Class A shares of DWS Global Thematic VIP returned 30.14% for the 12 months ended December 31, 2006 (unadjusted for contract charges), outperforming the MSCI World Index.

We continue to look for long-term themes in the global economy, then invest in fundamentally sound companies that stand to benefit as these themes unfold. There are currently 12 themes in the Portfolio, and most contributed positively to performance during the year. The top-performing theme was Disequilibria, which invests in companies that are experiencing, or about to experience, a material shift in their competitive dynamics. Among the top performers here were Italy's Capitalia SpA*, Germany's Commerzbank AG and Hungary's OTP Bank Nyrt. The next best performing theme was Ultimate Subcontractors, where a number of commodity-related companies — including ExxonMobil Corp., Aracruz Cellulose SA*, Total SA, and Petroleo Brasileiro SA (ADR) — led the way. Lastly, the Talent & Ingenuity theme was driven by robust returns from automaker Porsche AG; and Stada Arzneimittel AG, a German producer of generic drugs. The only meaningful drag on performance came from the Distressed Companies theme. Other underperforming holdings included Thai banks, most notably Kasikornbank PCL; and Turkish equities, particularly Turkcell Iletisim Hizmetleri AS (ADR)*.

Instead of focusing on economic or market cycles, we will continue to look for the largest inefficiencies and changes affecting the world. In an environment of potentially higher market volatility, we believe our approach — which seeks to spread out the Portfolio risk exposure via the highly diversified nature of its investments — will hold the Portfolio in good stead.

Oliver Kratz

Lead Portfolio Manager
Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Morgan Stanley Capital International (MSCI) World Index is an unmanaged, capitalization-weighted measure of global stock markets around the world, including North America, Europe, Australia and the Far East. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates. Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

* As of December 31, 2006, the positions were sold.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Global Thematic VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

93%

91%

Cash Equivalents

2%

5%

Exchange Traded Funds

3%

2%

Preferred Stocks

2%

2%

 

100%

100%

Sector Diversification (As a % of Common and Preferred Stocks)

12/31/06

12/31/05

 

 

 

Financials

23%

28%

Industrials

16%

9%

Information Technology

15%

10%

Energy

11%

12%

Health Care

10%

9%

Consumer Discretionary

9%

7%

Materials

7%

11%

Consumer Staples

5%

8%

Telecommunication Services

3%

4%

Utilities

1%

2%

 

100%

100%

Geographical Diversification (As a % of Common and Preferred Stocks)

12/31/06

12/31/05

 

 

 

Continental Europe

31%

27%

United States

28%

22%

Asia (excluding Japan)

14%

21%

Japan

8%

9%

United Kingdom

7%

7%

Latin America

6%

4%

Bermuda

2%

2%

Africa

2%

2%

Canada

1%

3%

Middle East

1%

2%

Australia

—

1%

 

100%

100%

Asset allocation, sector and geographical diversifications are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 100. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Global Thematic VIP

 


Shares

Value ($)

 

 

Common Stocks 92.8%

Australia 0.1%

Australian Agricultural Co., Ltd. (Cost $88,425)

72,900

106,468

Austria 1.5%

Erste Bank der oesterreichischen Sparkassen AG

10,917

833,984

OMV AG

8,700

491,642

Wienerberger AG

20,282

1,204,666

(Cost $1,914,762)

2,530,292

Bermuda 2.0%

Marvell Technology Group Ltd.*

52,100

999,799

Tyco International Ltd.

78,725

2,393,240

(Cost $3,509,276)

3,393,039

Brazil 5.2%

Diagnosticos da America SA*

41,600

887,936

Gol-Linhas Aereas Inteligentes SA (ADR) (Preferred) (a)

77,800

2,230,526

Petroleo Brasileiro SA (ADR)

34,200

3,522,258

Santos-Brasil SA (Units)*

120,900

1,525,827

Tim Participacoes SA (ADR)

14,400

498,528

(Cost $8,030,806)

8,665,075

Canada 1.0%

Goldcorp, Inc.

43,100

1,223,720

Meridian Gold, Inc.*

16,800

467,199

(Cost $876,882)

1,690,919

China 1.5%

Shanghai Electric Group Co., Ltd. "H"

4,059,800

1,697,878

Xinao Gas Holdings Ltd.

743,100

840,827

(Cost $2,096,725)

2,538,705

Egypt 0.3%

Orascom Construction Industries (GDR) (REG S) (Cost $356,500)

5,468

526,492

France 2.5%

PPR

5,478

818,218

Total SA

45,411

3,274,555

(Cost $2,971,613)

4,092,773

Germany 11.2%

Adidas AG

23,085

1,149,418

Axel Springer AG

5,200

935,679

BASF AG (a)

8,888

865,053

Bayer AG (a)

13,401

718,952

Commerzbank AG (a)

49,857

1,892,086

DaimlerChrysler AG (a)

13,400

822,894

Deutsche Post AG (Registered)

87,971

2,650,613

Deutsche Telekom AG (Registered) (a)

84,220

1,538,034

GEA Group AG

41,395

932,260

GfK AG (a)

17,344

751,652

Hypo Real Estate Holding AG (a)

22,400

1,407,159

Siemens AG (Registered) (a)

17,558

1,740,511

Stada Arzneimittel AG (a)

30,962

1,775,537

 


Shares

Value ($)

 

 

TUI AG (a)

81,132

1,620,812

(Cost $15,791,770)

18,800,660

Hong Kong 1.4%

Great Eagle Holdings Ltd.

264,000

756,274

Hongkong & Shanghai Hotels Ltd.

596,857

1,006,479

Industrial & Commercial Bank of China (Asia) Ltd.

322,200

619,547

(Cost $1,915,799)

2,382,300

Hungary 1.2%

MOL Hungarian Oil and Gas Nyrt.

10,200

1,149,598

OTP Bank Nyrt.

19,300

878,700

(Cost $1,499,304)

2,028,298

India 0.5%

Infosys Technologies Ltd. (Cost $359,572)

16,200

817,862

Israel 1.1%

NICE Systems Ltd. (ADR)*

24,000

738,720

Teva Pharmaceutical Industries Ltd. (ADR)

36,400

1,131,312

(Cost $1,792,517)

1,870,032

Italy 1.0%

Assicurazioni Generali SpA

14,000

613,010

ERG SpA

42,900

983,531

(Cost $1,341,905)

1,596,541

Japan 7.2%

FANUC Ltd.

13,800

1,353,377

Komatsu Ltd.

58,000

1,168,322

Mitsui Fudosan Co., Ltd.

98,000

2,396,963

Mizuho Financial Group, Inc.

420

3,004,197

Nomura Holdings, Inc.

67,900

1,284,717

Shinsei Bank Ltd.

499,000

2,923,600

(Cost $9,139,788)

12,131,176

Kazakhstan 0.6%

KazMunaiGas Exploration Production (GDR)* (Cost $600,240)

41,000

1,002,860

Korea 5.9%

CDNetworks Co., Ltd.*

12,187

445,401

Hyundai Motor Co.

15,170

1,101,670

Kookmin Bank

24,000

1,934,407

Kookmin Bank (ADR)

7,100

572,544

LG Chem Ltd.

16,900

780,644

NHN Corp.*

7,100

866,901

Samsung Electronics Co., Ltd.

6,400

4,191,538

(Cost $9,271,186)

9,893,105

Malaysia 1.4%

AMMB Holdings Bhd.

454,300

408,783

IOI Corp. Bhd.

99,000

516,279

Resorts World Bhd.

285,600

1,180,505

Steppe Cement Ltd.*

60,159

270,920

(Cost $1,796,538)

2,376,487

 


Shares

Value ($)

 

 

Mexico 1.1%

America Movil SAB de CV "L" (ADR)

20,700

936,054

Fomento Economico Mexicano SA de CV (ADR)

7,450

862,412

(Cost $1,271,992)

1,798,466

Netherlands 1.9%

ABN AMRO Holding NV

68,684

2,203,459

Koninklijke DSM NV

20,994

1,036,473

(Cost $2,690,169)

3,239,932

Pakistan 0.2%

MCB Bank Ltd. (GDR) 144A* (Cost $362,694)

21,005

378,090

Russia 1.1%

Golden Telecom, Inc.

19,200

899,328

Surgutneftegaz (ADR) (a)

11,700

900,900

(Cost $1,606,077)

1,800,228

Singapore 0.3%

DBS Group Holdings Ltd. (Cost $237,592)

37,000

545,054

South Africa 1.6%

ABSA Group Ltd.

64,000

1,141,324

Lewis Group Ltd.

101,900

852,535

Naspers Ltd."N"

28,300

670,929

(Cost $2,133,084)

2,664,788

Sweden 2.2%

OMX AB

44,700

819,085

Rezidor Hotel Group AB*

103,900

895,434

Telefonaktiebolaget LM Ericsson"B"

493,800

1,989,882

(Cost $3,366,690)

3,704,401

Switzerland 2.2%

Credit Suisse Group (Registered)

21,807

1,521,488

Julius Baer Holding Ltd. (Registered)

11,343

1,243,303

Novartis AG (Registered)

16,411

943,091

(Cost $2,445,937)

3,707,882

Taiwan 1.4%

Asustek Computer, Inc.

529,200

1,441,688

High Tech Computer Corp.

43,000

846,715

(Cost $2,341,211)

2,288,403

Thailand 0.9%

Bangkok Bank PCL (Foreign Registered)

148,800

479,787

Kasikornbank PCL (Foreign Registered)

165,900

290,205

Krung Thai Bank PCL (Foreign Registered)

130,900

43,804

Siam City Bank PCL (Foreign Registered)

372,200

184,807

Thai Oil PCL (Foreign Registered)

355,800

526,925

TMB Bank Public Co., Ltd.*

103,500

7,555

(Cost $1,411,836)

1,533,083

Turkey 1.8%

Tupras-Turkiye Petrol Rafinerileri AS

49,700

847,264

Turkiye Garanti Bankasi AS

243,000

800,334

Turkiye Is Bankasi (Isbank) "C"

304,640

1,388,556

(Cost $2,775,108)

3,036,154

 


Shares

Value ($)

 

 

United Kingdom 6.2%

Anglo American PLC

16,536

806,124

BHP Billiton PLC

78,881

1,457,314

GlaxoSmithKline PLC

130,569

3,441,404

Kingfisher PLC

241,888

1,127,624

Royal Bank of Scotland Group PLC

47,490

1,845,665

Standard Chartered PLC

58,048

1,687,177

(Cost $8,936,403)

10,365,308

United States 26.3%

3Com Corp.*

171,500

704,865

Apple Computer, Inc.*

14,600

1,238,664

Archer-Daniels-Midland Co.

36,700

1,172,932

BJ's Wholesale Club, Inc.*

19,800

615,978

BMB Munai, Inc.* (a)

48,500

240,075

Briggs & Stratton Corp.

19,900

536,305

Bunge Ltd.

12,900

935,379

Caterpillar, Inc.

36,200

2,220,146

Cisco Systems, Inc.*

102,775

2,808,841

Coca-Cola Co.

39,000

1,881,750

eBay, Inc.*

25,800

775,806

ExxonMobil Corp.

34,700

2,659,061

Foundry Networks, Inc.*

109,700

1,643,306

General Electric Co.

83,575

3,109,826

General Mills, Inc.

31,650

1,823,040

Intel Corp.

133,300

2,699,325

Johnson & Johnson

21,950

1,449,139

KKR Private Equity Investors LP

32,200

735,786

Lennox International, Inc.

23,700

725,457

Medtronic, Inc.

14,950

799,975

MetLife, Inc.

26,175

1,544,587

Monsanto Co.

30,700

1,612,671

Newmont Mining Corp.

12,900

582,435

Oracle Corp.*

38,675

662,890

Pantry, Inc.*

15,400

721,336

Pfizer, Inc.

52,975

1,372,052

Schlumberger Ltd.

33,425

2,111,123

St. Jude Medical, Inc.*

57,000

2,083,920

Symantec Corp.*

46,350

966,397

Walter Industries, Inc.

42,300

1,144,215

Wyeth

27,375

1,393,935

Zimmer Holdings, Inc.*

13,275

1,040,494

(Cost $37,260,692)

44,011,711

Total Common Stocks (Cost $130,193,093)

155,516,584

 

Preferred Stocks 1.5%

Brazil 0.6%

Net Servicos de Comunicacao SA* (Cost $978,690)

89,700

1,071,230

Germany 0.9%

Porsche AG (a) (Cost $848,421)

1,158

1,472,819

Total Preferred Stocks (Cost $1,827,111)

2,544,049

 

Exchange Traded Funds 2.8%

Biotech HOLDRs Trust (a)

7,500

1,378,800

iShares Nasdaq Biotechnology Index Fund* (a)

41,825

3,252,312

Total Exchange Traded Funds (Cost $4,345,085)

4,631,112

 


Contracts

Value ($)

 

 

Call Options Purchased 0.1%

Wal Mart Stores, Inc. Expiration Date 6/16/2007, Strike Price $50.0 (Cost $215,956)

1,594

176,935

 


Shares

Value ($)

 

 

Securities Lending Collateral 10.3%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $17,195,771)

17,195,771

17,195,771

 

 


Shares

Value ($)

 

 

Cash Equivalents 2.3%

Cash Management QP Trust, 5.46% (d) (Cost $3,918,844)

3,918,844

3,918,844

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $157,695,860)+

109.8

183,983,295

Other Assets and Liabilities, Net

(9.8)

(16,368,964)

Net Assets

100.0

167,614,331

* Non-income producing security.
+ The cost for federal income tax purposes was $158,636,946. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $25,346,349. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $26,746,875 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,400,526.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions exempt from registration, normally to qualified institutional buyers.

(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $16,525,083 which is 9.9% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

GDR: Global Depositary Receipt

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $136,581,245) — including $16,525,083 of securities loaned

$ 162,868,680

Investment in Daily Assets Fund Institutional (cost $17,195,771)*

17,195,771

Investment in Cash Management QP Trust (cost $3,918,844)

3,918,844

Total investments in securities, at value (cost $157,695,860)

183,983,295

Cash

5,408

Foreign currency, at value (cost $1,162,347)

1,164,278

Dividends receivable

201,931

Interest receivable

22,397

Receivable for investments sold

2,997,257

Receivable for Portfolio shares sold

106,025

Foreign taxes recoverable

12,623

Other assets

4,506

Total assets

188,497,720

Liabilities

Payable for investments purchased

3,296,123

Accrued management fee

134,748

Payable upon return of securities loaned

17,195,771

Payable for Portfolio shares redeemed

65,215

Deferred foreign taxes payable

72,433

Other accrued expenses and payables

119,099

Total liabilities

20,883,389

Net assets, at value

$ 167,614,331

Net Assets

Net assets consist of:
Undistributed net investment income

963,505

Net unrealized appreciation (depreciation) on:

Investments (net of foreign taxes of $72,433)

26,215,002

Foreign currency related transactions

3,527

Accumulated net realized gain (loss)

25,372,148

Paid-in capital

115,060,149

Net assets, at value

$ 167,614,331

Class A

Net Asset Value, offering and redemption price per share ($142,529,008 ÷ 8,197,243 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 17.39

Class B

Net Asset Value, offering and redemption price per share ($25,085,323 ÷ 1,443,479 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 17.38

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $188,395)

$ 2,252,692

Interest

1,358

Interest — Cash Management QP Trust

244,408

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

92,756

Other income**

37,541

Total Income

2,628,755

Expenses:
Management fee

1,342,622

Custodian and accounting fees

351,337

Distribution service fees (Class B)

56,266

Record keeping fees (Class B)

31,431

Auditing

62,495

Legal

20,851

Trustees' fees and expenses

19,952

Reports to shareholders

29,362

Other

20,899

Total expenses before expense reductions

1,935,215

Expense reductions

(446,194)

Total expenses after expense reductions

1,489,021

Net investment income (loss)

1,139,734

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments (net of foreign taxes of $12,146)

25,609,069

Foreign currency related transactions

(106,475)

 

25,502,594

Net unrealized appreciation (depreciation) during the period on:
Investments (net of deferred foreign taxes of $29,305)

8,971,636

Foreign currency related transactions

2,402

 

8,974,038

Net gain (loss) on investment transactions

34,476,632

Net increase (decrease) in net assets resulting from operations

$ 35,616,366

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 1,139,734

$ 772,300

Net realized gain (loss) on investment transactions

25,502,594

13,242,108

Net unrealized appreciation (depreciation) during the period on investment transactions

8,974,038

4,296,970

Net increase (decrease) in net assets resulting from operations

35,616,366

18,311,378

Distributions to shareholders from:
Net investment income:

Class A

(572,746)

(188,888)

Class B

(42,929)

—

Net realized gains:

Class A

(7,184,784)

—

Class B

(1,620,965)

—

Portfolio share transactions:

Class A

Proceeds from shares sold

39,340,554

15,806,082

Reinvestment of distributions

7,757,530

188,888

Cost of shares redeemed

(11,647,602)

(8,739,580)

Net increase (decrease) in net assets from Class A share transactions

35,450,482

7,255,390

Class B

Proceeds from shares sold

5,266,200

5,152,763

Reinvestment of distributions

1,663,894

—

Cost of shares redeemed

(5,607,559)

(1,457,434)

Net increase (decrease) in net assets from Class B share transactions

1,322,535

3,695,329

Increase (decrease) in net assets

62,967,959

29,073,209

Net assets at beginning of period

104,646,372

75,573,163

Net assets at end of period (including undistributed net investment income of $963,505 and $558,067, respectively)

$ 167,614,331

$ 104,646,372

Other Information

Class A

Shares outstanding at beginning of period

5,887,898

5,350,985

Shares sold

2,556,665

1,229,117

Shares issued to shareholders in reinvestment of distributions

513,064

15,980

Shares redeemed

(760,384)

(708,184)

Net increase (decrease) in Class A shares

2,309,345

536,913

Shares outstanding at end of period

8,197,243

5,887,898

Class B

Shares outstanding at beginning of period

1,359,840

1,064,827

Shares sold

334,421

406,987

Shares issued to shareholders in reinvestment of distributions

109,756

—

Shares redeemed

(360,538)

(111,974)

Net increase (decrease) in Class B shares

83,639

295,013

Shares outstanding at end of period

1,443,479

1,359,840

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 14.44

$ 11.78

$ 10.39

$ 8.08

$ 9.64

Income (loss) from investment operations:

Net investment income (loss)a

.15c

.12

.04

.09

.07

Net realized and unrealized gain (loss) on investment transactions

4.02

2.58

1.48

2.25

(1.57)

Total from investment operations

4.17

2.70

1.52

2.34

(1.50)

Less distributions from:

Net investment income

(.09)

(.04)

(.13)

(.03)

(.06)

Net realized gain on investment transactions

(1.13)

—

—

—

—

Total distributions

(1.22)

(.04)

(.13)

(.03)

(.06)

Net asset value, end of period

$ 17.39

$ 14.44

$ 11.78

$ 10.39

$ 8.08

Total Return (%)

30.14b,c

22.94b

14.76b

29.13b

(15.77)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

143

85

63

55

43

Ratio of expenses before expense reductions (%)

1.38

1.41

1.44

1.48

1.32

Ratio of expenses after expense reductions (%)

1.04

1.28

1.43

1.17

1.32

Ratio of net investment income (%)

.92c

.98

.38

1.02

.79

Portfolio turnover rate (%)

136

95

81

65

41

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.
c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.004 per share and an increase in the ratio of net investment income of 0.03%. Excluding this non-recurring income, total return would have been 0.02% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 14.43

$ 11.78

$ 10.38

$ 8.06

$ 8.98

Income (loss) from investment operations:

Net investment income (loss)b

.09d

.07

.00e

.04

.02

Net realized and unrealized gain (loss) on investment transactions

4.02

2.58

1.48

2.29

(.94)

Total from investment operations

4.11

2.65

1.48

2.33

(.92)

Less distributions from:

Net investment income

(.03)

—

(.08)

(.01)

—

Net realized gain on investment transactions

(1.13)

—

—

—

—

Total distributions

(1.16)

—

(.08)

(.01)

—

Net asset value, end of period

$ 17.38

$ 14.43

$ 11.78

$ 10.38

$ 8.06

Total Return (%)

29.65c,d

22.50c

14.33c

28.96c

(10.24)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

25

20

13

6

.2

Ratio of expenses before expense reductions (%)

1.76

1.79

1.84

1.87

1.60*

Ratio of expenses after expense reductions (%)

1.43

1.65

1.83

1.64

1.60*

Ratio of net investment income (%)

.53d

.61

.02

.55

.49*

Portfolio turnover rate (%)

136

95

81

65

41

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.004 per share and an increase in the ratio of net investment income of 0.03%. Excluding this non-recurring income, total return would have been 0.02% lower.
e Amount is less than $.005 per share.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Government & Agency Securities VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The government guarantee relates only to the prompt payment of principal and interest and does not remove market risks. Additionally, yields will fluctuate in response to changing interest rates and may be affected by the prepayment of mortgage-backed securities. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the investment, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS Government & Agency Securities VIP

[] DWS Government & Agency Securities VIP — Class A

[] Lehman Brothers GNMA Index

The Lehman Brothers GNMA Index is an unmanaged market-value-weighted measure of all fixed-rate securities backed by mortgage pools of the Government National Mortgage Association.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1510

 

Yearly periods ended December 31

 

Comparative Results

DWS Government & Agency Securities VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$10,416

$11,085

$12,248

$17,147

Average annual total return

4.16%

3.49%

4.14%

5.54%

Lehman Brothers GNMA Index
 Growth of $10,000

$10,461

$11,266

$12,594

$18,077

Average annual total return

4.61%

4.05%

4.72%

6.10%

DWS Government & Agency Securities VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$10,374

$10,963

$11,579

Average annual total return

 

3.74%

3.11%

3.31%

Lehman Brothers GNMA Index
 Growth of $10,000

 

$10,461

$11,266

$12,069

Average annual total return

 

4.61%

4.05%

4.26%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Government & Agency Securities VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,048.70

 

$ 1,046.10

 

Expenses Paid per $1,000*

$ 3.56

 

$ 5.72

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.73

 

$ 1,019.76

 

Expenses Paid per $1,000*

$ 3.52

 

$ 5.65

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Government & Agency Securities VIP

.69%

 

1.11%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Government & Agency Securities VIP

The first half of the period saw the US economy continue to display solid economic growth. New Federal Reserve chairman Bernanke indicated that future rate changes would depend on incoming economic data, creating increased uncertainty with respect to inflation and Fed policy. This led to a more volatile interest rate environment and an overall upward trend for rates. As the period progressed economic growth showed some signs of moderating. In particular, market participants focused heavily on softening in the housing sector. Despite this area of weakness, core inflation remained generally stable rather than easing. After 17 consecutive quarter point increases in the fed funds rate, the US Federal Reserve Board (the Fed) paused in August, leaving the benchmark rate at its current 5.25%. As the period closed, the yield curve was inverted, with short term rates higher than long term rates. While conventional wisdom has it that this is a predictor of recession; there were signs of economic strength including a tight labor market.

During the 12-month period ended December 31, 2006, the portfolio provided a total return of 4.16% (Class A shares, unadjusted for contract charges) compared with the 4.61% return of its benchmark, the Lehman Brothers GNMA Index. The portfolio's return slightly lagged the 4.39% return of the average peer in its Lipper category.

During the period, we focused largely on seasoned mortgages and mortgage pools with smaller loan sizes or specific geographic profiles that we believed would provide predictable cash flows in a wide variety of interest rate scenarios. This strategy generally worked well for the portfolio. In addition, we shifted the fund's relative focus between GNMA I and less homogenous GNMA II mortgage pools with good results. Our significant exposure to conventional mortgages did not pay off in an environment where GNMAs outperformed. Our limited exposure to 15-year GNMAs contributed positively to performance. Going forward, we will be monitoring the housing market and interest rate environment closely as we seek to maintain an attractive dividend for investors.

William Chepolis, CFA
Matthew F. MacDonald

Co-Managers

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

The government guarantee relates only to the prompt payment of principal and interest and does not remove market risks. Additionally, yields will fluctuate in response to changing interest rates and may be affected by the prepayment of mortgage-backed securities. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the investment, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Lehman Brothers GNMA Index is an unmanaged, market-value-weighted measure of all fixed-rate securities backed by mortgage pools of the Government National Mortgage Association. Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Government & Agency Securities VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Agencies Backed by the Full Faith and Credit of the US Government (GNMA)

53%

58%

Agencies Not Backed by the Full Faith and Credit of the US Government (FNMA, FHLMC)

32%

32%

Cash Equivalents

10%

5%

US Treasury Obligations

5%

5%

 

100%

100%

Quality

12/31/06

12/31/05

 

 

 

AAA*

100%

100%

* Includes cash equivalents

Interest Rate Sensitivity

12/31/06

12/31/05

 

 

 

Average Maturity

5.6 years

5.9 years

Average Duration

3.4 years

4.0 years

Asset allocation, quality and interest rate sensitivity are subject to change.

The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Portfolio's quality does not remove market risk.

For more complete details about the Portfolio's investment portfolio, see page 111. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Government & Agency Securities VIP

 

Principal Amount ($)

Value ($)

 

 

Agencies Backed by the Full Faith and Credit of the US Government 55.3%

Government National Mortgage Association:

 

 

5.0%, with various maturities from 9/1/2032 until 6/20/2036

18,897,249

18,398,943

5.5%, with various maturities from 9/1/2032 until 11/15/2035 (c)

51,916,927

51,662,192

6.0%, with various maturities from 4/15/2013 until 4/15/2036 (c)

36,498,040

36,986,545

6.5%, with various maturities from 3/15/2014 until 10/15/2036

20,448,490

20,958,297

7.0%, with various maturities from 6/20/2017 until 7/15/2036

3,489,603

3,602,508

7.5%, with various maturities from 4/15/2026 until 7/15/2032

2,335,675

2,437,547

8.0%, with various maturities from 12/15/2026 until 11/15/2031

756,535

802,201

8.5%, with various maturities from 5/15/2016 until 12/15/2030

104,088

111,614

9.5%, with various maturities from 6/15/2013 until 12/15/2022

56,798

61,786

10.0%, with various maturities from 2/15/2016 until 3/15/2016

21,380

23,568

Total Agencies Backed by the Full Faith and Credit of the US Government (Cost $137,191,631)

135,045,201

 

Agencies Not Backed by the Full Faith and Credit of the US Government 34.8%

Federal Home Loan Bank, Series 679, 5.375%, 8/19/2011

25,000,000

25,429,687

Federal Home Loan Mortgage Corp.:

 

 

4.5%, 5/1/2019

65,986

63,666

4.612%*, 2/1/2035

714,001

707,430

5.25%, 7/18/2011

25,000,000

25,296,875

5.5%, 2/1/2017

62,216

62,356

6.5%, 9/1/2032

182,284

186,380

7.0%, with various maturities from 5/1/2029 until 8/1/2035

3,727,447

3,822,078

7.5%, with various maturities from 1/1/2027 until 5/1/2032

150,762

156,758

8.0%, 11/1/2030

3,015

3,169

8.5%, 7/1/2030

4,023

4,310

Federal National Mortgage Association:

 

 

4.585%*, 1/1/2035

1,367,449

1,351,615

4.625%, 12/15/2009

13,750,000

13,625,391

4.673%*, 2/1/2035

1,096,470

1,086,831

4.738%*, 5/1/2035

1,769,343

1,748,526

 

Principal Amount ($)

Value ($)

 

 

5.0%, 10/1/2033

708,411

685,266

5.5%, with various maturities from 2/1/2033 until 6/1/2034

3,947,043

3,904,827

6.0%, 9/1/2035

6,065,924

6,097,164

7.0%, with various maturities from 9/1/2013 until 7/1/2034

647,123

664,873

8.0%, 12/1/2024

14,426

15,229

Total Agencies Not Backed by the Full Faith and Credit of the US Government (Cost $85,331,059)

84,912,431

 

Collateralized Mortgage Obligations 7.9%

Federal National Mortgage Association, "LO", Series 2005-50, Principal Only, 6/25/2035

1,178,178

883,025

Government National Mortgage Association:

 

 

"DA", Series 2005-45, 5.5%*, 6/16/2035

8,377,288

8,352,513

"ZA", Series 2006-7, 5.5%, 2/20/2036

1,771,424

1,628,610

"FH", Series 1999-18, 5.60%*, 5/16/2029

2,422,481

2,428,979

"FE", Series 2003-57, 5.65%*, 3/16/2033

202,146

202,151

"FA", Series 2006-25, 5.65%*, 5/20/2036

4,774,177

4,781,129

"FB", Series 2001-28, 5.85%*, 6/16/2031

962,960

969,640

Total Collateralized Mortgage Obligations (Cost $19,497,078)

19,246,047

 

US Treasury Obligations 5.1%

US Treasury Bill, 5.238%**, 1/18/2007 (a)

190,000

189,556

US Treasury Notes:

 

 

3.0%, 11/15/2007

4,000,000

3,931,408

4.625%, 10/31/2011

2,300,000

2,291,644

4.875%, 8/31/2008

6,000,000

5,999,532

Total US Treasury Obligations (Cost $12,424,873)

12,412,140

 


Shares

Value ($)

 

 

Cash Equivalents 11.0%

Cash Management QP Trust, 5.46% (b) (Cost $26,800,420)

26,800,420

26,800,420

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $281,245,061)+

114.1

278,416,239

Other Assets and Liabilities, Net

(14.1)

(34,360,028)

Net Assets

100.0

244,056,211

* Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2006.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $281,275,518. At December 31, 2006, net unrealized depreciation for all securities based on tax cost was $2,859,279. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $510,379 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $3,369,658.
(a) At December 31, 2006, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(b) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Mortgage dollar rolls included.

Principal Only: Principal Only (PO) bonds represent the "principal only" portion of payments on a pool of underlying mortgages or mortgage-backed securities.

At December 31, 2006, open futures contracts purchased were as follows:

Futures

Expiration
Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Depreciation ($)

10-Year US Treasury Note

3/21/2007

47

5,066,424

5,051,031

(15,393)

At December 31, 2006, open futures contracts sold were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Appreciation ($)

10 Year Interest Rate Swap

3/19/2007

24

2,579,927

2,551,875

28,052

Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal Home Loan Mortgage Corp., Federal National Mortgage Association and Government National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments

Investments in securities, at value (cost $254,444,641)

$ 251,615,819

Investments in Cash Management QP Trust, (cost $26,800,420)

26,800,420

Total investments in securities at value (Cost $281,245,061)

278,416,239

Receivable for investments sold

64,537,266

Interest receivable

2,254,157

Receivable for daily variation margin on open futures contracts

580

Receivable for Portfolio shares sold

178,960

Other assets

7,543

Total assets

345,394,745

Liabilities

Payable for investments purchased

65,458,376

Payable for investments purchased — mortgage dollar rolls

35,434,470

Payable for Portfolio shares redeemed

123,973

Accrued management fee

118,032

Other accrued expenses and payables

203,683

Total liabilities

101,338,534

Net assets, at value

$ 244,056,211

Net Assets

Net assets consist of:
Undistributed net investment income

11,470,474

Net unrealized appreciation (depreciation) on:

Investments

(2,828,822)

Futures

12,659

Accumulated net realized gain (loss)

(1,394,729)

Paid-in capital

236,796,629

Net assets, at value

$ 244,056,211

Class A

Net Asset Value, offering and redemption price per share ($210,908,916 ÷ 17,174,275 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.28

Class B

Net Asset Value, offering and redemption price per share ($33,147,295 ÷ 2,706,547 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.25

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Interest

$ 12,195,141

Interest — Cash Management QP Trust

1,395,538

Total Income

13,590,679

Expenses:
Management fee

1,427,977

Custodian fees

16,054

Distribution service fees (Class B)

94,226

Record keeping fees (Class B)

56,574

Auditing

56,748

Legal

13,218

Trustees' fees and expenses

24,745

Reports to shareholders

147,700

Other

68,150

Total expenses before expense reductions

1,905,392

Expense reductions

(5,855)

Total expenses after expense reductions

1,899,537

Net investment income

11,691,142

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

(1,338,144)

Futures

59,735

Net increase from payments by affiliates and net losses realized on the disposal of investments in violation of restrictions

—

 

(1,278,409)

Net unrealized appreciation (depreciation) during the period on:
Investments

(514,774)

Futures

(46,159)

 

(560,933)

Net gain (loss) on investment transactions

(1,839,342)

Net increase (decrease) in net assets resulting from operations

$ 9,851,800

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income

$ 11,691,142

$ 12,794,240

Net realized gain (loss) on investment transactions

(1,278,409)

(786,212)

Net unrealized appreciation (depreciation) during the period on investment transactions

(560,933)

(4,324,240)

Net increase (decrease) in net assets resulting from operations

9,851,800

7,683,788

Distributions to shareholders from:
Net investment income:

Class A

(8,821,928)

(10,824,223)

Class B

(1,559,664)

(1,736,774)

Net realized gains:

Class A

—

(2,099,899)

Class B

—

(374,454)

Portfolio share transactions:

Class A

Proceeds from shares sold

9,888,675

24,046,411

Reinvestment of distributions

8,821,928

12,924,122

Cost of shares redeemed

(51,098,907)

(67,354,142)

Net increase (decrease) in net assets from Class A share transactions

(32,388,304)

(30,383,609)

Class B

Proceeds from shares sold

2,370,667

3,998,526

Reinvestment of distributions

1,559,664

2,111,228

Cost of shares redeemed

(17,355,673)

(7,544,629)

Net increase (decrease) in net assets from Class B share transactions

(13,425,342)

(1,434,875)

Increase (decrease) in net assets

(46,343,438)

(39,170,046)

Net assets at beginning of period

290,399,649

329,569,695

Net assets at end of period (including undistributed net investment income of $11,470,474 and $10,160,924, respectively)

$ 244,056,211

$ 290,399,649

Other Information

Class A

Shares outstanding at beginning of period

19,851,802

22,309,252

Shares sold

824,144

1,970,071

Shares issued to shareholders in reinvestment of distributions

749,527

1,082,422

Shares redeemed

(4,251,198)

(5,509,943)

Net increase (decrease) in Class A shares

(2,677,527)

(2,457,450)

Shares outstanding at end of period

17,174,275

19,851,802

Class B

Shares outstanding at beginning of period

3,838,802

3,952,379

Shares sold

196,489

326,302

Shares issued to shareholders in reinvestment of distributions

132,399

176,820

Shares redeemed

(1,461,143)

(616,699)

Net increase (decrease) in Class B shares

(1,132,255)

(113,577)

Shares outstanding at end of period

2,706,547

3,838,802

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 12.26

$ 12.55

$ 12.54

$ 12.84

$ 12.32

Income (loss) from investment operations:

Net investment incomea

.55

.51

.44

.31

.62

Net realized and unrealized gain (loss) on investment transactions

(.06)

(.20)

.03

(.04)

.35

Total from investment operations

.49

.31

.47

.27

.97

Less distributions from:

Net investment income

(.47)

(.50)

(.35)

(.35)

(.45)

Net realized gain on investment transactions

—

(.10)

(.11)

(.22)

—

Total distributions

(.47)

(.60)

(.46)

(.57)

(.45)

Net asset value, end of period

$ 12.28

$ 12.26

$ 12.55

$ 12.54

$ 12.84

Total Return (%)

4.16

2.57

3.75c

2.26

8.05

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

211

243

280

347

551

Ratio of expenses (%)

.67

.63

.61

.61

.59

Ratio of net investment income (%)

4.56

4.17

3.59

2.50

4.96

Portfolio turnover rate (%)b

241

191

226

511

534

a Based on average shares outstanding during the period.
b The portfolio turnover rate including mortgage dollar roll transactions was 403%, 325%, 391%, 536% and 651% for the periods ended December 31, 2006, December 31, 2005, December 31, 2004, December 31, 2003 and December 31, 2002, respectively.
c Reimbursement of $2,420 due to disposal of investments in violation of restrictions had no effect on total return.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 12.23

$ 12.52

$ 12.51

$ 12.82

$ 12.36

Income (loss) from investment operations:

Net investment incomeb

.50

.47

.40

.27

.31

Net realized and unrealized gain (loss) on investment transactions

(.06)

(.21)

.02

(.04)

.15

Total from investment operations

.44

.26

.42

.23

.46

Less distributions from:

Net investment income

(.42)

(.45)

(.30)

(.32)

—

Net realized gain on investment transactions

—

(.10)

(.11)

(.22)

—

Total distributions

(.42)

(.55)

(.41)

(.54)

—

Net asset value, end of period

$ 12.25

$ 12.23

$ 12.52

$ 12.51

$ 12.82

Total Return (%)

3.74

2.24

3.36d

1.83

3.72**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

33

47

49

38

3

Ratio of expenses (%)

1.07

1.02

1.00

.98

.84*

Ratio of net investment income (%)

4.16

3.78

3.21

2.13

4.95*

Portfolio turnover rate (%)c

241

191

226

511

534

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c The portfolio turnover rate including mortgage dollar roll transactions was 403%, 325%, 391%, 536% and 651% for the periods ended December 31, 2006, December 30, 2005, December 31, 2004, December 31, 2003 and December 31, 2002, respectively.
d Reimbursement of $2,420 due to disposal of investments in violation of restrictions had no effect on total return.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Growth Allocation VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Diversification does not eliminate risk. The underlying portfolios invest in individual equity and bond funds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Growth Allocation VIP from 8/16/2004 to 12/31/2006

[] DWS Growth Allocation VIP — Class B

[] Russell 1000® Index

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

Index returns assume reinvestment of all dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1500

 

 

 

Comparative Results

DWS Growth Allocation VIP

1-Year

Life of Portfolio*

Class B

Growth of $10,000

$11,266

$13,174

Average annual total return

12.66%

12.35%

Russell 1000 Index
 Growth of $10,000

$11,546

$13,642

Average annual total return

15.46%

14.24%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on August 16, 2004. Index returns began on August 31, 2004.

Information About Your Portfolio's Expenses

DWS Growth Allocation VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In addition to the ongoing expenses which the Portfolio bears directly, the Portfolio's shareholders indirectly bear the expense of the Underlying DWS Portfolios in which the Portfolio invests. The Portfolio's estimated indirect expense from investing in the Underlying DWS Portfolios is based on its allocation of Underlying DWS Portfolios. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Direct Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,097.50

Expenses Paid per $1,000*

 

$ 3.07

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,022.28

Expenses Paid per $1,000*

 

$ 2.96

Direct Portfolio Expenses and Estimated Indirect Underlying DWS Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,097.50

Expenses Paid per $1,000**

 

$ 6.82

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,018.70

Expenses Paid per $1,000**

 

$ 6.56

* Expenses are equal to the Portfolio's annualized expense ratio for the share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
** Expenses are equal to the Portfolio's annualized expense ratio for the share class plus the estimated indirect expense from investing in underlying portfolios in which the Portfolio invests, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

 

Class B

Direct Portfolio Expense Ratio

 

.58%

Estimated Indirect Expenses of Underlying DWS Portfolios

 

.71%

Estimated Net Annual Portfolio and Underlying DWS Portfolios Expenses

 

1.29%

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Growth Allocation VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. All major asset classes — equities, bonds and cash — had positive returns for the year. Most equity indexes had double digit returns, while bond returns, except for high yield, were in single digits. Within the equity market, small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years. Comparison of Russell Growth and Russell Value indexes reveals that value stocks performed better than growth stocks in all size categories.

For the 12 months ended December 31, 2006, the DWS Growth Allocation VIP had a return of 12.66% (Class B, unadjusted for contract charges). The Portfolio's benchmark, the Russell 1000 Index, returned 15.46% for the same period. Since this Portfolio invests in stock and bond portfolios in several different categories, performance is analyzed by comparing the Portfolio's return with indexes that represent each asset class. Since this Portfolio invests in a blend of equity and bond portfolios, its return was above that of its major bond benchmarks but below that of its equity benchmarks.

The Portfolio's allocation between equity and fixed income portfolios remained close to its target of 75% equity and 25% fixed income during 2006, but with equities slightly overweighted throughout the year. This overweight was positive for returns, as equities outperformed fixed income.1 The Portfolio's position in bonds detracted from performance relative to the equity benchmark. Positions in international equity contributed to absolute performance, since international equities (as measured by the MSCI EAFE® Index) outperformed US equities.

In the fixed income portion of the Portfolio, a position in high-yield bond portfolios and an overweight in cash equivalents, with a corresponding underweight in investment-grade bond portfolios, was positive for performance, as short-term interest rates continued to rise, providing attractive returns on cash equivalents.

Inna Okounkova Robert Wang
Portfolio Managers, Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Diversification does not eliminate risk. The underlying portfolios invest in individual equity and bond funds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

The MSCI EAFE® (Morgan Stanley Capital International Europe-Australasia-Far East) Index is composed of approximately 1,100 companies in 20 countries in Europe and the Pacific Basin. The objective of the index is to reflect the movements of stock markets in these countries by representing an unmanaged (indexed) portfolio within each country. The index is calculated in US dollars and is constructed to represent about 60% of market capitalization in each country.

Thee Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment of dividends and, unlike Portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Growth Allocation VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Equity Funds

75%

75%

Fixed Income — Bond Funds

18%

14%

Fixed Income — Money Market Funds

7%

11%

 

100%

100%

Asset allocation is subject to change.

For more complete details about the Portfolio's investment portfolio, see page 122. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Growth Allocation VIP

 


Shares

Value ($)

 

 

Equity Funds 75.6%

DWS Blue Chip VIP "A"

1,033,457

16,711,005

DWS Capital Growth VIP "A"

545,773

9,954,892

DWS Davis Venture Value VIP "A"

1,084,221

15,450,149

DWS Dreman High Return Equity VIP "A"

1,152,735

17,314,081

DWS Dreman Small Mid Cap Value VIP "A"

627,010

14,377,339

DWS Global Opportunities VIP "A"

4,909

89,046

DWS Growth & Income VIP "A"

2,482,985

27,163,852

DWS International Select Equity VIP "A"

31,716

517,292

DWS International VIP "A"

1,697,787

22,784,307

DWS Large Cap Value VIP "A"

1,486,190

26,691,977

DWS Mid Cap Growth VIP "A"

8,113

101,894

DWS RREEF Real Estate Securities VIP "A"

181,645

4,072,471

DWS Small Cap Growth VIP "A"

201,969

2,865,940

Total Equity Funds (Cost $141,059,793)

158,094,245

 

 


Shares

Value ($)

 

 

Fixed Income — Bond Funds 17.7%

DWS Core Fixed Income VIP "A"

2,954,193

35,036,725

DWS Government & Agency Securities VIP "A"

284

3,489

DWS High Income VIP "A"

111,979

938,385

DWS Strategic Income VIP "A"

78,959

931,719

Total Fixed Income — Bond Funds (Cost $35,652,734)

36,910,318

 

Fixed Income — Money Market Funds 6.8%

Cash Management QP Trust (Cost $14,178,328)

14,178,328

14,178,328

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $190,890,855)+

100.1

209,182,891

Other Assets and Liabilities, Net

(0.1)

(191,154)

Net Assets

100.0

208,991,737

+ The cost for federal income tax purposes was $191,443,241. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $17,739,650. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $17,796,426 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $56,776.

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in Underlying Affiliated Portfolios, at value (cost $176,712,527)

$ 195,004,563

Investment in Cash Management QP Trust (cost $14,178,328)

14,178,328

Total investments in securities, at value (cost $190,890,855)

209,182,891

Interest receivable

61,421

Other assets

5,688

Total assets

209,250,000

Liabilities

Payable for Portfolio shares redeemed

66,340

Accrued management fee

17,953

Other accrued expenses and payables

173,970

Total liabilities

258,263

Net assets, at value

$ 208,991,737

Net Assets

Net assets consist of:
Undistributed net investment income

4,067,143

Net unrealized appreciation (depreciation) on investments

18,292,036

Accumulated net realized gain (loss)

9,895,441

Paid-in capital

176,737,117

Net assets, at value

$ 208,991,737

Class B

Net Asset Value, offering and redemption price per share ($208,991,737 ÷ 16,154,379 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.94

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Income distribution from Underlying
Affiliated Portfolios

$ 2,723,455

Interest — Cash Management QP Trust

912,817

Total Income

3,636,272

Expenses:
Management fee

307,763

Custodian and accounting fees

51,623

Distribution service fees (Class B)

512,938

Record keeping fees (Class B)

308,687

Auditing

41,781

Legal

13,733

Trustees' fees and expenses

19,814

Reports to shareholders

13,953

Other

7,487

Total expenses before expense reductions

1,277,779

Expense reductions

(102,588)

Total expenses after expense reductions

1,175,191

Net investment income (loss)

2,461,081

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

6,301,219

Capital gain distributions from Underlying Affiliated Portfolios

5,468,239

 

11,769,458

Net unrealized appreciation (depreciation) during the period on investments

10,477,889

Net gain (loss) on investment transactions

22,247,347

Net increase (decrease) in net assets resulting from operations

$ 24,708,428

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 2,461,081

$ 1,127,246

Net realized gain (loss) on investment transactions

11,769,458

1,978,666

Net unrealized appreciation (depreciation) during the period on investment transactions

10,477,889

5,737,112

Net increase (decrease) in net assets resulting from operations

24,708,428

8,843,024

Distributions to shareholders from:
Net investment income:

Class B

(1,665,343)

—

Net realized gains:

Class B

(1,700,403)

(144,613)

Portfolio share transactions:

Class B

Proceeds from shares sold

17,704,517

143,559,919

Reinvestment of distributions

3,365,746

144,613

Cost of shares redeemed

(30,803,312)

(2,017,170)

Net increase (decrease) in net assets from Class B share transactions

(9,733,049)

141,687,362

Increase (decrease) in net assets

11,609,633

150,385,773

Net assets at beginning of period

197,382,104

46,996,331

Net assets at end of period (including undistributed net investment income of $4,067,143 and $1,575,496, respectively)

$ 208,991,737

$ 197,382,104

Other Information

Class B

Shares outstanding at beginning of period

16,920,311

4,262,187

Shares sold

1,481,587

12,825,648

Shares issued to shareholders in reinvestment of distributions

281,181

13,341

Shares redeemed

(2,528,700)

(180,865)

Net increase (decrease) in Class B shares

(765,932)

12,658,124

Shares outstanding at end of period

16,154,379

16,920,311

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class B

Years Ended December 31,

2006

2005

2004a

Selected Per Share Data

Net asset value, beginning of period

$ 11.67

$ 11.03

$ 10.00

Income (loss) from investment operations:

Net investment income (loss)b

.14

.11

(.03)

Net realized and unrealized gain (loss) on investment transactions

1.33

.55

1.06

Total from investment operations

1.47

.66

1.03

Less distributions from:

Net investment income

(.10)

—

—

Net realized gain on investment transactions

(.10)

(.02)

—

Total Distributions

(.20)

(.02)

—

Net asset value, end of period

$ 12.94

$ 11.67

$ 11.03

Total Return (%)c,d

12.66

6.02

10.30**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

209

197

47

Ratio of expenses before expense reductions (%)e

.62

.65

1.38*

Ratio of expenses after expense reductions (%)e

.57

.60

0.75*

Ratio of net investment income (%)

1.20

1.01

(0.69)*

Portfolio turnover rate (%)

45

20

15

a For the period from August 16, 2004 (commencement of operations) to December 31, 2004.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Total return would have been lower if the Advisor had not reduced certain of the Underlying Portfolios' expenses.
e The Portfolio invests in other DWS Portfolios and bears its proportionate share of fees and expenses incurred by the Underlying DWS Portfolios in which the Portfolio is invested.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS High Income VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. Additionally, the Portfolio may invest in lower-quality and nonrated securities which present greater risk of loss of principal and interest than higher-quality securities. All of these factors may result in greater share price volatility. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the investment, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS High Income VIP

[] DWS High Income VIP — Class A

[] Credit Suisse High Yield Index

The Credit Suisse High Yield Index is an unmanaged index that is market-weighted, including publicly traded bonds having a rating below BBB by Standard & Poor's and Moody's.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14fo

 

Yearly periods ended December 31

 

Comparative Results

DWS High Income VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$11,047

$12,901

$16,029

$17,376

Average annual total return

10.47%

8.86%

9.90%

5.68%

Credit Suisse High Yield Index
 Growth of $10,000

$11,192

$12,813

$16,901

$19,831

Average annual total return

11.92%

8.61%

11.07%

7.09%

DWS High Income VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$11,011

$12,762

$16,239

Average annual total return

 

10.11%

8.47%

11.39%

Credit Suisse High Yield Index
 Growth of $10,000

 

$11,192

$12,813

$16,874

Average annual total return

 

11.92%

8.61%

12.32%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS High Income VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,068.90

 

$ 1,066.20

 

Expenses Paid per $1,000*

$ 3.70

 

$ 5.78

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.63

 

$ 1,019.61

 

Expenses Paid per $1,000*

$ 3.62

 

$ 5.65

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS High Income VIP

.71%

 

1.11%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS High Income VIP

High yield was one of the best-performing areas of the bond market during 2006. Although bouts of volatility periodically affected the performance of the high-yield market, the investment backdrop remained broadly positive. Economic growth, while appearing to moderate throughout the course of the year, remained on a solid footing. High-yield companies were able to maintain their sound financial positions as a result, and this was reflected in a continuation of the low default rate. In addition, the market remained supported by the overall low level of supply at a time when demand remained firm.

DWS High Income VIP posted a 10.47% total return for the 12-month period ending December 31, 2006 (Class A shares, unadjusted for contract charges) and outpaced the 9.89% average return of the 104 portfolios in its Lipper peer group, High Current Yield Variable Annuity Funds category. The Portfolio's benchmark, the Credit Suisse High Yield Index, returned 11.92%. We remained focused on adding value by conducting fundamental research rather than making broad predictions about sector performance or interest rates. The Portfolio's overweight positions in General Motors Acceptance Corporation (GMAC), Ford Motor Credit Company, North Atlantic Trading Co. and emerging-market securities such as Republic of Argentina were positive contributors to relative return.1 However, the Portfolio's overweight in more defensive securities, along with its underweight in the aerospace/airlines industry, detracted from relative performance. In addition, an underweight in Calpine* — which outperformed during the year — dampened results.

The high-yield market continues to exhibit stable fundamentals. Nevertheless, we believe low default rates will not last forever, meaning that good security selection is paramount at this point in the cycle.

Gary Sullivan, CFA

Portfolio Manager
Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. Additionally, the Portfolio may invest in lower-quality and nonrated securities which present greater risk of loss of principal and interest than higher-quality securities. All of these factors may result in greater share price volatility. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the investment, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Lipper's High Current Yield Variable Annuity Funds category represents funds that aim at a high (relative) current yield from fixed-income securities, have no quality or maturity restrictions and tend to invest in lower-grade debt issues. It is not possible to invest directly into a Lipper category.

The Credit Suisse High Yield Index is an unmanaged index that is market-weighted, including publicly traded bonds having a rating below BBB by Standard & Poor's and Moody's. Index returns assume reinvestment of all dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

* As of December 31, 2006, the position was sold.
1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS High Income VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Corporate Bonds

84%

80%

Foreign Bonds — US$ Denominated

12%

13%

Foreign Bonds — Non US$ Denominated

2%

1%

Cash Equivalents

1%

2%

Other Investments

1%

—

Loan Participations

—

1%

Asset Backed

—

1%

Convertible Bonds

—

1%

Stocks

—

1%

 

100%

100%

Corporate and Foreign Bonds Diversification (Excludes Cash Equivalents and Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Consumer Discretionary

25%

24%

Financials

16%

15%

Materials

15%

14%

Industrials

10%

14%

Utilities

9%

6%

Telecommunication Services

8%

9%

Energy

8%

8%

Information Technology

4%

3%

Health Care

2%

3%

Consumer Staples

2%

3%

Sovereign Bonds

1%

1%

 

100%

100%

Quality

12/31/06

12/31/05

 

 

 

Cash Equivalents

1%

2%

A

—

2%

BBB

3%

4%

BB

30%

28%

B

50%

51%

CCC

16%

13%

 

100%

100%

Asset allocation, corporate and foreign bonds diversification and quality are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 131. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com as of each calendar quarter-end on or after the last day of the following month.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS High Income VIP

 

Principal Amount ($)(a)

Value ($)

 

 

Corporate Bonds 81.9%

Consumer Discretionary 21.6%

AAC Group Holding Corp., 12.75%, 10/1/2012 (PIK) (b)

519,302

553,057

Affinia Group, Inc., 9.0%, 11/30/2014 (b)

995,000

975,100

AMC Entertainment, Inc., 8.0%, 3/1/2014

1,480,000

1,468,900

American Achievement Corp., 8.25%, 4/1/2012

100,000

102,375

American Media Operations, Inc., Series B, 10.25%, 5/1/2009 (b)

400,000

387,500

Buffets, Inc., 144A, 12.5%, 11/1/2014

400,000

403,000

Burlington Coat Factory Warehouse Corp., 144A, 11.125%, 4/15/2014 (b)

605,000

589,875

Cablevision Systems Corp., Series B, 9.87%**, 4/1/2009

350,000

369,250

Caesars Entertainment, Inc., 8.875%, 9/15/2008

725,000

755,812

Charter Communications Holdings LLC:

 

 

8.625%, 4/1/2009

45,000

43,650

9.625%, 11/15/2009

50,000

48,500

Series B, 10.25%, 9/15/2010

975,000

1,017,656

10.25%, 9/15/2010

3,080,000

3,222,450

11.0%, 10/1/2015

2,782,000

2,855,027

Cooper-Standard Automotive, Inc., 8.375%, 12/15/2014 (b)

735,000

578,813

CSC Holdings, Inc.:

 

 

7.25%, 7/15/2008

560,000

564,900

7.875%, 12/15/2007

1,694,000

1,715,175

Series B, 8.125%, 7/15/2009

190,000

196,888

Series B, 8.125%, 8/15/2009

200,000

207,250

Denny's Corp. Holdings, Inc., 10.0%, 10/1/2012

195,000

205,725

Dex Media East LLC/Financial, 12.125%, 11/15/2012

5,197,000

5,723,196

EchoStar DBS Corp.:

 

 

6.625%, 10/1/2014

870,000

848,250

7.125%, 2/1/2016

675,000

675,000

Foot Locker, Inc., 8.5%, 1/15/2022

205,000

201,413

Ford Motor Co., 7.45%, 7/16/2031 (b)

580,000

455,300

French Lick Resorts & Casinos, 144A, 10.75%, 4/15/2014

2,200,000

2,057,000

General Motors Corp.:

 

 

7.4%, 9/1/2025 (b)

550,000

464,750

8.375%, 7/15/2033 (b)

2,010,000

1,859,250

Goodyear Tire & Rubber Co., 11.25%, 3/1/2011

3,430,000

3,790,150

Gregg Appliances, Inc., 9.0%, 2/1/2013

365,000

348,575

Hanesbrands, Inc., 144A, 8.735%**, 12/15/2014

500,000

508,750

Hertz Corp.:

 

 

144A, 8.875%, 1/1/2014

1,445,000

1,513,637

144A, 10.5%, 1/1/2016 (b)

320,000

352,000

ION Media Networks, Inc., 144A, 11.624%**, 1/15/2013

595,000

602,438

 

Principal Amount ($)(a)

Value ($)

 

 

Isle of Capri Casinos, Inc., 7.0%, 3/1/2014

2,065,000

2,054,675

Jacobs Entertainment, Inc., 9.75%, 6/15/2014

1,035,000

1,050,525

Lear Corp.:

 

 

Series B, 5.75%, 8/1/2014

35,000

29,400

144A, 8.75%, 12/1/2016

495,000

478,294

Levi Strauss & Co., 10.122%**, 4/1/2012

45,000

46,181

Liberty Media Corp.:

 

 

5.7%, 5/15/2013

95,000

89,503

8.25%, 2/1/2030

795,000

779,281

8.5%, 7/15/2029

965,000

970,265

Majestic Star Casino LLC, 9.5%, 10/15/2010

110,000

115,500

Mediacom Broadband LLC, 8.5%, 10/15/2015

50,000

50,625

Medimedia USA, Inc., 144A, 11.375%, 11/15/2014

300,000

314,250

Metaldyne Corp.:

 

 

10.0%, 11/1/2013 (b)

470,000

502,900

11.0%, 6/15/2012 (b)

210,000

215,250

MGM MIRAGE:

 

 

6.75%, 9/1/2012

245,000

241,325

8.375%, 2/1/2011 (b)

545,000

565,438

9.75%, 6/1/2007

950,000

961,875

MTR Gaming Group, Inc., Series B, 9.75%, 4/1/2010

980,000

1,033,900

NCL Corp., 10.625%, 7/15/2014

200,000

200,000

Norcraft Holdings/Capital, Step-up Coupon, 0% to 9/1/2008, 9.75% to 9/1/2012 (b)

1,670,000

1,411,150

Pinnacle Entertainment, Inc., 8.75%, 10/1/2013 (b)

620,000

657,200

Pokagon Gaming Authority, 144A, 10.375%, 6/15/2014

275,000

301,125

Premier Entertainment Biloxi LLC/Finance, 10.75%, 2/1/2012

3,698,000

3,808,940

PRIMEDIA, Inc.:

 

 

8.875%, 5/15/2011

585,000

596,700

10.749%**, 5/15/2010 (b)

1,565,000

1,627,600

Resorts International Hotel & Casino, Inc., 11.5%, 3/15/2009

3,740,000

3,856,875

Sinclair Broadcast Group, Inc.:

 

 

8.0%, 3/15/2012

705,000

727,912

8.75%, 12/15/2011

2,025,000

2,113,594

Sirius Satellite Radio, Inc., 9.625%, 8/1/2013 (b)

1,345,000

1,323,144

Six Flags, Inc., 9.75%, 4/15/2013 (b)

1,790,000

1,680,362

Station Casinos, Inc., 6.5%, 2/1/2014

795,000

706,556

The Bon-Ton Department Stores, Inc., 10.25%, 3/15/2014 (b)

585,000

598,163

Travelport, Inc., 144A, 9.994%**, 9/1/2014

500,000

487,500

Trump Entertainment Resorts, Inc., 8.5%, 6/1/2015 (b)

2,570,000

2,557,150

TRW Automotive, Inc.:

 

 

11.0%, 2/15/2013 (b)

2,720,000

2,981,800

11.75%, 2/15/2013 EUR

485,000

717,852

 

Principal Amount ($)(a)

Value ($)

 

 

United Auto Group, Inc.:

 

 

144A, 7.75%, 12/15/2016

495,000

497,475

9.625%, 3/15/2012

2,540,000

2,670,175

Wheeling Island Gaming, Inc., 10.125%, 12/15/2009

395,000

402,406

XM Satellite Radio, Inc., 9.75%, 5/1/2014 (b)

2,640,000

2,640,000

Young Broadcasting, Inc., 8.75%, 1/15/2014 (b)

3,620,000

3,135,825

 

80,859,303

Consumer Staples 2.5%

Del Laboratories, Inc., 8.0%, 2/1/2012

515,000

482,813

Delhaize America, Inc.:

 

 

8.05%, 4/15/2027

190,000

205,454

9.0%, 4/15/2031

2,680,000

3,181,977

GNC Parent Corp., 144A, 12.114%**, 12/1/2011 (PIK)

700,000

700,000

Harry & David Holdings, Inc., 10.369%**, 3/1/2012

600,000

597,000

North Atlantic Trading Co., 9.25%, 3/1/2012

1,365,000

1,190,963

Viskase Co., Inc., 11.5%, 6/15/2011

3,100,000

3,100,000

 

9,458,207

Energy 7.3%

Belden & Blake Corp., 8.75%, 7/15/2012

2,585,000

2,649,625

Chaparral Energy, Inc., 8.5%, 12/1/2015

1,405,000

1,397,975

Chesapeake Energy Corp.:

 

 

6.25%, 1/15/2018

620,000

596,750

6.875%, 1/15/2016

1,925,000

1,941,844

7.75%, 1/15/2015 (b)

255,000

265,519

Complete Production Services, Inc., 144A, 8.0%, 12/15/2016

895,000

917,375

Delta Petroleum Corp., 7.0%, 4/1/2015

1,640,000

1,517,000

Dynegy Holdings, Inc.:

 

 

7.625%, 10/15/2026

1,635,000

1,585,950

8.375%, 5/1/2016

1,305,000

1,370,250

El Paso Production Holding Corp., 7.75%, 6/1/2013

1,075,000

1,124,719

Encore Acquisition Co., 6.0%, 7/15/2015

290,000

264,625

Frontier Oil Corp., 6.625%, 10/1/2011

435,000

433,912

NGC Corp. Capital Trust I, Series B, 8.316%, 6/1/2027 (b)

560,000

529,200

Peabody Energy Corp., 7.375%, 11/1/2016

400,000

426,000

Quicksilver Resources, Inc., 7.125%, 4/1/2016

385,000

376,337

Sabine Pass LNG LP:

 

 

144A, 7.25%, 11/30/2013

150,000

149,063

144A, 7.5%, 11/30/2016

475,000

473,219

Southern Natural Gas, 8.875%, 3/15/2010

2,345,000

2,460,116

Stone Energy Corp.:

 

 

6.75%, 12/15/2014

1,715,000

1,637,825

144A, 8.124%**, 7/15/2010

480,000

475,200

Transmeridian Exploration, Inc., 12.0%, 12/15/2010 (b)

970,000

933,625

 

Principal Amount ($)(a)

Value ($)

 

 

Williams Companies, Inc.:

 

 

8.125%, 3/15/2012

3,685,000

3,989,012

8.75%, 3/15/2032

1,665,000

1,881,450

 

27,396,591

Financials 12.0%

Alamosa Delaware, Inc., 11.0%, 7/31/2010

810,000

875,274

Ashton Woods USA LLC, 9.5%, 10/1/2015

1,495,000

1,360,450

BCP Crystal Holdings Corp., 9.625%, 6/15/2014

200,000

221,000

Buffalo Thunder Development Authority, 144A, 9.375%, 12/15/2014

295,000

299,425

E*TRADE Financial Corp.:

 

 

7.375%, 9/15/2013

550,000

572,000

7.875%, 12/1/2015

410,000

435,625

8.0%, 6/15/2011

890,000

930,050

Ford Motor Credit Co.:

 

 

7.25%, 10/25/2011

3,820,000

3,740,819

7.375%, 10/28/2009

7,390,000

7,405,741

7.875%, 6/15/2010

1,860,000

1,875,449

8.0%, 12/15/2016

265,000

261,860

8.11%**, 1/13/2012

475,000

470,686

GMAC LLC:

 

 

6.875%, 9/15/2011

8,555,000

8,774,846

8.0%, 11/1/2031

3,538,000

4,061,865

Hexion US Finance Corp., 144A, 9.75%, 11/15/2014

395,000

400,431

Idearc, Inc., 144A, 8.0%, 11/15/2016

2,285,000

2,319,275

iPayment, Inc., 9.75%, 5/15/2014

510,000

524,025

Poster Financial Group, Inc., 8.75%, 12/1/2011 (b)

1,800,000

1,867,500

R.H. Donnelly Finance Corp., 10.875%, 12/15/2012

2,280,000

2,485,200

Sally Holdings LLC, 144A, 9.25%, 11/15/2014

995,000

1,013,656

Triad Acquisition Corp., Series B, 11.125%, 5/1/2013

850,000

807,500

UCI Holding Co., Inc., 144A, 12.365%**, 12/15/2013 (PIK)

600,000

582,000

Universal City Development, 11.75%, 4/1/2010

2,540,000

2,720,975

Wimar Opco LLC, 144A, 9.625%, 12/15/2014

1,000,000

990,000

 

44,995,652

Health Care 1.9%

HCA, Inc.:

 

 

6.5%, 2/15/2016 (b)

530,000

446,525

144A, 9.125%, 11/15/2014

790,000

844,313

144A, 9.25%, 11/15/2016

1,750,000

1,874,687

HEALTHSOUTH Corp.:

 

 

144A, 10.75%, 6/15/2016 (b)

1,225,000

1,318,406

144A, 11.354%**, 6/15/2014 (b)

190,000

202,350

Tenet Healthcare Corp., 9.25%, 2/1/2015

2,510,000

2,510,000

 

7,196,281

Industrials 8.4%

Aleris International, Inc., 144A, 9.0%, 12/15/2014

495,000

497,475

Allied Security Escrow Corp., 11.375%, 7/15/2011

819,000

839,475

Allied Waste North America, Inc., Series B, 9.25%, 9/1/2012

1,985,000

2,109,062

 

Principal Amount ($)(a)

Value ($)

 

 

American Color Graphics, 10.0%, 6/15/2010 (b)

945,000

670,950

Browning-Ferris Industries:

 

 

7.4%, 9/15/2035

1,560,000

1,458,600

9.25%, 5/1/2021

920,000

975,200

Case New Holland, Inc., 9.25%, 8/1/2011

2,190,000

2,318,662

Cenveo Corp., 7.875%, 12/1/2013

1,257,000

1,206,720

Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010 (b)

1,705,000

1,743,362

Congoleum Corp., 8.625%, 8/1/2008*

1,200,000

1,140,000

DRS Technologies, Inc.:

 

 

6.625%, 2/1/2016

195,000

196,463

7.625%, 2/1/2018

1,205,000

1,241,150

Education Management LLC, 144A, 8.75%, 6/1/2014

480,000

496,800

Esco Corp.:

 

 

144A, 8.625%, 12/15/2013 (b)

995,000

1,022,363

144A, 9.235%**, 12/15/2013 (b)

445,000

451,675

Iron Mountain, Inc., 8.75%, 7/15/2018 (b)

375,000

397,500

K. Hovnanian Enterprises, Inc.:

 

 

6.25%, 1/15/2016

1,660,000

1,568,700

8.875%, 4/1/2012 (b)

1,865,000

1,892,975

Kansas City Southern:

 

 

7.5%, 6/15/2009

395,000

398,456

9.5%, 10/1/2008

3,420,000

3,573,900

Millennium America, Inc., 9.25%, 6/15/2008

810,000

836,325

Mobile Services Group, Inc., 144A, 9.75%, 8/1/2014

915,000

956,175

Panolam Industries International, Inc., 144A, 10.75%, 10/1/2013

295,000

310,488

Rainbow National Services LLC, 144A, 10.375%, 9/1/2014

180,000

200,025

Riverdeep Bank, 11.063%, 12/15/2007

1,095,000

1,096,369

Ship Finance International Ltd., 8.5%, 12/15/2013

460,000

459,425

The Brickman Group Ltd., Series B, 11.75%, 12/15/2009

1,420,000

1,508,750

Titan International, Inc., 144A, 8.0%, 1/15/2012

995,000

1,001,219

Williams Partners LP, 144A, 7.25%, 2/1/2017

495,000

504,900

Xerox Capital Trust I, 8.0%, 2/1/2027

335,000

342,119

 

31,415,283

Information Technology 3.8%

Freescale Semiconductor, Inc., 144A, 8.875%, 12/15/2014

495,000

493,144

L-3 Communications Corp.:

 

 

5.875%, 1/15/2015

2,205,000

2,127,825

Series B, 6.375%, 10/15/2015

730,000

722,700

Lucent Technologies, Inc., 6.45%, 3/15/2029

3,290,000

3,035,025

Sanmina-SCI Corp., 8.125%, 3/1/2016 (b)

1,370,000

1,325,475

SunGard Data Systems, Inc., 10.25%, 8/15/2015 (b)

1,710,000

1,825,425

UGS Corp., 10.0%, 6/1/2012

1,610,000

1,754,900

Unisys Corp., 7.875%, 4/1/2008

2,890,000

2,882,775

 

14,167,269

 

Principal Amount ($)(a)

Value ($)

 

 

Materials 11.2%

ARCO Chemical Co., 9.8%, 2/1/2020

4,940,000

5,705,700

Associated Materials, Inc., Step-up Coupon, 0% to 3/1/2009, 11.25% to 3/1/2014

485,000

327,375

Chemtura Corp., 6.875%, 6/1/2016

975,000

938,437

Constar International, Inc., 11.0%, 12/1/2012 (b)

255,000

235,875

CPG International I, Inc.:

 

 

10.5%, 7/1/2013

1,510,000

1,538,312

12.39%**, 7/1/2012

645,000

657,900

Crystal US Holdings:

 

 

Series A, Step-up Coupon, 0% to 10/1/2009, 10% to 10/1/2014

1,945,000

1,662,975

Series B, Step-up Coupon, 0% to 10/1/2009, 10.5% to 10/1/2014 (b)

545,000

468,700

Equistar Chemical Funding, 10.625%, 5/1/2011

1,215,000

1,293,975

Exopac Holding Corp., 144A, 11.25%, 2/1/2014

1,550,000

1,631,375

GEO Specialty Chemicals, Inc., 144A, 13.36%**, 12/31/2009

3,044,000

2,511,300

Georgia-Pacific Corp., 144A, 7.125%, 1/15/2017

345,000

344,138

Greif, Inc., 8.875%, 8/1/2012

830,000

871,500

Hexcel Corp., 6.75%, 2/1/2015

1,895,000

1,866,575

Huntsman LLC, 11.625%, 10/15/2010

2,422,000

2,646,035

International Coal Group, Inc., 10.25%, 7/15/2014

650,000

650,000

Koppers Holdings, Inc., Step-up Coupon, 0% to 11/15/2009, 9.875% to 11/15/2014

1,170,000

936,000

Lyondell Chemical Co., 10.5%, 6/1/2013

335,000

368,500

Massey Energy Co.:

 

 

6.625%, 11/15/2010

1,375,000

1,375,000

6.875%, 12/15/2013

720,000

676,800

Metals USA Holding Corp., 144A, 11.365%**, 1/15/2012

700,000

672,000

Momentive Performance, 144A, 9.75%, 12/1/2014

495,000

495,000

Mueller Holdings, Inc., Step-up Coupon, 0% to 4/15/2009, 14.75% to 4/15/2014

2,441,000

2,196,900

Neenah Foundry Co.:

 

 

144A, 9.5%, 1/1/2017

695,000

698,475

144A, 13.0%, 9/30/2013

732,460

732,460

NewMarket Corp., 144A, 7.125%, 12/15/2016

1,190,000

1,190,000

OM Group, Inc., 9.25%, 12/15/2011 (b)

675,000

706,219

Omnova Solutions, Inc., 11.25%, 6/1/2010

2,785,000

2,993,875

Oxford Automotive, Inc., 144A, 12.0%, 10/15/2010*

1,962,795

29,442

Pliant Corp., 11.625%, 6/15/2009 (PIK)

11

12

Radnor Holdings Corp., 11.0%, 3/15/2010*

265,000

663

Rockwood Specialties Group, Inc., 10.625%, 5/15/2011

420,000

447,300

The Mosaic Co.:

 

 

144A, 7.375%, 12/1/2014

1,195,000

1,226,369

144A, 7.625%, 12/1/2016

400,000

414,500

 

Principal Amount ($)(a)

Value ($)

 

 

TriMas Corp., 9.875%, 6/15/2012

1,371,000

1,326,442

United States Steel Corp., 9.75%, 5/15/2010

979,000

1,041,411

Witco Corp., 6.875%, 2/1/2026

390,000

341,250

Wolverine Tube, Inc., 10.5%, 4/1/2009 (b)

850,000

688,500

 

41,907,290

Telecommunication Services 4.8%

American Cellular Corp., Series B, 10.0%, 8/1/2011

750,000

793,125

Centennial Communications Corp., 10.0%, 1/1/2013 (b)

780,000

829,725

Cincinnati Bell, Inc.:

 

 

7.25%, 7/15/2013

2,290,000

2,370,150

8.375%, 1/15/2014 (b)

1,575,000

1,618,312

Dobson Cellular Systems, 9.875%, 11/1/2012

780,000

850,200

Dobson Communications Corp., 8.875%, 10/1/2013

700,000

713,125

Insight Midwest LP, 9.75%, 10/1/2009

319,000

324,184

Intelsat Corp., 144A, 9.0%, 6/15/2016

345,000

365,269

MetroPCS Wireless, Inc., 144A, 9.25%, 11/1/2014

745,000

778,525

Nextel Communications, Inc., Series D, 7.375%, 8/1/2015

4,095,000

4,199,115

Qwest Corp., 7.25%, 9/15/2025

1,395,000

1,433,362

Rural Cellular Corp., 9.875%, 2/1/2010 (b)

925,000

983,969

SunCom Wireless Holdings, Inc., 8.5%, 6/1/2013 (b)

1,075,000

1,029,313

Ubiquitel Operating Co., 9.875%, 3/1/2011

615,000

664,200

US Unwired, Inc., Series B, 10.0%, 6/15/2012

1,075,000

1,182,500

Windstream Corp., 144A, 8.625%, 8/1/2016

45,000

49,275

 

18,184,349

Utilities 8.4%

AES Corp., 144A, 8.75%, 5/15/2013

5,790,000

6,202,537

Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/2012

3,885,000

4,263,787

CMS Energy Corp., 8.5%, 4/15/2011

3,270,000

3,556,125

Mirant Americas Generation LLC, 8.3%, 5/1/2011

365,000

374,125

Mirant North America LLC, 7.375%, 12/31/2013

360,000

365,400

Mission Energy Holding Co., 13.5%, 7/15/2008

4,680,000

5,159,700

NRG Energy, Inc.:

 

 

7.25%, 2/1/2014

1,560,000

1,571,700

7.375%, 2/1/2016

3,155,000

3,170,775

PSE&G Energy Holdings LLC, 10.0%, 10/1/2009

4,095,000

4,484,025

Regency Energy Partners LP, 144A, 8.375%, 12/15/2013

1,040,000

1,042,600

Sierra Pacific Resources:

 

 

6.75%, 8/15/2017

1,160,000

1,137,740

8.625%, 3/15/2014 (b)

200,000

214,732

 

31,543,246

Total Corporate Bonds (Cost $306,754,613)

307,123,471

 

 

Principal Amount ($)(a)

Value ($)

 

 

Foreign Bonds — US$ Denominated 11.7%

Consumer Discretionary 2.0%

Dollarama Group Holdings LP, 144A, 11.12%**, 8/15/2012

495,000

491,288

Jafra Cosmetics International, Inc., 10.75%, 5/15/2011

2,825,000

3,019,219

Quebecor World, Inc., 144A, 9.75%, 1/15/2015

495,000

498,094

Shaw Communications, Inc., 8.25%, 4/11/2010

655,000

695,937

Telenet Group Holding NV, 144A, Step-up Coupon, 0% to 12/15/2008, 11.5% to 6/15/2014

2,482,000

2,236,902

Unity Media GmbH, 144A, 10.375%, 2/15/2015 (b)

410,000

398,213

Vitro, SA de CV, Series A, 11.75%, 11/1/2013

225,000

246,375

 

7,586,028

Energy 0.4%

OPTI Canada, Inc., 144A, 8.25%, 12/15/2014

595,000

611,363

Secunda International Ltd., 13.374%**, 9/1/2012

890,000

920,037

 

1,531,400

Financials 1.6%

Conproca SA de CV, Series REG S, 12.0%, 6/16/2010

2,685,000

3,101,175

Doral Financial Corp., 6.204%**, 7/20/2007 (b)

2,115,000

1,922,015

Inmarsat Finance II PLC, Step-up Coupon, 0% to 11/15/2008, 10.375% to 11/15/2012

590,000

543,537

New ASAT (Finance) Ltd., 9.25%, 2/1/2011

575,000

477,250

 

6,043,977

Health Care 0.4%

Biovail Corp., 7.875%, 4/1/2010

1,535,000

1,567,619

Industrials 1.4%

Bombardier, Inc., 144A, 8.0%, 11/15/2014

280,000

287,000

Kansas City Southern de Mexico:

 

 

144A, 7.625%, 12/1/2013

1,345,000

1,345,000

9.375%, 5/1/2012

1,220,000

1,302,350

12.5%, 6/15/2012

1,026,000

1,108,080

Navios Maritime Holdings, 144A, 9.5%, 12/15/2014

695,000

684,742

Stena AB, 9.625%, 12/1/2012

480,000

511,200

Supercanal Holding SA, Series REG S, 11.5%, 5/15/2005*

100,000

15,000

 

5,253,372

Information Technology 0.3%

Seagate Technology HDD Holdings, 6.8%, 10/1/2016

950,000

954,750

Materials 2.0%

Cascades, Inc., 7.25%, 2/15/2013

1,471,000

1,467,322

ISPAT Inland ULC, 9.75%, 4/1/2014

1,820,000

2,033,850

Novelis, Inc., Step-up Coupon, 8.25% to 1/4/2007, 7.25% to 2/15/2015

2,430,000

2,351,025

Rhodia SA:

 

 

8.875%, 6/1/2011

581,000

612,955

10.25%, 6/1/2010

640,000

729,600

 

Principal Amount ($)(a)

Value ($)

 

 

Tembec Industries, Inc., 8.625%, 6/30/2009

690,000

472,650

 

7,667,402

Sovereign Bonds 0.4%

Federative Republic of Brazil, 8.875%, 10/14/2019 (b)

605,000

738,100

Republic of Argentina, 5.59%**, 8/3/2012 (PIK)

1,200,000

850,387

 

1,588,487

Telecommunication Services 3.2%

Cell C Property Ltd., 144A, 11.0%, 7/1/2015

1,950,000

1,828,125

Embratel, Series B, 11.0%, 12/15/2008 (b)

212,000

232,670

Grupo Iusacell SA de CV, Series B, 10.0%, 7/15/2004*

285,000

282,150

Intelsat Bermuda Ltd., 144A, 11.25%, 6/15/2016

895,000

982,262

Intelsat Ltd., 5.25%, 11/1/2008

895,000

870,388

Millicom International Cellular SA, 10.0%, 12/1/2013

465,000

506,850

Mobifon Holdings BV, 12.5%, 7/31/2010

2,251,000

2,487,387

Nortel Networks Ltd.:

 

 

144A, 9.624%**, 7/15/2011

1,790,000

1,886,212

144A, 10.125%, 7/15/2013

820,000

885,600

144A, 10.75%, 7/15/2016

695,000

760,156

Stratos Global Corp., 9.875%, 2/15/2013

1,135,000

1,095,275

 

11,817,075

Total Foreign Bonds — US$ Denominated (Cost $43,829,020)

44,010,110

 

Foreign Bonds — Non US$ Denominated 1.5%

Consumer Discretionary 0.4%

Cirsa Capital Luxembourg, 144A, 7.875%, 7/15/2012 EUR

385,000

485,553

Unity Media GmbH, 144A, 8.75%, 2/15/2015 EUR

905,000

1,161,792

 

1,647,345

Financials 0.6%

Codere Finance Luxembourg SA, 144A, 8.25%,
6/15/2015 EUR

445,000

621,199

Louis No. 1 PLC:

 

 

144A, 8.5%, 12/1/2014 EUR

500,000

660,025

144A, 10.0%, 12/1/2016 EUR

295,000

391,362

Ono Finance II, 144A, 8.0%, 5/16/2014 EUR

435,000

591,448

 

2,264,034

Materials 0.2%

Rhodia SA, 144A, 6.242%**, 10/15/2013 EUR

640,000

844,410

Sovereign Bonds 0.3%

Republic of Argentina, 7.82%, 12/31/2033 (PIK) EUR

706,205

979,304

Total Foreign Bonds — Non US$ Denominated (Cost $5,428,771)

5,735,093

 


Shares

Value ($)

 

 

Preferred Stocks 0.0%

ION Media Networks, Inc. 14.25%, (PIK) (Cost $9,006)

1

7,450

 

Principal Amount ($)(a)

Value ($)

 

 

Loan Participation 0.2%

Alliance Mortgage Cycle Loan, LIBOR plus 7.25%, 12.65%**, 6/4/2010 (Cost $712,500)

712,500

712,500

 


Shares

Value ($)

 

 

Warrants 0.0%

Dayton Superior Corp. 144A, Expiration 6/15/2009*

95

0

DeCrane Aircraft Holdings, Inc. 144A, Expiration 9/30/2008*

1,350

0

TravelCenters of America, Inc., Expiration 5/1/2009*

345

8,625

Total Warrants (Cost $1,409)

8,625

 


Units

Value ($)

 

 

Other Investments 0.6%

Hercules, Inc., (Bond Unit), 6.5%, 6/30/2029

1,100,000

940,500

IdleAire Technologies Corp. (Bond Unit), 144A, Step-up Coupon, 0% to 6/15/2008, 13.0% to 12/15/2012

1,735,000

1,301,250

Total Other Investments (Cost $2,251,365)

2,241,750

 


Shares

Value ($)

 

 

Common Stocks 0.0%

GEO Specialty Chemicals, Inc.*

24,225

20,591

GEO Specialty Chemicals, Inc. 144A*

2,206

1,875

IMPSAT Fiber Networks, Inc.*

13,327

123,075

Total Common Stocks (Cost $1,058,657)

145,541

 

Convertible Preferred Stocks 0.1%

ION Media Networks, Inc.:

 

 

144A, 9.75% (PIK)

60

274,993

Series AI, 144A, 9.75% (PIK)

6

27,300

Total Convertible Preferred Stocks (Cost $455,025)

302,293

 

Securities Lending Collateral 10.6%

Daily Assets Fund Institutional, 5.34% (c) (d) (Cost $39,617,550)

39,617,550

39,617,550

 

Cash Equivalents 1.1%

Cash Management QP Trust, 5.46% (e) (Cost $4,049,599)

4,049,599

4,049,599

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $404,167,515)+

107.8

403,953,982

Other Assets and Liabilities, Net

(7.8)

(29,138,892)

Net Assets

100.0

374,815,090

+ The cost for federal income tax purposes was $404,356,452. At December 31, 2006, net unrealized depreciation for all securities based on tax cost was $402,470. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $6,330,191 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $6,732,661.
* Non-income producing security. In the case of a bond, generally denotes that the issuer has defaulted on the payment of principal or the interest or has filed for bankruptcy. The following table represents bonds that are in default:

Securities

Coupon

Maturity Date

Principal Amount

Acquisition Cost ($)

Value ($)

Congoleum Corp.

8.625%

8/1/2008

1,200,000

USD

1,114,956

1,140,000

Grupo Iusacell SA de CV

10.0%

7/15/2004

285,000

USD

182,087

282,150

Oxford Automotive, Inc.

12.0%

10/15/2010

1,962,795

USD

1,574,274

29,442

Radnor Holdings Corp.

11.0%

3/15/2010

265,000

USD

242,395

663

Supercanal Holding SA

11.5%

5/15/2005

100,000

USD

10,000

15,000

 

 

 

 

 

3,123,712

1,467,255

** Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury Bill rate. These securities are shown at their current rate as of December 31, 2006.
(a) Principal amount stated in US dollars unless otherwise noted.
(b) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $38,814,439 which is 10.4% of net assets.
(c) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(d) Represents collateral held in connection with securities lending.
(e) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

LIBOR: Represents the London InterBank Offered Rate.

PIK: Denotes that all or a portion of the income is paid in-kind.

At December 31, 2006, the open credit default swap contract purchased was as follows:

Effective/
Expiration Date

Notional Amount ($)

Cash Flows Paid by the Portfolio

Underlying Debt Obligation

Unrealized Appreciation ($)

9/27/2006 12/20/2011

3,500,000+

Fixed — 3.25%

Dow Jones CDX High Yield

103,778

Counterparty:
+ JPMorgan Chase

As of December 31, 2006, the Portfolio had the following open forward foreign currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement Date

 

Unrealized Appreciation ($)

EUR

795,000

 
 USD

1,062,812

 

2/12/2007

 

11,227

EUR

2,451,000

 
 USD

3,253,541

 

2/12/2007

 

11,486

Total unrealized appreciation

22,713

Contracts to Deliver

 

In Exchange For

 

Settlement Date

 

Unrealized Depreciation ($)

EUR

640,000

 
 USD

816,576

 

1/5/2007

 

(28,472)

EUR

100,000

 
 USD

126,119

 

1/12/2007

 

(5,968)

EUR

490,000

 
 USD

625,394

 

2/5/2007

 

(22,561)

EUR

305,000

 
 USD

389,607

 

2/9/2007

 

(13,780)

EUR

93,000

 
 USD

119,631

 

2/12/2007

 

(3,385)

Total unrealized depreciation

(74,166)

Currency Abbreviations

EUR Euro
USD US Dollar

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $360,500,366) — including $38,814,439 of securities loaned

$ 360,286,833

Investment in Daily Assets Fund Institutional (cost $39,617,550)*

39,617,550

Investment in Cash Management QP Trust (cost $4,049,599)

4,049,599

Total investments in securities, at value (cost $404,167,515)

403,953,982

Cash

3,431,545

Foreign currency, at value (cost $47,034)

47,278

Interest receivable

7,599,766

Receivable for Portfolio shares sold

21,450

Foreign taxes recoverable

779

Unrealized appreciation on forward foreign currency exchange contracts

22,713

Unrealized appreciation on credit default swap contracts

103,778

Other assets

10,843

Total assets

415,192,134

Liabilities

Payable for Portfolio shares redeemed

234,457

Payable upon return of securities loaned

39,617,550

Accrued management fee

188,848

Unrealized depreciation on forward foreign currency exchange contracts

74,166

Other accrued expenses and payables

262,023

Total liabilities

40,377,044

Net assets, at value

$ 374,815,090

Net Assets

Net assets consist of:
Undistributed net investment income

28,104,439

Net unrealized appreciation (depreciation) on:

Investments

(213,533)

Credit default swaps

103,778

Foreign currency related transactions

(46,802)

Accumulated net realized gain (loss)

(116,011,566)

Paid-in capital

462,878,774

Net assets, at value

$ 374,815,090

Class A

Net Asset Value, offering and redemption price per share ($321,548,895 ÷ 38,357,993 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 8.38

Class B

Net Asset Value, offering and redemption price per share ($53,266,195 ÷ 6,354,214 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 8.38

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income
Dividends

$ 14,868

Interest (net of foreign taxes withheld of $618)

31,393,163

Interest — Cash Management QP Trust

451,180

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

122,029

Total Income

31,981,240

Expenses:
Management fee

2,263,303

Custodian fees

30,922

Distribution service fees (Class B)

133,627

Record keeping fees (Class B)

75,618

Auditing

59,873

Legal

16,648

Trustees' fees and expenses

30,652

Reports to shareholders

190,761

Other

116,209

Total expenses before expense reductions

2,917,613

Expense reductions

(9,582)

Total expenses after expense reductions

2,908,031

Net investment income

29,073,209

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

(3,844,246)

Credit default swaps

73,879

Foreign currency related transactions

(470,784)

 

(4,241,151)

Net unrealized appreciation (depreciation) during the period on:
Investments

12,731,846

Credit default swaps

103,778

Foreign currency related transactions

(1,659)

 

12,833,965

Net gain (loss) on investment transactions

8,592,814

Net increase (decrease) in net assets resulting from operations

$ 37,666,023

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income

$ 29,073,209

$ 33,801,550

Net realized gain (loss) on investment transactions

(4,241,151)

1,281,093

Net unrealized appreciation (depreciation) on investment transactions during the period

12,833,965

(19,453,613)

Net increase (decrease) in net assets resulting from operations

37,666,023

15,629,030

Distributions to shareholders from:
Net investment income:

Class A

(26,233,542)

(33,565,659)

Class B

(4,096,501)

(5,270,980)

Portfolio share transactions:

Class A

Proceeds from shares sold

42,074,123

75,871,095

Reinvestment of distributions

26,233,542

33,565,659

Cost of shares redeemed

(96,640,530)

(139,459,552)

Net increase (decrease) in net assets from Class A share transactions

(28,332,865)

(30,022,798)

Class B

Proceeds from shares sold

8,449,167

14,544,739

Reinvestment of distributions

4,096,501

5,270,980

Cost of shares redeemed

(15,970,978)

(17,547,469)

Net increase (decrease) in net assets from Class B share transactions

(3,425,310)

2,268,250

Increase (decrease) in net assets

(24,422,195)

(50,962,157)

Net assets at beginning of period

399,237,285

450,199,442

Net assets at end of period (including undistributed net investment income of $28,104,439 and $29,781,622, respectively)

$ 374,815,090

$ 399,237,285

Other Information

Class A

Shares outstanding at beginning of period

41,769,600

44,826,321

Shares sold

5,241,451

9,379,235

Shares issued to shareholders in reinvestment of distributions

3,376,260

4,275,880

Shares redeemed

(12,029,318)

(16,711,836)

Net increase (decrease) in Class A shares

(3,411,607)

(3,056,721)

Shares outstanding at end of period

38,357,993

41,769,600

Class B

Shares outstanding at beginning of period

6,770,189

6,474,194

Shares sold

1,037,633

1,758,405

Shares issued to shareholders in reinvestment of distributions

525,192

669,756

Shares redeemed

(1,978,800)

(2,132,166)

Net increase (decrease) in Class B shares

(415,975)

295,995

Shares outstanding at end of period

6,354,214

6,770,189

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 8.23

$ 8.78

$ 8.43

$ 7.40

$ 8.13

Income (loss) from investment operations:

Net investment incomea

.62

.68

.67

.67

.75

Net realized and unrealized gain (loss) on investment transactions

.19

(.38)

.31

1.03

(.74)

Total from investment operations

.81

.30

.98

1.70

.01

Less distributions from:

Net investment income

(.66)

(.85)

(.63)

(.67)

(.74)

Net asset value, end of period

$ 8.38

$ 8.23

$ 8.78

$ 8.43

$ 7.40

Total Return (%)

10.47

3.89

12.42

24.62

(.30)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

322

344

393

413

329

Ratio of expenses (%)

.71

.70

.66

.67

.66

Ratio of net investment income (%)

7.73

8.27

8.11

8.62

10.07

Portfolio turnover rate (%)

93

100

162

165

138

a Based on average shares outstanding during the period.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 8.22

$ 8.77

$ 8.41

$ 7.39

$ 7.21

Income (loss) from investment operations:

Net investment incomeb

.59

.65

.64

.64

.31

Net realized and unrealized gain (loss) on investment transactions

.20

(.39)

.32

1.03

(.13)

Total from investment operations

.79

.26

.96

1.67

.18

Less distributions from:

Net investment income

(.63)

(.81)

(.60)

(.65)

—

Net asset value, end of period

$ 8.38

$ 8.22

$ 8.77

$ 8.41

$ 7.39

Total Return (%)

10.11

3.41

12.08

24.14

2.50**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

53

56

57

37

1

Ratio of expenses (%)

1.10

1.10

1.06

1.06

.92*

Ratio of net investment income (%)

7.34

7.87

7.71

8.23

8.78*

Portfolio turnover rate (%)

93

100

162

165

138

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS International Select Equity VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS International Select Equity VIP

[] DWS International Select Equity VIP — Class A

[] MSCI EAFE® + EMF Index

The MSCI EAFE® + EMF Index (Morgan Stanley Capital International Europe, Australasia, Far East and Emerging Markets Free Index) is an unmanaged index generally accepted as a benchmark for major overseas markets plus emerging markets. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14eo

 

Yearly periods ended December 31

 

Comparative Results

DWS International Select Equity VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$12,556

$17,002

$19,097

$20,137

Average annual total return

25.56%

19.35%

13.81%

7.25%

MSCI EAFE + EMF Index
 Growth of $10,000

$12,776

$18,034

$21,630

$22,404

Average annual total return

27.76%

21.72%

16.68%

8.40%

DWS International Select Equity VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$12,506

$16,799

$19,224

Average annual total return

 

25.06%

18.88%

15.65%

MSCI EAFE + EMF Index
 Growth of $10,000

 

$12,776

$18,034

$21,843

Average annual total return

 

27.76%

21.72%

18.96%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS International Select Equity VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,145.40

 

$ 1,143.50

 

Expenses Paid per $1,000*

$ 4.97

 

$ 7.02

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.57

 

$ 1,018.65

 

Expenses Paid per $1,000*

$ 4.69

 

$ 6.61

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS International Select Equity VIP

.92%

 

1.30%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS International Select Equity VIP

An environment characterized by strong corporate earnings, robust global growth and a high level of merger and acquisition activity helped propel the MSCI EAFE® + EMF Index to a US dollar return of 27.76% during 2006. For the 12 months ended December 31, 2006, the Portfolio had a return of 25.56% (Class A shares, unadjusted for contract charges), lagging the return of the index.

The largest contribution to the Portfolio's return came from stock selection in the telecommunications, consumer discretionary and health care sectors. Within telecommunications, the Portfolio benefited from the strong performance of Luxembourg-based Millicom International Cellular SA, which operates under the brand Tigo in 17 developing countries. In consumer discretionary, shares of Whitbread PLC — a U.K. operator of budget lodging, restaurants and fitness clubs — climbed to an all-time high. Also aiding performance was Greene King PLC, a U.K. brewer of beer and operator of tenanted pub houses. The company reported a strong increase in its first half profits as a warm U.K. summer spurred increased lager sales. Within health care, top contributors were Fresenius Medical Care AG & Co., a dialysis treatment provider based in Germany, and Denmark's Novo Nordisk AS, a world leader in diabetes treatments.

These contributions were offset by the Portfolio's underperformance in the industrials and financials sectors. With respect to the former, relative performance was hurt by mediocre results from Japan's Mitsubishi Corp.* and Brazil's Gol-Linhas Aereas Inteligentes SA, (ADR). With regard to the latter, the Portfolio's holdings in Japanese banks, including Mitsubishi UFJ Financial Group Inc.*, Nishi-Nippon City Bank Ltd.* and Credit Saison Co., Ltd.,* underperformed.

Matthias Knerr, CFA

Portfolio Manager
Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio's is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The MSCI EAFE® + EMF Index (Morgan Stanley Capital International Europe, Australasia, Far East and Emerging Markets Free Index) is an unmanaged index generally accepted as a benchmark for major overseas markets plus emerging markets. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates. Index returns assume reinvested dividends and, unlike Portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

* As of December 31, 2006, the positions were sold.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS International Select Equity VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

94%

99%

Preferred Stocks

3%

1%

Cash Equivalents

3%

—

 

100%

100%

Geographical Diversification (As a % of Common and Preferred Stocks)

12/31/06

12/31/05

 

 

 

Continental Europe

56%

48%

Japan

20%

23%

United Kingdom

15%

17%

Latin America

6%

3%

Asia (excluding Japan)

3%

6%

Australia

—

3%

 

100%

100%

Sector Diversification (As a % of Common and Preferred Stocks)

12/31/06

12/31/05

 

 

 

Financials

30%

30%

Consumer Discretionary

17%

17%

Health Care

12%

9%

Industrials

9%

10%

Information Technology

8%

6%

Energy

6%

11%

Telecommunications Services

6%

1%

Materials

5%

8%

Consumer Staples

5%

6%

Utilities

2%

2%

 

100%

100%

Asset allocation, geographical and sector diversifications are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 146. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS International Select Equity VIP

 


Shares

Value ($)

 

 

Common Stocks 93.9%

Austria 1.5%

Erste Bank der oesterreichischen Sparkassen AG (Cost $3,538,796)

58,900

4,499,555

Belgium 2.0%

KBC Groep NV (Cost $5,880,363)

47,900

5,863,366

Brazil 3.1%

Gol-Linhas Aereas Inteligentes SA (ADR) (Preferred) (a)

131,200

3,761,504

Petroleo Brasileiro SA (ADR)

51,000

5,252,490

(Cost $6,631,368)

9,013,994

China 1.0%

Shanghai Electric Group Co., Ltd. "H" (Cost $3,043,128)

7,397,600

3,093,804

Denmark 1.9%

Novo Nordisk AS "B" (Cost $4,171,149)

66,400

5,528,130

Finland 3.3%

Nokia Oyj

282,800

5,751,508

Nokian Renkaat Oyj (a)

199,500

4,086,562

(Cost $7,832,165)

9,838,070

France 4.3%

Societe Generale

42,361

7,167,184

Total SA

77,341

5,577,004

(Cost $8,282,245)

12,744,188

Germany 10.7%

Bayer AG

103,221

5,537,718

Commerzbank AG

81,279

3,084,560

E.ON AG

38,677

5,247,420

Fresenius Medical Care AG & Co.

35,653

4,737,333

Hypo Real Estate Holding AG

139,125

8,739,778

Merck KGaA

40,064

4,152,147

(Cost $20,197,946)

31,498,956

Greece 1.8%

National Bank of Greece SA (Cost $4,518,907)

114,000

5,235,996

Ireland 1.5%

Anglo Irish Bank Corp. PLC (Cost $2,784,801)

213,741

4,431,698

Italy 4.7%

Banca Italease

113,500

6,594,632

UniCredito Italiano SpA

820,900

7,175,423

(Cost $10,803,066)

13,770,055

Japan 19.1%

Canon, Inc.

164,500

9,316,898

Casio Computer Co., Ltd.

216,000

4,906,721

Daito Trust Construction Co., Ltd.

95,500

4,369,400

Eisai Co., Ltd.

93,000

5,114,225

Komatsu Ltd.

232,000

4,673,287

Mitsui Fudosan Co., Ltd.

286,000

6,995,218

ORIX Corp.

21,400

6,209,700

Sumitomo Corp.

313,000

4,666,810

 


Shares

Value ($)

 

 

Suzuki Motor Corp.

194,000

5,484,779

Yamaha Motor Co., Ltd.

145,800

4,589,846

(Cost $44,729,285)

56,326,884

Kazakhstan 0.6%

KazMunaiGas Exploration Production (GDR)* (Cost $1,115,568)

76,200

1,863,852

Korea 1.6%

Samsung Electronics Co., Ltd. (GDR), 144A (Cost $3,282,029)

14,690

4,833,010

Luxembourg 1.6%

Millicom International Cellular SA* (a) (Cost $2,728,825)

78,000

4,807,920

Mexico 2.9%

Fomento Economico Mexicano SA de CV (ADR)

41,300

4,780,888

Grupo Financiero Banorte SA de CV "O"

976,800

3,819,312

(Cost $6,583,386)

8,600,200

Norway 1.7%

Statoil ASA (a) (Cost $5,176,501)

190,600

5,024,961

Pakistan 0.5%

MCB Bank Ltd. (GDR) 144A (Cost $1,422,133)

79,387

1,428,966

Spain 2.8%

Telefonica SA (Cost $7,147,350)

387,645

8,226,367

Sweden 7.9%

Atlas Copco AB "B"

174,900

5,645,590

Rezidor Hotel Group AB*

621,500

5,356,232

Swedish Match AB

248,700

4,647,549

Tele2 AB "B"

215,800

3,142,599

Telefonaktiebolaget LM Ericsson "B"

1,100,700

4,435,526

(Cost $19,650,628)

23,227,496

Switzerland 4.6%

Compagnie Financiere Richemont AG "A" (Unit)

85,559

4,969,524

Lonza Group AG (Registered)

33,360

2,875,498

Roche Holding AG (Genusschein)

32,671

5,845,532

(Cost $9,565,392)

13,690,554

United Kingdom 14.8%

Aviva PLC

286,738

4,603,615

BHP Billiton PLC

328,559

6,070,075

Capita Group PLC

453,601

5,389,648

Greene King PLC

230,123

5,098,382

Hammerson PLC

102,221

3,147,796

Shire PLC

230,282

4,756,958

Standard Chartered PLC

189,991

5,522,127

Tesco PLC

510,397

4,033,262

Whitbread PLC

157,078

5,149,076

(Cost $38,138,420)

43,770,939

Total Common Stocks (Cost $217,223,451)

277,318,961

 


Shares

Value ($)

 

 

Preferred Stocks 3.1%

Germany

Fresenius AG

22,257

4,783,100

Porsche AG

3,473

4,417,185

Total Preferred Stocks (Cost $6,640,561)

9,200,285

 

Securities Lending Collateral 2.8%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $8,370,138)

8,370,138

8,370,138

 


Shares

Value ($)

 

 

Cash Equivalents 2.6%

Cash Management QP Trust, 5.46% (d) (Cost $7,611,107)

7,611,107

7,611,107

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $239,845,257)+

102.4

302,500,491

Other Assets and Liabilities, Net

(2.4)

(7,049,293)

Net Assets

100.0

295,451,198

* Non-income producing security.
+ The cost for federal income tax purposes was $246,522,161. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $55,978,330. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $62,051,478 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $6,073,148.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $8,172,045 which is 2.8% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

ADR: American Depositary Receipt

GDR: Global Depositary Receipt

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $223,864,012) — including $8,172,045 of securities loaned

$ 286,519,246

Investment in Daily Assets Fund Institutional (cost $8,370,138)*

8,370,138

Investment in Cash Management QP Trust (cost $7,611,107)

7,611,107

Total investments in securities, at value (cost $239,845,257)

302,500,491

Foreign currency, at value (cost $821,133)

820,658

Receivable for investments sold

870,195

Dividends receivable

363,221

Interest receivable

31,481

Receivable for Portfolio shares sold

61,151

Foreign taxes recoverable

124,869

Other assets

8,149

Total assets

304,780,215

Liabilities

Payable for investments purchased

138,611

Payable for Portfolio shares redeemed

469,618

Payable upon return of securities loaned

8,370,138

Accrued management fee

200,847

Other accrued expenses and payables

149,803

Total liabilities

9,329,017

Net assets, at value

$ 295,451,198

Net Assets

Net assets consist of:
Undistributed net investment income

1,329,997

Net unrealized appreciation (depreciation) on:

Investments

62,655,234

Foreign currency related transactions

17,908

Accumulated net realized gain (loss)

27,670,053

Paid-in capital

203,778,006

Net assets, at value

$ 295,451,198

Class A

Net Asset Value, offering and redemption price per share ($222,667,768 ÷ 13,653,834 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 16.31

Class B

Net Asset Value, offering and redemption price per share ($72,783,430 ÷ 4,475,081 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 16.26

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $632,837)

$ 6,560,131

Interest

12,602

Interest — Cash Management QP Trust

172,503

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

319,681

Total Income

7,064,917

Expenses:
Management fee

2,094,158

Custodian fees

157,859

Distribution service fees (Class B)

171,003

Record keeping fees (Class B)

86,025

Auditing

60,243

Legal

12,954

Trustees' fees and expenses

25,105

Reports to shareholders

81,147

Other

43,141

Total expenses before expense reductions

2,731,635

Expense reductions

(4,122)

Total expenses after expense reductions

2,727,513

Net investment income (loss)

4,337,404

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments (net of foreign taxes of $5,994)

51,886,972

Foreign currency related transactions

(158,457)

Net increase from payments by affiliates and net losses realized on trades executed incorrectly

—

 

51,728,515

Net unrealized appreciation (depreciation) during the period on:
Investments

6,799,480

Foreign currency related transactions

11,456

 

6,810,936

Net gain (loss) on investment transactions

58,539,451

Net increase (decrease) in net assets resulting from operations

$ 62,876,855

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 4,337,404

$ 3,609,139

Net realized gain (loss) on investment transactions

51,728,515

26,472,017

Net unrealized appreciation (depreciation) during the period on investment transactions

6,810,936

3,296,964

Net increase (decrease) in net assets resulting from operations

62,876,855

33,378,120

Distributions to shareholders from:
Net investment income:

Class A

(4,319,400)

(5,238,343)

Class B

(1,106,261)

(1,218,036)

Portfolio share transactions:

Class A

Proceeds from shares sold

19,462,653

24,909,113

Reinvestment of distributions

4,319,400

5,238,343

Cost of shares redeemed

(40,279,711)

(38,838,821)

Net increase (decrease) in net assets from Class A share transactions

(16,497,658)

(8,691,365)

Class B

Proceeds from shares sold

6,691,885

13,931,982

Reinvestment of distributions

1,106,261

1,218,036

Cost of shares redeemed

(11,527,517)

(5,723,561)

Net increase (decrease) in net assets from Class B share transactions

(3,729,371)

9,426,457

Increase (decrease) in net assets

37,224,165

27,656,833

Net assets at beginning of period

258,227,033

230,570,200

Net assets at end of period (including undistributed net investment income of $1,329,997 and $1,038,108, respectively)

$ 295,451,198

$ 258,227,033

Other Information

Class A

Shares outstanding at beginning of period

14,778,650

15,442,740

Shares sold

1,353,025

2,084,048

Shares issued to shareholders in reinvestment of distributions

298,301

457,897

Shares redeemed

(2,776,142)

(3,206,035)

Net increase (decrease) in Class A shares

(1,124,816)

(664,090)

Shares outstanding at end of period

13,653,834

14,778,650

Class B

Shares outstanding at beginning of period

4,725,198

3,923,204

Shares sold

460,794

1,162,087

Shares issued to shareholders in reinvestment of distributions

76,399

106,471

Shares redeemed

(787,310)

(466,564)

Net increase (decrease) in Class B shares

(250,117)

801,994

Shares outstanding at end of period

4,475,081

4,725,198

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 13.25

$ 11.91

$ 10.18

$ 7.96

$ 9.24

Income (loss) from investment operations:

Net investment income (loss)a

.24b

.20

.17

.10

.12

Net realized and unrealized gain (loss) on investment transactions

3.11

1.48

1.67

2.23

(1.36)

Total from investment operations

3.35

1.68

1.84

2.33

(1.24)

Less distributions from:

Net investment income

(.29)

(.34)

(.11)

(.11)

(.04)

Net asset value, end of period

$ 16.31

$ 13.25

$ 11.91

$ 10.18

$ 7.96

Total Return (%)

25.56

14.51

18.25

29.83

(13.48)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

223

196

184

147

120

Ratio of expenses (%)

.88

.87

.89

.94

.85

Ratio of net investment income (%)

1.65b

1.59

1.58

1.17

1.46

Portfolio turnover rate (%)

122

93

88

139

190

a Based on average shares outstanding during the period.
b Net investment income per share and the ratio of net investment income without non-recurring dividend income amounting to $0.20 per share and 1.39% of average daily net assets, respectively.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 13.21

$ 11.88

$ 10.15

$ 7.94

$ 8.98

Income (loss) from investment operations:

Net investment income (loss)b

.19c

.15

.13

.06

.02

Net realized and unrealized gain (loss) on investment transactions

3.09

1.47

1.67

2.24

(1.06)

Total from investment operations

3.28

1.62

1.80

2.30

(1.04)

Less distributions from:

Net investment income

(.23)

(.29)

(.07)

(.09)

—

Net asset value, end of period

$ 16.26

$ 13.21

$ 11.88

$ 10.15

$ 7.94

Total Return (%)

25.06

14.00

17.84

29.42

(11.58)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

73

62

47

18

.4

Ratio of expenses (%)

1.26

1.26

1.28

1.33

1.11*

Ratio of net investment income (%)

1.27c

1.20

1.19

.78

.54*

Portfolio turnover rate (%)

122

93

88

139

190

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Net investment income per share and the ratio of net investment income without non-recurring dividend income amounting to $0.15 per share and 1.01% of average daily net assets, respectively.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Janus Growth & Income VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. The Portfolio also invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for the 3-year and Life of Class periods for Class B shares reflect a waiver and/or expense reimbursement. Without this waiver/reimbursement, returns for Class B shares would have been lower.

Growth of an Assumed $10,000 Investment in DWS Janus Growth & Income VIP from 10/29/1999 to 12/31/2006

[] DWS Janus Growth & Income VIP — Class A

[] Russell 1000® Growth Index

The Russell 1000® Growth Index is an unmanaged index composed of common stocks of larger US companies with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14do

 

Yearly periods ended December 31

 

Comparative Results

DWS Janus Growth & Income VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$10,843

$13,556

$13,450

$12,315

Average annual total return

8.43%

10.67%

6.11%

2.95%

Russell 1000 Growth Index
 Growth of $10,000

$10,907

$12,205

$11,420

$8,203

Average annual total return

9.07%

6.87%

2.69%

-2.73%

DWS Janus Growth & Income VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$10,798

$13,400

$14,960

Average annual total return

 

7.98%

10.25%

9.37%

Russell 1000 Growth Index
 Growth of $10,000

 

$10,907

$12,205

$14,415

Average annual total return

 

9.07%

6.87%

8.47%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations October 29, 1999. Index returns began on October 31, 1999. Total returns would have been lower for the Life of Portfolio period for Class A shares if the Portfolio's expenses were not maintained.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

cInformation About Your Portfolio's Expenses

DWS Janus Growth & Income VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,062.40

 

$ 1,061.00

 

Expenses Paid per $1,000*

$ 4.42

 

$ 6.44

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.92

 

$ 1,018.95

 

Expenses Paid per $1,000*

$ 4.33

 

$ 6.31

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Janus Growth & Income VIP

.85%

 

1.24%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Janus Growth & Income VIP

The broad-market rally continued for much of the fourth quarter amid strong earnings reports, a plethora of merger and acquisition activity, and hope that the Federal Reserve's next monetary policy action could be easing. Despite some signs of moderating inflationary pressures and a steady labor market, concerns over the still-elevated level of inflation and worries about a housing-induced economic slowdown remained. DWS Janus Growth & Income VIP produced a total return of 8.43% for the 12-month period ending December 31, 2006 (Class A shares unadjusted for contract charges), slightly underperforming the 9.07% return of its benchmark, the Russell 1000® Growth Index.

Holdings within the information technology sector detracted the most from relative performance during the time period. An overweight position in the consumer discretionary sector contributed positively to the Portfolio during the period.1 Certain industrials picks also aided returns. Overweight exposure to energy and our underweighting within the consumer staples group helped to offset poor performance of some of our selections within those groups.

As challenges persist, the Portfolio Manager relies on in-depth, company-focused research in his efforts to attempt to generate favorable long-term results for shareholders.

Minyoung Sohn
Portfolio Manager

Janus Capital Management LLC, Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Risk Considerations

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. The Portfolio also invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the Portfolio, can decline and the investor can lose principal value. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Russell 1000 Growth Index is an unmanaged index composed of common stocks of larger US companies with higher price-to-book ratios and higher forecasted growth values. Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Janus Growth & Income VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

98%

89%

Cash Equivalents

2%

3%

Preferred Stocks

—

2%

Convertible Preferred Stocks

—

6%

 

100%

100%

Sector Diversification (As a % of Common and Preferred Stocks)

12/31/06

12/31/05

 

 

 

Information Technology

25%

28%

Energy

18%

18%

Consumer Discretionary

17%

11%

Financials

12%

13%

Health Care

11%

15%

Industrials

9%

8%

Consumer Staples

8%

7%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 156. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Janus Growth & Income VIP

 


Shares

Value ($)

 

 

Common Stocks 97.3%

Consumer Discretionary 16.5%

Hotels Restaurants & Leisure 3.5%

Boyd Gaming Corp. (a)

50,645

2,294,725

Four Seasons Hotels Ltd.

32,680

2,679,433

Harrah's Entertainment, Inc.

33,685

2,786,423

 

7,760,581

Household Durables 0.6%

NVR, Inc.*

2,245

1,448,025

Internet & Catalog Retail 0.8%

Amazon.com, Inc.* (a)

46,315

1,827,590

Leisure Equipment & Products 1.7%

Marvel Entertainment, Inc.* (a)

141,887

3,818,179

Media 5.0%

British Sky Broadcasting Group PLC

444,341

4,540,079

Clear Channel Outdoor Holdings, Inc. "A"*

20,000

558,200

Lamar Advertising Co. "A"*

49,205

3,217,515

XM Satellite Radio Holdings, Inc. "A"* (a)

200,000

2,890,000

 

11,205,794

Multiline Retail 1.0%

Nordstrom, Inc.

45,850

2,262,239

Specialty Retail 3.9%

Best Buy Co., Inc.

57,130

2,810,224

PETsMART, Inc.

90,380

2,608,367

Tiffany & Co.

84,170

3,302,831

 

8,721,422

Consumer Staples 7.4%

Food & Staples Retailing 3.1%

CVS Corp.

152,905

4,726,293

Whole Foods Market, Inc.

50,000

2,346,500

 

7,072,793

Food Products 0.3%

Archer-Daniels-Midland Co.

23,835

761,767

Household Products 2.6%

Procter & Gamble Co.

90,710

5,829,932

Tobacco 1.4%

Altria Group, Inc.

35,300

3,029,446

Energy 17.0%

Energy Equipment & Services 1.3%

Halliburton Co.

96,310

2,990,425

Oil, Gas & Consumable Fuels 15.7%

Apache Corp.

20,495

1,363,123

EnCana Corp.

116,118

5,335,622

EOG Resources, Inc.

18,040

1,126,598

ExxonMobil Corp.

73,395

5,624,259

Hess Corp.

120,739

5,985,032

Peabody Energy Corp.

42,410

1,713,788

Petro-Canada

82,744

3,388,094

Suncor Energy, Inc.

95,343

7,504,638

Valero Energy Corp.

64,890

3,319,773

 

35,360,927

 


Shares

Value ($)

 

 

Financials 11.4%

Commercial Banks 3.1%

Commerce Bancorp, Inc. (a)

81,535

2,875,739

US Bancorp.

112,657

4,077,057

 

6,952,796

Diversified Financial Services 5.9%

Citigroup, Inc.

139,708

7,781,736

JPMorgan Chase & Co.

114,180

5,514,894

 

13,296,630

Thrifts & Mortgage Finance 2.4%

Fannie Mae

92,065

5,467,740

Health Care 11.1%

Biotechnology 3.3%

Amylin Pharmaceuticals, Inc.* (a)

80,000

2,885,600

Celgene Corp.*

29,955

1,723,311

Genentech, Inc.*

30,000

2,433,900

Neurocrine Biosciences, Inc.* (a)

32,180

335,316

 

7,378,127

Health Care Equipment & Supplies 0.7%

Align Technology, Inc.* (a)

120,340

1,681,150

Health Care Providers & Services 2.3%

Coventry Health Care, Inc.*

102,685

5,139,384

Pharmaceuticals 4.8%

Roche Holding AG (Genusschein)

35,806

6,406,449

Sanofi-Aventis (a)

46,777

4,307,385

 

10,713,834

Industrials 9.2%

Aerospace & Defense 1.4%

Boeing Co.

34,845

3,095,630

Air Freight & Logistics 1.0%

United Parcel Service, Inc. "B"

31,630

2,371,617

Electrical Equipment 3.2%

Rockwell Automation, Inc.

63,155

3,857,508

Suntech Power Holdings Co., Ltd. (ADR)* (a)

100,000

3,401,000

 

7,258,508

Industrial Conglomerates 3.4%

General Electric Co.

204,105

7,594,747

Road & Rail 0.2%

Canadian National Railway Co.

11,275

485,163

Information Technology 24.7%

Communications Equipment 2.1%

Nokia Oyj (ADR)

119,320

2,424,582

QUALCOMM, Inc.

60,000

2,267,400

 

4,691,982

Computers & Peripherals 6.0%

Apple Computer, Inc.*

5,420

459,833

Dell, Inc.*

138,315

3,470,323

EMC Corp.*

494,245

6,524,034

Rackable Systems, Inc.* (a)

100,000

3,097,000

 

13,551,190

 


Shares

Value ($)

 

 

Internet Software & Services 4.9%

Google, Inc. "A"*

10,500

4,835,040

Yahoo!, Inc.*

240,985

6,154,757

 

10,989,797

Semiconductors & Semiconductor Equipment 10.1%

Advanced Micro Devices, Inc.*

343,330

6,986,766

NVIDIA Corp.*

111,494

4,126,393

Samsung Electronics Co., Ltd. (GDR), 144A

20,000

6,580,000

Spansion, Inc. "A"*

138,840

2,063,162

Texas Instruments, Inc.

104,300

3,003,840

 

22,760,161

Software 1.6%

Electronic Arts, Inc.*

70,480

3,549,373

Total Common Stocks (Cost $171,290,919)

219,066,949

 


Shares

Value ($)

 

 

Preferred Stocks 0.8%

Financials 0.8%

Diversified 0.8%

Allegro Invest Corp., SA, Series APPL, 144A, 9.08% (Cost $1,811,918)

22,453

1,850,826

 

Securities Lending Collateral 11.2%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $25,288,674)

25,288,674

25,288,674

 

Cash Equivalents 1.6%

Cash Management QP Trust, 5.46% (d) (Cost $3,492,359)

3,492,359

3,492,359

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $201,883,870)+

110.9

249,698,808

Other Assets and Liabilities, Net

(10.9)

(24,610,045)

Net Assets

100.0

225,088,763

* Non-income producing security.
+ The cost for federal income tax purposes was $202,144,695. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $47,554,113. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $52,138,256 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $4,584,143.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $24,437,431 which is 10.86% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

ADR: American Depositary Receipt

GDR: Global Depositary Receipt

As of December 31, 2006, the Portfolio had the following open foreign forward currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement Date

Unrealized
(Depreciation) ($)

CHF

1,355,000

 
 USD

1,112,936

 

1/11/2007

(262)

EUR

1,115,000

 
 USD

1,421,625

 

1/11/2007

(51,060)

CHF

925,000

 
 USD

756,553

 

3/14/2007

(7,616)

EUR

200,000

 
 USD

252,710

 

3/15/2007

(12,200)

Total net unrealized depreciation

(71,138)

Currency Abbreviations

CHF Swiss Franc
EUR Euro
USD United States Dollar

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $173,102,837) — including $24,437,431 of securities loaned

$ 220,917,775

Investments in Daily Asset Fund Institutional, (cost $25,288,674)*

25,288,674

Investment in Cash Management QP Trust (cost $3,492,359)

3,492,359

Total investments in securities, at value (cost $201,883,870)

249,698,808

Cash

30,852

Receivable for investments sold

783,120

Dividends receivable

237,125

Interest receivable

1,160

Receivable for Portfolio shares sold

10,276

Foreign taxes recoverable

838

Other assets

6,652

Total assets

250,768,831

Liabilities

Unrealized depreciation on forward foreign currency exchange contracts

71,138

Payable upon return of securities loaned

25,288,674

Payable for Portfolio shares redeemed

98,884

Accrued management fee

139,168

Other accrued expenses and payables

82,204

Total liabilities

25,680,068

Net assets, at value

$ 225,088,763

Net Assets

Net assets consist of:
Undistributed net investment income

1,186,939

Net unrealized appreciation (depreciation) on:

Investments

47,814,938

Foreign currency related transactions

(71,383)

Accumulated net realized gain (loss)

(15,915,558)

Paid-in capital

192,073,827

Net assets, at value

$ 225,088,763

Class A

Net Asset Value, offering and redemption price per share ($193,435,557 ÷ 16,236,105 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.91

Class B

Net Asset Value, offering and redemption price per share ($31,653,206 ÷ 2,676,871 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.82

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $65,650)

$ 3,325,544

Interest — Cash Management QP Trust

140,124

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

32,611

Total Income

3,498,279

Expenses:
Management fee

1,719,994

Custodian and accounting fees

90,845

Distribution service fees (Class B)

81,050

Record keeping fees (Class B)

46,333

Auditing

46,252

Legal

8,324

Trustees' fees and expenses

23,010

Reports to shareholders

34,370

Other

26,252

Total expenses before expense reductions

2,076,430

Expense reductions

(4,833)

Total expenses after expense reductions

2,071,597

Net investment income (loss)

1,426,682

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

26,055,434

Foreign currency related transactions

(11,174)

 

26,044,260

Net unrealized appreciation (depreciation) during the period on:
Investments

(9,178,903)

Foreign currency related transactions

(206,407)

 

(9,385,310)

Net gain (loss) on investment transactions

16,658,950

Net increase (decrease) in net assets resulting from operations

$ 18,085,632

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 1,426,682

$ 828,820

Net realized gain (loss) on investment transactions

26,044,260

9,144,683

Net unrealized appreciation (depreciation) during the period on investment transactions

(9,385,310)

14,101,550

Net increase (decrease) in net assets resulting from operations

18,085,632

24,075,053

Distributions to shareholders from:
Net investment income:

Class A

(1,244,972)

(419,512)

Class B

(74,570)

—

Portfolio share transactions:

Class A

Proceeds from shares sold

11,754,230

11,053,339

Reinvestment of distributions

1,244,972

419,512

Cost of shares redeemed

(28,913,722)

(23,499,483)

Net increase (decrease) in net assets from Class A share transactions

(15,914,520)

(12,026,632)

Class B

Proceeds from shares sold

2,861,992

5,186,158

Reinvestment of distributions

74,570

—

Cost of shares redeemed

(6,002,097)

(3,183,678)

Net increase (decrease) in net assets from Class B share transactions

(3,065,535)

2,002,480

Increase (decrease) in net assets

(2,213,965)

13,631,389

Net assets at beginning of period

227,302,728

213,671,339

Net assets at end of period (including undistributed net investment income of $1,186,939 and $1,090,973, respectively)

$ 225,088,763

$ 227,302,728

Other Information

Class A

Shares outstanding at beginning of period

17,645,394

18,888,001

Shares sold

1,022,138

1,050,942

Shares issued to shareholders in reinvestment of distributions

107,325

43,249

Shares redeemed

(2,538,752)

(2,336,798)

Net increase (decrease) in Class A shares

(1,409,289)

(1,242,607)

Shares outstanding at end of period

16,236,105

17,645,394

Class B

Shares outstanding at beginning of period

2,946,169

2,758,937

Shares sold

250,333

500,557

Shares issued to shareholders in reinvestment of distributions

6,456

—

Shares redeemed

(526,087)

(313,325)

Net increase (decrease) in Class B shares

(269,298)

187,232

Shares outstanding at end of period

2,676,871

2,946,169

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002*

Selected Per Share Data

(Restated)

Net asset value, beginning of period

$ 11.05

$ 9.88

$ 8.86

$ 7.18

$ 9.05

Income (loss) from investment operations:

Net investment income (loss)a

.07

.05

.03

.03

.04

Net realized and unrealized gain (loss) on investment transactions

.86

1.14

.99

1.71

(1.86)

Total from investment operations

.93

1.19

1.02

1.74

(1.82)

Less distributions from:

Net investment income

(.07)

(.02)

—

(.06)

(.05)

Net asset value, end of period

$ 11.91

$ 11.05

$ 9.88

$ 8.86

$ 7.18

Total Return (%)

8.43

12.11

11.51

24.37

(20.22)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

193

195

187

189

167

Ratio of expenses (%)

.85

.92

1.06

1.07

1.04

Ratio of net investment income (loss) (%)

.68

.45

.34

.40

.54

Portfolio turnover rate (%)

44

32

52

46

57

a Based on average shares outstanding during the period.
* Subsequent to December 31, 2002, these numbers have been restated to reflect an adjustment to the value of a security as of December 31, 2002. The effect of this adjustment for the year ended December 31, 2002 was to increase the net asset value per share by $0.03. The total return was also adjusted from -20.56% to -20.22% in accordance with this change.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a***

Selected Per Share Data

(Restated)

Net asset value, beginning of period

$ 10.97

$ 9.82

$ 8.84

$ 7.17

$ 7.96

Income (loss) from investment operations:

Net investment income (loss)b

.03

.01

(.01)

.00c

.02

Net realized and unrealized gain (loss) on investment transactions

.85

1.14

.99

1.71

(.81)

Total from investment operations

.88

1.15

.98

1.71

(.79)

Less distributions from:

Net investment income

(.03)

—

—

(.04)

—

Net asset value, end of period

$ 11.82

$ 10.97

$ 9.82

$ 8.84

$ 7.17

Total Return (%)

7.98

11.71d

11.09

23.94

(9.92)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

32

32

27

15

.4

Ratio of expenses before expense reductions (%)

1.24

1.32

1.44

1.47

1.29*

Ratio of expenses after expense reductions (%)

1.24

1.30

1.44

1.47

1.29*

Ratio of net investment income (loss) (%)

.29

.07

(.04)

(.01)

.48*

Portfolio turnover rate (%)

44

32

52

46

57

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Amount is less than $.005 per share.
d Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
*** Subsequent to December 31, 2002, these numbers have been restated to reflect an adjustment to the value of a security as of December 31, 2002. The effect of this adjustment for the year ended December 31, 2002 was to increase the net asset value per share by $0.03. The total return was also adjusted from -10.30% to -9.92% in accordance with this change.

Performance Summary December 31, 2006

DWS Large Cap Value VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio is subject to stock market risk. It focuses its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns during 3-, 5- and 10-year period shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Large Cap Value VIP

[] DWS Large Cap Value VIP — Class A

[] Russell 1000® Value Index

The Russell 1000® Value Index is an unmanaged index, which consists of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted-growth values. Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14co

 

Yearly periods ended December 31

 

Comparative Results

DWS Large Cap Value VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$11,541

$12,953

$14,602

$24,117

Average annual total return

15.41%

9.01%

7.87%

9.20%

Russell 1000 Value Index
 Growth of $10,000

$12,225

$15,245

$16,746

$28,390

Average annual total return

22.25%

15.09%

10.86%

11.00%

DWS Large Cap Value VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$11,496

$12,804

$14,884

Average annual total return

 

14.96%

8.59%

9.25%

Russell 1000 Value Index
 Growth of $10,000

 

$12,225

$15,245

$17,586

Average annual total return

 

22.25%

15.09%

13.37%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Large Cap Value VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,110.70

 

$ 1,108.10

 

Expenses Paid per $1,000*

$ 4.52

 

$ 6.59

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.92

 

$ 1,018.95

 

Expenses Paid per $1,000*

$ 4.33

 

$ 6.31

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Large Cap Value VIP

.85%

 

1.24%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Large Cap Value VIP

During 2006, the US equity markets were strong with most posting double digit returns. Small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years. Comparison of Russell Growth and Russell Value indexes reveals that value stocks performed better than growth stocks in all size categories.

With a return of 15.41% (Class A shares, unadjusted for contract charges), the Portfolio performed in line with the S&P 500® Index, which returned 15.79%, but underperformed its other benchmark, the Russell 1000® Value Index, which posted a return of 22.25%. The significantly higher return of the Russell 1000 Value Index resulted from the benchmark's mid cap bias and outsized weights of selected mega caps which did well.

All 10 industry sectors within the S&P 500 Index and the Russell 1000 Value Index had positive performance. In both indexes, the strongest sector was telecommunication services, while the weakest was health care. Several of the holdings that contributed most to the Portfolio's performance were in the energy sector; these include Marathon Oil Corp.*, Chevron Corp. and Baker Hughes, Inc. Also positive was the Portfolio's position in the financials sector where holdings that performed particularly well include Morgan Stanley, Bear Stearns Cos.*, JPMorgan Chase & Co. and US Bancorp. In the health care sector, the Portfolio's performance relative to its benchmarks benefited from not owning some of the weakest stocks. The Portfolio's positioning in information technology detracted from performance, particularly an overweight in Intel Corp., which dropped on disappointing earnings and investor concerns regarding increased competition in semiconductors.1 Also negative was a position in Analog Devices Inc.*, which has been sold on fundamental concerns.

The following person will handle the day-to-day management of the portfolio through February 4, 2007.

David Hone, CFA
Portfolio Manager

Effective February 5, 2007, the following individual will handle the day-to-day management of the portfolio.

Thomas Schuessler, PhD
Portfolio Manager

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

The Portfolio is subject to stock market risk. It focuses its investments on certain economic sectors, thereby increasing its vulnerability to any single economic, political or regulatory development. This may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Value Index is an unmanaged index that consists of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values.

The Standard & Poor's 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.
* As of December 31, 2006, the positions were sold.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Large Cap Value VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

96%

95%

Cash Equivalents

4%

5%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Financials

33%

25%

Energy

19%

16%

Information Technology

10%

20%

Industrials

9%

9%

Health Care

8%

7%

Consumer Discretionary

7%

7%

Consumer Staples

5%

6%

Telecommunication Services

4%

3%

Materials

4%

3%

Utilities

1%

4%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 167. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Large Cap Value VIP

 


Shares

Value ($)

 

 

Common Stocks 96.2%

Consumer Discretionary 7.1%

Media 0.1%

Idearc, Inc.*

7,185

205,850

Multiline Retail 2.2%

Federated Department Stores, Inc.

112,300

4,281,999

Target Corp.

46,600

2,658,530

 

6,940,529

Specialty Retail 4.8%

Best Buy Co., Inc.

77,200

3,797,468

Lowe's Companies, Inc.

152,200

4,741,030

Staples, Inc.

160,100

4,274,670

TJX Companies, Inc.

91,600

2,612,432

 

15,425,600

Consumer Staples 5.0%

Beverages 1.7%

Coca-Cola Co.

108,700

5,244,775

Food Products 1.5%

General Mills, Inc.

81,100

4,671,360

Household Products 1.8%

Colgate-Palmolive Co.

88,200

5,754,168

Energy 17.8%

Energy Equipment & Services 6.3%

Baker Hughes, Inc.

65,300

4,875,298

BJ Services Co.

161,800

4,743,976

ENSCO International, Inc.

101,300

5,071,078

Schlumberger Ltd.

81,300

5,134,908

 

19,825,260

Oil, Gas & Consumable Fuels 11.5%

Anadarko Petroleum Corp.

104,800

4,560,896

Apache Corp.

23,700

1,576,287

BP PLC (ADR)

65,900

4,421,890

Chevron Corp.

85,200

6,264,756

ConocoPhillips

75,000

5,396,250

Devon Energy Corp.

67,700

4,541,316

ExxonMobil Corp.

123,000

9,425,490

 

36,186,885

Financials 31.3%

Capital Markets 3.9%

Lehman Brothers Holdings, Inc.

71,000

5,546,520

Morgan Stanley

43,000

3,501,490

The Goldman Sachs Group, Inc.

16,100

3,209,535

 

12,257,545

Commercial Banks 10.2%

National City Corp.

163,900

5,992,184

Regions Financial Corp.

63,901

2,389,898

SunTrust Banks, Inc.

24,200

2,043,690

US Bancorp.

167,500

6,061,825

Wachovia Corp.

170,100

9,687,195

Wells Fargo & Co.

169,000

6,009,640

 

32,184,432

Diversified Financial Services 10.6%

Bank of America Corp.

213,926

11,421,509

 


Shares

Value ($)

 

 

Citigroup, Inc.

224,500

12,504,650

JPMorgan Chase & Co.

195,200

9,428,160

 

33,354,319

Insurance 4.9%

Aflac, Inc.

70,700

3,252,200

American International Group, Inc.

118,100

8,463,046

Hartford Financial Services Group, Inc.

41,200

3,844,372

 

15,559,618

Thrifts & Mortgage Finance 1.7%

Washington Mutual, Inc.

113,700

5,172,213

Health Care 7.6%

Health Care Equipment & Supplies 2.0%

Baxter International, Inc.

133,800

6,206,981

Pharmaceuticals 5.6%

Abbott Laboratories

85,300

4,154,963

Johnson & Johnson

67,300

4,443,146

Pfizer, Inc.

202,800

5,252,520

Wyeth

74,700

3,803,724

 

17,654,353

Industrials 9.0%

Aerospace & Defense 3.0%

Honeywell International, Inc.

65,800

2,976,792

L-3 Communications Holdings, Inc.

42,700

3,492,006

United Technologies Corp.

49,400

3,088,488

 

9,557,286

Industrial Conglomerates 1.1%

General Electric Co.

90,500

3,367,505

Machinery 3.7%

Dover Corp.

32,500

1,593,150

Illinois Tool Works, Inc.

103,000

4,757,570

Ingersoll-Rand Co., Ltd. "A"

133,400

5,219,942

 

11,570,662

Road & Rail 1.2%

Burlington Northern Santa Fe Corp.

51,000

3,764,310

Information Technology 9.2%

Communications Equipment 2.9%

Cisco Systems, Inc.*

118,000

3,224,940

Harris Corp.

52,800

2,421,408

Nokia Oyj (ADR)

175,600

3,568,192

 

9,214,540

Computers & Peripherals 1.1%

Hewlett-Packard Co.

82,697

3,406,289

Semiconductors & Semiconductor Equipment 3.3%

Applied Materials, Inc.

173,900

3,208,455

Intel Corp.

256,700

5,198,175

Texas Instruments, Inc.

71,800

2,067,840

 

10,474,470

Software 1.9%

Symantec Corp.*

282,500

5,890,125

 


Shares

Value ($)

 

 

Materials 3.8%

Chemicals 2.6%

Dow Chemical Co.

115,300

4,605,082

E.I. du Pont de Nemours & Co.

73,700

3,589,927

 

8,195,009

Containers & Packaging 1.2%

Sonoco Products Co.

104,500

3,977,270

Telecommunication Services 4.2%

Diversified Telecommunication Services

AT&T, Inc.

158,600

5,669,950

Verizon Communications, Inc.

206,500

7,690,060

 

13,360,010

 


Shares

Value ($)

 

 

Utilities 1.2%

Electric Utilities

FPL Group, Inc.

68,100

3,706,003

Total Common Stocks (Cost $248,831,677)

303,127,367

 

Cash Equivalents 3.9%

Cash Management QP Trust, 5.46% (a) (Cost $12,210,507)

12,210,507

12,210,507

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $261,042,184)+

100.1

315,337,874

Other Assets and Liabilities, Net

(0.1)

(426,256)

Net Assets

100.0

314,911,618

* Non-income producing security.
+ The cost for federal income tax purposes was $262,783,940. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $52,553,934. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $56,434,606 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $3,880,672.
(a) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $248,831,677)

$ 303,127,367

Investment in Cash Management QP Trust (cost $12,210,507)

12,210,507

Total investments in securities, at value (cost $261,042,184)

315,337,874

Receivable for investments sold

487,162

Dividends receivable

350,094

Interest receivable

45,006

Receivable for Portfolio shares sold

53,257

Foreign taxes recoverable

114

Other assets

6,548

Total assets

316,280,055

Liabilities

Payable for Portfolio shares redeemed

62,905

Payable for investments purchased

471,491

Due to custodian

487,315

Accrued management fee

200,884

Other accrued expenses and payables

145,842

Total liabilities

1,368,437

Net assets, at value

$ 314,911,618

Net Assets

Net assets consist of:
Undistributed net investment income

5,231,439

Net unrealized appreciation (depreciation) on investments

54,295,690

Accumulated net realized gain (loss)

9,489,671

Paid-in capital

245,894,818

Net assets, at value

$ 314,911,618

Class A

Net Asset Value, offering and redemption price per share ($274,866,571 ÷ 15,303,964 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 17.96

Class B

Net Asset Value, offering and redemption price per share ($40,045,047 ÷ 2,232,310 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 17.94

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $41,515)

$ 7,100,161

Interest — Cash Management QP Trust

712,367

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

16,879

Other income**

139,707

Total Income

7,969,114

Expenses:
Management fee

2,335,628

Custodian fees

18,323

Distribution service fees (Class B)

100,296

Record keeping fees (Class B)

55,116

Auditing

49,475

Legal

12,732

Trustees' fees and expenses

25,235

Reports to shareholders

118,105

Other

21,070

Total expenses before expense reductions

2,735,980

Expense reductions

(4,673)

Total expenses after expense reductions

2,731,307

Net investment income (loss)

5,237,807

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

25,014,587

Net unrealized appreciation (depreciation) during the period on investments

14,129,866

Net gain (loss) on investment transactions

39,144,453

Net increase (decrease) in net assets resulting from operations

$ 44,382,260

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

 2006

2005

Operations:
Net investment income (loss)

$ 5,237,807

$ 4,890,927

Net realized gain (loss) on investment transactions

25,014,587

11,041,062

Net unrealized appreciation (depreciation) during the period on investment transactions

14,129,866

(10,143,924)

Net increase (decrease) in net assets resulting from operations

44,382,260

5,788,065

Distributions to shareholders from:
Net investment income:

Class A

(4,273,682)

(4,761,672)

Class B

(482,902)

(575,737)

Portfolio share transactions:

Class A

Proceeds from shares sold

20,402,810

36,091,471

Reinvestment of distributions

4,273,682

4,761,672

Cost of shares redeemed

(52,316,305)

(47,266,915)

Net increase (decrease) in net assets from Class A share transactions

(27,639,813)

(6,413,772)

Class B

Proceeds from shares sold

1,368,796

4,068,880

Reinvestment of distributions

482,902

575,737

Cost of shares redeemed

(7,365,382)

(4,564,820)

Net increase (decrease) in net assets from Class B share transactions

(5,513,684)

79,797

Increase (decrease) in net assets

6,472,179

(5,883,319)

Net assets at beginning of period

308,439,439

314,322,758

Net assets at end of period (including undistributed net investment income of $5,231,439 and $4,759,802, respectively)

$ 314,911,618

$ 308,439,439

Other Information

Class A

Shares outstanding at beginning of period

16,949,748

17,350,180

Shares sold

1,230,380

2,330,962

Shares issued to shareholders in reinvestment of distributions

263,158

312,241

Shares redeemed

(3,139,322)

(3,043,635)

Net increase (decrease) in Class A shares

(1,645,784)

(400,432)

Shares outstanding at end of period

15,303,964

16,949,748

Class B

Shares outstanding at beginning of period

2,564,460

2,560,016

Shares sold

81,671

261,484

Shares issued to shareholders in reinvestment of distributions

29,681

37,679

Shares redeemed

(443,502)

(294,719)

Net increase (decrease) in Class B shares

(332,150)

4,444

Shares outstanding at end of period

2,232,310

2,564,460

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 15.81

$ 15.79

$ 14.57

$ 11.24

$ 13.40

Income (loss) from investment operations:

Net investment income (loss)a

.29c

.26

.27

.24

.23

Net realized and unrealized gain (loss) on investment transactions

2.12

.04

1.18

3.33

(2.20)

Total from investment operations

2.41

.30

1.45

3.57

(1.97)

Less distributions from:

Net investment income

(.26)

(.28)

(.23)

(.24)

(.19)

Net asset value, end of period

$ 17.96

$ 15.81

$ 15.79

$ 14.57

$ 11.24

Total Return (%)

15.41c

1.97b

10.07

32.60

(14.98)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

275

268

274

263

215

Ratio of expenses before expense reductions (%)

.83

.80

.80

.80

.79

Ratio of expenses after expense reductions (%)

.83

.80

.80

.80

.79

Ratio of net investment income (loss) (%)

1.73c

1.64

1.84

1.94

1.84

Portfolio turnover rate (%)

76

64

40

58

84

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.
c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.04%. Excluding this non-recurring income, total return would have been 0.04% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 15.79

$ 15.77

$ 14.55

$ 11.23

$ 12.77

Income (loss) from investment operations:

Net investment income (loss)b

.23d

.19

.22

.18

.15

Net realized and unrealized gain (loss) on investment transactions

2.11

.05

1.17

3.35

(1.69)

Total from investment operations

2.34

.24

1.39

3.53

(1.54)

Less distributions from:

Net investment income

(.19)

(.22)

(.17)

(.21)

—

Net asset value, end of period

$ 17.94

$ 15.79

$ 15.77

$ 14.55

$ 11.23

Total Return (%)

14.96d

1.58c

9.65

32.19

(12.06)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

40

40

40

18

.5

Ratio of expenses before expense reductions (%)

1.21

1.21

1.18

1.19

1.04*

Ratio of expenses after expense reductions (%)

1.21

1.20

1.18

1.19

1.04*

Ratio of net investment income (loss) %)

1.35d

1.24

1.46

1.55

2.74*

Portfolio turnover rate (%)

76

64

40

58

84

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.04%. Excluding this non-recurring income, total return would have been 0.04% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Mid Cap Growth VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. It is nondiversified and can take larger positions in fewer companies, increasing its overall potential risk. Stocks of medium-sized companies involve greater risk than securities of larger, more established companies, as they often have limited product lines, markets or financial resources and may be subject to more-erratic and more-abrupt market movements. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Mid Cap Growth VIP from 5/1/1999 to 12/31/2006

[] DWS Mid Cap Growth VIP — Class A

[] Russell Midcap™ Growth Index

Russell Midcap™ Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000® Growth Index.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14bo

 

Yearly periods ended December 31

 

Comparative Results

DWS Mid Cap Growth VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$11,095

$13,263

$12,335

$12,831

Average annual total return

10.95%

9.87%

4.29%

3.31%

Russell Midcap Growth Index
 Growth of $10,000

$11,066

$14,325

$14,840

$14,632

Average annual total return

10.66%

12.73%

8.22%

5.09%

DWS Mid Cap Growth VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$11,055

$13,132

$16,649

Average annual total return

 

10.55%

9.51%

12.01%

Russell Midcap Growth Index
 Growth of $10,000

 

$11,066

$14,325

$18,482

Average annual total return

 

10.66%

12.73%

14.62%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 1999. Index returns began on April 30, 1999.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Mid Cap Growth VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,096.90

 

$ 1,094.70

 

Expenses Paid per $1,000*

$ 4.76

 

$ 6.76

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.67

 

$ 1,018.75

 

Expenses Paid per $1,000*

$ 4.58

 

$ 6.51

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Mid Cap Growth VIP

.90%

 

1.28%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio of any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Mid Cap Growth VIP

For the 12 months ended December 31, 2006, stocks posted mixed performance in the first half of the year, then ended the period strongly. The second quarter witnessed the 17th straight short-term interest rate hike by the US Federal Reserve Board (the Fed) to 5.25%, as well as a reversal of fortune in the equity markets, a stark contrast from strength during the first quarter. Economic activity was moderating, consumer spending had downshifted and some measures of inflation had edged up slightly. At its August meeting, the Fed decided to pause in raising short-term rates, as it felt that the lagged effects of its credit tightening and the ongoing contraction in the housing market would slow economic activity and ease strains on key economic resources. In the third quarter, stocks rallied based on receding commodity prices and declining long-term rates, then a fourth quarter rally led to double-digit equity market gains for the year. Energy prices remained low, inflation concerns were tame and the consensus of a soft landing paved the way for 2007.

For the annual period ending December 31, 2006, the Portfolio returned 10.95% (Class A shares, unadjusted for contract charges), outperforming the 10.66% return of the Russell Midcap™ Growth Index.

During the period, detractors from performance included stock selection in the consumer discretionary and financials sectors as well as underweights to materials and information technology and an overweight to energy relative to the Portfolio benchmark.1 Positive contributors to performance included stock selection in the health care, industrials, and information technology sectors. We continue to maintain our long-term perspective, investing in quality mid-cap growth stocks.

Robert S. Janis Joseph Axtell
Lead Portfolio Manager Portfolio Manager

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. It is nondiversified and can take larger positions in fewer companies, increasing its overall potential risk. Stocks of medium-sized companies involve greater risk than securities of larger, more established companies, as they often have limited product lines, markets or financial resources and may be subject to more-erratic and more-abrupt market movements. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The Russell Midcap Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the Portfolio holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Portfolio holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Mid Cap Growth VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

98%

97%

Cash Equivalents

2%

2%

Exchange Traded Funds

—

1%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Consumer Discretionary

24%

22%

Information Technology

18%

21%

Health Care

16%

22%

Industrials

14%

10%

Financials

12%

10%

Energy

11%

11%

Consumer Staples

2%

3%

Telecommunication Services

2%

1%

Materials

1%

—

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 178. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Mid Cap Growth VIP

 


Shares

Value ($)

 

 

Common Stocks 97.6%

Consumer Discretionary 23.1%

Hotels Restaurants & Leisure 1.1%

Melco PBL Entertainment (Macau) Ltd. (ADR)* (a)

31,300

665,438

Internet & Catalog Retail 4.7%

Coldwater Creek, Inc.* (a)

43,200

1,059,264

Nutri/System, Inc.* (a)

28,300

1,793,937

 

2,853,201

Media 1.1%

XM Satellite Radio Holdings, Inc. "A"* (a)

45,200

653,140

Specialty Retail 6.9%

Abercrombie & Fitch Co. "A"

10,800

752,004

Guess?, Inc.*

20,400

1,293,972

Urban Outfitters, Inc.* (a)

94,200

2,169,426

 

4,215,402

Textiles, Apparel & Luxury Goods 9.3%

Coach, Inc.*

63,900

2,745,144

Polo Ralph Lauren Corp.

37,940

2,946,420

 

5,691,564

Consumer Staples 2.3%

Personal Products

Herbalife Ltd.*

35,100

1,409,616

Energy 10.7%

Energy Equipment & Services 4.3%

BJ Services Co.

19,250

564,410

Noble Corp.

17,470

1,330,340

Rowan Companies, Inc.

23,050

765,260

 

2,660,010

Oil, Gas & Consumable Fuels 6.4%

Peabody Energy Corp.

29,940

1,209,875

Southwestern Energy Co.*

37,300

1,307,365

Ultra Petroleum Corp.*

28,830

1,376,633

 

3,893,873

Financials 11.8%

Capital Markets 9.7%

Affiliated Managers Group, Inc.* (a)

22,310

2,345,451

E*TRADE Financial Corp.*

48,610

1,089,836

Jefferies Group, Inc.

46,500

1,247,130

Nuveen Investments "A"

23,900

1,239,932

 

5,922,349

Diversified Financial Services 2.0%

Nasdaq Stock Market, Inc.* (a)

39,600

1,219,284

Real Estate Investment Trusts 0.1%

DCT Industrial Trust, Inc. (REIT)*

6,400

75,520

Health Care 16.1%

Biotechnology 1.3%

Celgene Corp.*

14,280

821,528

 


Shares

Value ($)

 

 

Health Care Equipment & Supplies 3.2%

Hologic, Inc.*

15,100

713,928

Mentor Corp. (a)

25,300

1,236,411

 

1,950,339

Health Care Providers & Services 6.5%

AMERIGROUP Corp.*

37,580

1,348,746

DaVita, Inc.*

22,960

1,305,965

Pediatrix Medical Group, Inc.*

26,200

1,281,180

 

3,935,891

Health Care Technology 2.2%

Cerner Corp.* (a)

30,000

1,365,000

Life Sciences Tools & Services 2.9%

Thermo Fisher Scientific, Inc.*

38,820

1,758,158

Industrials 13.3%

Electrical Equipment 2.9%

Roper Industries, Inc. (a)

34,850

1,750,864

Machinery 9.1%

Joy Global, Inc.

29,590

1,430,381

Oshkosh Truck Corp.

36,780

1,780,888

Terex Corp.*

35,880

2,317,130

 

5,528,399

Trading Companies & Distributors 1.3%

WESCO International, Inc.*

13,800

811,578

Information Technology 18.1%

Communications Equipment 5.9%

Comverse Technologies, Inc.* (a)

87,290

1,842,692

F5 Networks, Inc.*

23,500

1,743,935

 

3,586,627

Computers & Peripherals 2.5%

Network Appliance, Inc.*

38,800

1,524,064

Internet Software & Services 4.9%

Akamai Technologies, Inc.* (a)

45,700

2,427,584

Digital River, Inc.* (a)

10,300

574,638

 

3,002,222

IT Services 1.6%

Cognizant Technology Solutions Corp. "A"*

12,650

976,074

Semiconductors & Semiconductor Equipment 3.2%

MEMC Electronic Materials, Inc.*

50,000

1,957,000

Materials 0.5%

Metals & Mining

Allegheny Technologies, Inc.

3,300

299,244

Telecommunication Services 1.7%

Wireless Telecommunication Services

NII Holdings, Inc.* (a)

15,860

1,022,017

Total Common Stocks (Cost $44,609,557)

59,548,402

 

Securities Lending Collateral 26.8%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $16,364,610)

16,364,610

16,364,610

 


Shares

Value ($)

 

 

Cash Equivalents 2.5%

Cash Management QP Trust, 5.46% (d) (Cost $1,509,632)

1,509,632

1,509,632

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $62,483,799)+

126.9

77,422,644

Other Assets and Liabilities, Net

(26.9)

(16,433,326)

Net Assets

100.0

60,989,318

* Non-income producing security.
+ The cost for federal income tax purposes was $62,525,621. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $14,897,023. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $15,397,684 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $500,661.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $15,835,868 which is 26.0% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

REIT: Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $44,609,557) — including $15,835,868 of securities loaned

$ 59,548,402

Investment in Daily Assets Fund Institutional (cost $16,364,610)*

16,364,610

Investment in Cash Management QP Trust (cost $1,509,632)

1,509,632

Total investments in securities, at value (cost $62,483,799)

77,422,644

Receivable for investments sold

19,959

Dividends receivable

8,813

Interest receivable

10,586

Other assets

1,770

Total assets

77,463,772

Liabilities

Payable for Portfolio shares redeemed

15,067

Payable upon return of securities loaned

16,364,610

Accrued management fee

3,059

Other accrued expenses and payables

91,718

Total liabilities

16,474,454

Net assets, at value

$ 60,989,318

Net Assets

Net assets consist of:
Accumulated net investment loss

(5,750)

Net unrealized appreciation (depreciation) on
investments

14,938,845

Accumulated net realized gain (loss)

(28,575,530)

Paid-in capital

74,631,753

Net assets, at value

$ 60,989,318

Class A

Net Asset Value, offering and redemption price per share ($53,071,342 ÷ 4,226,008 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.56

Class B

Net Asset Value, offering and redemption price per share ($7,917,976 ÷ 640,328 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.37

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends

$ 158,328

Interest — Cash Management QP Trust

77,264

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

14,989

Other income**

16,995

Total Income

267,576

Expenses:
Management fee

473,444

Custodian and accounting fees

67,937

Distribution service fees (Class B)

18,895

Record keeping fees (Class B)

10,269

Auditing

45,574

Legal

9,920

Trustees' fees and expenses

16,446

Reports to shareholders

34,160

Other

4,626

Total expenses before expense reductions

681,271

Expense reductions

(69,215)

Total expenses after expense reductions

612,056

Net investment income (loss)

(344,480)

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

4,409,781

Net unrealized appreciation (depreciation) during the period on investments

2,176,003

Net gain (loss) on investment transactions

6,585,784

Net increase (decrease) in net assets resulting from operations

$ 6,241,304

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ (344,480)

$ (292,729)

Net realized gain (loss) on investment transactions

4,409,781

6,195,328

Net unrealized appreciation (depreciation) during the period on investment transactions

2,176,003

2,483,401

Net increase (decrease) in net assets resulting from operations

6,241,304

8,386,000

Portfolio share transactions:

Class A

Proceeds from shares sold

5,059,680

10,629,646

Cost of shares redeemed

(14,794,831)

(14,069,195)

Net increase (decrease) in net assets from Class A share transactions

(9,735,151)

(3,439,549)

Class B

Proceeds from shares sold

1,920,284

1,213,427

Cost of shares redeemed

(1,540,560)

(1,408,796)

Net increase (decrease) in net assets from Class B share transactions

379,724

(195,369)

Increase (decrease) in net assets

(3,114,123)

4,751,082

Net assets at beginning of period

64,103,441

59,352,359

Net assets at end of period (including accumulated net investment loss of $5,750 and $4,048, respectively)

$ 60,989,318

$ 64,103,441

Other Information

Class A

Shares outstanding at beginning of period

5,056,911

5,401,258

Shares sold

418,748

1,010,050

Shares redeemed

(1,249,651)

(1,354,397)

Net increase (decrease) in Class A shares

(830,903)

(344,347)

Shares outstanding at end of period

4,226,008

5,056,911

Class B

Shares outstanding at beginning of period

612,639

634,195

Shares sold

159,745

115,791

Shares redeemed

(132,056)

(137,347)

Net increase (decrease) in Class B shares

27,689

(21,556)

Shares outstanding at end of period

640,328

612,639

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 11.32

$ 9.84

$ 9.46

$ 7.06

$ 10.22

Income (loss) from investment operations:

Net investment income (loss)a

(.06)c

(.05)

(.01)

(.05)

(.01)

Net realized and unrealized gain (loss) on investment transactions

1.30

1.53

.39

2.45

(3.11)

Total from investment operations

1.24

1.48

.38

2.40

(3.12)

Less distributions from:

Net investment income

—

—

—

—

(.04)

Net asset value, end of period

$ 12.56

$ 11.32

$ 9.84

$ 9.46

$ 7.06

Total Return (%)

10.95b,c

15.04b

4.02b

33.99b

(30.66)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

53

57

53

56

44

Ratio of expenses before expense reductions (%)

1.03

1.01

1.02

.98

.81

Ratio of expenses after expense reductions (%)

.93

.95

.95

.95

.81

Ratio of net investment income (loss) (%)

(.51)c

(.45)

(.11)

(.57)

(.19)

Portfolio turnover rate (%)

46

104

103

91

71

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.
c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.003 per share and an increase in the ratio of net investment income of 0.03%. Excluding this non-recurring income, total return would have been 0.03% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 11.19

$ 9.76

$ 9.42

$ 7.06

$ 7.43

Income (loss) from investment operations:

Net investment income (loss)b

(.10)d

(.09)

(.05)

(.09)

(.02)

Net realized and unrealized gain (loss) on investment transactions

1.28

1.52

.39

2.45

(.35)

Total from investment operations

1.18

1.43

.34

2.36

(.37)

Net asset value, end of period

$ 12.37

$ 11.19

$ 9.76

$ 9.42

$ 7.06

Total Return (%)

10.55c,d

14.65c

3.61c

33.43c

(4.98)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

8

7

6

4

.1

Ratio of expenses before expense reductions (%)

1.42

1.40

1.41

1.37

1.06*

Ratio of expenses after expense reductions (%)

1.29

1.32

1.34

1.34

1.06*

Ratio of net investment income (loss) (%)

(.87)d

(.82)

(.50)

(.96)

(.47)*

Portfolio turnover rate (%)

46

104

103

91

71

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.003 per share and an increase in the ratio of net investment income of 0.03%. Excluding this non-recurring income, total return would have been 0.03% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Moderate Allocation VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Diversification does not eliminate risk. The underlying portfolios invest in individual bonds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond investment, can decline and the investor can lose principal value. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

Portfolio returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Moderate Allocation VIP from 8/16/2004 to 12/31/2006

[] DWS Moderate Allocation VIP — Class B

[] Russell 1000® Index

The Russell 1000® Index is an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which measures the performance of the 3,000 largest US companies based on total market capitalization. The Russell 1000 Index represents approximately 92% of the total market capitalization of the Russell 3000 Index.

Index returns assume reinvestment dividends and unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k14ao

 

 

 

Comparative Results

DWS Moderate Allocation VIP

1-Year

Life of Portfolio*

Class B

Growth of $10,000

$11,093

$12,633

Average annual total return

10.93%

10.37%

Russell 1000 Index
 Growth of $10,000

$11,546

$13,642

Average annual total return

15.46%

14.24%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on August 16, 2004. Index returns began on August 31, 2004.

Information About Your Portfolio's Expenses

DWS Moderate Allocation VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In addition to the ongoing expenses which the Portfolio bears directly, the Portfolio's shareholders indirectly bear the expense of the Underlying DWS Portfolios in which the Portfolio invests. The Portfolio's estimated indirect expense from investing in the Underlying DWS Portfolios is based on its allocation of Underlying DWS Portfolios. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Direct Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,086.60

Expenses Paid per $1,000*

 

$ 3.05

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,022.28

Expenses Paid per $1,000*

 

$ 2.96

Direct Portfolio Expenses and Estimated Indirect Underlying DWS Portfolio Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,086.60

Expenses Paid per $1,000**

 

$ 6.63

Hypothetical 5% Portfolio Return

 

Class B

Beginning Account Value 7/1/06

 

$ 1,000.00

Ending Account Value 12/31/06

 

$ 1,018.85

Expenses Paid per $1,000**

 

$ 6.41

* Expenses are equal to the Portfolio's annualized expense ratio for the share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
** Expenses are equal to the Portfolio's annualized expense ratio for the class plus the estimated indirect expense from investing in underlying portfolios in which the Portfolio invests, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

 

Class B

Direct Portfolio Expense Ratio

 

.58%

Estimated Indirect Expenses of Underlying DWS Portfolios

 

.68%

Estimated Net Annual Portfolio and Underlying DWS Portfolios Expenses

 

1.26%

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Moderate Allocation VIP

The US economy posted positive growth for all four quarters of 2006, although growth slowed somewhat in the last half of the year. All major asset classes — equities, bonds and cash — had positive returns for the year. Most equity indexes had double digit returns, while bond returns, except for high yield, were in single digits. Within the equity market, small-cap stocks (as measured by the Russell 2000® Index) performed better than large-cap stocks (as measured by the Russell 1000® Index), as they have for several years. Comparison of Russell Growth and Russell Value indexes reveals that value stocks performed better than growth stocks in all size categories.

For the 12 months ended December 31, 2006, the DWS Moderate Allocation VIP had a return of 10.93% (Class B shares, unadjusted for contract charges). The Portfolio's benchmark, the Russell 1000 Index, returned 15.46% for the same period. Since this Portfolio invests in stock and bond portfolios in several different categories, performance is analyzed by comparing the Portfolio's return with indexes that represent each asset class. Since this Portfolio invests in a blend of equity and bond portfolios, its return was above that of its major bond benchmarks but below that of its equity benchmarks.

The Portfolio's allocation between equity and fixed income portfolios remained close to its target of 60% equity and 40% fixed income during 2006, but with equities slightly overweighted throughout the year.1 This overweight was positive for returns, as equities outperformed fixed income. The Portfolio's position in bonds detracted from performance relative to the equity benchmark. Positions in international equity portfolios contributed to absolute performance, since international equities (as measured by the MSCI EAFE Index) outperformed US equities.

In the fixed income portion of the Portfolio, a position in high-yield bond portfolios and an overweight in cash equivalents, with a corresponding underweight in investment-grade portfolios, was positive for performance, as short-term interest rates continued to rise, providing attractive returns on cash equivalents.

Inna Okounkova Robert Wang
Portfolio Managers, Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Diversification does not eliminate risk. The underlying portfolios invest in individual bonds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond investment, can decline and the investor can lose principal value. In addition, the underlying portfolios are subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks. Derivatives may be more volatile and less liquid than traditional securities, and the Portfolio could suffer losses on its derivative positions. An investment in underlying money market investments is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any government agency. Although money market investments seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these investments. Please read this Portfolio's prospectus for specific details regarding its risk profile.

The MSCI EAFE (Morgan Stanley Capital International Europe-Australasia-Far East Index) is composed of approximately 1,100 companies in 20 countries in Europe and the Pacific Basin. The objective of the index is to reflect the movements of stock markets in these countries by representing an unmanaged (indexed) portfolio within each country. The index is calculated in US dollars and is constructed to represent about 60% of market capitalization in each country.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index

1 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Moderate Allocation VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Equity Funds

61%

60%

Fixed Income — Bond Funds

32%

29%

Fixed Income — Money Market Funds

7%

11%

 

100%

100%

Asset allocation is subject to change.

For more complete details about the Portfolio's investment portfolio, see page 188. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Moderate Allocation VIP

 


Shares

Value ($)

 

 

Equity Funds 60.6%

DWS Blue Chip VIP "A"

840,853

13,596,596

DWS Capital Growth VIP "A"

400,220

7,300,005

DWS Davis Venture Value VIP "A"

765,752

10,911,971

DWS Dreman High Return Equity VIP "A"

653,224

9,811,419

DWS Dreman Small Mid Cap Value VIP "A"

488,007

11,190,007

DWS Global Opportunities VIP "A"

5,496

99,702

DWS Global Thematic VIP "A"

1,224

21,285

DWS Growth & Income VIP "A"

1,808,397

19,783,868

DWS International Select Equity VIP "A"

2,424

39,538

DWS International VIP "A"

936,119

12,562,715

DWS Large Cap Value VIP "A"

1,032,426

18,542,372

DWS Mid Cap Growth VIP "A"

7,574

95,135

DWS RREEF Real Estate Securities VIP "A"

125,066

2,803,974

DWS Small Cap Growth VIP "A"

121,896

1,729,705

Total Equity Funds (Cost $95,855,490)

108,488,292

 

 


Shares

Value ($)

 

 

Fixed Income — Bond Funds 32.5%

DWS Core Fixed Income VIP "A"

4,476,966

53,096,816

DWS Government & Agency Securities VIP "A"

52

642

DWS High Income VIP "A"

482,240

4,041,168

DWS Strategic Income VIP "A"

83,353

983,571

Total Fixed Income — Bond Funds (Cost $56,804,818)

58,122,197

 

Fixed Income —Money Market Funds 7.0%

Cash Management QP Trust (Cost $12,422,512)

12,422,512

12,422,512

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $165,082,820)+

100.1

179,033,001

Other Assets and Liabilities, Net

(0.1)

(127,471)

Net Assets

100.0

178,905,530

+ The cost for federal income tax purposes was $165,717,808. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $13,315,193. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $13,315,193 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $0.

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in Underlying Affiliated Portfolios, at value (cost $152,660,308)

$ 166,610,489

Investment in Cash Management QP Trust (cost $12,422,512)

12,422,512

Total investments in securities, at value (cost $165,082,820)

179,033,001

Interest receivable

54,859

Other assets

4,970

Total assets

179,092,830

Liabilities

Payable for Portfolio shares redeemed

28,619

Accrued management fee

8,352

Other accrued expenses and payables

150,329

Total liabilities

187,300

Net assets, at value

$ 178,905,530

Net Assets

Net assets consist of:
Undistributed net investment income

3,893,238

Net unrealized appreciation (depreciation) on investments

13,950,181

Accumulated net realized gain (loss)

5,809,434

Paid-in capital

155,252,677

Net assets, at value

$ 178,905,530

Class B

Net Asset Value, offering and redemption price per share ($178,905,530 ÷ 14,409,131 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 12.42

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Income distributions from Underlying Affiliated Portfolios

3,244,960

Interest — Cash Management QP Trust

734,860

Total Income

3,979,820

Expenses:
Management fee

268,882

Custodian and accounting fees

50,645

Distribution service fees (Class B)

448,138

Record keeping fees (Class B)

253,352

Auditing

41,271

Legal

13,604

Trustees' fees and expenses

19,101

Reports to shareholders

10,124

Other

7,179

Total expenses before expense reductions

1,112,296

Expense reductions

(89,628)

Total expenses after expense reductions

1,022,668

Net investment income (loss)

2,957,152

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

3,450,247

Capital gain distributions from Underlying Affiliated Portfolios

3,472,555

 

6,922,802

Net unrealized appreciation (depreciation) during the period on investments

8,346,369

Net gain (loss) on investment transactions

15,269,171

Net increase (decrease) in net assets resulting from operations

$ 18,226,323

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ 2,957,152

$ 1,146,691

Net realized gain (loss) on investment transactions

6,922,802

1,514,979

Net unrealized appreciation (depreciation) during the period on investment transactions

8,346,369

4,147,334

Net increase (decrease) in net assets resulting from operations

18,226,323

6,809,004

Distributions to shareholders from:
Net investment income:

Class B

(1,569,948)

—

Net realized gains:

Class B

(1,255,958)

(98,563)

Portfolio share transactions:

Class B

Proceeds from shares sold

12,643,004

129,422,492

Reinvestment of distributions

2,825,906

98,563

Cost of shares redeemed

(23,279,005)

(3,450,269)

Net increase (decrease) in net assets from Class B share transactions

(7,810,095)

126,070,786

Increase (decrease) in net assets

7,590,322

132,781,227

Net assets at beginning of period

171,315,208

38,533,981

Net assets at end of period (including undistributed net investment income of $3,893,238 and $1,492,734, respectively)

$ 178,905,530

$ 171,315,208

Other Information

Class B

Shares outstanding at beginning of period

15,061,439

3,555,593

Shares sold

1,083,996

11,805,548

Shares issued to shareholders in reinvestment of distributions

244,244

9,229

Shares redeemed

(1,980,548)

(308,931)

Net increase (decrease) in Class B shares

(652,308)

11,505,846

Shares outstanding at end of period

14,409,131

15,061,439

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class B

Years Ended December 31,

2006

2005

2004a

Selected Per Share Data

Net asset value, beginning of period

$ 11.37

$ 10.84

$ 10.00

Income (loss) from investment operations:

Net investment income (loss)b

.19

.12

(.03)

Net realized and unrealized gain (loss) on investment transactions

1.04

.43

.87

Total from investment operations

1.23

.55

.84

Less distributions from:

Net investment income

(.10)

—

—

Net realized gain on investment transactions

(.08)

(.02)

—

Total distributions

(.18)

(.02)

—

Net asset value, end of period

$ 12.42

$ 11.37

$ 10.84

Total Return (%)c,d

10.93

5.06

8.40**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

179

171

39

Ratio of expenses before expense reductions (%)e

.62

.66

1.53*

Ratio of expenses after expense reductions (%)e

.57

.61

.75*

Ratio of net investment income (%)

1.65

1.15

(.68)*

Portfolio turnover rate (%)

35

14

13

a For the period from August 16, 2004 (commencement of operations) to December 31, 2004.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Total return would have been lower if the Advisor had not reduced certain of the Underlying Portfolios' expenses.
e The Portfolio invests in other DWS Portfolios and indirectly bears its proportionate share of fees and expenses incurred by the Underlying DWS Portfolios in which the Portfolio is invested.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Money Market VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ. The yield quotation more closely reflects the current earnings of the Portfolio than the total return quotation.

Risk Considerations

An investment in this Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio. Please read this Portfolio's prospectus for specific details regarding its investment and risk profile.

Portfolio's Class A Shares Yield

7-day current yield

7-day compounded effective yield

December 31, 2006

4.95%*

5.07%*

December 31, 2005

3.74%

3.81%

* The investment advisor has agreed to waive fees/reimburse expenses. Without such fee waivers/expense reimbursements the 7-day current yield would have been 4.92% and the 7-day compounded effective yield would have been 5.04% as of December 31, 2006.

Portfolio's Class B Shares Yield

7-day current yield

7-day compounded effective yield

December 31, 2006

4.55%

4.65%

December 31, 2005

3.38%

3.43%

Yields are historical, will fluctuate and do not guarantee future performance. The 7-day current yield refers to the income paid by the Portfolio over a 7-day period expressed as an annual percentage rate of the Portfolio's shares outstanding. The 7-day compounded effective yield is the annualized yield based on the most recent 7 days of interest earnings with all income reinvested.

Information About Your Portfolio's Expenses

DWS Money Market VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses; had they not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,024.90

 

$ 1,022.90

 

Expenses Paid per $1,000*

$ 2.91

 

$ 4.38

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,022.33

 

$ 1,020.87

 

Expenses Paid per $1,000*

$ 2.91

 

$ 4.38

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Money Market VIP

.57%

 

.86%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Money Market VIP

At its first four meetings of 2006, the US Federal Reserve Board (the Fed) raised the federal funds rate in an attempt to head off any increases in inflation. The Fed then paused from rate increases at its August meeting, citing a moderation in growth resulting from a cooling housing market and higher energy costs. During the second half of the year, the US economy continued to grow, but at a rate below the market's expectations. At the end of 2006, the one-year LIBOR rate, an industry standard for measuring one-year money market rates, stood at 5.32%.

During the 12-month period ended December 31, 2006, the Portfolio provided a total return of 4.65% (Class A shares, unadjusted for contract charges) compared with the 4.54% average return for the 109 funds in the Lipper Money Market Variable Annuity Funds category for the same period, according to Lipper Inc. Please see page 193 for standardized performance as of December 31, 2006.

Up until the Fed paused its rate increases in August, our strategy was to keep the Portfolio's average maturity very short, in order to maintain portfolio flexibility given the Fed's dependence on economic data from month to month. Once it became apparent to us that the Fed would most likely remain "on hold" for an extended period, we lengthened maturity by purchasing three- to six-month issues. For the 12-month period, we maintained a significant allocation in floating-rate securities, which benefited performance. Going forward, we will continue our insistence on the highest credit quality within the Portfolio and maintain our conservative investment strategies and standards.

A group of investment professionals is responsible for the day-to-day management of the Portfolio. These investment professionals have a broad range of experience managing money market funds.

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. The yield quotation more closely reflects the current earnings of the Portfolio than the total return quotation.

Yields fluctuate and are not guaranteed. Money Market seven-day current yield is the annualized net investment income per share for the period owned.

Risk Considerations

An investment in this Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio. Please read this Portfolio's prospectus for specific details regarding its investment and risk profile.

The Lipper Money Market Variable Annuity Funds category includes funds that invest in high-quality financial instruments rated in the top two grades with dollar-weighted average maturities of less than 90 days and that intend to keep a constant net asset value. It is not possible to invest directly in a Lipper category.

LIBOR, or the London Interbank Offered Rate, is the most widely used benchmark or reference rate for short-term interest rates. LIBOR is the rate of interest at which banks borrow funds from other banks, in large volume, in the international market.

Federal funds rate — the overnight rate charged by banks when they borrow money from each other. Set by the Federal Open Market Committee (FOMC), the fed funds rate is the most sensitive — and closely watched — indicator concerning the direction of short-term interest rates. The FOMC is a key committee within the US Federal Reserve System, and meets every six weeks to review Fed policy on short-term rates. Based on current Fed policy, the FOMC may choose to raise or lower the fed funds rate to either add liquidity to the economy or remove it.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Money Market VIP

Asset Allocation

12/31/06

12/31/05

 

 

 

Short-Term Notes

37%

30%

Commercial Paper

32%

32%

Certificates of Deposit and Bank Notes

19%

25%

Repurchase Agreements

6%

7%

Funding Agreement

3%

4%

Promissory Notes

2%

—

Asset Backed

1%

—

US Government Sponsored Agencies

—

2%

 

100%

100%

Weighted Average Maturity*

 

 

 

 

 

DWS Variable Series II — DWS Money Market VIP

35 days

35 days

First Tier Retail Money Fund Average

42 days

38 days

* The Fund is compared to its respective iMoneyNet Category: First Tier Retail Money Fund Average — Category includes a widely-recognized composite of money market funds that invest in only first tier (highest rating) securities. Portfolio Holdings of First Tier funds include US Treasury, US Other, Repos, Time Deposits, Domestic Bank Obligations, Foreign Bank Obligations, First Tier Commercial Paper, Floating Rate Notes and Asset Backed Commercial Paper.

Asset allocation and weighted average maturity are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 197. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Money Market VIP

 

Principal Amount ($)

Value ($)

 

 

Certificates of Deposit and Bank Notes 18.9%

Banco Bilbao Vizcaya Argentaria SA, 5.325%, 2/5/2007

4,000,000

4,000,000

Bank of Tokyo-Mitsubishi-UFJ, Ltd., 5.36%, 4/23/2007

3,500,000

3,500,000

Canadian Imperial Bank of Commerce, 5.31%, 1/5/2007

3,000,000

3,000,000

CIT Group, Inc., 7.375%, 4/2/2007

5,350,000

5,375,603

HSH Nordbank AG, 5.35%, 4/13/2007

3,500,000

3,500,000

Mizuho Corporate Bank:

 

 

5.33%, 1/4/2007

6,000,000

6,000,000

5.34%, 2/8/2007

8,000,000

8,000,000

5.34%, 2/13/2007

4,000,000

4,000,000

Nationwide Building Society, 5.32%,1/4/2007

7,000,000

7,000,000

Natixis SA, 5.0%, 2/8/2007

4,700,000

4,700,000

Norinchukin Bank:

 

 

5.35%, 2/15/2007

5,000,000

5,000,000

5.405%, 3/15/2007

10,000,000

10,000,000

Toronto Dominion Bank, 5.45%, 10/25/2007

1,600,000

1,600,000

UniCredito Italiano SpA, 5.385%, 2/15/2007

750,000

749,992

Total Certificates of Deposit and Bank Notes (Cost $66,425,595)

66,425,595

 

Commercial Paper** 31.8%

Cancara Asset Securitization LLC, 5.26%, 1/19/2007

13,712,000

13,675,937

CC (USA), Inc., 5.23%, 3/9/2007

1,500,000

1,485,400

Cedar Springs Capital Co., LLC:

 

 

5.28%, 1/9/2007

1,000,000

998,827

5.28%, 1/12/2007

800,000

798,709

5.31%, 1/5/2007

9,000,000

8,994,690

Giro Funding US Corp., 5.29%, 1/22/2007

18,500,000

18,442,912

Greyhawk Funding LLC, 5.27%, 1/19/2007

17,500,000

17,453,887

K2 (USA) LLC, 5.26%, 2/13/2007

9,000,000

8,943,455

KBC Financial Products International Ltd., 5.2%, 5/14/2007

4,000,000

3,923,156

Perry Global Funding LLC:

 

 

Series A, 5.25%, 1/18/2007

1,000,000

997,521

Series A, 5.26%, 2/14/2007

16,000,000

15,897,138

Simba Funding Corp., 5.27%, 3/21/2007

11,000,000

10,872,788

Tango Finance Corp., 5.25%, 1/25/2007

9,500,000

9,466,750

Total Commercial Paper (Cost $111,951,170)

111,951,170

 

Funding Agreement 3.4%

New York Life Insurance Co., 5.425% *, 9/18/2007 (Cost $12,000,000)

12,000,000

12,000,000

 

Principal Amount ($)

Value ($)

 

 

Asset Backed 0.8%

Steers Mercury III Trust, 144A, 5.37% *, 5/27/2048 (Cost $3,000,000)

3,000,000

3,000,000

 

Promissory Notes 2.3%

The Goldman Sachs Group, Inc., 5.433% *, 3/20/2007 (Cost $8,000,000)

8,000,000

8,000,000

 

Short-Term Notes 36.6%

American Express Bank FSB, 5.32%*, 11/8/2007

8,000,000

7,999,332

American Express Credit Corp., 5.31%*, 1/9/2007

7,000,000

6,999,984

American Honda Finance Corp.:

 

 

5.346%*, 11/9/2007

4,000,000

4,000,000

5.473%*, 4/13/2007

500,000

500,132

Beta Finance, Inc., 5.36%*, 2/26/2007

6,000,000

6,000,350

BNP Paribas:

 

 

5.31%*, 10/3/2007

10,000,000

9,997,225

5.34%*, 10/26/2010

3,000,000

3,000,000

Caja de Ahorros y Monte de Piedad de Madrid, 5.368%*, 10/19/2007

1,000,000

1,000,000

Canadian Imperial Bank of Commerce, 5.39%*, 10/26/2007

3,000,000

2,999,411

Carrera Capital Finance LLC, 144A, 5.34%*, 2/26/2007

500,000

500,000

CIT Group, Inc., 5.573%*, 2/15/2007

10,500,000

10,502,569

Credit Suisse, 5.375%*, 4/24/2007

6,000,000

6,000,021

DNB NOR Bank ASA, 5.34%*, 5/25/2011

9,500,000

9,500,000

Five Finance, Inc., 144A, 3.5%, 7/3/2007

3,500,000

3,500,000

General Electric Capital Corp., 5.31%*, 8/19/2011

10,000,000

10,000,000

International Business Machine Corp., 5.36%*, 11/8/2007

3,000,000

3,000,000

Intesa Bank Ireland PLC, 5.35%*, 7/25/2011

500,000

500,000

JPMorgan Chase & Co., 5.44%*, 6/14/2007

1,500,000

1,500,637

M&I Marshall & Ilsley Bank, 5.33%*, 11/15/2007

4,000,000

4,000,000

Merrill Lynch & Co., Inc.:

 

 

5.495%*, 2/27/2007

1,000,000

1,000,227

5.52%*, 4/20/2007

1,500,000

1,500,792

Morgan Stanley, 5.382%*, 2/5/2007

18,500,000

18,500,000

Natixis SA, 5.42%*, 8/31/2007

3,000,000

3,000,000

Northern Rock PLC, 5.35%*, 11/5/2007

3,500,000

3,500,000

Skandinaviska Enskilda Banken, 5.35%*, 11/16/2007

4,000,000

4,000,000

The Goldman Sachs Group, Inc., 5.51%*, 1/9/2007

1,000,000

1,000,029

 

Principal Amount ($)

Value ($)

 

 

UniCredito Italiano Bank (Ireland) PLC:

 

 

5.36%*, 11/9/2007

4,000,000

4,000,000

5.36%*, 11/15/2007

1,000,000

1,000,000

Total Short-Term Notes (Cost $129,000,709)

129,000,709

 

Repurchase Agreements 6.0%

BNP Paribas, 5.31%, dated 12/29/2006, to be repurchased at $18,013,275 on 1/3/2007 (a)

18,000,000

18,000,000

JPMorgan Securities, Inc., 5.33%, dated 12/29/2006, to be repurchased at $3,001,777 on 1/2/2007 (b)

3,000,000

3,000,000

 

Principal Amount ($)

Value ($)

 

 

State Street Bank & Trust Co., 4.4%, dated 12/29/2006, to be repurchased at $89,044 on 1/2/2007 (c)

89,000

89,000

Total Repurchase Agreements (Cost $21,089,000)

21,089,000

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $351,466,474)+

99.8

351,466,474

Other Assets and Liabilities, Net

0.2

660,484

Net Assets

100.0

352,126,958

* Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury Bill rate. These securities are shown at their current rate as of December 31, 2006.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $351,466,474.
(a) Collateralized by:

Principal Amount ($)

Security

Rate (%)

Maturity Date

Collateral Value ($)

4,162,896

Federal Home Loan Mortgage Corp.

6.5

11/1/2036

4,259,998

14,191,998

Federal National Mortgage Association

5.5

1/1/2036

14,100,002

Total Collateral Value

18,360,000

(b) Collateralized by $3,115,000, Government National Mortgage Association, 5.146%, maturing on 12/16/2040 with a value of $3,062,046.
(c) Collateralized by $95,000 US Treasury Note, 5.0%, maturing on 7/31/2008 with a value of $95,238.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, valued at amortized cost (cost $351,466,474)

$ 351,466,474

Total investments in securities, valued at amortized cost (cost $351,466,474)

351,466,474

Cash

14,324

Interest receivable

1,762,095

Receivable for Portfolio shares sold

151,448

Due from Advisor

50,730

Other assets

8,340

Total assets

353,453,411

Liabilities

Payable for Portfolio shares redeemed

397,338

Distributions payable

660,902

Accrued management fee

107,962

Other accrued expenses and payables

160,251

Total liabilities

1,326,453

Net assets, at value

$ 352,126,958

Net Assets

Net assets consist of:
Accumulated distributions in excess of net investment income

(34,790)

Accumulated net realized gain (loss)

(1,813)

Paid-in capital

352,163,561

Net assets, at value

$ 352,126,958

Class A

Net Asset Value, offering and redemption price per share ($293,752,906 ÷ 293,774,884 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 1.00

Class B

Net Asset Value, offering and redemption price per share ($58,374,052 ÷ 58,376,359 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 1.00

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Interest

$ 16,438,772

Expenses:
Management fee

1,444,203

Custodian fees

26,163

Distribution service fees (Class B)

150,122

Record keeping fees (Class B)

76,851

Auditing

43,079

Legal

12,089

Trustees' fee and expenses

27,915

Reports to shareholders

103,852

Other

19,153

Total expenses, before expense reductions

1,903,427

Expense reductions

(22,732)

Total expenses, after expense reductions

1,880,695

Net investment income

14,558,077

Net realized gain (loss) on investment transactions

5,373

Net increase (decrease) in net assets resulting from operations

$ 14,563,450

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income

$ 14,558,077

$ 8,462,304

Net realized gain (loss) on investment transactions

5,373

1,179

Net increase (decrease) in net assets resulting from operations

14,563,450

8,463,483

Distributions to shareholders from:
Net investment income:

Class A

(12,054,423)

(7,099,842)

Class B

(2,502,064)

(1,362,462)

Portfolio share transactions:

Class A

Proceeds from shares sold

168,824,740

227,608,429

Net assets acquired in tax-free reorganization

56,965,779

—

Reinvestment of distributions

11,880,927

6,884,287

Cost of shares redeemed

(178,891,004)

(240,799,854)

Net increase (decrease) in net assets from Class A share transactions

58,780,442

(6,307,138)

Class B

Proceeds from shares sold

63,581,378

83,177,262

Reinvestment of distributions

2,487,387

1,303,053

Cost of shares redeemed

(65,942,247)

(78,947,805)

Net increase (decrease) in net assets from Class B share transactions

126,518

5,532,510

Increase (decrease) in net assets

58,913,923

(773,449)

Net assets at beginning of period

293,213,035

293,986,484

Net assets at end of period (including accumulated distributions in excess of net investment income of $34,790 and $40,899, respectively)

$ 352,126,958

$ 293,213,035

Other Information

Class A

Shares outstanding at beginning of period

235,000,612

241,307,750

Shares sold

168,824,740

227,608,429

Shares acquired in tax-free reorganization

56,959,609

—

Shares issued to shareholders in reinvestment of distributions

11,880,927

6,884,287

Shares redeemed

(178,891,004)

(240,799,854)

Net increase (decrease) in Class A shares

58,774,272

(6,307,138)

Shares outstanding at end of period

293,774,884

235,000,612

Class B

Shares outstanding at beginning of period

58,249,841

52,717,331

Shares sold

63,581,378

83,177,262

Shares issued to shareholders in reinvestment of distributions

2,487,387

1,303,053

Shares redeemed

(65,942,247)

(78,947,805)

Net increase (decrease) in Class B shares

126,518

5,532,510

Shares outstanding at end of period

58,376,359

58,249,841

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 1.000

$ 1.000

$ 1.000

$ 1.000

$ 1.000

Income from investment operations:

Net investment income

.046

.028

.009

.007

.013

Total from investment operations

.046

.028

.009

.007

.013

Less distributions from:

Net investment income

(.046)

(.028)

(.009)

(.007)

(.013)

Net asset value, end of period

$ 1.000

$ 1.000

$ 1.000

$ 1.000

$ 1.000

Total Return (%)

4.65a

2.80

.91

.72

1.35

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

294

235

241

326

570

Ratio of expenses before expense reductions (%)

.52

.52

.53

.54

.54

Ratio of expenses after expense reductions (%)

.51

.52

.53

.54

.54

Ratio of net investment income (%)

4.58

2.77

.88

.73

1.35

a Total return would have been lower had certain expenses not been reduced.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 1.000

$ 1.000

$ 1.000

$ 1.000

$ 1.000

Income from investment operations:

Net investment income

.042

.024

.005

.004

.007

Total from investment operations

.042

.024

.005

.004

.007

Less distributions from:

Net investment income

(.042)

(.024)

(.005)

(.004)

(.007)

Net asset value, end of period

$ 1.000

$ 1.000

$ 1.000

$ 1.000

$ 1.000

Total Return (%)

4.25b

2.42

.52

.42

.67**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

58

58

53

66

3

Ratio of expenses before expense reductions (%)

.90

.89

.91

.93

.79*

Ratio of expenses after expense reductions (%)

.89

.89

.91

.92

.64*

Ratio of net investment income (%)

4.20

2.40

.50

.35

1.11*

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Small Cap Growth VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, stocks of small companies involve greater risk than securities of larger, more-established companies, as they often have limited product lines, markets or financial resources and may be subject to more erratic and abrupt market movements. Finally, derivatives may be more volatile and less liquid than traditional securities and the Portfolio could suffer losses on its derivatives positions. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

Portfolio returns during the period reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Small Cap Growth VIP

[] DWS Small Cap Growth VIP — Class A

[] Russell 2000® Growth Index

The Russell 2000® Growth Index is an unmanaged, capitalization-weighted index of those securities in the Russell 2000 Index with a higher price-to-book ratio and higher forecasted growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1490

 

Yearly periods ended December 31

 

Comparative Results

DWS Small Cap Growth VIP

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$10,527

$12,513

$11,069

$15,041

Average annual total return

5.27%

7.76%

2.05%

4.17%

Russell 2000 Growth Index
 Growth of $10,000

$11,335

$13,494

$13,979

$16,103

Average annual total return

13.35%

10.51%

6.93%

4.88%

DWS Small Cap Growth VIP

 

1-Year

3-Year

Life of Class*

Class B

Growth of $10,000

 

$10,480

$12,365

$14,867

Average annual total return

 

4.80%

7.33%

9.22%

Russell 2000 Growth Index
 Growth of $10,000

 

$11,335

$13,494

$16,913

Average annual total return

 

13.35%

10.51%

12.39%

The growth of $10,000 is cumulative.

* The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Small Cap Growth VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,017.90

 

$ 1,015.30

 

Expenses Paid per $1,000*

$ 3.71

 

$ 5.54

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.53

 

$ 1,019.71

 

Expenses Paid per $1,000*

$ 3.72

 

$ 5.55

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Small Cap Growth VIP

.73%

 

1.09%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Small Cap Growth VIP

For the 12 months ended December 31, 2006, stocks posted mixed performance in the first half of the year, then ended the period strongly. The second quarter witnessed the 17th straight short-term interest rate hike by the US Federal Reserve Board (the Fed) to 5.25%, as well as a reversal of fortune in the equity markets, a stark contrast from strength during the first quarter. Economic activity was moderating, consumer spending had downshifted and some measures of inflation had edged up slightly. At its August meeting, the Fed decided to pause in raising short-term rates, as it felt that the lagged effects of its credit tightening and the ongoing contraction in the housing market would slow economic activity and ease strains on key economic resources. In the third quarter, stocks rallied based on receding commodity prices and declining long-term rates, then a fourth quarter rally led to double-digit equity market gains for the year. Energy prices remained low, inflation concerns were tame, and the consensus of a soft landing paved the way for 2007.

During the annual period ended December 31, 2006, the Portfolio returned 5.27% (Class A shares, unadjusted for contract charges), underperforming the 13.35% return of the Russell 2000® Growth Index.

During the period, detractors from performance included stock selection in the information technology, financials and industrials sectors, and underweights to industrials and materials, and an overweight to health care relative to the benchmark.1 Positive contributors to performance included stock selection in the health care and consumer discretionary sectors. We continue to maintain a long-term perspective, investing in quality small-cap growth stocks.

Robert S. Janis
Joseph Axtell
Portfolio Managers
Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

This Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Additionally, stocks of small companies involve greater risk than securities of larger, more-established companies, as they often have limited product lines, markets or financial resources and may be subject to more erratic and abrupt market movements. Finally, derivatives may be more volatile and less liquid than traditional securities and the Portfolio could suffer losses on its derivatives positions. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

The Russell 2000® Growth Index is an unmanaged, capitalization-weighted measure of 2,000 of the smallest capitalized US companies with a greater-than-average growth orientation and whose common stocks trade on the NYSE, AMEX and Nasdaq.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Small Cap Growth VIP

Asset Allocation (Excludes Security Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

97%

99%

Cash Equivalent

3%

1%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Information Technology

26%

23%

Health Care

23%

30%

Consumer Discretionary

22%

17%

Energy

12%

9%

Financials

8%

12%

Industrials

4%

4%

Consumer Staples

3%

4%

Telecommunication Services

2%

1%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 207. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Small Cap Growth VIP

 


Shares

Value ($)

 

 

Common Stocks 96.9%

Consumer Discretionary 20.9%

Hotels Restaurants & Leisure 10.1%

Buffalo Wild Wings, Inc.* (a)

86,400

4,596,480

Chipotle Mexican Grill, Inc. "A"* (a)

104,300

5,945,100

McCormick & Schmick's Seafood Restaurants, Inc.*

164,200

3,947,368

Orient-Express Hotels Ltd. "A"

137,700

6,515,964

Texas Roadhouse, Inc. "A"* (a)

284,000

3,765,840

 

24,770,752

Leisure Equipment & Products 0.5%

MarineMax, Inc.*

46,500

1,205,745

Media 0.3%

RRSat Global Communications Network Ltd.*

66,100

857,978

Specialty Retail 7.5%

bebe stores, Inc.

253,400

5,014,786

Guess?, Inc.*

210,500

13,352,015

 

18,366,801

Textiles, Apparel & Luxury Goods 2.5%

Under Armour, Inc. "A"*

119,500

6,028,775

Consumer Staples 2.7%

Personal Products

Herbalife Ltd.*

166,500

6,686,640

Energy 11.3%

Energy Equipment & Services 4.3%

Atwood Oceanics, Inc.*

109,000

5,337,730

Complete Production Services, Inc.*

109,600

2,323,520

Hornbeck Offshore Services, Inc.*

81,500

2,909,550

 

10,570,800

Oil, Gas & Consumable Fuels 7.0%

Carrizo Oil & Gas, Inc.* (a)

231,000

6,703,620

EXCO Resources, Inc.*

206,900

3,498,679

Parallel Petroleum Corp.*

133,900

2,352,623

US BioEnergy Corp.*

89,800

1,526,600

Western Refining, Inc.

120,400

3,065,384

 

17,146,906

Financials 7.4%

Capital Markets 1.1%

Thomas Weisel Partners Group, Inc.* (a)

123,000

2,595,300

Commercial Banks 4.0%

PrivateBancorp, Inc. (a)

103,800

4,321,194

Signature Bank*

178,300

5,523,734

 

9,844,928

Diversified Financial Services 1.8%

Kohlberg Capital Corp.*

97,300

1,683,290

Portfolio Recovery Associates, Inc.* (a)

59,870

2,795,330

 

4,478,620

Real Estate Investment Trusts 0.5%

DCT Industrial Trust, Inc. (REIT)

101,600

1,198,880

 


Shares

Value ($)

 

 

Health Care 22.7%

Health Care Equipment & Supplies 5.8%

Hologic, Inc.*

118,400

5,597,952

Orthofix International NV*

43,300

2,165,000

Viasys Healthcare, Inc.*

137,200

3,816,904

West Pharmaceutical Services, Inc.

51,800

2,653,714

 

14,233,570

Health Care Providers & Services 12.9%

Amedisys, Inc.*

107,167

3,522,569

AMERIGROUP Corp.*

157,900

5,667,031

Centene Corp.* (a)

338,300

8,312,031

inVentiv Health, Inc.*

155,500

5,496,925

Nighthawk Radiology Holdings, Inc.* (a)

144,700

3,689,850

Providence Service Corp.* (a)

201,500

5,063,695

 

31,752,101

Health Care Technology 3.6%

Allscripts Healthcare Solutions, Inc.* (a)

159,100

4,294,109

Eclipsys Corp.*

214,700

4,414,232

 

8,708,341

Pharmaceuticals 0.4%

Obagi Medical Products, Inc.*

86,600

892,846

Industrials 4.4%

Aerospace & Defense 1.2%

BE Aerospace, Inc.*

111,300

2,858,184

Electrical Equipment 2.1%

Energy Conversion Devices, Inc.* (a)

144,800

4,920,304

Solarfun Power Holdings Co., Ltd. (ADR)*

20,000

233,800

 

5,154,104

Trading Companies & Distributors 1.1%

H&E Equipment Services, Inc.*

109,200

2,704,884

Information Technology 25.2%

Communications Equipment 2.0%

Avocent Corp.*

145,000

4,908,250

Computers & Peripherals 2.3%

Rackable Systems, Inc.* (a)

182,600

5,655,122

Electronic Equipment & Instruments 2.0%

Itron, Inc.*

94,900

4,919,616

Internet Software & Services 7.5%

Digital River, Inc.*

190,900

10,650,311

j2 Global Communications, Inc.* (a)

235,800

6,425,550

Perficient, Inc.*

81,400

1,335,774

 

18,411,635

IT Services 2.9%

Euronet Worldwide, Inc.* (a)

239,400

7,107,786

Semiconductors & Semiconductor Equipment 6.6%

FEI Co.*

167,500

4,416,975

FormFactor, Inc.*

188,200

7,010,450

Standard Microsystems Corp.*

85,000

2,378,300

Trident Microsystems, Inc.*

128,600

2,337,948

 

16,143,673

 


Shares

Value ($)

 

 

Software 1.9%

THQ, Inc.*

143,250

4,658,490

Telecommunication Services 2.3%

Diversified Telecommunication Services 0.9%

Globalstar, Inc.* (a)

168,800

2,348,008

Wireless Telecommunication Services 1.4%

SBA Communications Corp. "A"*

123,800

3,404,500

Total Common Stocks (Cost $192,717,566)

237,613,235

 

 


Shares

Value ($)

 

 

Securities Lending Collateral 21.5%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $52,652,325)

52,652,325

52,652,325

 

Cash Equivalents 3.0%

Cash Management QP Trust, 5.46% (d) (Cost $7,424,236)

7,424,236

7,424,236

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $252,794,127)+

121.4

297,689,796

Other Assets and Liabilities, Net

(21.4)

(52,484,387)

Net Assets

100.0

245,205,409

* Non-income producing security.
+ The cost for federal income tax purposes was $252,966,536. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $44,723,260. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $51,482,047 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $6,758,787.
(a) All or a portion of these securities were on loan amounting to $50,587,312. In addition, included in other assets and liabilities is a pending sale, amounting to $206,160 that is also on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $50,793,472 which is 20.7% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

REIT: Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $192,717,566) — including $50,587,312 of securities loaned

$ 237,613,235

Investment in Daily Assets Fund Institutional (cost $52,652,325)*

52,652,325

Investment in Cash Management QP Trust (cost $7,424,236)

7,424,236

Total investments in securities, at value (cost $252,794,127)

297,689,796

Receivable for investments sold

1,545,084

Dividends receivable

48,726

Interest receivable

46,092

Receivable for Portfolio shares sold

116,428

Other assets

7,351

Total assets

299,453,477

Liabilities

Due to custodian

454,557

Payable for Portfolio shares redeemed

70,990

Payable for investments purchased

816,908

Payable upon return of securities loaned

52,652,325

Accrued management fee

112,409

Other accrued expenses and payables

140,879

Total liabilities

54,248,068

Net assets, at value

$ 245,205,409

Net Assets

Net assets consist of:
Accumulated net investment loss

(9,528)

Net unrealized appreciation (depreciation) on investments

44,895,669

Accumulated net realized gain (loss)

(117,289,710)

Paid-in capital

317,608,978

Net assets, at value

$ 245,205,409

Class A

Net Asset Value, offering and redemption price per share ($208,387,628 ÷ 14,686,087 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 14.19

Class B

Net Asset Value, offering and redemption price per share ($36,817,781 ÷ 2,636,495 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 13.96

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends

$ 564,056

Interest — Cash Management QP Trust

190,095

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

156,163

Other income**

155,225

Total Income

1,065,539

Expenses:
Management fee

1,738,224

Custodian fees

16,211

Distribution service fees (Class B)

95,565

Record keeping fees (Class B)

52,687

Auditing

56,465

Legal

13,339

Trustees' fees and expenses

24,775

Reports to shareholders

104,590

Other

17,144

Total expenses before expense reductions

2,119,000

Expense reductions

(53,911)

Total expenses after expense reductions

2,065,089

Net investment income (loss)

(999,550)

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

18,324,595

Net unrealized appreciation (depreciation) during the period on investments

(3,666,288)

Net gain (loss) on investment transactions

14,658,307

Net increase (decrease) in net assets resulting from operations

$ 13,658,757

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ (999,550)

$ (1,349,056)

Net realized gain (loss) on investment transactions

18,324,595

24,013,018

Net realized gains on investments not meeting investment guidelines of the Portfolio

—

49,496

Net unrealized appreciation (depreciation) during the period on investment transactions

(3,666,288)

(117,156)

Net increase (decrease) in net assets resulting from operations

13,658,757

22,596,302

Portfolio share transactions:

Class A

Proceeds from shares sold

11,831,161

24,384,647

Net assets acquired in tax free reorganization

—

37,649,364

Cost of shares redeemed

(58,380,185)

(48,722,289)

Net increase (decrease) in net assets from Class A share transactions

(46,549,024)

13,311,722

Class B

Proceeds from shares sold

2,945,973

11,204,648

Net assets acquired in tax free reorganization

—

7,786,470

Cost of shares redeemed

(6,685,805)

(11,469,498)

Net increase (decrease) in net assets from Class B share transactions

(3,739,832)

7,521,620

Increase (decrease) in net assets

(36,630,099)

43,429,644

Net assets at beginning of period

281,835,508

238,405,864

Net assets at end of period (including accumulated net investment loss of $9,528 and $11,255, respectively)

$ 245,205,409

$ 281,835,508

Other Information

Class A

Shares outstanding at beginning of period

18,035,147

16,708,714

Shares sold

837,139

1,926,487

Shares issued in tax free reorganization

—

3,256,621

Shares redeemed

(4,186,199)

(3,856,675)

Net increase (decrease) in Class A shares

(3,349,060)

1,326,433

Shares outstanding at end of period

14,686,087

18,035,147

Class B

Shares outstanding at beginning of period

2,908,589

2,250,352

Shares sold

216,737

951,158

Shares issued in tax free reorganization

—

680,062

Shares redeemed

(488,831)

(972,983)

Net increase (decrease) in Class B shares

(272,094)

658,237

Shares outstanding at end of period

2,636,495

2,908,589

The accompanying notes are an integral part of the financial statements.

-Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 13.48

$ 12.59

$ 11.34

$ 8.53

$ 12.80

Income (loss) from investment operations:

Net investment income (loss)a

(.04)c

(.06)

(.05)

(.04)

(.02)

Net realized and unrealized gain (loss) on investment transactions

.75

.95

1.30

2.85

(4.25)

Total from investment operations

.71

.89

1.25

2.81

(4.27)

Net asset value, end of period

$ 14.19

$ 13.48

$ 12.59

$ 11.34

$ 8.53

Total Return (%)

5.27c,d

7.07b

11.02

32.94

(33.36)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

208

243

210

210

154

Ratio of expenses before expense reductions (%)

.73

.72

.71

.69

.71

Ratio of expenses after expense reductions (%)

.72

.72

.71

.69

.71

Ratio of net investment income (loss) (%)

(.32)c

(.47)

(.47)

(.41)

(.24)

Portfolio turnover rate (%)

73

94

117

123

68

a Based on average shares outstanding during the period.
b In 2005, the Portfolio realized a gain of $49,496 on the disposal of an investment not meeting the Portfolio's investment restrictions. This violation had no negative impact on the total return.
c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.06%. Excluding this non-recurring income, total return would have been 0.06% lower.
d Total return would have been lower had certain expenses been reduced.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 13.32

$ 12.48

$ 11.29

$ 8.52

$ 9.39

Income (loss) from investment operations:

Net investment income (loss)b

(.09)e

(.11)

(.10)

(.09)

(.02)

Net realized and unrealized gain (loss) on investment transactions

.73

.95

1.29

2.86

(.85)

Total from investment operations

.64

.84

1.19

2.77

(.87)

Net asset value, end of period

$ 13.96

$ 13.32

$ 12.48

$ 11.29

$ 8.52

Total Return (%)

4.80c,e

6.73c,d

10.54c

32.51

(9.27)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

37

39

28

15

.5

Ratio of expenses before expense reductions (%)

1.12

1.12

1.10

1.08

.96*

Ratio of expenses after expense reductions (%)

1.09

1.09

1.09

1.08

.96*

Ratio of net investment income (loss) (%)

(.69)e

(.84)

(.85)

(.80)

(.39)*

Portfolio turnover rate (%)

73

94

117

123

68

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d In 2005, the Portfolio realized a gain of $49,496 on the disposal of an investment not meeting the Portfolio's investment restrictions. This violation had no negative impact on the total return.
e Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.06%. Excluding this non-recurring income, total return would have been 0.06% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Strategic Income VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond investment, can decline and the investor can lose principal value. Additionally, investments by the Portfolio in lower-rated bonds present greater risk to principal and income than investments in higher-quality securities. Finally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. All of these factors may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

Portfolio returns shown for all periods for Class B shares reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Strategic Income VIP from 5/1/1997 to 12/31/2006

[] DWS Strategic Income VIP — Class A

[] Citigroup World Government Bond Index

[] JP Morgan Emerging Markets Bond Plus Index

[] Merrill Lynch High Yield Cash Pay Index

[] Lehman Brothers US Treasury Index

The Citigroup World Government Bond Index (formerly known as Salomon Smith Barney World Government Bond Index) is an unmanaged index comprised of government bonds from 22 developed countries (including the US) with maturities greater than one year. JP Morgan Emerging Markets Bond Plus Index is an unmanaged foreign securities index of US dollar- and other external-currency-denominated Brady bonds, loans, Eurobonds and local market debt instruments traded in emerging markets. The Merrill Lynch High Yield Cash Pay Index is an unmanaged index which tracks the performance of below investment grade US dollar- denominated corporate bonds publicly issued in the US domestic market. Lehman Brothers US Treasury Index is an unmanaged index reflecting the performance of all public obligations and does not focus on one particular segment of the Treasury market.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1480

 

Yearly periods ended December 31

 

Comparative Results

DWS Strategic Income VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$10,898

$12,117

$14,545

$16,876

Average annual total return

8.98%

6.61%

7.78%

5.57%

Citigroup World Government Bond Index
 Growth of $10,000

$10,612

$10,905

$14,974

$17,537

Average annual total return

6.12%

2.93%

8.41%

5.98%

JP Morgan Emerging Markets Bond Plus Index
 Growth of $10,000

$11,049

$13,814

$20,330

$27,416

Average annual total return

10.49%

11.37%

15.25%

11.00%

Merrill Lynch High Yield Cash Pay Index
 Growth of $10,000

$11,164

$12,716

$15,993

$18,996

Average annual total return

11.64%

8.34%

9.85%

6.86%

Lehman Brothers US Treasury Index
 Growth of $10,000

$10,308

$10,971

$12,539

$17,751

Average annual total return

3.08%

3.14%

4.63%

6.12%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 1997. Index returns began on April 30, 1997.

Comparative Results

DWS Strategic Income VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$10,875

$12,001

$12,357

Average annual total return

 

8.75%

6.27%

5.95%

Citigroup World Government Bond Index
 Growth of $10,000

 

$10,612

$10,905

$12,009

Average annual total return

 

6.12%

2.93%

5.12%

JP Morgan Emerging Markets Bond Plus Index
 Growth of $10,000

 

$11,049

$13,814

$15,569

Average annual total return

 

10.49%

11.37%

12.83%

Merrill Lynch High Yield Cash Pay Index
 Growth of $10,000

 

$11,164

$12,716

$14,329

Average annual total return

 

11.64%

8.34%

10.31%

Lehman Brothers US Treasury Index
 Growth of $10,000

 

$10,308

$10,971

$11,055

Average annual total return

 

3.08%

3.14%

2.77%

The growth of $10,000 is cumulative.

** The Portfolio commenced offering Class B shares on May 1, 2003. Index returns began on April 30, 2003.

Information About Your Portfolio's Expenses

DWS Strategic Income VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses for Class B shares; had it not done so, expenses for Class B shares would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,068.80

 

$ 1,067.30

 

Expenses Paid per $1,000*

$ 4.33

 

$ 6.10

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,021.02

 

$ 1,019.31

 

Expenses Paid per $1,000*

$ 4.23

 

$ 5.96

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Strategic Income VIP

.83%

 

1.17%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Strategic Income VIP

The past year was somewhat mixed for fixed income investors as the US Federal Reserve Board (the Fed) started the period on a tightening course, and then appeared to take a respite. The Fed raised interest rates four times during the period for a total of 1.00%. At the close of the year, the overnight federal funds rate stood at 5.25%. US Treasury yields started the year at approximately 4.40% and peaked close to 5.25% mid-way through the period. However, Treasury yields decreased in the second half of the year on investors' outlook that the Fed was taking a pause on, or possibly nearing the end of, its rate increases.

Although bouts of volatility periodically affected the performance of the high-yield and emerging markets debt markets, the investment backdrop remained broadly positive for both of these asset classes. Both high-yield and emerging-markets debt were among the top-performing asset classes within the broad bond market.

The Portfolio posted an 8.98% total return for the period ending December 31, 2006 (Class A shares, unadjusted for contract charges). This compares with the Portfolio benchmarks' returns of 10.49% for the JP Morgan Emerging Markets Bond Plus Index, 11.64% for the Merrill Lynch High Yield Cash Pay Index, 3.08% for the Lehman Brothers US Treasury Index, and 6.12% for the Citigroup World Government Bond Index (US dollar terms — unhedged). (Please see the page 213 for standardized performance as of December 31, 2006.)

We maintained overweight exposures in both high-yield and emerging-markets bonds throughout the year, and this positioning was a positive contributor to returns during the period.1 In the middle of the year, we tactically decreased our exposure to these sectors as spreads tightened, and then added back to our exposure on our opinion that fundamentals in both high-yield and emerging markets debt remained sound. The Portfolio was also invested in high quality sovereign, agency and provincial bonds including US Treasuries and debt issues from the European Union, the UK and Japan. Our resulting euro and pound currency exposures helped returns as these currencies appreciated against the US dollar for the period.

Gary Sullivan, CFA, William Chepolis, CFA and Matthew F. MacDonald Portfolio Managers

Effective January 23, 2007, Portfolio Manager Thomas Picciochi will join the portfolio management team.

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

The Portfolio invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Bond investments are subject to interest-rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the bond investment, can decline and the investor can lose principal value. Additionally, investments by the Portfolio in lower-rated bonds present greater risk to principal and income than investments in higher-quality securities. Finally, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes and market risks. All of these factors may result in greater share price volatility. Please read this Portfolio's prospectus for specific details regarding its investments and risk profile.

The JP Morgan Emerging Markets Bond Plus Index is an unmanaged foreign securities index of US dollar and other external-currency-denominated Brady bonds, loans, Eurobonds and local market debt instruments traded in emerging markets.

The Merrill Lynch High Yield Cash Pay Index is an unmanaged index which tracks the performance of below investment grade US dollar- denominated corporate bonds publicly issued in the US domestic market.

The Lehman Brothers US Treasury Index is an unmanaged index reflecting the performance of all public obligations and does not focus on one particular segment of the Treasury market.

The Citigroup World Government Bond Index (formerly known as Salomon Smith Barney World Government Bond Index) is an unmanaged index comprised of government bonds from 18 developed countries, including the US, with maturities greater than one year.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Strategic Income VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Corporate Bonds

30%

35%

Foreign Bonds — US$ Denominated

28%

24%

Foreign Bonds — Non US$ Denominated

17%

18%

US Treasury Obligations

16%

15%

Cash Equivalents

7%

5%

US Government Sponsored Agencies

1%

2%

Other

1%

1%

 

100%

100%

Quality (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

AAA*

30%

31%

AA

1%

1%

A

6%

4%

BBB

5%

6%

BB

25%

20%

B

20%

25%

CCC

5%

5%

Not Rated

8%

8%

 

100%

100%

* Includes cash equivalents

Interest Rate Sensitivity

12/31/06

12/31/05

 

 

 

Average maturity

7.6 years

7.6 years

Average duration

5.4 years

5.0 years

Asset allocation, quality and interest rate sensitivity are subject to change.

The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Portfolio's credit quality does not remove market risk.

For more complete details about the Portfolio's investment portfolio, see page 218. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Strategic Income VIP

 

Principal Amount ($)(a)

Value ($)

 

 

Corporate Bonds 29.5%

Consumer Discretionary 7.6%

Affinia Group, Inc., 9.0%, 11/30/2014

90,000

88,200

AMC Entertainment, Inc., 8.0%, 3/1/2014

145,000

143,912

American Achievement Corp., 8.25%, 4/1/2012

10,000

10,238

American Media Operations, Inc., Series B, 10.25%, 5/1/2009

45,000

43,594

Buffets, Inc., 144A, 12.5%, 11/1/2014

45,000

45,338

Burlington Coat Factory Warehouse Corp., 144A, 11.125%, 4/15/2014 (b)

65,000

63,375

Cablevision Systems Corp., Series B, 9.87%**, 4/1/2009

25,000

26,375

Caesars Entertainment, Inc., 8.875%, 9/15/2008

75,000

78,187

Charter Communications Holdings LLC:

 

 

8.625%, 4/1/2009

10,000

9,700

9.625%, 11/15/2009 (b)

10,000

9,700

10.25%, 9/15/2010

325,000

340,031

Series B, 10.25%, 9/15/2010

80,000

83,500

11.0%, 10/1/2015 (b)

306,000

314,032

Cooper-Standard Automotive, Inc., 8.375%, 12/15/2014 (b)

75,000

59,063

CSC Holdings, Inc.:

 

 

7.25%, 7/15/2008

50,000

50,438

7.875%, 12/15/2007

180,000

182,250

Series B, 8.125%, 7/15/2009 (b)

20,000

20,725

Series B, 8.125%, 8/15/2009

25,000

25,906

Denny's Corp. Holdings, Inc., 10.0%, 10/1/2012 (b)

20,000

21,100

Dex Media East LLC/Financial, 12.125%, 11/15/2012 (b)

561,000

617,801

EchoStar DBS Corp.:

 

 

6.625%, 10/1/2014

100,000

97,500

7.125%, 2/1/2016

80,000

80,000

Foot Locker, Inc., 8.5%, 1/15/2022

25,000

24,563

Ford Motor Co., 7.45%, 7/16/2031 (b)

65,000

51,025

French Lick Resorts & Casinos, 144A, 10.75%, 4/15/2014

235,000

219,725

General Motors Corp.:

 

 

7.4%, 9/1/2025 (b)

60,000

50,700

8.375%, 7/15/2033 (b)

215,000

198,875

Goodyear Tire & Rubber Co., 11.25%, 3/1/2011

380,000

419,900

Gregg Appliances, Inc., 9.0%, 2/1/2013

25,000

23,875

Hanesbrands, Inc., 144A, 8.735%**, 12/15/2014

55,000

55,963

Hertz Corp.:

 

 

144A, 8.875%, 1/1/2014

130,000

136,175

144A, 10.5%, 1/1/2016

35,000

38,500

ION Media Networks, Inc., 144A, 11.624%**, 1/15/2013

60,000

60,750

Isle of Capri Casinos, Inc., 7.0%, 3/1/2014

235,000

233,825

 

Principal Amount ($)(a)

Value ($)

 

 

Jacobs Entertainment, Inc., 9.75%, 6/15/2014

110,000

111,650

Lear Corp.:

 

 

Series B, 5.75%, 8/1/2014 (b)

10,000

8,400

144A, 8.75%, 12/1/2016

55,000

53,144

Levi Strauss & Co., 10.122%**, 4/1/2012

10,000

10,263

Liberty Media Corp.:

 

 

5.7%, 5/15/2013

10,000

9,421

8.25%, 2/1/2030

50,000

49,011

8.5%, 7/15/2029

95,000

95,518

Majestic Star Casino LLC, 9.5%, 10/15/2010

15,000

15,750

Medimedia USA, Inc., 144A, 11.375%, 11/15/2014

35,000

36,663

Metaldyne Corp.:

 

 

10.0%, 11/1/2013 (b)

45,000

48,150

11.0%, 6/15/2012 (b)

25,000

25,625

MGM MIRAGE:

 

 

6.75%, 9/1/2012

25,000

24,625

8.375%, 2/1/2011 (b)

55,000

57,063

9.75%, 6/1/2007

70,000

70,875

MTR Gaming Group, Inc., Series B, 9.75%, 4/1/2010

95,000

100,225

NCL Corp., 10.625%, 7/15/2014

25,000

25,000

Norcraft Holdings/Capital, Step-up Coupon, 0% to 9/1/2008, 9.75% to 9/1/2012

160,000

135,200

Pinnacle Entertainment, Inc., 8.75%, 10/1/2013 (b)

65,000

68,900

Pokagon Gaming Authority, 144A, 10.375%, 6/15/2014

30,000

32,850

Premier Entertainment Biloxi LLC/Finance, 10.75%, 2/1/2012

380,000

391,400

PRIMEDIA, Inc.:

 

 

8.875%, 5/15/2011 (b)

65,000

66,300

10.749%**, 5/15/2010 (b)

115,000

119,600

Resorts International Hotel & Casino, Inc., 11.5%, 3/15/2009 (b)

425,000

438,281

Sinclair Broadcast Group, Inc.:

 

 

8.0%, 3/15/2012

75,000

77,437

8.75%, 12/15/2011

205,000

213,969

Sirius Satellite Radio, Inc., 9.625%, 8/1/2013 (b)

150,000

147,562

Six Flags, Inc., 9.75%, 4/15/2013 (b)

185,000

173,669

Station Casinos, Inc., 6.5%, 2/1/2014

85,000

75,544

The Bon-Ton Department Stores, Inc., 10.25%, 3/15/2014 (b)

65,000

66,462

Travelport, Inc., 144A, 9.994%**, 9/1/2014

55,000

53,625

Trump Entertainment Resorts, Inc., 8.5%, 6/1/2015 (b)

295,000

293,525

TRW Automotive, Inc.:

 

 

11.0%, 2/15/2013 (b)

280,000

306,950

11.75%, 2/15/2013 EUR

40,000

59,204

United Auto Group, Inc.:

 

 

144A, 7.75%, 12/15/2016

55,000

55,275

9.625%, 3/15/2012

260,000

273,325

 

Principal Amount ($)(a)

Value ($)

 

 

Wheeling Island Gaming, Inc., 10.125%, 12/15/2009

45,000

45,844

XM Satellite Radio, Inc., 9.75%, 5/1/2014 (b)

295,000

295,000

Young Broadcasting, Inc., 8.75%, 1/15/2014 (b)

390,000

337,837

 

8,393,983

Consumer Staples 0.7%

Del Laboratories, Inc., 8.0%, 2/1/2012

60,000

56,250

Delhaize America, Inc.:

 

 

8.05%, 4/15/2027

20,000

21,627

9.0%, 4/15/2031

285,000

338,382

Harry & David Holdings, Inc., 10.369%**, 3/1/2012

55,000

54,725

North Atlantic Trading Co., 9.25%, 3/1/2012

140,000

122,150

Viskase Co., Inc., 11.5%, 6/15/2011

225,000

225,000

 

818,134

Energy 2.8%

Belden & Blake Corp., 8.75%, 7/15/2012

270,000

276,750

Chaparral Energy, Inc., 8.5%, 12/1/2015

145,000

144,275

Chesapeake Energy Corp.:

 

 

6.25%, 1/15/2018

70,000

67,375

6.875%, 1/15/2016

170,000

171,487

7.75%, 1/15/2015 (b)

30,000

31,238

Complete Production Services, Inc., 144A, 8.0%, 12/15/2016

95,000

97,375

Delta Petroleum Corp., 7.0%, 4/1/2015

185,000

171,125

Dynegy Holdings, Inc.:

 

 

7.625%, 10/15/2026

165,000

160,050

8.375%, 5/1/2016

150,000

157,500

El Paso Production Holding Corp., 7.75%, 6/1/2013

100,000

104,625

Encore Acquisition Co., 6.0%, 7/15/2015

35,000

31,938

Frontier Oil Corp., 6.625%, 10/1/2011

50,000

49,875

Peabody Energy Corp., 7.375%, 11/1/2016

45,000

47,925

Quicksilver Resources, Inc., 7.125%, 4/1/2016

45,000

43,988

Sabine Pass LNG LP:

 

 

144A, 7.25%, 11/30/2013

100,000

99,375

144A, 7.5%, 11/30/2016 (b)

100,000

99,625

Southern Natural Gas, 8.875%, 3/15/2010

205,000

215,063

Stone Energy Corp.:

 

 

6.75%, 12/15/2014

180,000

171,900

144A, 8.124%**, 7/15/2010

185,000

183,150

Transmeridian Exploration, Inc., 12.0%, 12/15/2010 (b)

115,000

110,687

Williams Companies, Inc.:

 

 

8.125%, 3/15/2012 (b)

415,000

449,237

8.75%, 3/15/2032

180,000

203,400

 

3,087,963

Financials 4.7%

AAC Group Holding Corp., 12.75%, 10/1/2012 (PIK) (b)

41,544

44,244

Alamosa Delaware, Inc., 11.0%, 7/31/2010

75,000

81,044

 

Principal Amount ($)(a)

Value ($)

 

 

Ashton Woods USA LLC, 9.5%, 10/1/2015

155,000

141,050

BCP Crystal Holdings Corp., 9.625%, 6/15/2014

20,000

22,100

Buffalo Thunder Development Authority, 144A, 9.375%, 12/15/2014

30,000

30,450

E*TRADE Financial Corp.:

 

 

7.375%, 9/15/2013

35,000

36,400

7.875%, 12/1/2015

30,000

31,875

8.0%, 6/15/2011

75,000

78,375

Ford Motor Credit Co.:

 

 

7.25%, 10/25/2011

420,000

411,294

7.375%, 10/28/2009

815,000

816,736

7.875%, 6/15/2010

205,000

206,703

8.0%, 12/15/2016

100,000

98,815

8.11%**, 1/13/2012

100,000

99,092

GMAC LLC:

 

 

6.875%, 9/15/2011

960,000

984,670

8.0%, 11/1/2031

391,000

448,895

GNC Parent Corp., 144A, Zero Coupon**, 12/1/2011

75,000

75,000

Hexion US Finance Corp., 144A, 9.75%, 11/15/2014

45,000

45,619

Idearc, Inc., 144A, 8.0%, 11/15/2016

240,000

243,600

iPayment, Inc., 9.75%, 5/15/2014

45,000

46,238

Poster Financial Group, Inc., 8.75%, 12/1/2011

190,000

197,125

R.H. Donnelly Finance Corp., 10.875%, 12/15/2012

190,000

207,100

Sally Holdings LLC, 144A, 9.25%, 11/15/2014

115,000

117,156

Titan International, Inc., 144A, 8.0%, 1/15/2012 (b)

105,000

105,656

Triad Acquisition Corp., Series B, 11.125%, 5/1/2013

85,000

80,750

UCI Holding Co., Inc., 144A, 12.365%**, 12/15/2013 (PIK)

65,000

63,050

Universal City Development, 11.75%, 4/1/2010

290,000

310,662

Wimar Opco LLC, 144A, 9.625%, 12/15/2014

105,000

103,950

 

5,127,649

Health Care 0.7%

HCA, Inc.:

 

 

6.5%, 2/15/2016 (b)

60,000

50,550

144A, 9.125%, 11/15/2014

95,000

101,531

144A, 9.25%, 11/15/2016

185,000

198,182

HEALTHSOUTH Corp.:

 

 

144A, 10.75%, 6/15/2016

125,000

134,531

144A, 11.354%**, 6/15/2014 (b)

20,000

21,300

Tenet Healthcare Corp., 9.25%, 2/1/2015

290,000

290,000

 

796,094

Industrials 2.7%

Aleris International, Inc., 144A, 9.0%, 12/15/2014

55,000

55,275

Allied Security Escrow Corp., 11.375%, 7/15/2011

90,000

92,250

Allied Waste North America, Inc., Series B, 9.25%, 9/1/2012

222,000

235,875

American Color Graphics, 10.0%, 6/15/2010 (b)

80,000

56,800

 

Principal Amount ($)(a)

Value ($)

 

 

Browning-Ferris Industries:

 

 

7.4%, 9/15/2035

165,000

154,275

9.25%, 5/1/2021

65,000

68,900

Case New Holland, Inc., 9.25%, 8/1/2011

240,000

254,100

Cenveo Corp., 7.875%, 12/1/2013

135,000

129,600

Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010 (b)

169,000

172,802

Congoleum Corp., 8.625%, 8/1/2008*

125,000

118,750

DRS Technologies, Inc.:

 

 

6.625%, 2/1/2016

25,000

25,188

7.625%, 2/1/2018

140,000

144,200

Education Management LLC, 144A, 8.75%, 6/1/2014

45,000

46,575

Esco Corp., 144A, 8.625%, 12/15/2013 (b)

105,000

107,887

Iron Mountain, Inc., 8.75%, 7/15/2018 (b)

40,000

42,400

K. Hovnanian Enterprises, Inc.:

 

 

6.25%, 1/15/2016 (b)

175,000

165,375

8.875%, 4/1/2012 (b)

200,000

203,000

Kansas City Southern:

 

 

7.5%, 6/15/2009

30,000

30,263

9.5%, 10/1/2008

365,000

381,425

Millennium America, Inc., 9.25%, 6/15/2008

85,000

87,762

Mobile Services Group, Inc., 144A, 9.75%, 8/1/2014

105,000

109,725

Panolam Industries International, Inc., 144A, 10.75%, 10/1/2013

35,000

36,838

Rainbow National Services LLC, 144A, 10.375%, 9/1/2014

20,000

22,225

Ship Finance International Ltd., 8.5%, 12/15/2013 (b)

50,000

49,937

The Brickman Group Ltd., Series B, 11.75%, 12/15/2009

110,000

116,875

Williams Partners LP, 144A, 7.25%, 2/1/2017

55,000

56,100

Xerox Capital Trust I, 8.0%, 2/1/2027 (b)

35,000

35,744

 

3,000,146

Information Technology 1.4%

Freescale Semiconductor, Inc., 144A, 8.875%, 12/15/2014

55,000

54,794

L-3 Communications Corp.:

 

 

5.875%, 1/15/2015

250,000

241,250

Series B, 6.375%, 10/15/2015

80,000

79,200

Lucent Technologies, Inc., 6.45%, 3/15/2029

375,000

345,937

Sanmina-SCI Corp., 8.125%, 3/1/2016 (b)

145,000

140,288

SunGard Data Systems, Inc., 10.25%, 8/15/2015 (b)

190,000

202,825

UGS Corp., 10.0%, 6/1/2012

180,000

196,200

Unisys Corp., 7.875%, 4/1/2008

310,000

309,225

 

1,569,719

Materials 4.1%

ARCO Chemical Co., 9.8%, 2/1/2020

560,000

646,800

Associated Materials, Inc., Step-up Coupon, 0% to 3/1/2009, 11.25% to 3/1/2014 (b)

45,000

30,375

Chemtura Corp., 6.875%, 6/1/2016

110,000

105,875

Constar International, Inc., 11.0%, 12/1/2012 (b)

20,000

18,500

 

Principal Amount ($)(a)

Value ($)

 

 

CPG International I, Inc.:

 

 

10.5%, 7/1/2013

195,000

198,656

12.39%**, 7/1/2012

45,000

45,900

Crystal US Holdings:

 

 

Series A, Step-up Coupon, 0% to 10/1/2009, 10% to 10/1/2014

205,000

175,275

Series B, Step-up Coupon, 0% to 10/1/2009, 10.5% to 10/1/2014 (b)

60,000

51,600

Equistar Chemical Funding, 10.625%, 5/1/2011

120,000

127,800

Exopac Holding Corp., 144A, 11.25%, 2/1/2014

170,000

178,925

GEO Specialty Chemicals, Inc., 144A, 13.999%**, 12/31/2009

283,000

233,475

Georgia-Pacific Corp., 144A, 7.125%, 1/15/2017

40,000

39,900

Greif, Inc., 8.875%, 8/1/2012

75,000

78,750

Hexcel Corp., 6.75%, 2/1/2015

220,000

216,700

Huntsman LLC, 11.625%, 10/15/2010

268,000

292,790

International Coal Group, Inc., 10.25%, 7/15/2014

70,000

70,000

Koppers Holdings, Inc., Step-up Coupon, 0% to 11/15/2009, 9.875% to 11/15/2014

120,000

96,000

Lyondell Chemical Co., 10.5%, 6/1/2013

40,000

44,000

Massey Energy Co.:

 

 

6.625%, 11/15/2010

145,000

145,000

6.875%, 12/15/2013 (b)

75,000

70,500

Metals USA Holding Corp., 144A, 11.365%**, 1/15/2012

75,000

72,000

Momentive Performance, 144A, 9.75%, 12/1/2014

55,000

55,000

Mueller Holdings, Inc., Step-up Coupon, 0% to 4/15/2009, 14.75% to 4/15/2014

274,000

246,600

Neenah Foundry Co.:

 

 

144A, 9.5%, 1/1/2017

75,000

75,375

144A, 13.0%, 9/30/2013

94,000

94,000

NewMarket Corp., 144A, 7.125%, 12/15/2016

125,000

125,000

OM Group, Inc., 9.25%, 12/15/2011 (b)

80,000

83,700

Omnova Solutions, Inc., 11.25%, 6/1/2010

275,000

295,625

Oxford Automotive, Inc., 144A, 12.0%, 10/15/2010*

157,024

2,355

Pliant Corp., 11.625%, 6/15/2009 (PIK)

10

11

Radnor Holdings Corp., 11.0%, 3/15/2010*

25,000

63

Rockwood Specialties Group, Inc., 10.625%, 5/15/2011

33,000

35,145

The Mosaic Co.:

 

 

144A, 7.375%, 12/1/2014

125,000

128,281

144A, 7.625%, 12/1/2016

45,000

46,631

TriMas Corp., 9.875%, 6/15/2012

155,000

149,963

United States Steel Corp., 9.75%, 5/15/2010

105,000

111,694

Witco Corp., 6.875%, 2/1/2026

35,000

30,625

Wolverine Tube, Inc., 10.5%, 4/1/2009 (b)

90,000

72,900

 

4,491,789

 

Principal Amount ($)(a)

Value ($)

 

 

Telecommunication Services 1.7%

American Cellular Corp., Series B, 10.0%, 8/1/2011

80,000

84,600

Centennial Communications Corp., 10.0%, 1/1/2013 (b)

90,000

95,737

Cincinnati Bell, Inc.:

 

 

7.25%, 7/15/2013

230,000

238,050

8.375%, 1/15/2014 (b)

160,000

164,400

Dobson Cellular Systems, 9.875%, 11/1/2012

90,000

98,100

Dobson Communications Corp., 8.875%, 10/1/2013 (b)

75,000

76,406

Insight Midwest LP, 9.75%, 10/1/2009

26,000

26,423

Intelsat Corp., 144A, 9.0%, 6/15/2016

40,000

42,350

MetroPCS Wireless, Inc., 144A, 9.25%, 11/1/2014

85,000

88,825

Nextel Communications, Inc., Series D, 7.375%, 8/1/2015

400,000

410,170

Qwest Corp., 7.25%, 9/15/2025

150,000

154,125

Rural Cellular Corp., 9.875%, 2/1/2010 (b)

105,000

111,694

SunCom Wireless Holdings, Inc., 8.5%, 6/1/2013 (b)

125,000

119,687

Ubiquitel Operating Co., 9.875%, 3/1/2011

60,000

64,800

US Unwired, Inc., Series B, 10.0%, 6/15/2012

120,000

132,000

Windstream Corp., 144A, 8.625%, 8/1/2016

10,000

10,950

 

1,918,317

Utilities 3.1%

AES Corp., 144A, 8.75%, 5/15/2013

645,000

690,956

Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/2012

390,000

428,025

CMS Energy Corp., 8.5%, 4/15/2011

335,000

364,313

Mirant Americas Generation LLC, 8.3%, 5/1/2011

40,000

41,000

Mirant North America LLC, 7.375%, 12/31/2013

40,000

40,600

Mission Energy Holding Co., 13.5%, 7/15/2008

490,000

540,225

NRG Energy, Inc.:

 

 

7.25%, 2/1/2014

165,000

166,238

7.375%, 2/1/2016

370,000

371,850

PSE&G Energy Holdings LLC, 10.0%, 10/1/2009

460,000

503,700

Regency Energy Partners LP, 144A, 8.375%, 12/15/2013

110,000

110,275

Sierra Pacific Resources:

 

 

6.75%, 8/15/2017

130,000

127,505

8.625%, 3/15/2014 (b)

25,000

26,841

 

3,411,528

Total Corporate Bonds (Cost $31,836,630)

32,615,322

 

Foreign Bonds — US$ Denominated 27.2%

Consumer Discretionary 0.7%

Dollarama Group Holdings LP, 144A, 11.12%**, 8/15/2012

55,000

54,588

Jafra Cosmetics International, Inc., 10.75%, 5/15/2011

280,000

299,250

 

Principal Amount ($)(a)

Value ($)

 

 

Quebecor World, Inc., 144A, 9.75%, 1/15/2015

55,000

55,344

Shaw Communications, Inc., 8.25%, 4/11/2010

65,000

69,062

Telenet Group Holding NV, 144A, Step-up Coupon, 0% to 12/15/2008, 11.5% to 6/15/2014

268,000

241,535

Vitro, SA de CV, Series A, 11.75%, 11/1/2013

25,000

27,375

 

747,154

Energy 1.0%

OPTI Canada, Inc., 144A, 8.25%, 12/15/2014

65,000

66,787

Pemex Project Funding Master Trust:

 

 

8.0%, 11/15/2011

530,000

583,000

9.5%, 9/15/2027

205,000

275,520

Petronas Capital Ltd., Series REG S, 7.875%, 5/22/2022

115,000

142,736

Secunda International Ltd., 13.374%**, 9/1/2012

75,000

77,531

 

1,145,574

Financials 0.6%

Conproca SA de CV, Series REG S, 12.0%, 6/16/2010

300,000

346,500

Doral Financial Corp., 6.204%**, 7/20/2007 (b)

240,000

218,101

Inmarsat Finance II PLC, Step-up Coupon, 0% to 11/15/2008, 10.375% to 11/15/2012

70,000

64,487

New ASAT (Finance) Ltd., 9.25%, 2/1/2011

60,000

49,800

 

678,888

Health Care 0.2%

Biovail Corp., 7.875%, 4/1/2010

165,000

168,506

Industrials 0.5%

Bombardier, Inc., 144A, 8.0%, 11/15/2014 (b)

75,000

76,875

Kansas City Southern de Mexico:

 

 

144A, 7.625%, 12/1/2013

155,000

155,000

9.375%, 5/1/2012

115,000

122,763

12.5%, 6/15/2012

95,000

102,600

Navios Maritime Holdings, 144A, 9.5%, 12/15/2014

75,000

73,893

Stena AB, 9.625%, 12/1/2012

50,000

53,250

 

584,381

Information Technology 0.1%

Seagate Technology HDD Holdings, 6.8%, 10/1/2016

110,000

110,550

Materials 0.8%

Cascades, Inc., 7.25%, 2/15/2013

155,000

154,613

ISPAT Inland ULC, 9.75%, 4/1/2014

197,000

220,148

Novelis, Inc., 144A, 8.25%, 2/15/2015

275,000

266,062

Rhodia SA:

 

 

8.875%, 6/1/2011

60,000

63,300

10.25%, 6/1/2010

70,000

79,800

Tembec Industries, Inc., 8.625%, 6/30/2009

80,000

54,800

 

838,723

 

Principal Amount ($)(a)

Value ($)

 

 

Sovereign Bonds 21.8%

Aries Vermogensverwaltung GmbH, Series C REG S, 9.6%, 10/25/2014

500,000

640,995

Dominican Republic, Series REG S, 9.5%, 9/27/2011

329,354

354,056

Egypt Governemnt AID Bonds, 4.45%, 9/15/2015

5,050,000

4,879,865

Federative Republic of Brazil:

 

 

7.125%, 1/20/2037 (b)

310,000

333,095

7.875%, 3/7/2015

310,000

345,340

8.75%, 2/4/2025

260,000

321,100

8.875%, 10/14/2019 (b)

675,000

823,500

11.0%, 1/11/2012

460,000

565,800

11.0%, 8/17/2040 (b)

655,000

867,875

14.5%, 10/15/2009

220,000

273,350

Government of Ukraine, Series REG S, 7.65%, 6/11/2013

250,000

269,100

Province of Ontario, 3.5%, 9/17/2007

1,500,000

1,480,885

Republic of Argentina:

 

 

Step-up Coupon, 1.33% to 3/31/2009, 2.5% to 3/31/2019, 3.75% to 3/31/2029, 5.25% to 12/31/2038

240,000

129,600

5.59%**, 8/3/2012 (PIK)

1,210,000

857,475

Republic of Colombia:

 

 

8.25%, 12/22/2014 (b)

145,000

164,575

10.0%, 1/23/2012

315,000

370,125

10.75%, 1/15/2013

45,000

55,688

Republic of El Salvador, 144A, 7.65%, 6/15/2035

670,000

760,450

Republic of Indonesia, 144A, 6.875%, 3/9/2017

440,000

467,500

Republic of Panama:

 

 

7.125%, 1/29/2026

241,000

260,280

9.375%, 1/16/2023

570,000

738,150

Republic of Peru, 7.35%, 7/21/2025 (b)

1,135,000

1,282,550

Republic of Philippines:

 

 

7.75%, 1/14/2031

100,000

113,500

8.0%, 1/15/2016

540,000

614,250

8.375%, 2/15/2011

170,000

186,150

9.375%, 1/18/2017

150,000

184,875

Republic of Serbia, 144A, Series REG S, Step-up Coupon, 3.75% to 11/1/2009, 6.75% to 11/1/2024

115,000

106,375

Republic of Turkey:

 

 

6.875%, 3/17/2036 (b)

470,000

448,850

7.25%, 3/15/2015

70,000

72,363

7.375%, 2/5/2025

125,000

128,125

11.75%, 6/15/2010

405,000

477,900

12.375%, 6/15/2009

300,000

345,750

Republic of Uruguay:

 

 

7.625%, 3/21/2036

185,000

203,500

8.0%, 11/18/2022

265,000

300,775

9.25%, 5/17/2017

105,000

128,362

Republic of Venezuela:

 

 

7.65%, 4/21/2025

50,000

54,200

9.375%, 1/13/2034

300,000

396,000

10.75%, 9/19/2013

855,000

1,062,337

 

Principal Amount ($)(a)

Value ($)

 

 

Russian Federation, Series REG S, Step-up Coupon, 5.0% to 3/31/2007, 7.5% to 3/31/2030

1,530,000

1,727,217

Russian Ministry of Finance, Series VII, 3.0%, 5/14/2011

250,000

225,545

Socialist Republic of Vietnam, 144A, 6.875%, 1/15/2016 (b)

440,000

475,200

United Mexican States:

 

 

5.625%, 1/15/2017

510,000

510,510

8.3%, 8/15/2031

85,000

108,673

 

24,111,811

Telecommunication Services 1.1%

Cell C Property Ltd., 144A, 11.0%, 7/1/2015

220,000

206,250

Embratel, Series B, 11.0%, 12/15/2008 (b)

20,000

21,950

Grupo Iusacell SA de CV, Series B, 10.0%, 7/15/2004*

30,000

29,700

Intelsat Bermuda Ltd., 144A, 11.25%, 6/15/2016

95,000

104,262

Intelsat Ltd., 5.25%, 11/1/2008

95,000

92,388

Millicom International Cellular SA, 10.0%, 12/1/2013

55,000

59,950

Mobifon Holdings BV, 12.5%, 7/31/2010

195,000

215,478

Nortel Networks Ltd.:

 

 

144A, 9.624%**, 7/15/2011

200,000

210,750

144A, 10.125%, 7/15/2013

100,000

108,000

144A, 10.75%, 7/15/2016

75,000

82,031

Stratos Global Corp., 9.875%, 2/15/2013

130,000

125,450

 

1,256,209

Utilities 0.4%

Intergas Finance BV, Series REG S, 6.875%, 11/4/2011

375,000

384,626

Total Foreign Bonds — US$ Denominated (Cost $28,417,899)

30,026,422

 

Foreign Bonds — Non US$ Denominated 16.3%

Consumer Discretionary 0.2%

Cirsa Capital Luxembourg, 144A, 7.875%, 7/15/2012 EUR

50,000

63,059

Unity Media GmbH, 144A, 8.75%, 2/15/2015 EUR

100,000

128,375

 

191,434

Financials 0.2%

Codere Finance Luxembourg SA, 144A, 8.25%,
6/15/2015 EUR

50,000

69,798

Louis No. 1 PLC:

 

 

144A, 8.5%, 12/1/2014 EUR

55,000

72,603

144A, 10.0%, 12/1/2016 EUR

50,000

66,332

Ono Finance II, 144A, 8.0%, 5/16/2014 EUR

50,000

67,982

 

276,715

Materials 0.1%

Rhodia SA, 144A, 6.242%**, 10/15/2013 EUR

85,000

112,148

Sovereign Bonds 15.8%

Bundesrepublic Deutschland, Series 06, 4.0%, 7/4/2016 EUR

1,800,000

2,382,981

 

Principal Amount ($)(a)

Value ($)

 

 

Federative Republic of Brazil, 12.5%, 1/5/2016 BRL

250,000

125,660

Government of Malaysia, Series 1/04, 4.305%,
2/27/2009 MYR

1,650,000

474,416

Government of Ukraine, Series REG S, 4.95%, 10/13/2015 EUR

130,000

164,433

Hellenic Republic, 2.9%,
6/21/2008 EUR

3,100,000

4,031,264

Kingdom of Spain, 3.15%, 1/31/2016 EUR

1,900,000

2,353,020

Republic of Argentina:

 

 

5.83%, 12/31/2033 (PIK) ARS

375

179

7.82%, 12/31/2033 (PIK) EUR

746,534

1,035,229

Republic of Greece, 4.5%, 9/20/2037 EUR

1,800,000

2,383,123

Republic of Turkey, 20.0%, 10/17/2007 TRY

35

25

United Kingdom Treasury Bond, 5.0%, 3/7/2008 GBP

2,300,000

4,493,945

 

17,444,275

Total Foreign Bonds — Non US$ Denominated (Cost $17,723,522)

18,024,572

 

US Government Sponsored Agencies 1.5%

Tennessee Valley Authority, Series A, 6.79%, 5/23/2012 (Cost $1,685,458)

1,500,000

1,627,164

 

Loan Participation 0.2%

CSFB International (Exim Ukraine), 6.8%, 10/4/2012 (Cost $199,745)

205,000

200,224

 


Shares

Value ($)

 

 

Warrants 0.0%

Dayton Superior Corp. 144A, Expiration 6/15/2009*

10

0

TravelCenters of America, Inc., Expiration 5/1/2009*

25

625

Total Warrants (Cost $101)

625

 


Units

Value ($)

 

 

Other Investments 0.2%

Hercules, Inc., (Bond Unit), 6.5%, 6/30/2029

85,000

72,675

 


Shares

Value ($)

 

 

IdleAire Technologies Corp. (Bond Unit), 144A, Step-up Coupon, 0% to 6/15/2008, 13.0% to 12/15/2012

160,000

120,000

Total Other Investments (Cost $197,240)

192,675

Common Stocks 0.0%

GEO Specialty Chemicals, Inc.* (Cost $19,822)

2,058

1,749

 

Convertible Preferred Stock 0.0%

Consumer Discretionary

ION Media Networks, Inc.:

 

 

144A, 9.75% (PIK)

2

9,100

Series AI, 144A, 9.75% (PIK)

4

18,200

Total Convertible Preferred Stocks (Cost $41,950)

27,300

 

Principal Amount ($)(a)

Value ($)

 

 

US Treasury Obligations 15.5%

US Treasury Bill, 5.005%***, 1/18/2007 (c)

536,000

534,747

US Treasury Bonds:

 

 

5.375%, 2/15/2031

1,700,000

1,820,993

6.25%, 8/15/2023

5,200,000

5,985,283

US Treasury Note, 6.125%, 8/15/2007

8,735,000

8,790,275

Total US Treasury Obligations (Cost $17,002,869)

17,131,298

 


Shares

Value ($)

 

 

Securities Lending Collateral 7.6%

Daily Assets Fund Institutional, 5.34% (d) (e) (Cost $8,409,765)

8,409,765

8,409,765

 

Cash Equivalents 7.4%

Cash Management QP Trust, 5.46% (f) (Cost $8,156,731)

8,156,731

8,156,731

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $113,691,731)+

105.4

116,413,847

Other Assets and Liabilities, Net

(5.4)

(5,947,573)

Net Assets

100.0

110,466,274

+ The cost for federal income tax purposes was $113,904,184. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $2,509,663. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $3,127,408 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $617,745.
* Non-income producing security. In the case of a bond, generally denotes that the issuer has defaulted on the payment of principal or interest. The following table represents bonds that are in default.

Securities

Coupon

Maturity Date

Principal Amount

Acquisition Cost ($)

Value ($)

Congoleum Corp.

8.625%

8/1/2008

125,000

USD

105,994

118,750

Grupo Iusacell SA de CV

10.0%

7/15/2004

30,000

USD

21,475

29,700

Oxford Automotive, Inc.

12.0%

10/15/2010

157,024

USD

14,689

2,355

Radnor Holdings Corp.

11.0%

3/15/2010

25,000

USD

17,152

63

 

 

 

 

 

159,310

150,868

** Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2006.
*** Annualized yield at time of purchase; not a coupon rate.
(a) Principal amount stated in US dollars unless otherwise noted.
(b) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $8,247,392 which is 7.5% of net assets.
(c) At December 31, 2006, this security, in part or in whole, has been segregated to cover initial margin requirements for open future contracts.
(d) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(e) Represents collateral held in connection with securities lending.
(f) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

PIK: Denotes that all or a portion of the income is paid in-kind.

At December 31, 2006, open futures contracts purchased were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Depreciation ($)

10 Year Federal Republic of Germany Bond

3/8/2007

24

3,765,359

3,675,970

(89,389)

10 Year Japanese Government Bond

3/9/2007

5

5,638,956

5,632,116

(6,840)

10 Year US Treasury Note

3/21/2007

28

3,048,366

3,009,125

(39,241)

Total net unrealized depreciation

(135,470)

At December 31, 2006, open futures contracts sold were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Appreciation ($)

10 Year Canada Government Bond

3/21/2007

4

394,204

390,413

3,791

2 Year Federal Republic of Germany Bond

3/8/2007

40

5,491,857

5,463,159

28,698

2 Year US Treasury Note

3/30/2007

20

4,095,564

4,080,625

14,939

10 Year Australian Bond

3/15/2007

40

3,249,329

3,186,930

62,399

United Kingdom Treasury Bond

3/28/2007

14

3,002,130

2,964,062

38,068

Total net unrealized appreciation

147,895

At December 31, 2006, the open credit default swap contract purchased was as follows:

Effective/Expiration Date

Notional Amount ($)

Cash Flows Paid by the Portfolio

Underlying Debt Obligation

Unrealized Appreciation ($)

9/27/2006-12/20/2011

2,100,000+

Fixed — 3.25%

Dow Jones CDX High Yield

62,267

Counterparty:
+ JPMorgan Chase

At December 31, 2006, the Portfolio had the following open forward foreign currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement Date

Unrealized Appreciation ($)

USD

733,218

 
 AUD

967,000

 

1/29/2007

28,405

USD

1,769,276

 
 EUR

1,398,698

 

1/29/2007

79,109

USD

2,344,218

 
 GBP

1,248,000

 

1/29/2007

100,649

USD

202,449

 
 GBP

106,000

 

1/29/2007

5,208

JPY

464,513,100

 
 USD

3,950,210

 

1/29/2007

32,331

JPY

44,978,000

 
 USD

388,319

 

1/29/2007

8,957

USD

569,966

 
 SEK

4,074,000

 

1/29/2007

27,048

USD

2,483,221

 
 SGD

3,885,000

 

1/29/2007

53,153

EUR

105,000

 
 USD

140,371

 

2/12/2007

1,483

EUR

267,450

 
 USD

355,022

 

2/12/2007

1,253

EUR

798,300

 
 USD

1,059,691

 

2/12/2007

3,741

EUR

1,350,000

 
 USD

1,806,476

 

3/6/2007

19,612

GBP

750,000

 
 USD

1,486,200

 

3/6/2007

16,812

USD

115,476

 
 IDR

1,050,836

 

3/13/2007

1,368

Total unrealized appreciation

379,129

Contracts to Deliver

 

In Exchange For

 

Settlement Date

Unrealized
Depreciation ($)

EUR

85,000

 
 USD

108,452

 

1/5/2007

(3,781)

NOK

5,941,000

 
 USD

901,517

 

1/29/2007

(53,720)

USD

452,110

 
 CAD

508,000

 

1/29/2007

(15,841)

CHF

3,694,000

 
 USD

2,945,774

 

1/29/2007

(91,152)

CHF

961,000

 
 USD

777,709

 

1/29/2007

(12,352)

EUR

663,000

 
 USD

850,483

 

1/29/2007

(25,674)

EUR

55,000

 
 USD

70,197

 

2/5/2007

(2,532)

EUR

50,000

 
 USD

63,870

 

2/9/2007

(2,259)

USD

9,918,458

 
 JPY

1,130,000,000

 

3/6/2007

(342,534)

Total unrealized depreciation

(549,845)

Currency Abbreviations

ARS Argentine Peso
AUD Austrian Dollar
BRL Brazilian Dollar
CAD Canadian Dollars
CHF Swiss Franc
EUR Euro
GBP Great British Pound
IDR Indonesian Rupiah
JPY Japanese Yen
NOK Norwegian Krone
MYR Malaysian Ringgit
SEK Swedish Krona
SGD Singapore Dollar
TRY Turkish Lira
USD United States Dollar

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $97,125,235) — including $8,247,392 of securities loaned

$ 99,847,351

Investment in Daily Assets Fund Institutional (cost $8,409,765)*

8,409,765

Investment in Cash Management QP Trust (cost $8,156,731)

8,156,731

Total investments in securities, at value (cost $113,691,731)

116,413,847

Cash

338,309

Foreign currency, at value (cost $377,779)

375,518

Interest receivable

2,011,807

Receivable for Portfolio shares sold

40,822

Foreign taxes recoverable

2,498

Unrealized appreciation on forward foreign currency exchange contracts

379,129

Unrealized appreciation on credit default swap contracts

62,267

Other assets

3,261

Total assets

119,627,458

Liabilities

Payable upon return of securities loaned

8,409,765

Payable for Portfolio shares redeemed

4,613

Unrealized depreciation on forward foreign currency exchange contracts

549,845

Payable for daily variation margin on open futures contracts

19,628

Accrued management fee

53,940

Net payable on closed forward foreign currency exchange contracts

12,447

Other accrued expenses and payables

110,946

Total liabilities

9,161,184

Net assets, at value

$ 110,466,274

Net Assets

Net assets consist of:
Undistributed net investment income

6,991,143

Net unrealized appreciation (depreciation) on:

Investments

2,722,116

Credit default swaps

62,267

Futures

12,425

Foreign currency related transactions

(179,391)

Accumulated net realized gain (loss)

(215,945)

Paid-in capital

101,073,659

Net assets, at value

$ 110,466,274

Class A

Net Asset Value, offering and redemption price per share ($85,766,556 ÷ 7,267,545 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.80

Class B

Net Asset Value, offering and redemption price per share ($24,699,718 ÷ 2,104,567 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 11.74

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Interest (net of foreign taxes withheld of $88)

$ 6,000,129

Interest — Cash Management QP Trust

419,063

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

24,528

Total Income

6,443,720

Expenses:
Management fee

662,490

Custodian fees

38,875

Distribution service fees (Class B)

61,574

Record keeping fees (Class B)

31,717

Auditing

57,050

Legal

10,785

Trustees' fees and expenses

15,610

Reports to shareholders

42,048

Registration fees

277

Other

48,963

Total expenses before expense reductions

969,389

Expense reductions

(17,598)

Total expenses after expense reductions

951,791

Net investment income

5,491,929

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

1,526,104

Credit default swaps

(157,354)

Futures

47,043

Foreign currency related transactions

200,740

Net increase from payments by affiliates and net losses realized on trades executed incorrectly and the disposal of investments in violation of restrictions

—

 

1,616,533

Net unrealized appreciation (depreciation) during the period on:
Investments

1,514,128

Credit default swaps

197,123

Futures

79,925

Foreign currency related transactions

(49,418)

 

1,741,758

Net gain (loss) on investment transactions

3,358,291

Net increase (decrease) in net assets resulting from operations

$ 8,850,220

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income

$ 5,491,929

$ 4,985,394

Net realized gain (loss) on investment transactions

1,616,533

355,060

Net unrealized appreciation (depreciation) during the period on investment transactions

1,741,758

(3,288,846)

Net increase (decrease) in net assets resulting from operations

8,850,220

2,051,608

Distributions to shareholders from:
Net investment income:

Class A

(3,447,308)

(5,064,114)

Class B

(1,139,329)

(1,726,009)

Net realized gains:

Class A

(665,270)

(149,856)

Class B

(235,620)

(53,955)

Portfolio share transactions:

Class A

Proceeds from shares sold

23,655,231

19,392,981

Reinvestment of distributions

4,112,578

5,213,970

Cost of shares redeemed

(15,500,783)

(12,247,000)

Net increase (decrease) in net assets from Class A share transactions

12,267,026

12,359,951

Class B

Proceeds from shares sold

3,743,282

7,141,190

Reinvestment of distributions

1,374,949

1,779,964

Cost of shares redeemed

(7,442,604)

(2,685,538)

Net increase (decrease) in net assets from Class B share transactions

(2,324,373)

6,235,616

Increase (decrease) in net assets

13,305,346

13,653,241

Net assets at beginning of period

97,160,928

83,507,687

Net assets at end of period (including undistributed net investment income of $6,991,143 and $4,603,670, respectively)

$ 110,466,274

$ 97,160,928

Other Information

Class A

Shares outstanding at beginning of period

6,158,201

5,069,464

Shares sold

2,099,310

1,677,930

Shares issued to shareholders in reinvestment of distributions

375,578

468,040

Shares redeemed

(1,365,544)

(1,057,233)

Net increase (decrease) in Class A shares

1,109,344

1,088,737

Shares outstanding at end of period

7,267,545

6,158,201

Class B

Shares outstanding at beginning of period

2,304,696

1,758,421

Shares sold

329,869

619,274

Shares issued to shareholders in reinvestment of distributions

125,911

160,213

Shares redeemed

(655,909)

(233,212)

Net increase (decrease) in Class B shares

(200,129)

546,275

Shares outstanding at end of period

2,104,567

2,304,696

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 11.50

$ 12.25

$ 11.82

$ 11.10

$ 10.27

Income (loss) from investment operations:

Net investment incomea

.62

.65

.58

.41

.45

Net realized and unrealized gain (loss) on investment transactions

.36

(.39)

.39

.47

.68

Total from investment operations

.98

.26

.97

.88

1.13

Less distributions from:

Net investment income

(.57)

(.98)

—

(.15)

(.30)

Net realized gain on investment transactions

(.11)

(.03)

(.54)

(.01)

—

Total distributions

(.68)

(1.01)

(.54)

(.16)

(.30)

Net asset value, end of period

$ 11.80

$ 11.50

$ 12.25

$ 11.82

$ 11.10

Total Return (%)

8.98

2.38

8.60

7.85

11.30

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

86

71

62

62

60

Ratio of expenses (%)

.85

.88

.84

.83

.73

Ratio of net investment income (%)

5.47

5.61

4.99

3.60

4.26

Portfolio turnover rate (%)

143

120

210

160

65

a Based on average shares outstanding during the period.

Class B

Years Ended December 31,

2006

2005

2004

2003a

Selected Per Share Data

Net asset value, beginning of period

$ 11.44

$ 12.17

$ 11.78

$ 11.44

Income (loss) from investment operations:

Net investment incomeb

.59

.61

.53

.17

Net realized and unrealized gain (loss) on investment transactions

.35

(.38)

.40

.17

Total from investment operations

.94

.23

.93

.34

Less distributions from:

Net investment income

(.53)

(.93)

—

—

Net realized gain on investment transactions

(.11)

(.03)

(.54)

—

Total distributions

(.64)

(.96)

(.54)

—

Net asset value, end of period

$ 11.74

$ 11.44

$ 12.17

$ 11.78

Total Return (%)

8.75c

1.92c

8.27

2.97**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

25

26

21

8

Ratio of expenses before expense reductions (%)

1.24

1.25

1.22

1.26*

Ratio of expenses after expense reductions (%)

1.18

1.21

1.22

1.26*

Ratio of net investment income (%)

5.14

5.28

4.61

1.80*

Portfolio turnover rate (%)

143

120

210

160

a For the period from May 1, 2003 (commencement of operations of Class B shares) to December 31, 2003.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Technology VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Investments by the Portfolio in small companies present greater risk of loss than investments in larger, more established companies. Concentration of the Portfolio's investment in technology stocks may present a greater risk than investments in a more diversified portfolio. Investments by the Portfolio in emerging technology companies present greater risk than investments in more established technology companies. This Portfolio is non-diversified and can take larger positions in fewer companies, increasing its overall potential risk. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

Growth of an Assumed $10,000 Investment in DWS Technology VIP from 5/1/1999 to 12/31/2006

[] DWS Technology VIP — Class A

[] Goldman Sachs Technology Index

[] Russell 1000® Growth Index

The Goldman Sachs Technology Index is an unmanaged capitalization-weighted index based on a universe of technology-related stocks.

The Russell 1000® Growth Index is an unmanaged index that consists of those stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

vs2_g10k1470

 

Yearly periods ended December 31

 

Comparative Results

DWS Technology VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$10,075

$10,653

$10,070

$9,489

Average annual total return

.75%

2.13%

.14%

-.68%

Goldman Sachs Technology Index
 Growth of $10,000

$10,898

$11,443

$10,537

$7,726

Average annual total return

8.98%

4.59%

1.05%

-3.31%

Russell 1000 Growth Index
 Growth of $10,000

$10,907

$12,205

$11,420

$8,815

Average annual total return

9.07%

6.87%

2.69%

-1.63%

DWS Technology VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$10,043

$10,525

$14,655

Average annual total return

 

.43%

1.72%

8.87%

Goldman Sachs Technology Index
 Growth of $10,000

 

$10,898

$11,443

$15,726

Average annual total return

 

8.98%

4.59%

10.58%

Russell 1000 Growth Index
 Growth of $10,000

 

$10,907

$12,205

$14,415

Average annual total return

 

9.07%

6.87%

8.47%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 1999. Index returns began on April 30, 1999.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Technology VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,118.10

 

$ 1,117.10

 

Expenses Paid per $1,000*

$ 4.80

 

$ 6.88

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.67

 

$ 1,018.70

 

Expenses Paid per $1,000*

$ 4.58

 

$ 6.56

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Technology VIP

.90%

 

1.29%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Technology VIP

Technology stocks delivered a positive absolute return during 2006, but the sector underperformed the broader market. A strong second half rally was not enough to make up for tech's weakness in the second quarter, during which the options backdating scandal weighed heavily on the sector. DWS Technology VIP (Class A shares, unadjusted for contract charges) returned 0.75% for the year, trailing the 8.98% return of its benchmark, the Goldman Sachs Technology Index.

We have made an effort to invest in what we believe are faster-growing companies since taking over the Portfolio's management duties in April, an approach that is reflected in increased weightings in overseas and mid-cap companies. While we believe that this positioning will pay off in the long-term, it detracted from returns during the second half of the year due to the substantial outperformance of large-cap techs.

Software was our most significant area of underperformance, largely as a result of the Portfolio's underweights in Microsoft Corp. and Oracle Corp.1 Also hurting performance was our stock selection in the semiconductors, internet and hardware sectors. On the plus side, the Portfolio benefited from our decision to not own any US-based electronics equipment companies and to invest instead in foreign stocks such as Hon Hai Precision Industry Co., Ltd. and Inotera Memories, Inc., both of which are based in Taiwan. In terms of individual companies, notable winners included Apple Computer, Inc., Akamai Technologies, Inc., and a non-holding in Dell.

In an environment likely to be characterized by a large dispersion in the performance of individual stocks, our focus in 2007 will be on investing in companies that we believe are demonstrating solid growth and strong product cycles.

Kelly P. Davis, CFA Brian S. Peters, CFA
Lead Portfolio Manager Portfolio Manager

Deutsche Investment Management Americas Inc.

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns.

Risk Considerations

Investments by the Portfolio in small companies present greater risk of loss than investments in larger, more established companies. Concentration of the Portfolio's investment in technology stocks may present a greater risk than investments in a more diversified portfolio. Investments by the Portfolio in emerging technology companies present greater risk than investments in more established technology companies. This Portfolio is non-diversified and can take larger positions in fewer companies, increasing its overall potential risk. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

The Goldman Sachs Technology Index is an unmanaged capitalization-weighted index based on a universe of technology-related stocks.

Index returns assume reinvestment of all dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

1 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Technology VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

99%

95%

Cash Equivalents

1%

5%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Information Technology:

 

 

Software

23%

15%

Computers & Peripherals

19%

22%

Semiconductors & Semiconductor Equipment

18%

25%

Communications Equipment

16%

16%

Internet Software & Services

13%

9%

IT Services

6%

7%

Electronic Equipment & Instruments

2%

1%

Electronic Equipment

1%

—

Industrials

2%

—

Consumer Discretionary

—

5%

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 235. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Technology VIP

 


Shares

Value ($)

 

 

Common Stocks 97.9%

Industrials 1.6%

Commercial Services & Supplies 0.6%

SAIC, Inc.* (a)

59,800

1,063,842

Electrical Equipment 1.0%

Cheng Uei Precision Industry Co., Ltd.

516,071

1,836,668

Information Technology 96.0%

Communications Equipment 16.0%

Cisco Systems, Inc.*

373,800

10,215,954

Corning, Inc.*

283,700

5,308,027

Foundry Networks, Inc.*

180,500

2,703,890

Motorola, Inc.

155,584

3,198,807

QUALCOMM, Inc.

186,816

7,059,777

Riverbed Technology, Inc.* (a)

4,100

125,870

 

28,612,325

Computers & Peripherals 19.0%

Apple Computer, Inc.*

103,900

8,814,876

Asustek Computer, Inc.

750,000

2,043,208

EMC Corp.*

447,200

5,903,040

Hewlett-Packard Co.

210,900

8,686,971

Network Appliance, Inc.*

70,700

2,777,096

QLogic Corp.*

112,420

2,464,247

Rackable Systems, Inc.* (a)

60,100

1,861,297

SanDisk Corp.* (a)

32,700

1,407,081

 

33,957,816

Electronic Equipment & Instruments 2.2%

Hon Hai Precision Industry Co., Ltd.

535,200

3,821,955

Internet Software & Services 12.5%

Akamai Technologies, Inc.*

30,300

1,609,536

eBay, Inc.*

210,600

6,332,742

Google, Inc. "A"*

18,300

8,426,784

Yahoo!, Inc.*

235,700

6,019,778

 

22,388,840

IT Services 5.8%

Automatic Data Processing, Inc.

150,530

7,413,602

BearingPoint, Inc.* (a)

110,500

869,635

Paychex, Inc.

51,900

2,052,126

 

10,335,363

Semiconductors & Semiconductor Equipment 17.5%

Advanced Micro Devices, Inc.*

114,700

2,334,145

Applied Materials, Inc.

234,200

4,320,990

ASML Holding NV (NY Registered Shares)* (a)

102,500

2,524,575

Broadcom Corp. "A"*

31,287

1,010,883

Inotera Memories, Inc.*

1,492,000

1,780,426

 


Shares

Value ($)

 

 

Intel Corp.

245,389

4,969,127

Marvell Technology Group Ltd.*

103,000

1,976,570

Maxim Integrated Products, Inc.

106,834

3,271,257

MKS Instruments, Inc.*

49,600

1,119,968

PMC-Sierra, Inc.* (a)

113,800

763,598

SiRF Technology Holdings, Inc.* (a)

86,100

2,197,272

Spansion, Inc. "A"* (a)

133,000

1,976,380

Texas Instruments, Inc.

104,500

3,009,600

 

31,254,791

Software 23.0%

Adobe Systems, Inc.*

206,600

8,495,392

Autodesk, Inc.*

103,800

4,199,748

Cadence Design Systems, Inc.*

110,200

1,973,682

Electronic Arts, Inc.*

99,600

5,015,856

Microsoft Corp.

314,346

9,386,372

Oracle Corp.*

200,000

3,428,000

Symantec Corp.*

312,077

6,506,805

Take-Two Interactive Software, Inc.* (a)

122,100

2,168,496

 

41,174,351

Materials 0.3%

Chemicals

SODIFF Advanced Materials Co., Ltd.

28,944

525,097

Total Common Stocks (Cost $149,175,395)

174,971,048

 

Call Options Purchased 0.1%

Microsoft Corp. Expiring 4/21/2007, Strike Price, $30.0 (Cost $215,824)

1,927

279,415

 

Securities Lending Collateral 7.0%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $12,467,311)

12,467,311

12,467,311

 

Cash Equivalents 1.2%

Cash Management QP Trust, 5.46% (d) (Cost $2,194,811)

2,194,811

2,194,811

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $164,053,341)+

106.2

189,912,585

Other Assets and Liabilities, Net

(6.2)

(11,115,742)

Net Assets

100.0

178,796,843

* Non-income producing security.
+ The cost for federal income tax purposes was $177,677,616. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $12,234,969. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $31,588,147 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $19,353,178.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $12,094,384 which is 6.8% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

At December 31, 2006, open written options were as follows:

Written Options

Number of Contracts

ExpirationDate

Strike Price ($)

Value ($)

Call Options

Take Two Interactive Software (premiums received ($100,465)

536

1/20/2007

17.5

(54,136)

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $149,391,219) — including $12,094,384 of securities loaned

$ 175,250,463

Investment in Daily Assets Fund Institutional (cost $12,467,311)*

12,467,311

Investment in Cash Management QP Trust (cost $2,194,811)

2,194,811

Total investments in securities, at value (cost $164,053,341)

189,912,585

Foreign currency, at value (cost $1,377,304)

1,377,959

Receivable for Portfolio shares sold

186,808

Dividends receivable

82,990

Interest receivable

15,544

Foreign taxes recoverable

274

Other assets

5,671

Total assets

191,581,831

Liabilities

Payable for Portfolio shares redeemed

31,119

Payable upon return of securities loaned

12,467,311

Written options, at value (premium received $100,465)

54,136

Accrued management fee

115,837

Other accrued expenses and payables

116,585

Total liabilities

12,784,988

Net assets, at value

$ 178,796,843

Net Assets

Net assets consist of:
Accumulated net investment loss

(2,464)

Net unrealized appreciation (depreciation) on:

Investments

25,859,244

Written options

46,329

Foreign currency related transactions

654

Accumulated net realized gain (loss)

(265,490,735)

Paid-in capital

418,383,815

Net assets, at value

$ 178,796,843

Class A

Net Asset Value, offering and redemption price per share ($164,694,094 ÷ 17,575,288 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 9.37

Class B

Net Asset Value, offering and redemption price per share ($14,102,749 ÷ 1,525,054 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 9.25

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends (net of foreign taxes withheld of $27,951)

$ 828,209

Interest

2,220

Interest — Cash Management QP Trust

280,064

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

23,020

Other income**

338,842

Total Income

1,472,355

Expenses:
Management fee

1,436,929

Custodian and accounting fees

89,890

Distribution service fees (Class B)

37,465

Record keeping fees (Class B)

20,308

Auditing

47,016

Legal

17,823

Trustees' fees and expenses

22,214

Reports to shareholders

78,048

Other

20,928

Total expenses before expense reductions

1,770,621

Expense reductions

(3,493)

Total expenses after expense reductions

1,767,128

Net investment income (loss)

(294,773)

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:
Investments

6,086,166

Written options

60,573

Foreign currency related transactions

(33,849)

 

6,112,890

Net unrealized appreciation (depreciation) during the period on:
Investments

(5,948,927)

Written options

(5,655)

Foreign currency related transactions

(539)

 

(5,955,121)

Net gain (loss) on investment transactions

157,769

Net increase (decrease) in net assets resulting from operations

$ (137,004)

** Non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sales of DWS Scudder Funds (see Note J).

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ (294,773)

$ (837,802)

Net realized gain (loss)

6,112,890

13,020,687

Net unrealized appreciation (depreciation) during the period on investment transactions

(5,955,121)

(6,202,419)

Net increase (decrease) in net assets resulting from operations

(137,004)

5,980,466

Distributions to shareholders from:
Net investment income:

Class A

—

(979,061)

Class B

—

(18,255)

Portfolio share transactions:

Class A

Proceeds from shares sold

6,300,268

13,734,734

Reinvestment of distributions

—

979,061

Cost of shares redeemed

(40,707,874)

(50,111,493)

Net increase (decrease) in net assets from Class A share transactions

(34,407,606)

(35,397,698)

Class B

Proceeds from shares sold

2,069,789

2,549,674

Reinvestment of distributions

—

18,255

Cost of shares redeemed

(4,331,077)

(2,984,180)

Net increase (decrease) in net assets from Class B share transactions

(2,261,288)

(416,251)

Increase (decrease) in net assets

(36,805,898)

(30,830,799)

Net assets at beginning of period

215,602,741

246,433,540

Net assets at end of period (including accumulated net investment loss and accumulated distributions in excess of net investment income of $2,464 and $402, respectively)

$ 178,796,843

$ 215,602,741

Other Information

Class A

Shares outstanding at beginning of period

21,420,473

25,536,462

Shares sold

695,699

1,583,343

Shares issued to shareholders in reinvestment of distributions

—

119,107

Shares redeemed

(4,540,884)

(5,818,439)

Net increase (decrease) in Class A shares

(3,845,185)

(4,115,989)

Shares outstanding at end of period

17,575,288

21,420,473

Class B

Shares outstanding at beginning of period

1,782,726

1,832,122

Shares sold

234,259

296,780

Shares issued to shareholders in reinvestment of distributions

—

2,234

Shares redeemed

(491,931)

(348,410)

Net increase (decrease) in Class B shares

(257,672)

(49,396)

Shares outstanding at end of period

1,525,054

1,782,726

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 9.30

$ 9.01

$ 8.84

$ 6.02

$ 9.36

Income (loss) from investment operations:

Net investment income (loss)a

(.01)b

(.03)

.04

(.04)

(.03)

Net realized and unrealized gain (loss) on investment transactions

.08

.36

.13

2.86

(3.30)

Total from investment operations

.07

.33

.17

2.82

(3.33)

Less distributions from:

Net investment income

—

(.04)

—

—

(.01)

Net asset value, end of period

$ 9.37

$ 9.30

$ 9.01

$ 8.84

$ 6.02

Total Return (%)

.75b

3.74

1.92

46.84

(35.52)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

165

199

230

257

219

Ratio of expenses  (%)

.89

.86

.83

.86

.80

Ratio of net investment income  (%)

(.12)b

(.36)

.43

(.50)

(.37)

Portfolio turnover rate  (%)

49

135

112

66

64

a Based on average shares outstanding during the period.
b Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.017 per share and an increase in the ratio of net investment income of 0.18%. Excluding this non-recurring income, total return would have been 0.19% lower.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 9.21

$ 8.93

$ 8.80

$ 6.01

$ 6.32

Income (loss) from investment operations:

Net investment income (loss)b

(.04)d

(.07)

.01

(.07)

(.02)

Net realized and unrealized gain (loss) on investment transactions

.08

.36

.12

2.86

(.29)

Total from investment operations

.04

.29

.13

2.79

(.31)

Less distributions from:

Net investment income

—

(.01)

—

—

—

Net asset value, end of period

$ 9.25

$ 9.21

$ 8.93

$ 8.80

$ 6.01

Total Return (%)

.43d

3.27

1.48c

46.42

(4.75)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

14

16

16

11

.3

Ratio of expenses before expense reductions  (%)

1.28

1.26

1.22

1.25

1.06*

Ratio of expenses after expense reductions  (%)

1.28

1.26

1.21

1.25

1.06*

Ratio of net investment income  (%)

(.51)d

(.76)

.05

(.89)

(.79)*

Portfolio turnover rate  (%)

49

135

112

66

64

a For the period from July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
d Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Scudder Funds (see Note J). The non-recurring income resulted in an increase in net investment income of $0.017 per share and an increase in the ratio of net investment income of 0.18%. Excluding this non-recurring income, total return would have been 0.19% lower.
* Annualized
** Not annualized

Performance Summary December 31, 2006

DWS Turner Mid Cap Growth VIP

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Stocks of medium-sized companies involve greater risk than securities of larger, more established companies, as they often have limited product lines, markets or financial resources and may be subject to more-erratic and more-abrupt market movements. Additionally, it is nondiversified and can take larger positions in fewer companies, increasing its overall potential risk. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

Portfolio returns shown for life of portfolio period for Class A shares and for all periods shown for Class B shares reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Growth of an Assumed $10,000 Investment in DWS Turner Mid Cap Growth VIP from 5/1/2001 to 12/31/2006

[] DWS Turner Mid Cap Growth VIP — Class A

[] Russell Midcap™ Growth Index

The Russell Midcap™ Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.

Index returns assume reinvestment of dividends and unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly in an index.

vs2_g10k1460

 

Yearly periods ended December 31

 

Comparative Results

DWS Turner Mid Cap Growth VIP

1-Year

3-Year

5-Year

Life of Portfolio*

Class A

Growth of $10,000

$10,652

$13,219

$13,293

$11,738

Average annual total return

6.52%

9.75%

5.86%

2.87%

Russell Midcap Growth Index
 Growth of $10,000

$11,066

$14,325

$14,840

$13,558

Average annual total return

10.66%

12.73%

8.22%

5.52%

DWS Turner Mid Cap Growth VIP

 

1-Year

3-Year

Life of Class**

Class B

Growth of $10,000

 

$10,621

$13,072

$17,509

Average annual total return

 

6.21%

9.34%

13.27%

Russell Midcap Growth Index
 Growth of $10,000

 

$11,066

$14,325

$18,482

Average annual total return

 

10.66%

12.73%

14.62%

The growth of $10,000 is cumulative.

* The Portfolio commenced operations on May 1, 2001. Index returns began on April 30, 2001.
** The Portfolio commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.

Information About Your Portfolio's Expenses

DWS Turner Mid Cap Growth VIP

As an investor of the Portfolio, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Portfolio expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Portfolio and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Portfolio limited these expenses for Class B shares; had it not done so, expenses for Class B shares would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2006 to December 31, 2006).

The tables illustrate your Portfolio's expenses in two ways:

Actual Portfolio Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Portfolio using the Portfolio's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Portfolio Return. This helps you to compare your Portfolio's ongoing expenses (but not transaction costs) with those of other mutual funds using the Portfolio's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Portfolio return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2006

Actual Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,022.50

 

$ 1,021.90

 

Expenses Paid per $1,000*

$ 5.10

 

$ 7.19

 

Hypothetical 5% Portfolio Return

Class A

 

Class B

 

Beginning Account Value 7/1/06

$ 1,000.00

 

$ 1,000.00

 

Ending Account Value 12/31/06

$ 1,020.16

 

$ 1,018.10

 

Expenses Paid per $1,000*

$ 5.09

 

$ 7.17

 

* Expenses are equal to the Portfolio's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

 

Class B

 

DWS Variable Series II — DWS Turner Mid Cap Growth VIP

1.00%

 

1.41%

 

For more information, please refer to the Portfolio's prospectus.

These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option.

Management Summary December 31, 2006

DWS Turner Mid Cap Growth VIP

For the year, the DWS Turner Mid Cap Growth VIP recorded a return of 6.52% (Class A shares, unadjusted for contract charges), underperforming the 10.66% return posted by the Portfolio's benchmark, the Russell Midcap Growth™ Index. Three of the Portfolio's sector positions beat their corresponding index sectors. Contributing the most to performance were growth-oriented holdings in the producer durables and materials/processing sectors. Industries that added value included telecommunications equipment, trucks/construction/farm equipment, steel, and aerospace and defense stocks. Detracting the most from performance were our weightings in the health care and technology sectors.

After four straight up years, Wall Street pundits are sharply divided as to whether the aging bull has any more life in it. We think it does. We remain optimistic that over the next 12 months a recession will be avoided, although the economy should continue to slow. As the economy slows, the profitability of some companies is likely to falter and the stocks of companies able to keep achieving above-average growth (i.e., growth stocks) should do well, in our estimation. In short, we anticipate that investors may be willing to pay a premium for superior earnings growth and bona fide growth stocks.

We believe two catalysts could thwart the continuation of the bull market. One, the latest annualized core inflation rate is more than 2% -— above the level that the US Federal Reserve Board (the Fed) considers acceptable. Fed Chairman Ben Bernanke hinted in late November that the threat of inflation is still worrisome enough to possibly warrant another rate hike. Two, the yield curve remains inverted, with the three-month US Treasury rate higher than its 10-year counterpart. An inverted yield curve has been a reliable predictor of a recession in modern times. A combination of accelerating inflation and rising rates could blunt corporate earnings and precipitate a recession -— and in the process bring the bull market to a halt. But we don't think that will happen. As we see it, the economy should grow at a solid pace, inflation should be subdued, corporate earnings growth should reach the high single digits at least, and the stock market should have more gains in store for 2007.

Tara Hedlund
Christopher K. McHugh Jason Schrotberger
Lead Manager Portfolio Managers

Turner Investment Partners, Inc., Subadvisor to the Portfolio

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Portfolio's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Portfolio or any variable life insurance policy or variable annuity contract for which the Portfolio is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ.

Risk Considerations

The Portfolio is subject to stock market risk, meaning stocks in the Portfolio may decline in value for extended periods of time due to the activities and financial prospects of individual companies, or due to general market and economic conditions. Stocks of medium-sized companies involve greater risk than securities of larger, more established companies, as they often have limited product lines, markets or financial resources and may be subject to more-erratic and more-abrupt market movements. Additionally, it is nondiversified and can take larger positions in fewer companies, increasing its overall potential risk. Please read this Portfolio's prospectus for specific details regarding this product's investments and risk profile.

The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. Index returns assume reinvestment of dividends and, unlike portfolio returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Portfolio management market commentary is as of December 31, 2006, and may not come to pass. This information is subject to change at any time based on market and other conditions.

Portfolio Summary

DWS Turner Mid Cap Growth VIP

Asset Allocation (Excludes Securities Lending Collateral)

12/31/06

12/31/05

 

 

 

Common Stocks

99%

96%

Cash Equivalents

1%

4%

 

100%

100%

Sector Diversification (As a % of Common Stocks)

12/31/06

12/31/05

 

 

 

Information Technology

23%

25%

Consumer Discretionary

21%

17%

Health Care

16%

17%

Industrials

11%

14%

Financials

10%

10%

Energy

7%

10%

Telecommunication Services

6%

2%

Consumer Staples

3%

2%

Materials

2%

3%

Utilities

1%

—

 

100%

100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Portfolio's investment portfolio, see page 245. Information concerning portfolio holdings of the Portfolio as of month end will be posted to www.dws-scudder.com on or after the last day of the following month. In addition, the Portfolio's top ten holdings and other information about the Portfolio is posted on www.dws-scudder.com as of the calendar quarter-end on or after the 15th day following quarter-end.

Following the Portfolio's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio December 31, 2006

DWS Turner Mid Cap Growth VIP

 

Shares

Value ($)

 

 

Common Stocks 99.6%

Consumer Discretionary 20.8%

Hotels Restaurants & Leisure 8.1%

Ctrip.com International Ltd. (ADR) (a)

11,460

716,021

Hilton Hotels Corp.

74,260

2,591,674

International Game Technology

80,380

3,713,556

Pinnacle Entertainment, Inc.*

21,300

705,882

WMS Industries, Inc.* (a)

40,510

1,412,178

Wynn Resorts Ltd. (a)

26,200

2,458,870

 

11,598,181

Household Durables 1.3%

Harman International Industries, Inc.

17,790

1,777,399

Internet & Catalog Retail 2.5%

Nutri/System, Inc.* (a)

37,410

2,371,420

VistaPrint Ltd.* (a)

36,910

1,222,090

 

3,593,510

Multiline Retail 1.3%

J.C. Penney Co., Inc.

24,680

1,909,245

Specialty Retail 2.6%

GameStop Corp. "A"* (a)

16,740

922,541

Guess?, Inc.*

28,760

1,824,247

The Children's Place Retail Stores, Inc.*

13,890

882,293

 

3,629,081

Textiles, Apparel & Luxury Goods 5.0%

Coach, Inc.*

84,930

3,648,593

Polo Ralph Lauren Corp.

25,340

1,967,904

Under Armour, Inc. "A"* (a)

31,050

1,566,473

 

7,182,970

Consumer Staples 3.0%

Beverages 0.5%

Hansen Natural Corp.* (a)

23,940

806,299

Food Products 2.5%

Bunge Ltd.

12,450

902,750

McCormick & Co., Inc.

22,990

886,494

Wm. Wrigley Jr. Co.

33,960

1,756,411

 

3,545,655

Energy 7.2%

Energy Equipment & Services 3.9%

Cameron International Corp.*

31,530

1,672,667

National-Oilwell Varco, Inc.*

20,930

1,280,497

Smith International, Inc.

41,120

1,688,798

Superior Energy Services, Inc.*

29,260

956,217

 

5,598,179

Oil, Gas & Consumable Fuels 3.3%

Quicksilver Resources, Inc.* (a)

21,300

779,367

Range Resources Corp.

74,884

2,056,315

Southwestern Energy Co.*

17,360

608,468

Williams Companies, Inc.

49,980

1,305,477

 

4,749,627

 

Shares

Value ($)

 

 

Financials 10.4%

Capital Markets 5.5%

Affiliated Managers Group, Inc.* (a)

17,274

1,816,016

Greenhill & Co., Inc. (a)

13,920

1,027,296

Northern Trust Corp.

24,550

1,489,939

T. Rowe Price Group, Inc.

60,560

2,650,711

TD Ameritrade Holding Corp. (a)

55,200

893,136

 

7,877,098

Commercial Banks 0.2%

Synovus Financial Corp.

8,770

270,379

Diversified Financial Services 2.1%

IntercontinentalExchange, Inc.*

17,890

1,930,331

Nasdaq Stock Market, Inc.* (a)

34,040

1,048,092

 

2,978,423

Insurance 0.5%

Arch Capital Group Ltd.*

9,880

667,987

Real Estate Investment Trusts 0.9%

The Macerich Co. (REIT)

15,560

1,347,029

Real Estate Management & Development 1.2%

CB Richard Ellis Group, Inc. "A"*

52,350

1,738,020

Health Care 15.6%

Biotechnology 3.2%

Alexion Pharmaceuticals, Inc.* (a)

22,880

924,123

Celgene Corp.*

44,550

2,562,961

MedImmune, Inc.*

32,940

1,066,268

 

4,553,352

Health Care Equipment & Supplies 1.8%

Intuitive Surgical, Inc.* (a)

13,840

1,327,256

St. Jude Medical, Inc.*

32,780

1,198,437

 

2,525,693

Health Care Providers & Services 2.1%

DaVita, Inc.*

16,640

946,483

Henry Schein, Inc.*

14,550

712,659

Psychiatric Solutions, Inc.*

35,770

1,342,090

 

3,001,232

Life Sciences Tools & Services 3.1%

Applera Corp. — Applied Biosystems Group

32,200

1,181,418

Pharmaceutical Product Development, Inc.

43,700

1,408,014

Thermo Fisher Scientific, Inc.*

40,430

1,831,075

 

4,420,507

Pharmaceuticals 5.4%

Allergan, Inc.

18,550

2,221,177

Forest Laboratories, Inc.*

27,450

1,388,970

Medicis Pharmaceutical Corp. "A" (a)

19,810

695,925

New River Pharmaceuticals, Inc.* (a)

13,540

740,774

Sepracor, Inc.* (a)

17,640

1,086,271

Shire PLC (ADR) (a)

26,230

1,619,965

 

7,753,082

Industrials 11.2%

Aerospace & Defense 1.8%

Precision Castparts Corp.

32,910

2,576,195

 

Shares

Value ($)

 

 

Air Freight & Logistics 0.8%

C.H. Robinson Worldwide, Inc.

27,350

1,118,341

Airlines 1.9%

Continental Airlines, Inc. "B"* (a)

35,970

1,483,762

US Airways Group, Inc.* (a)

21,560

1,161,006

 

2,644,768

Commercial Services & Supplies 1.2%

Monster Worldwide, Inc.*

34,830

1,624,471

Electrical Equipment 3.1%

AMETEK, Inc.

45,990

1,464,322

Energy Conversion Devices, Inc.* (a)

19,610

666,348

General Cable Corp.*

25,650

1,121,161

Roper Industries, Inc.

23,720

1,191,693

 

4,443,524

Industrial Conglomerates 1.0%

McDermott International, Inc.*

28,595

1,454,342

Machinery 0.7%

Harsco Corp.

13,820

1,051,702

Road & Rail 0.7%

CSX Corp.

29,220

1,006,045

Information Technology 23.4%

Communications Equipment 3.8%

F5 Networks, Inc.*

33,540

2,489,003

JDS Uniphase Corp.*

62,814

1,046,481

Polycom, Inc.*

60,860

1,881,183

 

5,416,667

Computers & Peripherals 1.5%

QLogic Corp.*

66,920

1,466,887

SanDisk Corp.*

16,710

719,031

 

2,185,918

Internet Software & Services 3.6%

Akamai Technologies, Inc.* (a)

39,380

2,091,866

aQuantive, Inc.*

37,900

934,614

Digital River, Inc.* (a)

16,860

940,619

VeriSign, Inc.*

49,520

1,190,956

 

5,158,055

IT Services 2.7%

Fiserv, Inc.*

35,290

1,849,902

Isilon Systems, Inc.* (a)

18,900

521,640

Paychex, Inc.

36,480

1,442,419

 

3,813,961

Semiconductors & Semiconductor Equipment 8.5%

Altera Corp.*

67,090

1,320,331

Cymer, Inc.* (a)

29,000

1,274,550

 

Shares

Value ($)

 

 

Integrated Device Technology, Inc.*

75,840

1,174,003

KLA-Tencor Corp.

53,270

2,650,182

MEMC Electronic Materials, Inc.*

33,250

1,301,405

NVIDIA Corp.*

68,150

2,522,232

Varian Semiconductor Equipment Associates, Inc.*

40,780

1,856,306

 

12,099,009

Software 3.3%

Activision, Inc.*

79,020

1,362,305

Electronic Arts, Inc.*

27,560

1,387,921

Salesforce.com, Inc.* (a)

52,500

1,913,625

 

4,663,851

Materials 1.9%

Chemicals 0.5%

Agrium, Inc.

23,450

738,440

Containers & Packaging 0.5%

Owens-Illinois, Inc.*

38,790

715,676

Metals & Mining 0.9%

Allegheny Technologies, Inc.

13,580

1,231,434

Telecommunication Services 5.6%

Wireless Telecommunication Services

American Tower Corp. "A"*

58,530

2,181,999

Crown Castle International Corp.*

38,610

1,247,103

Leap Wireless International, Inc.*

14,020

833,769

NII Holdings, Inc.* (a)

58,440

3,765,875

 

8,028,746

Utilities 0.5%

Gas Utilities

Questar Corp.

8,450

701,773

Total Common Stocks (Cost $114,991,397)

142,195,866

 

Securities Lending Collateral 18.0%

Daily Assets Fund Institutional, 5.34% (b) (c) (Cost $25,631,553)

25,631,553

25,631,553

 

Cash Equivalents 0.6%

Cash Management QP Trust, 5.46% (d) (Cost $882,604)

882,604

882,604

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $141,505,554)+

118.2

168,710,023

Other Assets and Liabilities, Net

(18.2)

(25,997,066)

Net Assets

100.0

142,712,957

* Non-income producing security.
+ The cost for federal income tax purposes was $141,607,757. At December 31, 2006, net unrealized appreciation for all securities based on tax cost was $27,102,266. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $28,726,844 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,624,578.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2006 amounted to $24,937,749 which is 17.5% of net assets.
(b) Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending.
(d) Cash Management QP Trust, an affiliated fund, is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

ADR: American Depositary Receipt

REIT: Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements.

Financial Statements

Statement of Assets and Liabilities

as of December 31, 2006

Assets

Investments:

Investments in securities, at value (cost $114,991,397) — including $24,937,749 of securities loaned

$ 142,195,866

Investment in Daily Assets Fund Institutional (cost $25,631,553)*

25,631,553

Investment in Cash Management QP Trust (cost $882,604)

882,604

Total investments in securities, at value (cost $141,505,554)

168,710,023

Receivable for investments sold

400,603

Dividends receivable

46,739

Interest receivable

10,615

Other assets

4,239

Total assets

169,172,219

Liabilities

Payable upon return of securities loaned

25,631,553

Payable for investments purchased

452,779

Payable for Portfolio shares redeemed

156,431

Accrued management fee

102,739

Other accrued expenses and payables

115,760

Total liabilities

26,459,262

Net assets, at value

$ 142,712,957

Net Assets

Net assets consist of:
Accumulated net investment loss

(2,089)

Net unrealized appreciation (depreciation) on investments

27,204,469

Accumulated net realized gain (loss)

11,823,325

Paid-in capital

103,687,252

Net assets, at value

$ 142,712,957

Class A

Net Asset Value, offering and redemption price per share ($116,844,362 ÷ 10,696,292 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 10.92

Class B

Net Asset Value, offering and redemption price per share ($25,868,595 ÷ 2,410,110 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 10.73

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended December 31, 2006

Investment Income

Income:
Dividends

$ 1,200,593

Interest — Cash Management QP Trust

99,670

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

81,071

Total Income

1,381,334

Expenses:
Management fee

1,209,780

Custodian and accounting fees

116,746

Distribution service fees (Class B)

67,940

Record keeping fees (Class B)

40,984

Auditing

45,655

Legal

20,093

Trustees' fees and expenses

18,476

Reports to shareholders

45,166

Other

9,698

Total expenses before expense reductions

1,574,538

Expense reductions

(3,604)

Total expenses after expense reductions

1,570,934

Net investment income (loss)

(189,600)

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from investments

11,845,281

Net unrealized appreciation (depreciation) during the period on investments

(2,726,806)

Net gain (loss) on investment transactions

9,118,475

Net increase (decrease) in net assets resulting from operations

$ 8,928,875

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

 

Years Ended December 31,

Increase (Decrease) in Net Assets

2006

2005

Operations:
Net investment income (loss)

$ (186,600)

$ (848,873)

Net realized gain (loss) on investment transactions

11,845,281

15,832,516

Net unrealized appreciation (depreciation) during the period on investment transactions

(2,726,806)

(148,045)

Net increase (decrease) in net assets resulting from operations

8,928,875

14,835,598

Distributions to shareholders from:
Net realized gains:

Class A

(9,522,910)

—

Class B

(2,156,952)

—

Portfolio share transactions:

Class A

Proceeds from shares sold

8,775,738

10,529,915

Reinvestment of distributions

9,522,910

—

Cost of shares redeemed

(20,986,374)

(18,562,756)

Net increase (decrease) in net assets from Class A share transactions

(2,687,726)

(8,032,841)

Class B

Proceeds from shares sold

3,506,164

6,985,137

Reinvestment of distributions

2,156,952

—

Cost of shares redeemed

(6,329,936)

(5,854,761)

Net increase (decrease) in net assets from Class B share transactions

(666,820)

1,130,376

Increase (decrease) in net assets

(6,105,533)

7,933,133

Net assets at beginning of period

148,818,490

140,885,357

Net assets at end of period (including accumulated net investment loss of $2,089 and $86, respectively)

$ 142,712,957

$ 148,818,490

Other Information

Class A

Shares outstanding at beginning of period

11,034,621

11,918,058

Shares sold

775,698

997,835

Shares issued to shareholders in reinvestment of distributions

829,522

—

Shares redeemed

(1,943,549)

(1,881,272)

Net increase (decrease) in Class A shares

(338,329)

(883,437)

Shares outstanding at end of period

10,696,292

11,034,621

Class B

Shares outstanding at beginning of period

2,497,836

2,386,654

Shares sold

324,988

684,539

Shares issued to shareholders in reinvestment of distributions

190,543

—

Shares redeemed

(603,257)

(573,357)

Net increase (decrease) in Class B shares

(87,726)

111,182

Shares outstanding at end of period

2,410,110

2,497,836

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended December 31,

2006

2005

2004

2003

2002

Selected Per Share Data

Net asset value, beginning of period

$ 11.02

$ 9.86

$ 8.88

$ 5.98

$ 8.82

Income (loss) from investment operations:

Net investment income (loss)a

(.01)

(.05)

(.07)

(.06)

(.06)

Net realized and unrealized gain (loss) on investment transactions

.77

1.21

1.05

2.96

(2.78)

Total from investment operations

.76

1.16

.98

2.90

(2.84)

Less distributions from:

Net realized gain on investment transactions

(.86)

—

—

—

—

Net asset value, end of period

$ 10.92

$ 11.02

$ 9.86

$ 8.88

$ 5.98

Total Return (%)

6.52

11.76

11.04

48.49

(32.20)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

117

122

118

110

61

Ratio of expenses (%)

.97

1.11

1.19

1.18

1.13

Ratio of net investment income (loss) (%)

(.06)

(.56)

(.82)

(.90)

(.82)

Portfolio turnover rate (%)

148

151

174

155

225

a Based on average shares outstanding during the period.

Class B

Years Ended December 31,

2006

2005

2004

2003

2002a

Selected Per Share Data

Net asset value, beginning of period

$ 10.88

$ 9.78

$ 8.84

$ 5.97

$ 6.60

Income (loss) from investment operations:

Net investment income (loss)b

(.05)

(.09)

(.10)

(.09)

(.02)

Net realized and unrealized gain (loss) on investment transactions

.76

1.19

1.04

2.96

(.61)

Total from investment operations

.71

1.10

.94

2.87

(.63)

Less distributions from:

Net realized gain on investment transactions

(.86)

—

—

—

—

Net asset value, end of period

$ 10.73

$ 10.88

$ 9.78

$ 8.84

$ 5.97

Total Return (%)

6.21

11.25c

10.63

48.07

(9.55)**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

26

27

23

13

.6

Ratio of expenses before expense reductions (%)

1.37

1.51

1.56

1.57

1.38*

Ratio of expenses after expense reductions (%)

1.37

1.48

1.56

1.57

1.38*

Ratio of net investment income (loss) (%)

(.46)

(.93)

(1.19)

(1.29)

(.81)*

Portfolio turnover rate (%)

148

151

174

155

225

a For the period July 1, 2002 (commencement of operations of Class B shares) to December 31, 2002.
b Based on an average shares outstanding during the period.
c Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized

Notes to Financial Statements

A. Significant Accounting Policies

DWS Variable Series II (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end, diversified management investment company organized as a Massachusetts business trust. The Trust offers twenty-one portfolios (individually or collectively hereinafter referred to as a "Portfolio" or the "Portfolios"), including three Portfolios that invest primarily in existing DWS Portfolios ("Underlying Portfolios"). Each Underlying Portfolio's accounting policies and investment holdings are outlined in the Underlying Portfolio's financials statements and are available upon request.

Effective November 3, 2006, DWS Dreman Small Cap Value VIP changed its name to DWS Dreman Small Mid Cap Value VIP.

Multiple Classes of Shares of Beneficial Interest. The Trust offers two classes of shares (Class A shares and Class B shares) except, DWS Moderate Allocation VIP, DWS Growth Allocation VIP and DWS Conservative Allocation VIP, which offer Class B shares only. Sales of Class B shares are subject to record keeping fees up to 0.15% and Rule 12b-1 fees under the 1940 Act equal to an annual rate of 0.25%, of the average daily net assets of the Class B shares of the applicable Portfolio. Class A shares are not subject to such fees.

Investment income, realized and unrealized gains and losses, and certain portfolio-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares except that each class bears certain expenses unique to that class (including the applicable 12b-1 fee and record keeping fee). Differences in class-level expenses may result in payment of different per share dividends by class. All shares have equal rights with respect to voting subject to class-specific arrangements.

The Trust's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Trust in the preparation of its financial statements.

Security Valuation. DWS Money Market VIP values all securities utilizing the amortized cost method permitted in accordance with Rule 2a-7 under the 1940 Act and certain conditions therein. Under this method, which does not take into account unrealized capital gains or losses on securities, an instrument is initially valued at its cost and thereafter assumes a constant accretion/amortization rate to maturity of any discount or premium.

Investments in securities are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Equity securities are valued at the most recent sale price or official closing price reported on the exchange (US or foreign) or over-the-counter market on which the security is traded most extensively. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation.

Debt securities are valued by independent pricing services approved by the Trustees of the Portfolios. If the pricing services are unable to provide valuations, the securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from a broker-dealer. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes.

Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost. Investments in open-end investment companies and Cash Management QP Trust are valued at their net asset value each business day.

Investments in the Underlying Portfolios are valued at the net asset value per share of each class of the Underlying Portfolios as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading.

Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Trustees. The Portfolios may use a fair valuation model to value international equity securities in order to adjust for events which may occur between the close of the foreign exchanges and the close of the New York Stock Exchange.

In September 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. As of December 31, 2006, management does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

Foreign Currency Translations. The books and records of the Trust are maintained in US dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into US dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into US dollars at the prevailing exchange rates on the respective dates of the transactions.

Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies and the difference between the amount of net investment income accrued and the US dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gains and losses on investment securities.

Repurchase Agreements. The Portfolios may enter into repurchase agreements with certain banks and broker/dealers whereby the Portfolios, through their custodian or sub-custodian bank, receive delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the value is equal to at least the principal amount of the repurchase price plus accrued interest. The custodian bank holds the collateral in a separate account until the agreement matures. If the value of the securities falls below the principal amount of the repurchase agreement plus accrued interest, the financial institution deposits additional collateral by the following business day. If the financial institution either fails to deposit the required additional collateral or fails to repurchase the securities as agreed, the Portfolios have the right to sell the securities and recover any resulting loss from the financial institution. If the financial institution enters into bankruptcy, the Portfolios' claims on the collateral may be subject to legal proceedings.

Securities Lending. All Portfolios, except DWS Money Market VIP, DWS Moderate Allocation VIP, DWS Growth Allocation VIP and DWS Conservative Allocation VIP may lend securities to financial institutions. The Portfolios retain beneficial ownership of the securities they have loaned and continue to receive interest and dividends paid by the issuer of securities and to participate in any changes in their market value. The Portfolios require the borrowers of the securities to maintain collateral with the Portfolios consisting of liquid, unencumbered assets having a value at least equal to the value of the securities loaned. The Portfolios may invest the cash collateral into a joint trading account in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Portfolios receive compensation for lending their securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Portfolios or the borrower may terminate the loan. The Portfolios are subject to all investment risks associated with the value of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments.

Credit Default Swap Contracts. A credit default swap is a contract between a buyer and a seller of protection against a pre-defined credit event. The DWS Balanced VIP, DWS High Income VIP and DWS Strategic Income VIP may buy or sell credit default swap contracts to seek to increase each Portfolio's income, to add leverage to each Portfolio, or to hedge the risk of default on portfolio securities. As a seller in the credit default swap contract, each Portfolio would be required to pay the par (or other agreed-upon) value of the referenced debt obligation to the counterparty in the event of a default by a third party, such as a US or foreign corporate issuer, on the debt obligation, which would likely result in a loss to each Portfolio. In return, each Portfolio would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, each Portfolio would keep the stream of payments and would have no payment obligations. Each Portfolio may also buy credit default swap contracts in order to hedge against the risk of default of debt securities, in which case each Portfolio would function as the counterparty referenced above. This would involve the risk that the contract may expire worthless. It would also involve credit risk — that the seller may fail to satisfy its payment obligations to each Portfolio in the event of a default. When each Portfolio sells a credit default swap contract it will "cover" its commitment. This may be achieved by, among other methods, maintaining cash or liquid assets equal to the aggregate notional value of the underlying debt obligations for all outstanding credit default swap contracts sold by each Portfolio.

Credit default swap contracts are marked to market daily based upon quotations from the counterparty and the change in value, if any, is recorded daily as unrealized gain or loss. An upfront payment made by each Portfolio is recorded as an asset on the statement of assets and liabilities. An upfront payment received by each Portfolio is recorded as a liability on the statement of assets and liabilities. Under the terms of the credit default swap contracts, each Portfolio receives or makes payments semi-annually based on a specified interest rate on a fixed notional amount. These payments are recorded as a realized gain or loss on the statement of operations. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses.

Options. An option contract is a contract in which the writer of the option grants the buyer of the option the right to purchase from (call option), or sell to (put option), the writer a designated instrument at a specified price within a specified period of time. Certain options, including options on indices, will require cash settlement by the Portfolios if the option is exercised. The Portfolios, except for DWS Money Market VIP, may enter into option contracts in order to hedge against potential adverse price movements in the value of portfolio assets; as a temporary substitute for selling selected investments; to lock in the purchase price of a security or currency which it expects to purchase in the near future; as a temporary substitute for purchasing selected investments; and to enhance potential gain.

The liability representing the Portfolios' obligation under an exchange traded written option or investment in a purchased option is valued at the last sale price or, in the absence of a sale, the mean between the closing bid and asked prices or at the most recent asked price (bid for purchased options) if no bid and asked price are available. Over-the-counter written or purchased options are valued using dealer-supplied quotations. Gain or loss is recognized when the option contract expires or is closed.

If the Portfolios write a covered call option, the Portfolios forego, in exchange for the premium, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. If the Portfolios write a put option it accepts the risk of a decline in the value of the underlying security below the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Portfolios' maximum exposure to purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Portfolios' ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities or currencies hedged.

Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). The Portfolios, except for DWS Money Market VIP, may enter into futures contracts as a hedge against anticipated interest rate, currency or equity market changes and for duration management, risk management and return enhancement purposes.

Upon entering into a futures contract, the Portfolios are required to deposit with a financial intermediary an amount ("initial margin") equal to a certain percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Portfolios dependent upon the daily fluctuations in the value of the underlying security and are recorded for financial reporting purposes as unrealized gains or losses by the Portfolios. When entering into a closing transaction, the Portfolios will realize a gain or loss equal to the difference between the value of the futures contract to sell and the futures contract to buy. Futures contracts are valued at the most recent settlement price.

Certain risks may arise upon entering into futures contracts, including the risk that an illiquid secondary market will limit the Portfolios' ability to close out a futures contract prior to the settlement date and that a change in the value of a futures contract may not correlate exactly with the changes in the value of the securities or currencies hedged. When utilizing futures contracts to hedge, the Portfolios give up the opportunity to profit from favorable price movements in the hedged positions during the term of the contract.

Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract (forward currency contract) is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. The Portfolios, except for DWS Money Market VIP, may enter into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities.

Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. Sales and purchases of forward currency contracts having the same settlement date and broker are offset and any gain (loss) is realized on the date of offset; otherwise, gain (loss) is realized on settlement date. Realized and unrealized gains and losses which represent the difference between the value of a forward currency contract to buy and a forward currency contract to sell are included in net realized and unrealized gain (loss) from foreign currency related transactions.

Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. Additionally, when utilizing forward currency contracts to hedge, the Portfolios give up the opportunity to profit from favorable exchange rate movements during the term of the contract.

Loan Participations/Assignments. DWS Balanced VIP, DWS High Income VIP and DWS Strategic Income VIP may invest in US dollar-denominated fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign sovereign entity and one or more financial institutions ("Lenders"). Each Portfolio invests in such Loans in the form of participations in Loans ("Participations") or assignments of all or a portion of loans from third parties ("Assignments"). Participations typically result in each Portfolio having a contractual relationship only with the Lender, not with the sovereign borrower. Each Portfolio has the right to receive payments of principal, interest and any fees to which they are entitled from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, each Portfolio generally has no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and each Portfolio will not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, each Portfolio assumes the credit risk of both the borrower and the Lender that is selling the Participation.

Mortgage Dollar Rolls. DWS Core Fixed Income VIP, DWS Government & Agency Securities VIP and DWS Balanced VIP may enter into mortgage dollar rolls in which each Portfolio sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. Each Portfolio receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.

Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before each Portfolio is able to repurchase them. There can be no assurance that each Portfolio's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its costs.

When-Issued/Delayed Delivery Securities. Several of the Portfolios may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Portfolios enter into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Portfolios until payment takes place. At the time the Portfolios enter into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.

Certain risks may arise upon entering into when-issued or delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.

Federal Income Taxes. The Portfolios' policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, the Portfolios paid no federal income taxes and no federal income tax provision was required.

At December 31, 2006, the following Portfolios had an approximate net tax basis capital loss carryforward which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until the following expiration dates, whichever occurs first:

Portfolio

Capital Loss Carryforward ($)

Expiration
Date

Capital Loss Carryforwards Utilized ($)

DWS Balanced VIP*

6,757,000

12/31/2010

25,842,000

 

43,407,000

12/31/2011

 

DWS Core Fixed Income VIP

3,813,000

12/31/2014

—

DWS Davis Venture Value VIP

—

—

6,051,240

DWS Dreman High Return Equity VIP

—

—

6,617,309

DWS Government & Agency Securities VIP

14,000

1,337,000

12/31/2013

12/31/2014

—

DWS High Income VIP

3,945,000

12/31/2007

—

 

16,114,000

12/31/2008

 

22,935,000

12/31/2009

 

55,108,000

12/31/2010

 

13,877,000

12/31/2011

 

3,843,000

12/31/2014

DWS International Select Equity VIP**

—

—

21,875,648

DWS Janus Growth & Income VIP

8,721,000

12/31/2010

24,668,000

 

6,934,000

12/31/2011

 

DWS Large Cap Value VIP

—

—

13,785,000

DWS Mid Cap Growth VIP

4,535,000

12/31/2010

4,358,000

 

23,999,000

12/31/2011

 

DWS Money Market VIP

1,800

12/31/2009-12/31/2014

900

DWS Small Cap Growth VIP

41,074,200

12/31/2009

18,412,000

 

71,888,400

12/31/2010

 

 

4,154,700

12/31/2011

 

DWS Strategic Income VIP

23,340

12/31/2014

—

DWS Technology VIP

86,694,000

12/31/2009

565,000

 

93,499,000

12/31/2010

 

 

71,516,000

12/31/2011

 

* Certain of these losses may be subject to limitations under Sections 381-384 of the Internal Revenue Code.
** Certain of these losses may be subject to limitations under Sections 381-383 of the Internal Revenue Code.

In July 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109" (the "Interpretation"). The Interpretation establishes for the Portfolios a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether the Portfolios are taxable in certain jurisdictions), and requires certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006. On December 22, 2006, the SEC indicated that they would not object if a Portfolio implements FIN 48 in the first required financial statement reporting period for its fiscal year beginning after December 15, 2006. Management has begun to evaluate the application of the Interpretation to the Portfolios and is not in a position at this time to estimate the significance of its impact, if any, on the Portfolios' financial statements.

Distribution of Income and Gains. Distributions of net investment income, if any, for all Portfolios except the DWS Money Market VIP, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Portfolios if not distributed and, therefore, will be distributed to shareholders at least annually. All of the net investment income of the DWS Money Market VIP is declared as a daily dividend and is distributed to shareholders monthly.

The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to net operating losses, investments in foreign denominated investments, investments in forward foreign currency exchange contracts, income received from Passive Foreign Investment Companies and Real Estate Investment Trusts and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Portfolios may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Portfolios.

At December 31, 2006, the Portfolios' components of distributable earnings on a tax basis were as follows:

Portfolio

Undistributed Ordinary Income ($)

Undistributed Net Long-Term Capital Gains ($)

Capital Loss Carryforwards ($)

Unrealized Appreciation (Depreciation) on Investments ($)

DWS Balanced VIP

19,517,239

—

(50,164,000)

84,379,613

DWS Blue Chip VIP

28,893,894

14,481,878

—

35,433,566

DWS Conservative Allocation VIP

1,213,722

1,541,110

—

3,050,458

DWS Core Fixed Income VIP

15,366,952

—

(3,813,000)

(1,236,657)

DWS Davis Venture Value VIP

2,750,371

5,232,000

—

136,664,221

DWS Dreman High Return Equity VIP

15,406,882

9,331,395

—

303,827,221

DWS Dreman Small Mid Cap Value VIP

28,733,821

68,643,225

—

164,946,936

DWS Global Thematic VIP

14,779,129

12,499,803

—

25,346,349

DWS Government & Agency Securities VIP

11,482,463

—

(1,351,000)

(2,859,279)

DWS Growth Allocation VIP

5,732,230

8,785,044

—

17,739,650

DWS High Income VIP

28,079,663

—

(115,822,000)

(402,470)

DWS International Select Equity VIP

11,604,617

24,061,355

—

55,978,330

DWS Janus Growth & Income VIP

1,115,543

—

(15,655,000)

47,554,113

DWS Large Cap Value VIP

7,773,968

8,696,781

—

52,553,934

DWS Mid Cap Growth VIP

—

—

(28,534,000)

14,897,023

DWS Moderate Allocation VIP

3,916,403

6,423,489

—

13,315,193

DWS Money Market VIP

—

—

(1,800)

—

DWS Small Cap Growth VIP

—

—

(117,117,300)

44,723,260

DWS Strategic Income VIP

6,753,367

—

(23,340)

2,509,663

DWS Technology VIP

—

—

(251,709,000)

12,234,969

DWS Turner Mid Cap Growth VIP

—

11,925,528

—

27,102,266

In addition, the tax character of distributions paid by the Portfolios is summarized as follows:

 

Distributions from ordinary income ($)*

Distributions from long-term capital gains ($)

 

Years Ended December 31,

Years Ended December 31,

Portfolio

2006

2005

2006

2005

DWS Balanced VIP

16,639,374

15,182,335

—

—

DWS Blue Chip VIP

11,866,416

2,905,214

8,865,566

—

DWS Conservative Allocation VIP

710,388

47,583

151,805

2,423

DWS Core Fixed Income VIP

12,044,592

11,142,235

54,870

1,635,169

DWS Davis Venture Value VIP

2,297,497

2,352,085

—

—

DWS Dreman High Return Equity VIP

18,038,346

15,007,524

44,395,610

—

DWS Dreman Small Mid Cap Value VIP

5,725,641

3,657,738

47,358,429

47,511,442

DWS Global Thematic VIP

1,387,851

188,888

8,033,573

—

DWS Government & Agency Securities VIP

10,381,592

15,012,462

—

22,888

DWS Growth Allocation VIP

2,576,899

130,703

788,847

13,910

DWS High Income VIP

30,330,043

38,836,639

—

—

DWS International Select Equity VIP

5,425,661

6,456,379

—

—

DWS Janus Growth & Income VIP

1,319,542

419,512

—

—

DWS Large Cap Value VIP

4,756,584

5,337,409

—

—

DWS Moderate Allocation VIP

2,260,725

89,661

565,181

8,902

DWS Money Market VIP

14,556,487

8,462,304

—

—

DWS Strategic Income VIP

5,462,385

6,790,122

25,142

203,812

DWS Technology VIP

—

997,316

—

—

DWS Turner Mid Cap Growth VIP

—

—

11,679,862

—

* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.

Expenses. Expenses arising in connection with a specific Portfolio are allocated to that Portfolio. Trust expenses are allocated between the Portfolios in proportion to their relative net assets.

Contingencies. In the normal course of business, the Portfolios may enter into contracts with service providers that contain general indemnification clauses. The Portfolios' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Portfolios that have not yet been made. However, based on experience, the Portfolios expect the risk of loss to be remote.

Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding taxes. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Portfolios are informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for all Portfolios, with the exception of securities in default of principal. Distributions of income and capital gains from the Underlying Portfolios are recorded on the ex-dividend date.

B. Purchases and Sales of Securities

During the year ended December 31, 2006, purchases and sales of investment transactions (excluding short-term investments) were as follows:

Portfolio

Purchases ($)

Sales ($)

DWS Balanced VIP

excluding US Treasury Obligations

509,169,575

595,900,747

US Treasury Obligations

167,881,246

171,040,315

DWS Blue Chip VIP

763,188,026

786,487,376

DWS Conservative Allocation VIP

13,516,075

15,055,000

DWS Core Fixed Income VIP

excluding US Treasury Obligations and mortgage dollar roll transactions

265,225,781

197,726,584

US Treasury Obligations

428,133,082

439,983,098

mortgage dollar roll transactions

51,991,982

51,516,648

DWS Davis Venture Value VIP

64,116,452

80,212,869

DWS Dreman High Return Equity VIP

197,856,617

231,471,093

DWS Dreman Small Mid Cap Value VIP

316,369,120

382,628,349

DWS Global Thematic VIP

205,656,390

177,002,668

DWS Government & Agency Securities VIP

excluding US Treasury Obligations and mortgage dollar roll transactions

560,420,978

631,157,476

US Treasury Obligations

91,821,533

94,471,699

mortgage dollar roll transactions

439,493,917

419,760,244

DWS Growth Allocation VIP

86,491,693

83,250,000

DWS High Income VIP

excluding US Treasury Obligations

337,289,672

366,761,433

US Treasury Obligations

2,023,721

1,953,002

DWS International Select Equity VIP

334,794,521

364,226,577

DWS Janus Growth & Income VIP

100,353,524

115,273,798

DWS Large Cap Value VIP

227,586,400

256,949,796

DWS Mid Cap Growth VIP

28,462,811

38,608,202

DWS Moderate Allocation VIP

60,142,515

57,015,000

DWS Small Cap Growth VIP

192,972,824

249,417,968

DWS Strategic Income VIP

excluding US Treasury Securities

105,704,020

102,070,175

US Treasury Securities

32,817,517

29,805,538

DWS Technology VIP

90,691,363

120,330,753

DWS Turner Mid Cap Growth VIP

220,396,977

229,547,955

For the year ended December 31, 2006, transactions for written options on securities were as follows for the DWS Technology VIP:

 

Number of Contracts

Premium

Outstanding, beginning of period

403

$ 69,716

Options written

3,440

658,208

Options closed

(1,042)

(100,767)

Options exercised

(1,862)

(456,976)

Options expired

(403)

(69,716)

Outstanding, end of period

536

$ 100,465

C. Related Parties

Management Agreement. Under the Management Agreement with Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of the Portfolios in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by the Portfolios. In addition to portfolio management services, the Advisor provides certain administrative services in accordance with the Management Agreement. Accordingly, for the year ended December 31, 2006, the fees pursuant to the Management Agreement were equivalent to the annual rates shown below of the Portfolios' average daily net assets, accrued daily and payable monthly:

Portfolio

Annual Management Fee Rate

DWS Balanced VIP

$0-$250 million

.470%

next $750 million

.445%

over $1 billion

.410%

DWS Conservative Allocation VIP

$0-$500 million

.150%

next $500 million

.140%

next $500 million

.130%

next $1 billion

.120%

over $2.5 billion

.110%

DWS Davis Venture Value VIP

$0-$250 million

.950%

next $250 million

.925%

next $500 million

.900%

next $1.5 billion

.875%

over $2.5 billion

.850%

DWS Dreman High Return Equity VIP

$0-$250 million

.750%

next $750 million

.720%

next $1.5 billion

.700%

next $2.5 billion

.680%

next $2.5 billion

.650%

next $2.5 billion

.640%

next $2.5 billion

.630%

over $12.5 billion

.620%

DWS Global Thematic VIP

$0-$250 million

1.000%

next $500 million

.950%

next $750 million

.900%

next $1.5 billion

.850%

over $3 billion

.800%

DWS Growth Allocation VIP

$0-$500 million

.150%

next $500 million

.140%

next $500 million

.130%

next $1 billion

.120%

over $2.5 billion

.110%

DWS Janus Growth & Income VIP

$0-$250 million

.750%

next $750 million

.725%

next $1.5 billion

.700%

over $2.5 billion

.675%

DWS Mid Cap Growth VIP

$0-$250 million

.750%

next $750 million

.720%

next $1.5 billion

.700%

next $2.5 billion

.680%

next $2.5 billion

.650%

next $2.5 billion

.640%

next $2.5 billion

.630%

over $12.5 billion

.620%

DWS Moderate Allocation VIP

$0-$500 million

.150%

next $500 million

.140%

next $500 million

.130%

next $1 billion

.120%

over $2.5 billion

.110%

DWS Small Cap Growth VIP

$0-$250 million

.650%

next $750 million

.625%

over $1 billion

.600%

DWS Technology VIP

$0-$250 million

.750%

next $750 million

.720%

next $1.5 billion

.700%

next $2.5 billion

.680%

next $2.5 billion

.650%

next $2.5 billion

.640%

next $2.5 billion

.630%

over $12.5 billion

.620%

DWS Turner Mid Cap Growth VIP

$0-$250 million

.800%

next $250 million

.785%

next $500 million

.770%

over $1 billion

.755%

In addition, for the period from January 1, 2006 through September 30, 2006, the fees pursuant to the Management Agreement were equivalent to the annual rates shown below of the Portfolios' average daily net assets, accrued daily and payable monthly:

Portfolio

Annual Management Fee Rate

DWS Blue Chip VIP

.650%

DWS Core Fixed Income VIP

.600%

DWS Dreman Small Mid Cap Value VIP

.750%

DWS Government & Agency Securities VIP

.550%

DWS High Income VIP

.600%

DWS International Select Equity VIP

.750%

DWS Large Cap Value VIP

.750%

DWS Strategic Income VIP

.650%

Effective October 1, 2006, the fees pursuant to the Management Agreement were equivalent to the annual rates shown below of the Portfolios' average daily net assets, accrued daily and payable monthly:

Portfolio

Annual Management Fee Rate

DWS Blue Chip VIP

$0-$250 million

.650%

next $750 million

.620%

next $1.5 billion

.600%

next $2.5 billion

.580%

next $2.5 billion

.550%

next $2.5 billion

.530%

next $2.5 billion

.510%

over $12.5 billion

.490%

DWS Core Fixed Income VIP

$0-$250 million

.600%

next $750 million

.570%

next $1.5 billion

.550%

next $2.5 billion

.530%

next $2.5 billion

.500%

next $2.5 billion

.480%

next $2.5 billion

.460%

over $12.5 billion

.440%

DWS Dreman Small Mid Cap Value VIP

$0-$250 million

.750%

next $750 million

.720%

next $1.5 billion

.700%

next $2.5 billion

.680%

next $2.5 billion

.650%

next $2.5 billion

.640%

next $2.5 billion

.630%

over $12.5 billion

.620%

DWS Government & Agency Securities VIP

$0-$250 million

.550%

next $750 million

.530%

next $1.5 billion

.510%

next $2.5 billion

.500%

next $2.5 billion

.480%

next $2.5 billion

.460%

next $2.5 billion

.440%

over $12.5 billion

.420%

DWS High Income VIP

$0-$250 million

.600%

next $750 million

.570%

next $1.5 billion

.550%

next $2.5 billion

.530%

next $2.5 billion

.500%

next $2.5 billion

.480%

next $2.5 billion

.460%

over $12.5 billion

.440%

DWS International Select Equity VIP

$0-$1.5 billion

.750%

next $1.75 billion

.735%

next $1.75 billion

.720%

over $5 billion

.705%

DWS Large Cap Value VIP

$0-$250 million

.750%

next $750 million

.725%

next $1.5 billion

.700%

next $2.5 billion

.675%

next $2.5 billion

.650%

next $2.5 billion

.625%

next $2.5 billion

.600%

over $12.5 billion

.575%

DWS Strategic Income VIP

$0-$250 million

.650%

next $750 million

.620%

next $1.5 billion

.600%

next $2.5 billion

.580%

next $2.5 billion

.550%

next $2.5 billion

.530%

next $2.5 billion

.510%

over $12.5 billion

.490%

For the period from January 1, 2006 through November 5, 2006, the fee pursuant to the Management Agreement was equivalent to the annual rates shown below of the Portfolio's average daily net assets, accrued daily and payable monthly:

Portfolio

Annual Management Fee Rate

DWS Money Market VIP

$0-$215 million

.500%

next $335 million

.375%

next $250 million

.300%

over $800 million

.250%

Effective November 6, 2006, the fee pursuant to the Management Agreement was equivalent to the annual rates shown below of the Portfolio's average daily net assets, accrued daily and payable monthly:

Portfolio

Annual Management Fee Rate

DWS Money Market VIP

$0-$500 million

.385%

next $500 million

.370%

next $1.0 billion

.355%

over $2.0 billion

.340%

Aberdeen Asset Management PLC serves as subadvisor to DWS Core Fixed Income VIP and is paid by the Advisor for its services.

Dreman Value Management, L.L.C. serves as sub-advisor to the DWS Dreman High Return Equity VIP and DWS Dreman Small Mid Cap Value VIP and is paid by the Advisor for its services.

Janus Capital Management, L.L.C., serves as sub-advisor to the DWS Janus Growth & Income VIP and is paid by the Advisor for its services.

Turner Investment Partners, Inc. serves as sub-advisor to the DWS Turner Mid Cap Growth VIP and is paid by the Advisor for its services.

Davis Selected Advisers, L.P., serves as sub-advisor to the DWS Davis Venture Value VIP and is paid by the Advisor for its services.

Effective February 5, 2007, Deutsche Asset Management International GmbH ("DeAMI") will serve as subadvisor to the DWS Large Cap Value VIP and will be paid by the Advisor for its services.

For the year ended December 31, 2006, the Advisor has agreed to waive 0.05% of the monthly management fee based on average daily net assets of Class B of the DWS Moderate Allocation VIP, DWS Growth Allocation VIP and DWS Conservative Allocation VIP.

The Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period from January 1, 2006 through April 30, 2006 (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Blue Chip VIP

 

Class A

.95%

Class B

1.35%

DWS Core Fixed Income VIP

 

Class A

.80%

Class B

1.20%

DWS Dreman Small Mid Cap Value VIP

 

Class A

.84%

Class B

1.24%

DWS Janus Growth & Income VIP

 

Class A

.95%

DWS Large Cap Value VIP

 

Class A

.80%

Class B

1.20%

DWS Technology VIP

 

Class A

.95%

Class B

1.35%

The Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period from January 1, 2006 through September 30, 2006 (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Global Thematic VIP

 

Class A

1.04%

Class B

1.44%

DWS Janus Growth & Income VIP

 

Class B

1.25%

DWS Mid Cap Growth VIP

 

Class A

.95%

Class B

1.31%

DWS Strategic Income VIP

 

Class A

1.05%

Class B

1.20%

DWS Turner Mid Cap Growth VIP

 

Class A

1.30%

Class B

1.34%

Effective October 1, 2006 through September 30, 2007, the Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Global Thematic VIP

 

Class A

1.05%

Class B

1.49%

DWS Mid Cap Growth VIP

 

Class A

.86%

Class B

1.26%

The Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period from January 1, 2006 through September 30, 2007 (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Conservative Allocation VIP

 

Class B

.75%

DWS Davis Venture Value VIP

 

Class A

.85%

Class B

1.25%

DWS Growth Allocation VIP

 

Class B

.75%

DWS Moderate Allocation VIP

 

Class B

.75%

The Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period from January 1, 2006 through September 17, 2006 (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Dreman High Return Equity VIP

 

Class A

.87%

Class B

1.27%

Effective September 18, 2006 through September 30, 2007, the Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Dreman High Return Equity VIP

 

Class A

.78%

Class B

1.15%

The Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class for the period from January 1, 2006 through April 30, 2008 (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Balanced VIP

 

Class A

.51%

Class B

.89%

DWS Small Cap Growth VIP

 

Class A

.72%

Class B

1.09%

Effective November 6, 2006 through April 30, 2010, the Advisor, the underwriter and accounting agent contractually agreed to waive all or a portion of their respective fees and reimburse or pay certain operating expenses to the extent necessary to maintain the operating expenses of each class (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest and organizational and offering expenses) as follows:

Portfolio

Annual Rate

DWS Money Market VIP

 

Class A

.44%

Accordingly, for the year ended December 31, 2006, the total management fees charged, management fees waived and effective management fees are as follows:

Portfolio

Total Aggregated ($)

Waived ($)

Annual Effective Rate

DWS Balanced VIP

2,967,510

247,957

.42%

DWS Blue Chip VIP

2,228,613

—

.65%

DWS Conservative Allocation VIP

78,016

26,005

.10%

DWS Core Fixed Income VIP

2,124,452

—

.60%

DWS Davis Venture Value VIP

3,764,933

665,621

.77%

DWS Dreman High Return Equity VIP

7,237,569

—

73%

DWS Dreman Small Mid Cap Value VIP

4,646,491

—

.75%

DWS Global Thematic VIP

1,342,622

443,811

.67%

DWS Government & Agency Securities VIP

1,427,977

—

.55%

DWS Growth Allocation VIP

307,763

102,588

.10%

DWS High Income VIP

2,263,303

—

.60%

DWS International Select Equity VIP

2,094,158

—

.75%

DWS Janus Growth & Income VIP

1,719,994

—

.75%

DWS Large Cap Value VIP

2,335,628

—

.75%

DWS Mid Cap Growth VIP

473,444

64,954

.65%

DWS Moderate Allocation VIP

268,882

89,628

.10%

DWS Money Market VIP

1,444,203

18,025

.44%

DWS Small Cap Growth VIP

1,738,224

45,376

.63%

DWS Strategic Income VIP

662,490

—

.65%

DWS Technology VIP

1,436,929

—

.75%

DWS Turner Mid Cap Growth VIP

1,209,780

—

.80%

In addition, for the year ended December 31, 2006, the Advisor waived record keeping expenses of Class B shares of the Portfolios as follows:

Portfolio

Waived ($)

DWS Dreman High Return Equity VIP

9,001

DWS Mid Cap Growth VIP

2,088

DWS Small Cap Growth VIP

3,729

DWS Strategic Income VIP

13,068

DWS Turner Mid Cap Growth VIP

535

DWS Moderate Allocation VIP, DWS Growth Allocation VIP and DWS Conservative Allocation VIP do not invest in the Underlying Portfolios for the purpose of exercising management or control; however, investments within the set limits may represent a significant portion of an Underlying Portfolio. At December 31, 2006, the DWS Portfolios held the following percentage of the Underlying Portfolios' outstanding shares as follows:

Underlying Portfolio

DWS Conservative Allocation VIP

DWS Growth Allocation VIP

DWS Moderate Allocation VIP

DWS Blue Chip VIP

N/A

5%

N/A

DWS Core Fixed Income VIP

6%

10%

15%

DWS Growth & Income VIP

N/A

8%

6%

DWS Large Cap Value VIP

N/A

8%

6%

DWS RREEF Real Estate Securities VIP

N/A

8%

6%

N/A represents investments less than 5%.

Service Provider Fees. DWS Scudder Fund Accounting Corporation ("DWS-SFAC"), a subsidiary of the Advisor, is responsible for determining the daily net asset value per share and maintaining the portfolio and general accounting records of each Portfolio. In turn, DWS-SFAC has delegated certain fund accounting functions to a third-party service provider. For the year ended December 31, 2006, DWS-SFAC received a fee for its services as follows:

Portfolio

Total Aggregated ($)

Unpaid at December 31, 2006 ($)

DWS Conservative Allocation VIP

47,122

3,494

DWS Davis Venture Value VIP

94,006

8,874

DWS Dreman High Return Equity VIP

153,345

17,864

DWS Global Thematic VIP

175,325

14,682

DWS Growth Allocation VIP

44,581

3,719

DWS Janus Growth & Income VIP

69,130

5,518

DWS Mid Cap Growth VIP

59,257

5,050

DWS Moderate Allocation VIP

43,599

3,673

DWS Technology VIP

66,562

9,413

DWS Turner Mid Cap Growth VIP

94,442

6,203

Distribution Service Agreement. Under the Distribution Service Agreement, in accordance with Rule 12b-1 under the 1940 Act, DWS Scudder Distributors, Inc. ("DWS-SDI") receives a fee ("Distribution Service Fee") of 0.25% of average daily net assets of Class B shares. For the year ended December 31, 2006, the Distribution Service Fee was as follows:

Portfolio

Total Aggregated ($)

Unpaid at December 31, 2006 ($)

DWS Balanced VIP

80,542

6,333

DWS Blue Chip VIP

112,577

9,383

DWS Conservative Allocation VIP

130,027

12,496

DWS Core Fixed Income VIP

212,516

15,655

DWS Davis Venture Value VIP

195,529

16,404

DWS Dreman High Return Equity VIP

380,314

39,873

DWS Dreman Small Mid Cap Value VIP

222,240

18,284

DWS Global Thematic VIP

56,266

5,153

DWS Government & Agency Securities VIP

94,226

7,088

DWS Growth Allocation VIP

512,938

43,486

DWS High Income VIP

133,627

10,998

DWS International Select Equity VIP

171,003

14,864

DWS Janus Growth & Income VIP

81,050

6,596

DWS Large Cap Value VIP

100,296

8,279

DWS Mid Cap Growth VIP

18,895

1,754

DWS Moderate Allocation VIP

448,138

36,338

DWS Money Market VIP

150,122

13,091

DWS Small Cap Growth VIP

95,565

7,697

DWS Strategic Income VIP

61,574

4,591

DWS Technology VIP

37,464

2,968

DWS Turner Mid Cap Growth VIP

67,940

5,361

Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Portfolios. For the year ended December 31, 2006, the amounts charged to the Portfolios by DIMA included in the Statement of Operations under "reports to shareholders" were as follows:

Portfolio

Amount ($)

Unpaid at December 31, 2006 ($)

DWS Balanced VIP

3,625

1,150

DWS Blue Chip VIP

3,625

1,150

DWS Conservative Allocation VIP

3,625

1,150

DWS Core Fixed Income VIP

3,625

1,150

DWS Davis Venture Value VIP

3,625

1,150

DWS Dreman High Return Equity VIP

3,625

1,150

DWS Dreman Small Mid Cap Value VIP

3,625

1,150

DWS Global Thematic VIP

3,625

1,150

DWS Government & Agency Securities VIP

3,625

1,150

DWS Growth Allocation VIP

3,625

1,150

DWS High Income VIP

3,625

1,150

DWS International Select Equity VIP

3,625

1,150

DWS Janus Growth & Income VIP

3,625

1,150

DWS Large Cap Value VIP

3,625

1,150

DWS Mid Cap Growth VIP

3,625

1,150

DWS Moderate Allocation VIP

3,625

1,150

DWS Money Market VIP

3,625

1,150

DWS Small Cap Growth VIP

3,625

1,150

DWS Strategic Income VIP

3,625

1,150

DWS Technology VIP

3,625

1,150

DWS Turner Mid Cap Growth VIP

3,625

1,150

Trustees' Fees and Expenses. The Portfolios paid each Trustee not affiliated with the Advisor retainer fees plus specified amounts for various committee services and for the Board Chairman.

Cash Management QP Trust. Pursuant to an Exemptive Order issued by the SEC, the Portfolios may invest in the Cash Management QP Trust (the "QP Trust") and other affiliated funds managed by the Advisor. The QP Trust seeks to provide as high a level of current income as is consistent with the preservation of capital and the maintenance of liquidity. The QP Trust does not pay the Advisor a management fee for the affiliated funds' investments in the QP Trust.

D. Investing in High Yield Securities

Investing in high yield securities may involve greater risks and considerations not typically associated with investing in US Government bonds and other high quality fixed-income securities. These securities are non-investment grade securities, often referred to as "junk bonds." Economic downturns may disrupt the high yield market and impair the ability of issuers to repay principal and pay interest. Also, an increase in interest rates would likely have an adverse impact on the value of such obligations. Moreover, high yield securities may be less liquid due to the extent that there is no established retail secondary market and because of a decline in the value of such securities.

E. Investing in Emerging Markets

Investing in emerging markets may involve special risks and considerations not typically associated with investing in the United States of America. These risks include revaluation of currencies, high rates of inflation, repatriation restrictions on income and capital, and future adverse political, social and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls or delayed settlements and may have prices more volatile than those of comparable securities of issuers in the United States of America.

F. Expense Reductions

For the year ended December 31, 2006, the Advisor agreed to reimburse the Portfolios which represents a portion of the fee savings expected to be realized by the Advisor related to the outsourcing by the Advisor of certain administrative services to an unaffiliated service provider in the following amounts:

Portfolio

Amount ($)

DWS Balanced VIP

8,437

DWS Blue Chip VIP

4,714

DWS Core Fixed Income VIP

4,665

DWS Davis Venture Value VIP

5,260

DWS Dreman High Return Equity VIP

11,250

DWS Dreman Small Mid Cap Value VIP

7,870

DWS Global Thematic VIP

2,383

DWS Government & Agency Securities VIP

4,245

DWS High Income VIP

5,521

DWS International Select Equity VIP

4,122

DWS Janus Growth & Income VIP

3,843

DWS Large Cap Value VIP

4,567

DWS Mid Cap Growth VIP

2,110

DWS Money Market VIP

4,395

DWS Small Cap Growth VIP

4,321

DWS Strategic Income VIP

2,340

DWS Technology VIP

3,426

DWS Turner Mid Cap Growth VIP

2,794

In addition, the Portfolios have entered into arrangements with their custodian whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the Portfolios' expenses. During the year ended December 31, 2006, the Portfolios' custodian fees were reduced under these arrangements as follows:

Portfolio

Amount ($)

DWS Balanced VIP

1,081

DWS Blue Chip VIP

96

DWS Core Fixed Income VIP

295

DWS Davis Venture Value VIP

460

DWS Dreman High Return Equity VIP

1,439

DWS Dreman Small Mid Cap Value VIP

1,482

DWS Government & Agency Securities VIP

1,610

DWS High Income VIP

4,061

DWS Janus Growth & Income VIP

990

DWS Large Cap Value VIP

106

DWS Mid Cap Growth VIP

63

DWS Money Market VIP

312

DWS Small Cap Growth VIP

485

DWS Strategic Income VIP

2,190

DWS Technology VIP

67

DWS Turner Mid Cap Growth VIP

275

G. Ownership of the Portfolios

At December 31, 2006, the beneficial ownership in the Portfolios was as follows:

DWS Balanced VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 40%, 25% and 18%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 75 and 24%.

DWS Blue Chip VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 55% and 30%. Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 74%, 13% and 12%.

DWS Conservative Allocation VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 68% and 32%.

DWS Core Fixed Income VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 40%, 28% and 24%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 82 and 18%.

DWS Davis Venture Value VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 72% and 19%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 71% and 29%.

DWS Dreman High Return Equity VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 65% and 25%. Two Participating Insurance Companies were the owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 79% and 19%.

DWS Dreman Small Mid Cap Value VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 56%, 22% and 15%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 71% and 23%.

DWS Global Thematic VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 66% and 33%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 66% and 34%.

DWS Government & Agency Securities VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 41%, 36% and 18%. Two Participating Insurance Companies were the owner of record of 10% or more of the total outstanding Class B shares of the Portfolio, owning 84% and 15%.

DWS Growth Allocation VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 85% and 15%.

DWS High Income VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 35%, 33% and 26%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 77% and 23%.

DWS International Select Equity VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 50%, 27% and 23%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 54% and 46%.

DWS Janus Growth & Income VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 73% and 26%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 83% and 16%.

DWS Large Cap Value VIP: Four Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 38%, 28%, 16% and 15%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 80% and 20%.

DWS Mid Cap Growth VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 67% and 31%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 75% and 24%.

DWS Moderate Allocation VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 81% and 19%.

DWS Money Market VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 36%, 24% and 20%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 60% and 40%.

DWS Small Cap Growth VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 49%, 23% and 21%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 81% and 19%.

DWS Strategic Income VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 59% and 35%. Two Participating Insurance Companies were owners of record of 10% or more of the outstanding Class B shares of the Portfolio, each owning 63% and 36%.

DWS Technology VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 65% and 31%. Two Participating Insurance Companies were owners of record of 10% or more of the outstanding Class B shares of the Portfolio, each owning 78% and 20%.

DWS Turner Mid Cap Growth VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Portfolio, each owning 81% and 19%. Two Participating Insurance Companies were the owners of record of 10% or more of the total outstanding Class B shares of the Portfolio, each owning 82% and 18%.

H. Line of Credit

The Trust and several other affiliated funds (the "Participants") share in a $750 million revolving credit facility administered by JPMorgan Chase Bank N.A. for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated, based upon net assets, among each of the Participants. Interest is calculated at the Federal Funds Rate plus 0.5 percent. The facility borrowing limit for each Portfolio as a percent of net assets is as follows:

Portfolio

Facility Borrowing Limit

DWS Balanced VIP

33%

DWS Blue Chip VIP

33%

DWS Conservative Allocation VIP

33%

DWS Core Fixed Income VIP

33%

DWS Davis Venture Value VIP

33%

DWS Dreman High Return Equity VIP

33%

DWS Dreman Small Mid Cap Value VIP

33%

DWS Global Thematic VIP

33%

DWS Government & Agency Securities VIP

33%

DWS Growth Allocation VIP

33%

DWS High Income VIP

33%

DWS International Select Equity VIP

33%

DWS Janus Growth & Income VIP

33%

DWS Large Cap Value VIP

33%

DWS Mid Cap Growth VIP

33%

DWS Moderate Allocation VIP

33%

DWS Money Market VIP

33%

DWS Small Cap Growth VIP

33%

DWS Strategic Income VIP

33%

DWS Technology VIP

5%

DWS Turner Mid Cap Growth VIP

33%

I. Payments Made by Affiliates

During the year ended December 31, 2006, the Advisor fully reimbursed DWS Balanced VIP, DWS High Income VIP, DWS International Select Equity VIP and DWS Strategic Income VIP $14,837, $463, $101 and $25, respectively, for losses incurred on trades executed incorrectly.

In addition, the Advisor fully reimbursed DWS Balanced VIP, DWS Dreman High Return Equity VIP, DWS Government & Agency VIP, and DWS Strategic Income VIP $2,228, $273, $566 and 2,531, respectively, for losses incurred in violation of investment restrictions.

The amounts of the losses were less than 0.01% of each Portfolio's average net assets, thus having no impact on each Portfolio's total return.

J. Regulatory Matters and Litigation

Regulatory Settlements. On December 21, 2006, Deutsche Asset Management ("DeAM") settled proceedings with the Securities and Exchange Commission ("SEC") and the New York Attorney General on behalf of Deutsche Asset Management, Inc. ("DAMI") and Deutsche Investment Management Americas Inc. ("DIMA"), the investment advisors to many of the DWS Scudder funds, regarding allegations of improper trading at DeAM and at the legacy Scudder and Kemper organizations prior to their acquisition by DeAM in April 2002. These regulators alleged that although the prospectuses for certain funds in the regulators' view indicated that the funds did not permit market timing, DAMI and DIMA breached their fiduciary duty to those funds in that their efforts to limit trading activity in the funds were not effective at certain times. The regulators also alleged that DAMI and DIMA breached their fiduciary duty to certain funds by entering into certain market timing arrangements with investors. These trading arrangements originated in businesses that existed prior to the currently constituted DeAM organization, which came together as a result of various mergers of the legacy Scudder, Kemper and Deutsche fund groups, and all of the arrangements were terminated prior to the start of the regulatory investigations that began in the summer of 2003. No current DeAM employee approved these trading arrangements. Under the terms of the settlements, DAMI and DIMA neither admit nor deny any wrongdoing.

The terms of the SEC settlement, which identified improper trading in the legacy Deutsche and Kemper mutual funds only, provide for payment of disgorgement in the amount of $17.2 million. The terms of the settlement with the New York Attorney General provide for payment of disgorgement in the amount of $102.3 million, which is inclusive of the amount payable under the SEC settlement, plus a civil penalty in the amount of $20 million. The total amount payable by DeAM, approximately $122.3 million, would be distributed to funds in accordance with a distribution plan to be developed by a distribution consultant. The funds' investment advisors do not believe these amounts will have a material adverse financial impact on them or materially affect their ability to perform under their investment management agreements with the DWS funds. The above-described amounts are not material to Deutsche Bank, and have already been reserved.

Among the terms of the settled orders, DeAM is subject to certain undertakings regarding the conduct of its business in the future, including: formation of a Code of Ethics Oversight Committee to oversee all matters relating to issues arising under the advisors' Code of Ethics; establishment of an Internal Compliance Controls Committee having overall compliance oversight responsibility of the advisors; engagement of an Independent Compliance Consultant to conduct a comprehensive review of the advisors' supervisory compliance and other policies and procedures designed to prevent and detect breaches of fiduciary duty, breaches of the Code of Ethics and federal securities law violations by the advisors and their employees; and commencing in 2008, the advisors shall undergo a compliance review by an independent third party.

In addition, DeAM is subject to certain further undertakings relating to the governance of the mutual funds, including that: at least 75% of the members of the Boards of Trustees/Directors overseeing the DWS Funds continue to be independent of DeAM; the Chairmen of the DWS Funds' Boards of Trustees/Directors continue to be independent of DeAM; DeAM maintain existing management fee reductions for certain funds for a period of five years and not increase management fees for certain funds during this period; the funds retain a senior officer (or independent consultants) responsible for assisting in the review of fee arrangements and monitoring compliance by the funds and the investment advisors with securities laws, fiduciary duties, codes of ethics and other compliance policies, the expense of which shall be borne by DeAM; and periodic account statements, fund prospectuses and the mutual funds' web site contain additional disclosure and/or tools that assist investors in understanding the fees and costs associated with an investment in the funds and the impact of fees and expenses on fund returns.

DeAM has also settled proceedings with the Illinois Secretary of State regarding market timing matters. The terms of the Illinois settlement provide for investor education contributions totaling approximately $4 million and a payment in the amount of $2 million to the Securities Audit and Enforcement Fund.

On September 28, 2006, the SEC and the National Association of Securities Dealers ("NASD") announced final agreements in which Deutsche Investment Management Americas Inc. ("DIMA"), Deutsche Asset Management, Inc. ("DAMI") and Scudder Distributors, Inc. ("SDI") (now known as DWS Scudder Distributors, Inc.) settled administrative proceedings regarding disclosure of brokerage allocation practices in connection with sales of the Scudder Funds' (now known as the DWS Scudder Funds) shares during 2001-2003. The agreements with the SEC and NASD are reflected in orders which state, among other things, that DIMA and DAMI failed to disclose potential conflicts of interest to the fund Boards and to shareholders relating to SDI's use of certain funds' brokerage commissions to reduce revenue sharing costs to broker-dealer firms with whom it had arrangements to market and distribute Scudder Fund shares. These directed brokerage practices were discontinued in October 2003.

Under the terms of the settlements, in which DIMA, DeAM, Inc. and SDI neither admitted nor denied any of the regulators' findings, DIMA, DeAM, Inc. and SDI agreed to pay disgorgement, prejudgment interest and civil penalties in the total amount of $19.3 million. The portion of the settlements distributed to the funds was approximately $17.8 million and was paid to the funds as prescribed by the settlement orders based upon the amount of brokerage commissions from each fund used to satisfy revenue sharing agreements with broker-dealers who sold fund shares. Accordingly, in October 2006, the Portfolios received from the Advisor for their settlement portion as follows:

Portfolio

Total Settlement ($)

Per Share ($)

DWS Balanced VIP

651,306

.024

DWS Blue Chip VIP

73,817

.003

DWS Global Thematic VIP

37,541

.004

DWS Large Cap Value VIP

139,707

.008

DWS Mid Cap Growth VIP

16,995

.003

DWS Small Cap Growth VIP

155,225

.008

DWS Technology VIP

338,842

.017

As part of the settlements, DIMA, DAMI and SDI also agreed to implement certain measures and undertakings relating to revenue sharing payments including making additional disclosures in the fund Prospectuses or Statements of Additional Information, adopting or modifying relevant policies and procedures and providing regular reporting to the fund Boards.

Private Litigation Matters. The matters alleged in the regulatory settlements described above also serve as the general basis of a number of private class action lawsuits involving the DWS funds. These lawsuits name as defendants various persons, including certain DWS funds, the funds' investment advisors and their affiliates, and certain individuals, including in some cases fund Trustees/Directors, officers, and other parties. Each DWS fund's investment advisor has agreed to indemnify the applicable DWS funds in connection with these lawsuits, or other lawsuits or regulatory actions that may be filed making similar allegations.

Based on currently available information, the funds' investment advisors believe the likelihood that the pending lawsuits will have a material adverse financial impact on a DWS fund is remote and such actions are not likely to materially affect their ability to perform under their investment management agreements with the DWS funds.

K. Acquisition of Assets

On April 29, 2005, the DWS Small Cap Growth VIP acquired all of the net assets of Scudder Variable Series I 21st Century Growth Portfolio pursuant to a plan of reorganization approved by shareholders on April 20, 2005. The acquisition was accomplished by a tax-free exchange of 7,739,831 Class A shares and 1,627,657 Class B shares of the Scudder Variable Series I 21st Century Growth Portfolio for 3,256,621 Class A shares and 680,062 Class B shares of the DWS Small Cap Growth VIP outstanding on April 29, 2005. Scudder Variable Series I 21st Century Growth Portfolio's net assets at that date of $45,435,834, including $4,404,910 of net unrealized appreciation, were combined with those of the DWS Small Cap Growth VIP. The aggregate net assets of the DWS Small Cap Growth VIP immediately before the acquisition were $209,671,733. The combined net assets of the DWS Small Cap Growth VIP immediately following the acquisitions were $255,107,567.

On April 29, 2005, the DWS Balanced VIP acquired all of the net assets of Scudder Variable Series I Balanced Portfolio pursuant to a plan of reorganization approved by shareholders on April 20, 2005. The acquisition was accomplished by a tax-free exchange of 10,773,456 Class A shares of the Scudder Variable Series I Balanced Portfolio for 5,591,767 Class A shares of the DWS Balanced VIP outstanding on April 29, 2005. Scudder Variable Series I Balanced Portfolio's net assets at that date of $118,997,707, including $9,126,657 of net unrealized appreciation, were combined with those of the DWS Balanced VIP. The aggregate net assets of the DWS Balanced VIP immediately before the acquisition were $598,273,318. The combined net assets of the DWS Balanced VIP immediately following the acquisitions were $717,271,025.

On September 15, 2006, the DWS Conservative Allocation VIP acquired all of the net assets of DWS Income Allocation VIP pursuant to a plan of reorganization approved by shareholders on August 24, 2006. The acquisition was accomplished by a tax-free exchange of 1,263,254 Class B shares of DWS Income Allocation VIP for 1,177,592 Class B shares of DWS Conservative Allocation VIP outstanding on September 15, 2006. DWS Income Allocation VIP's net assets at that date of $13,389,187, including $205,220 of net unrealized appreciation, were combined with those of DWS Conservative Allocation VIP. The aggregate net assets of DWS Conservative Allocation VIP immediately before the acquisition were $49,279,295. The combined net assets of DWS Conservative Allocation VIP immediately following the acquisition were $62,668,482.

On September 15, 2006, DWS Dreman High Return Equity VIP acquired all of the net assets of DWS Dreman Financial Services VIP and DWS MFS Strategic Value VIP pursuant to a plan of reorganization approved by shareholders on August 24, 2006. The acquisition was accomplished by a tax-free exchange of 9,878,311 Class A shares and 1,552,231 Class B shares of DWS Dreman Financial Services VIP and 2,714,688 Class A shares and 2,857,615 Class B shares of DWS MFS Strategic Value VIP, respectively, for 7,492,130 Class A shares and 1,180,445 Class B shares and 1,965,950 Class A shares and 2,075,811 Class B shares of DWS Dreman High Return Equity VIP, respectively, outstanding on September 15, 2006. DWS Dreman Financial Services VIP and DWS MFS Strategic Value VIP's net assets at that date of $125,823,288 and $58,623,028, respectively, including $13,177,547 and $2,482,671, respectively, of net unrealized appreciation, were combined with those of DWS Dreman High Return Equity VIP. The aggregate net assets of DWS Dreman High Return Equity VIP immediately before the acquisition were $950,803,547. The combined net assets of DWS Dreman High Return Equity VIP immediately following the acquisition were $1,135,249,863.

On November 3, 2006, DWS Money Market VIP acquired all of the net assets of Money Market VIP pursuant to a plan of reorganization approved by shareholders on October 19, 2006. The acquisition was accomplished by a tax-free exchange of 56,959,609 Class A shares of the Money Market VIP for 56,959,609 Class A shares of DWS Money Market VIP outstanding on November 3, 2006. Money Market VIP's net assets at that date of $56,965,779 were combined with those of DWS Money Market VIP. The aggregate net assets of DWS Money Market VIP immediately before the acquisition were $317,440,879. The combined net assets of DWS Money Market VIP immediately following the acquisition were $374,406,658.

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of DWS Variable Series II:

We have audited the accompanying statements of assets and liabilities of DWS Variable Series II (the "Trust"), comprising the DWS Balanced VIP, DWS Blue Chip VIP, DWS Conservative Allocation VIP, DWS Core Fixed Income VIP, DWS Davis Venture Value VIP, DWS Dreman High Return Equity VIP, DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP), DWS Global Thematic VIP, DWS Government & Agency Securities VIP, DWS Growth Allocation VIP, DWS High Income VIP, DWS International Select Equity VIP, DWS Janus Growth & Income VIP, DWS Large Cap Value VIP, DWS Mid Cap Growth VIP, DWS Moderate Allocation VIP, DWS Money Market VIP, DWS Small Cap Growth VIP, DWS Strategic Income VIP, DWS Technology VIP and DWS Turner Mid Cap Growth VIP (collectively, the "Portfolios"), including the investment portfolios, as of December 31, 2006, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Trust's 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Trust's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the aforementioned portfolios of the DWS Variable Series II at December 31, 2006, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

vs2_eny0Boston, Massachusetts
February 14, 2007

Tax Information (Unaudited)

The following Portfolios paid distributions from net long-term capital gains during the year ended December 31, 2006 as follows:

Portfolio

Distribution Per Share ($)

% Representing 15% Rate Gains

DWS Blue Chip VIP

.402

100

DWS Conservative Allocation VIP

.036

100

DWS Core Fixed Income VIP

.002

100

DWS Dreman High Return Equity VIP

.586

100

DWS Dreman Small Mid Cap Value VIP

1.670

100

DWS Global Thematic VIP

1.030

100

DWS Growth Allocation VIP

.050

100

DWS Moderate Allocation VIP

.040

100

DWS Strategic Income VIP

.005

100

DWS Turner Mid Cap Growth VIP

.860

100

The following Portfolios designated as capital gain dividends for their year ended December 31, 2006:

Portfolio

Capital Gain ($)

% Representing 15% Rate Gains

DWS Blue Chip VIP

15,930,000

100

DWS Conservative Allocation VIP

1,618,000

100

DWS Davis Venture Value VIP

5,500,000

100

DWS Dreman High Return Equity VIP

59,100,000

100

DWS Dreman Small Mid Cap Value VIP

75,558,000

100

DWS Global Thematic VIP

13,145,000

100

DWS Growth Allocation VIP

9,716,000

100

DWS International Select Equity VIP

25,265,000

100

DWS Large Cap Value VIP

9,132,000

100

DWS Moderate Allocation VIP

7,091,000

100

DWS Turner Mid Cap Growth VIP

12,525,000

100

For corporate shareholders, the following percentage of income dividends paid during the following Portfolios' fiscal year ended December 31, 2006 qualified for the dividends received deduction:

Portfolio

Dividends Received %

DWS Balanced VIP

39

DWS Blue Chip VIP

100

DWS Conservative Allocation VIP

100

DWS Davis Venture Value VIP

100

DWS Dreman High Return Equity VIP

100

DWS Dreman Small Mid Cap Value VIP

100

DWS Global Thematic VIP

18

DWS Growth Allocation VIP

100

DWS Janus Growth & Income VIP

100

DWS Large Cap Value VIP

94

DWS Moderate Allocation VIP

100

For federal income tax purposes, the following Portfolios designated as qualified dividend income during the year ended December 31, 2006 as follows or the maximum amount allowable under tax law:

Portfolio

Qualified Dividend Income ($)

DWS Balanced VIP

7,155,000

DWS Blue Chip VIP

6,559,000

DWS Conservative Allocation VIP

597,000

DWS Davis Venture Value VIP

6,875,000

DWS Dreman High Return Equity VIP

27,539,000

DWS Growth Allocation VIP

1,800,000

DWS Janus Growth & Income VIP

3,731,000

DWS Large Cap Value VIP

8,000,000

DWS Moderate Allocation VIP

1,700,000

DWS Global Thematic VIP paid foreign taxes of $167,027 and earned $651,021 of foreign source income during the year ended December 31, 2006. Pursuant to section 853 of the Internal Revenue Code, the Portfolio designates $0.02 per share as foreign taxes paid and $0.07 per share as income earned from foreign sources for the year ended December 31, 2006.

DWS International Select Equity VIP paid foreign taxes of $499,267 and earned $7,354,807 of foreign source income during the year ended December 31, 2006. Pursuant to Section 853 of the Internal Revenue Code, the Portfolio designates $0.03 per share as foreign taxes paid and $0.41 per share as income earned from foreign sources for the year ended December 31, 2006.

Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call (800) 621-1048.

Proxy Voting

A description of the Trust's policies and procedures for voting proxies for portfolio securities and information about how the Trust voted proxies related to its portfolio securities during the 12-month period ended June 30 is available on our Web site — www.dws-scudder.com (click on "proxy voting"at the bottom of the page) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the Trust's policies and procedures without charge, upon request, call us toll free at (800) 621-1048.

Shareholder Meeting Results

A Special Meeting of Shareholders (the "Meeting") of DWS Dreman Financial Services VIP (the "Portfolio") was held on August 24, 2006 at the offices of Deutsche Investment Management Americas Inc., 345 Park Avenue, New York, NY 10154. At the Meeting, the following matter was voted upon by the shareholders (the resulting votes are presented below).

1. To approve an Agreement and Plan of Reorganization:

Number of Votes:

Affirmative

Against

Abstain

8,828,830.679

252,426.591

658,232.920

A Special Meeting of Shareholders (the "Meeting") of DWS Income Allocation VIP (the "Portfolio") was held on August 24, 2006 at the offices of Deutsche Investment Management Americas Inc., 345 Park Avenue, New York, NY 10154. At the Meeting, the following matter was voted upon by the shareholders (the resulting votes are presented below).

1. To approve an Agreement and Plan of Reorganization:

Number of Votes:

Affirmative

Against

Abstain

922,503.464

59,887.026

182,802.050

A Special Meeting of Shareholders (the "Meeting") of DWS MFS Strategic Value VIP (the "Portfolio") was held on August 24, 2006 at the offices of Deutsche Investment Management Americas Inc., 345 Park Avenue, New York, NY 10154. At the Meeting, the following matter was voted upon by the shareholders (the resulting votes are presented below).

1. To approve an Agreement and Plan of Reorganization:

Number of Votes:

Affirmative

Against

Abstain

5,121,720.424

94,898.955

154,084.645

A Special Meeting of Shareholders (the "Meeting") of DWS Money Market VIP (the "Portfolio") was held on October 19, 2006 at the offices of Deutsche Investment Management Americas Inc., 345 Park Avenue, New York, NY 10154. At the Meeting, the following matter was voted upon by the shareholders (the resulting votes are presented below).

1. To approve an Agreement and Plan of Reorganization:

Number of Votes:

Affirmative

Against

Abstain

48,059,440.623

2,769,355.205

7,230,710.389

Investment Management Agreement Approval

The Board of Trustees, including the Independent Trustees, approved the renewal of each Portfolio's investment management agreement (each an "Agreement") with Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor") in September 2006. As part of its review process, the Board requested and evaluated all information it deemed reasonably necessary to evaluate the Agreements. Over the course of several months, the Contract Review Committee, in coordination with the Equity Oversight Committee and the Fixed-Income Oversight Committee, as applicable, and the Operations Committee of the Board, reviewed comprehensive materials received from the Advisor, independent third parties and independent counsel. These materials included an analysis of each Portfolio's performance, fees and expenses, and profitability compiled by an independent fee consultant. The Board also received extensive information throughout the year regarding performance and operating results of each Portfolio. Based on their evaluation of the information provided, the Committees presented their findings and recommendations to the Independent Trustees as a group. The Independent Trustees then reviewed the Committees' findings and recommendations and presented their recommendations to the full Board. Throughout their consideration of the Agreements, the Independent Trustees were advised by their independent legal counsel and by an independent fee consultant.

In connection with the contract review process, the various Committees and the Board considered the factors discussed below, among others. The Board also considered that the Advisor and its predecessors have managed each Portfolio since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of each of the Portfolios. The Board considered, generally, that shareholders invested in a Portfolio, or approved the investment management agreement for a Portfolio, knowing that the Advisor managed the Portfolio and knowing the investment management fee schedule. In connection with recent and ongoing efforts by Deutsche Bank to restructure its US mutual fund business, which resulted in turnover of senior management and other personnel of the Advisor, the Board considered Deutsche Bank's commitment that it will devote to the Advisor and its affiliates all attention and resources that are necessary to provide the Portfolios with top-quality investment management and shareholder, administrative and product distribution services.

Nature, Quality and Extent of Services. The Board considered the nature, extent and quality of services provided under the Agreements, including portfolio management services and administrative services. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of the Advisor to attract and retain high-quality personnel, and the organizational depth and stability of the Advisor. For certain Portfolios, the Board considered the delegation of day-to-day portfolio management responsibility to a sub-advisor. The Board reviewed each Portfolio's performance over short-term and, as applicable, long-term periods, and compared those returns to various agreed-upon performance measures, including market indices and peer universes compiled by Lipper Inc. ("Lipper"). The Board considered whether investment results were consistent with a Portfolio's investment objective and policies. The Board also noted that it has put a process into place of identifying "Focus Funds" (e.g., funds performing poorly relative to their peer group), and receives more frequent reporting and information from the Advisor regarding such funds, along with the Advisor's remedial plans to address underperformance. The Board believes this process is an effective manner of addressing poorly performing funds at this time.

On the basis of this evaluation and the ongoing review of investment results by the Equity Oversight Committee and the Fixed-Income Oversight Committee, as applicable, the Board concluded that the nature, quality and extent of services provided by the Advisor historically have been and continue to be satisfactory and unless otherwise noted below, each Portfolio's performance over time was satisfactory.

Fees and Expenses. The Board considered each Portfolio's management fee rate, operating expenses and total expense ratios, and compared management fees to a peer group and total expenses to a broader peer universe based on information and data supplied by Lipper. The information provided to the Board is discussed in greater detail below for each Portfolio. The Board also considered each Portfolio's management fee rate as compared to fees charged by the Advisor and certain of its affiliates for comparable mutual funds and, as applicable, for similarly managed institutional accounts. With respect to institutional accounts, the Board noted that (i) both the mix of services provided and the level of responsibility required under an Agreement were significantly greater as compared to the Advisor's obligations for similarly managed institutional accounts; and (ii) the management fees of institutional accounts are less relevant to the Board's consideration because they reflect significantly different competitive forces from those in the mutual fund marketplace. With respect to the other comparable DWS Funds, the Board considered differences in fund and fee structures among the DWS Funds. When applicable, the Board took into account the Advisor's commitment to cap total expenses for certain classes through specified periods.

On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by the Advisor.

Profitability. The Board reviewed detailed information regarding revenues received by the Advisor under each Agreement. The Board considered the estimated costs and pre-tax profits realized by the Advisor from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing each Portfolio in particular. The Board also received information regarding the estimated enterprise-wide profitability of the DWS Scudder organization with respect to all fund services in totality and by fund. The Board reviewed DIMA's methodology in allocating its costs to the management of each Portfolio. Although the Board noted the inherently subjective nature of any allocation methodology, the Board received an attestation report from an accounting firm affirming that the allocation methods were consistently applied and were based upon practices commonly used in the investment management industry. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of each Portfolio were not unreasonable. For DWS Mid Cap Growth VIP, the Board noted that, based on the information provided, the Advisor operated the Portfolio at a loss. For DWS Growth Allocation VIP, DWS Moderate Allocation VIP and DWS Conservative Allocation VIP, the Board did not receive profitability information with respect to the Portfolios, but did receive such information with respect to the funds in which the Portfolio invests.

Economies of Scale. The Board considered whether there are economies of scale with respect to the management of each Portfolio and whether each Portfolio benefits from any economies of scale. The Board considered whether the management fee schedule under each Agreement is reasonable in relation to the asset size of the Portfolio. The Board noted that the management fee schedule for each Portfolio included breakpoints designed to share economies of scale with the shareholders. The Board noted that for DWS Blue Chip VIP, DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP), DWS International Select Equity VIP, DWS Large Cap Value VIP, DWS Core Fixed Income VIP, DWS Government & Agency VIP, DWS High Income VIP and DWS Strategic Income VIP, the Advisor, at the request of the Independent Trustees, added breakpoints to each Portfolio's management fee schedule effective October 1, 2006. The Board concluded that each management fee schedule reflects an appropriate level of sharing of any economies of scale.

Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DIMA and its affiliates, including fees received by the Advisor for administrative services provided to each Portfolio and any fees received by an affiliate of the Advisor for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, which pertain primarily to funds investing in equity securities. The Board considered that the Advisor has recently proposed and the Board is evaluating a change in the Advisor's policies to permit the allocation of brokerage to acquire research services from third-party service providers. The Advisor had voluntarily discontinued this practice in 2004. The Board concluded that management fees were reasonable in light of these fallout benefits.

Regulatory Matters. The Board also considered information regarding pending regulatory actions against the Advisor and its affiliates related to allegations of market timing, revenue sharing, directed brokerage and other matters. The Board considered that the Advisor informed the Board that it expects to pay approximately $134 million in connection with final settlement agreements with various federal and state regulators regarding allegations of market timing in the DWS Funds. The Board also considered that the Advisor agreed to pay approximately $19 million in connection with a final settlement agreement with the Securities and Exchange Commission regarding allegations of directed brokerage. The Board considered the Advisor's representation that such regulatory actions will not materially impact its ability to perform under the Agreements or materially impact the Portfolios and that no current DAMI employee approved the trading arrangements. The Board also noted the private lawsuits brought against the DWS Funds in connection with the above allegations and considered the Advisor's commitment to indemnify the DWS Funds against any liability arising from these lawsuits.

In connection with the factors described above, the Board considered factors specific to a particular Portfolio, as discussed below.

DWS Mid Cap Growth VIP

Nature, Quality and Extent of Services. The Board noted that, effective October 28, 2005, the Portfolio adopted a new investment objective and strategy and changed its name to Scudder (now DWS) Mid Cap Growth Portfolio.

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap that expires on December 1, 2006, showed that the Portfolio's management fee rate was at the 38th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 81st percentile for Class A shares and the 81st percentile for Class B shares.

In light of the expense rankings, the Board recommended caps on total expenses through September 30, 2007 as follows: 0.864% for Class A shares and 1.264% for Class B shares. The Board noted that although the Portfolio's total expense ratios for Class A and Class B shares were above the median for the peer universe, such ratios (after the recommended expense caps) were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Blue Chip VIP

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 14th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 27th percentile for Class A shares and the 27th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Fund's management fee schedule, effective October 1, 2006.

DWS Davis Venture Value VIP

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap that expired on October 1, 2006, showed that the Portfolio's management fee rate was at the 96th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 85th percentile for Class A shares and the 85th percentile for Class B shares.

In light of the expense rankings, the Board recommended caps on total expenses through September 30, 2007 as follows: 0.853% for Class A shares and 1.253% for Class B shares. The Board noted that although the Portfolio's management fee rate was above the median for the peer group and the total expense ratios for Class A and Class B shares were above the median of the peer universe, such expenses (after the recommended expense caps) were within an acceptable range of the peer group and peer universe, respectively, and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor, including the favorable performance of the Portfolio.

DWS Dreman High Return Equity VIP

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 40th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 46th percentile for Class A shares and the 46th percentile for Class B shares. The Board took into account the Advisor's commitment to cap total expenses through at least November 30, 2006.

DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP)

Nature, Quality and Extent of Services. The Board considered that it approved a change, which is expected to take effect in November 2006, in the Portfolio's investment policies to invest in small and mid-size US companies.

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 13th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 6th percentile for Class A shares and the 7th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Portfolio's management fee schedule, effective October 1, 2006.

DWS Global Thematic VIP

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap that expired on October 1, 2006, showed that the Portfolio's management fee rate was at the 50th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 96th percentile for Class A shares and the 96th percentile for Class B shares.

In light of the expense rankings, the Board recommended caps on total expenses through September 30, 2007 as follows: 1.046% for Class A shares and 1.488% for Class B shares. The Board noted that although the Portfolio's total expense ratios for Class A and Class B shares were above the median for the peer universe, such expenses (after the recommended expense caps) were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS International Select Equity VIP

Nature, Quality and Extent of Services. The Board noted the relative underperformance of the Portfolio, and took into account the factors contributing to such performance and steps being taken by the Advisor to improve performance.

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 14th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 19th percentile for Class A shares and the 19th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add three breakpoints to the Fund's management fee schedule, effective October 1, 2006.

DWS Janus Growth & Income VIP

Fees and Expenses. The Board noted that, in connection with its annual review process in 2004, the Advisor agreed to reduce the Portfolio's management fee rate, effective May 1, 2005. The information provided to the Board, which included the effect of an expense cap for Class B shares that expired on October 1, 2006,  showed that the Portfolio's management fee rate was at the 50th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 64th percentile for Class A shares and the 64th percentile for Class B shares.

The Board noted that although the Portfolio's total expense ratios were above the median for Class A and Class B shares, such expenses were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Large Cap Value VIP

Nature, Quality and Extent of Services. The Board noted the short-term relative underperformance of the Portfolio, and took into account the factors contributing to such performance, the Portfolio's favorable long-term performance, and steps being taken by the Advisor to improve performance.

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap that expired on April 30, 2006, showed that the Portfolio's management fee rate was at the 53rd percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 49th percentile for Class A shares and the 49th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Fund's management fee schedule, effective October 1, 2006.

The Board noted that although the Portfolio's management fees were above the median of the peer group, the management fees were within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Small Cap Growth VIP

Nature, Quality and Extent of Services. The Board concluded that the Portfolio's short-term performance was satisfactory. The Board noted the long-term relative underperformance of the Portfolio, and took into account the factors contributing to such performance and steps being taken by the Advisor to improve performance, including recent changes in investment personnel.

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap for Class B shares which expires May 1, 2008, showed that the Portfolio's management fee rate was at the 5th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 12th percentile for Class A shares and the 12th percentile for Class B shares. The Board took into account the Advisor's commitment to cap total expenses through April 30, 2008.

DWS Technology VIP

Nature, Quality and Extent of Services. The Board noted the relative underperformance of the Portfolio, and took into account the factors contributing such performance and steps being taken by the Advisor to improve performance, including the new lead portfolio manager and the shift in the Portfolio's investment focus.

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 22nd percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 31st percentile for Class A shares and the 31st percentile for Class B shares.

DWS Balanced VIP

Nature, Quality and Extent of Services. The Board noted the relative underperformance of the Portfolio, and took into account the factors contributing to such performance, including the Portfolio's lower exposure to international equities relative to its peers, and steps being taken by the Advisor to improve performance, including the use of a global asset allocation strategy.

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap for Class A and Class B shares that expires on May 1, 2008, showed that the Portfolio's management fee rate was at the 21st percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 9th percentile for Class A shares and the 9th percentile for Class B shares. The Board took into account the Advisor's commitment to cap total expenses through April 30, 2008.

DWS Turner Mid Cap Growth VIP

Fees and Expenses. The Board noted that, in connection with its annual review process in 2005, the Advisor agreed to reduce the Portfolio's management fee rate, effective October 1, 2005. The information provided to the Board, which included the effect of an expense cap for Class B shares that expires on December 1, 2006, showed that the Portfolio's management fee rate was at the 32nd percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 73rd percentile for Class A shares and the 73rd percentile for Class B shares.

The Board noted that although the Portfolio's total expense ratios for Class A and Class B shares were above the median for the peer universe, such expenses were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Conservative Allocation VIP

Nature, Quality and Extent of Services. The Board considered that the Portfolio is a fund-of-funds and that investment management services consisted primarily of asset allocation services. The Board noted that comparative performance information for longer-term periods was not available due to the limited operating history of the Portfolio.

The Board noted the relative short-term underperformance of the Portfolio, and took into account the factors contributing to such performance, the limited operating history of the Portfolio and steps being taken by the Advisor to improve performance.

Fees and Expenses. The Board noted that the Lipper peer group and peer universe information included mutual funds that were not structured as funds-of-funds. As a result, the information provided to the Board, which included the effect of an expense cap on the Portfolio's direct operating expenses that expires on December 1, 2006 and a management fee waiver that expired on October 1, 2006, showed that the Portfolio's management fee rate was at the 1st percentile of the peer group, and that the Portfolio's total expense ratio (excluding any 12b-1 and recordkeeping fees) was at the 11th percentile of the peer universe. Based upon questions from the Independent Trustees, the Advisor produced additional comparative information on other funds-of-funds selected by the Advisor. Based upon that data, the Board observed that the Portfolio's management fees for the asset allocation service were above the median.

Given that the Portfolio's total expense ratio was impacted by a management fee waiver and that the Advisor represented to the Board that it believes the Portfolio's management fee with the current waiver is competitive and reasonable, the Board recommended that the Advisor continue the management fee waiver through September 30, 2007 or until the Advisor introduces the Global Asset Allocation strategy to the Board and the Board approves the strategy. The Board also recommended that the existing expense cap on the Portfolio's direct operating expenses be continued through September 30, 2007.

DWS Moderate Allocation VIP

Nature, Quality and Extent of Services. The Board considered that the Portfolio is a fund-of-funds and that investment management services consisted primarily of asset allocation services. The Board noted that comparative performance information for longer-term periods was not available due to the limited operating history of the Portfolio.

Fees and Expenses. The Board noted that the Lipper peer group and peer universe information included mutual funds that were not structured as funds-of-funds. As a result, the information provided to the Board, which included the effect of a management fee waiver that expired on October 1, 2006, showed that the Portfolio's management fee rate was at the 1st percentile of the peer group, and that the Portfolio's total expense ratio (excluding any 12b-1 and recordkeeping fees) was at the 1st percentile of the peer universe. Based upon questions from the Independent Trustees, the Advisor produced additional comparative information on other funds-of-funds selected by the Advisor. Based upon that data, the Board observed that the Portfolio's management fees for the asset allocation service were above the median. The Board also took into account that the Advisor's commitment to cap the Portfolio's direct operating expenses would expire on October 1, 2006.

Given that the Portfolio's total expense ratio was impacted by a management fee waiver and that the Advisor represented to the Board that it believes the Portfolio's management fee with the current waiver is competitive and reasonable, the Board recommended that the Advisor continue the management fee waiver through September 30, 2007 or until the Advisor introduces the Global Asset Allocation strategy to the Board and the Board approves the strategy. The Board also recommended that the expiring expense cap on the Portfolio's direct operating expenses be continued through September 30, 2007.

DWS Growth Allocation VIP

Nature, Quality and Extent of Services. The Board considered that the Portfolio is a fund-of-funds and that investment management services consisted primarily of asset allocation services. The Board noted that comparative performance information for longer-term periods was not available due to the limited operating history of the Portfolio.

Fees and Expenses. The Board noted that the Lipper peer group and peer universe information included mutual funds that were not structured as funds-of-funds. As a result, the information provided to the Board, which included the effect of a management fee waiver that expired on October 1, 2006, showed that the Portfolio's management fee rate was at the 1st percentile of the peer group, and that the Portfolio's total expense ratio (excluding any 12b-1 and recordkeeping fees) was at the 1st percentile of the peer universe. Based upon questions from the Independent Trustees, the Advisor produced additional comparative information on other funds-of-funds selected by the Advisor. Based upon that data, the Board observed that the Portfolio's management fees for the asset allocation service were above the median. The Board also took into account that the Advisor's commitment to cap the Portfolio's direct operating expenses would expire on October 1, 2006.

Given that the Portfolio's total expense ratio was impacted by a management fee waiver and that the Advisor represented to the Board that it believes the Portfolio's management fee with the current waiver is competitive and reasonable, the Board recommended that the Advisor continue the management fee waiver through September 30, 2007 or until the Advisor introduces the Global Asset Allocation strategy to the Board and the Board approves the strategy. The Board also recommended that the expiring expense cap on the Portfolio's direct operating expenses be continued through September 30, 2007.

DWS Core Fixed Income VIP

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 42nd percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 57th percentile for Class A shares and the 57th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Portfolio's management fee schedule, effective October 1, 2006.

The Board noted that, although the total expense ratio for each share class was above the median of the peer universe, such total expense ratios were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Government & Agency Securities VIP

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 60th percentile for the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 69th percentile for Class A shares and the 69th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Portfolio's management fee schedule, effective October 1, 2006.

The Board noted that, although the Fund's management fee rate was above the median of the peer group and the total expense ratio for each share class was above the median of the peer universe, such management fee rate and total expense ratios were within an acceptable range of the peer group and peer universe, respectively, and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS High Income VIP

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 29th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 37th percentile for Class A shares and the 37th percentile for Class B shares. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Portfolio's management fee schedule, effective October 1, 2006.

DWS Strategic Income VIP

Fees and Expenses. The information provided to the Board, which included the effect of an expense cap for Class B shares that expires on October 1, 2006, showed that the Portfolio's management fee rate was at the 38th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 73rd percentile for Class A shares and the 73rd percentile for Class B shares. The Board took into account the Advisor's commitment to cap total expenses through September 30, 2006. The Board considered that, at the request of the Independent Trustees, the Advisor agreed to add seven breakpoints to the Portfolio's management fee schedule, effective October 1, 2006.

The Board noted that, although the Portfolio's total expense ratio for each share class was above the median of the peer universe, such total expense ratios were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

DWS Money Market VIP

Nature, Quality and Extent of Services. The Board reviewed the Portfolio's gross and net performance over short-term and long-term periods and compared those returns to various agreed-upon peer universe performance measures, focusing, for this purpose, primarily on gross performance. The Board concluded that the Portfolio's gross performance over time was satisfactory.

Fees and Expenses. The information provided to the Board showed that the Portfolio's management fee rate was at the 70th percentile of the peer group, and that the Portfolio's total expense ratios (excluding any 12b-1 and recordkeeping fees) were at the following percentiles of the peer universe: the 47th percentile for Class A shares and the 47th percentile for Class B shares.

The Board noted that although the Portfolio's management fee rate was above the median of the peer group such management fee rate was within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

Based on all of the information considered and the conclusions reached, the Board (including a majority of the Independent Trustees) determined that the terms of each Agreement continue to be fair and reasonable and that the continuation of each Agreement is in the best interests of each Portfolio. No single factor was determinative in the Board's analysis.

Board Considerations in Connection with the Annual Review of the Sub-Advisory Agreement for each of the following Portfolios:

DWS Davis Venture Value VIP

DWS Dreman High Return Equity VIP

DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP)

DWS Core Fixed Income VIP

DWS Janus Growth & Income VIP

DWS Turner Mid Cap Growth VIP

The Board of Trustees, including the Independent Trustees, approved the renewal of each Portfolio's sub-advisory agreement (the "Sub-Advisory Agreement") between Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor") and each Portfolio's sub-advisor (each a "Sub-Advisor") in September 2006. As part of its review process, the Board requested and evaluated all information it deemed reasonably necessary to evaluate each Sub-Advisory Agreement. The review process followed by the Board is described in detail above. In connection with the renewal of the Sub-Advisory Agreements, the various Committees and the Board considered the factors described below, among others.

Nature, Quality and Extent of Services. The Board considered the nature, extent and quality of services provided under each Sub-Advisory Agreement. The Board considered the reputation, qualifications and background of each Sub-Advisor, investment approach of each Sub-Advisor, the experience and skills of investment personnel responsible for the day-to-day management of each Portfolio, and the resources made available to such personnel. The Board considered short-term and longer-term performance of each Portfolio (as described above).

On the basis of this evaluation and the ongoing review of investment results by the Equity Oversight Committee and the Fixed-Income Oversight Committee, as applicable, the Board concluded that the nature, quality and extent of services provided by each Sub-Advisor historically have been and continue to be satisfactory and that, except as discussed below, each Portfolio's performance during the tenure of the Sub-Advisor was satisfactory.

With respect to DWS Janus Growth & Income VIP, the Board considered the Sub-Advisor's representation that it had reached a settlement with regulators in August 2004 with respect to regulatory actions arising from market timing allegations affecting the Sub-Advisor. With respect to DWS Dreman Small Mid Cap Value VIP (formerly DWS Dreman Small Cap Value VIP), the Board considered that it approved a change, which is expected to take effect in November 2006, in the Portfolio's investment policies to invest in small and mid-size US companies.

Fees; Profitability and Economies of Scale. The Board considered the sub-advisory fee rate under each Sub-Advisory Agreement and how it related to the overall management fee structure of the Portfolio. With respect to DWS Janus Growth & Income VIP, the Board noted that in connection with the annual review process in 2004, the Sub-Advisor agreed to reduce its sub-advisory fees, effective May 1, 2005. With respect to DWS Dreman High Return Equity VIP, the Board considered the terms of a relationship agreement between the Advisor and Sub-Advisor. With respect to DWS Turner Mid Cap Growth VIP, the Board noted that, in connection with its annual review process in 2005, the Sub-Advisor agreed to reduce its sub-advisory fee, effective October 1, 2005.

The Board considered that each sub-advisory fee rate was negotiated at arm's length between the Advisor and Sub-Advisor, an unaffiliated third party, and that the Advisor compensates each Sub-Advisor from its fees. With respect to DWS Davis Venture Value VIP, DWS Dreman High Return Equity VIP, DWS Dreman Small Mid Cap Value VIP (formerly Dreman Small Cap Value VIP), DWS Janus Growth & Income VIP and DWS Turner Mid Cap Growth VIP, the Board also considered the estimated profitability of the Sub-Advisor based on revenues and expenses, as provided by the Sub-Advisor, and concluded that the estimated profitability realized by the Sub-Advisor in connection with the management of the Portfolio was not unreasonable. With respect to DWS Core Fixed Income VIP, the Board noted that the Sub-Advisor did not provide an estimate of profitability in connection with the management of the Portfolio. The Board noted its consideration of the estimated profitability of the Advisor for this Portfolio.

As part of its review of the investment management agreement with DIMA, the Board considered whether there will be economies of scale with respect to the overall fee structure of each Portfolio and whether the Portfolio will benefit from any economies of scale. With respect to DWS Turner Mid Cap Growth VIP and DWS Janus Growth & Income VIP, the Board noted that the Sub-Advisor agreed to reduce the Portfolio's sub-advisory fee, effective October 1, 2005 for DWS Turner Mid Cap Growth VIP, and May 1, 2005 for DWS Janus Growth & Income VIP. The Board noted that each investment management agreement with DIMA included breakpoints and concluded that the overall structure was designed to share economies of scale with shareholders. For DWS Dreman Small Mid Cap VIP (formerly DWS Dreman Small Cap Value VIP) and DWS Core Fixed Income VIP, the Board noted that, at the request of the Independent Trustees, DIMA agreed to add seven breakpoints to its investment management fee schedule, effective October 1, 2006.

Other Benefits to the Sub-Advisor. The Board also considered the character and amount of other incidental benefits received by each Sub-Advisor and their affiliates. The Board noted that each Sub-Advisor agreed to adhere to DIMA's Soft Dollar Policy for the Portfolios, which includes an agreement not to use Portfolio brokerage transactions to pay for research services generated by parties other than the executing broker-dealer. The Board noted that DIMA has recently proposed and the Board is evaluating a change in its policies to permit the allocation of brokerage to acquire research services generated by parties other than the executing broker-dealer. The Board concluded that the sub-advisory fees were reasonable in light of these fallout benefits.

Based on all of the information considered and the conclusions reached, the Board (including a majority of the Independent Trustees) determined that the terms of each Sub-Advisory Agreement continue to be fair and reasonable and that the continuation of each Sub-Advisory Agreement is in the best interests of each Portfolio. No single factor was determinative in the Board's analysis.

Trustees and Officers

The following table presents certain information regarding the Board Members and Officers of the Trust as of December 31, 2006. Each individual's year of birth is set forth in parentheses after his or her name. Unless otherwise noted; (i) each individual has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each individual is c/o Deutsche Asset Management, 222 South Riverside Plaza, Chicago, Illinois 60606. Each Board Member's term of office extends until the next shareholders' meeting called for the purpose of electing such Board Members and until the election and qualification of a successor, or until such Board Member sooner dies, retires, resigns or is removed as provided in the governing documents of the Trust.

Independent Board Members

Name, Year of Birth, Position(s) Held with the Fund and Length of Time Served1

Principal Occupation(s) During Past 5 Years and Other Directorships Held

Number of Funds in Fund Complex Overseen

Shirley D. Peterson (1941)
Chairperson, 2004-present
Board Member, 1995-present
 Retired; formerly, President, Hood College (1995-2000); prior thereto, Partner, Steptoe & Johnson (law firm); Commissioner, Internal Revenue Service; Assistant Attorney General (Tax), US Department of Justice. Directorships: Federal Mogul Corp. (supplier of automotive components and subsystems); AK Steel (steel production); Goodyear Tire & Rubber Co. (April 2004-present); Champion Enterprises, Inc. (manufactured home building); Wolverine World Wide, Inc. (designer, manufacturer and marketer of footwear) (April 2005-present); Trustee, Bryn Mawr College. Former Directorship: Bethlehem Steel Corp.

63

Paul K. Freeman2 (1950)
Board Member, 2002-present
 President, Cook Street Holdings (consulting); Consultant, World Bank/Inter-American Development Bank; formerly, Project Leader, International Institute for Applied Systems Analysis (1998-2001); Chief Executive Officer, The Eric Group, Inc. (environmental insurance) (1986-1998)

63

John W. Ballantine (1946)
Board Member, 1999-present
 Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996-1998); Executive Vice President and Head of International Banking (1995-1996). Directorships: Healthways, Inc. (provider of disease and care management services); Portland General Electric (utility company). Former Directorships: First Oak Brook Bancshares, Inc. and Oak Brook Bank

63

Donald L. Dunaway (1937)
Board Member, 1980-present
 Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified manufacturer) (1963-1994)

63

James R. Edgar (1946)
Board Member, 1999-present
 Distinguished Fellow, University of Illinois, Institute of Government and Public Affairs (1999-present); formerly, Governor, State of Illinois (1991-1999). Directorships: Kemper Insurance Companies; John B. Sanfilippo & Son, Inc. (processor/packager/marketer of nuts, snacks and candy products); Horizon Group Properties, Inc.; Youbet.com (online wagering platform); Alberto-Culver Company (manufactures, distributes and markets health and beauty care products)

63

Robert B. Hoffman (1936)
Board Member, 1981-present
 Retired; formerly, Chairman, Harnischfeger Industries, Inc. (machinery for the mining and paper industries) (1999-2000); prior thereto, Vice Chairman and Chief Financial Officer, Monsanto Company (agricultural, pharmaceutical and nutritional/food products) (1994-1999). Directorships: RCP Advisors, LLC (a private equity investment advisory firm)

63

William McClayton (1944)
Board Member, 2004-present
 Managing Director of Finance and Administration, Diamond Management & Technology Consultants, Inc. (global management consulting firm) (2001-present); formerly, Partner, Arthur Andersen LLP (accounting) (1986-2001). Formerly: Trustee, Ravinia Festival; Board of Managers, YMCA of Metropolitan Chicago

63

Robert H. Wadsworth
(1940)
Board Member, 2004-present
 President, Robert H. Wadsworth & Associates, Inc. (consulting firm) (1983 to present). Formerly, Trustee of New York Board DWS Funds; President and Trustee, Trust for Investment Managers (registered investment company) (1999-2002). President, Investment Company Administration, L.L.C. (1992*-2001); President, Treasurer and Director, First Fund Distributors, Inc. (June 1990-January 2002); Vice President, Professionally Managed Portfolios (May 1991-January 2002) and Advisors Series Trust (October 1996-January 2002) (registered investment companies)
*Inception date of the corporation which was the predecessor to the L.L.C.

66

Officers3

Name, Year of Birth, Position(s) Held with the Fund and Length of Time Served1

Principal Occupation(s) During Past 5 Years and Other Directorships Held

Number of Funds in Fund Complex Overseen

Michael G. Clark5 (1965)
President, 2006-present
 Managing Director4, Deutsche Asset Management (2006-present); President of DWS family of funds; formerly, Director of Fund Board Relations (2004-2006) and Director of Product Development (2000-2004), Merrill Lynch Investment Managers; Senior Vice President Operations, Merrill Lynch Asset Management (1999-2000)

n/a

Philip J. Collora (1945)
Vice President and Assistant Secretary, 1986-present
 Director4, Deutsche Asset Management

n/a

Paul H. Schubert5 (1963)
Chief Financial Officer, 2004-present
Treasurer, 2005-present
 Managing Director4, Deutsche Asset Management (since July 2004); formerly, Executive Director, Head of Mutual Fund Services and Treasurer for UBS Family of Funds (1998-2004); Vice President and Director of Mutual Fund Finance at UBS Global Asset Management (1994-1998)

n/a

John Millette6 (1962)
Secretary, 2001-present
 Director4, Deutsche Asset Management

n/a

Patricia DeFilippis5 (1963)
Assistant Secretary, 2005-present
 Vice President, Deutsche Asset Management (since June 2005); formerly, Counsel, New York Life Investment Management LLC (2003-2005); legal associate, Lord, Abbett & Co. LLC (1998-2003)

n/a

Elisa D. Metzger5, (1962)
Assistant Secretary 2005-present
 Director4, Deutsche Asset Management (since September 2005); formerly, Counsel, Morrison and Foerster LLP (1999-2005)

n/a

Caroline Pearson6 (1962)
Assistant Secretary, 1998-present
 Managing Director4, Deutsche Asset Management

n/a

Scott M. McHugh6 (1971)
Assistant Treasurer, 2005-present
 Director4, Deutsche Asset Management

n/a

Kathleen Sullivan D'Eramo6 (1957)
Assistant Treasurer, 2003-present
 Director4, Deutsche Asset Management

n/a

John Robbins5 (1966)
Anti-Money Laundering Compliance Officer, 2005-present
 Managing Director4, Deutsche Asset Management (since 2005); formerly, Chief Compliance Officer and Anti-Money Laundering Compliance Officer for GE Asset Management (1999-2005)

n/a

Robert Kloby5 (1962)
Chief Compliance Officer, 2006-present
 Managing Director4, Deutsche Asset Management (2004-present); formerly, Chief Compliance Officer/Chief Risk Officer, Robeco USA (2000-2004); Vice President, The Prudential Insurance Company of America (1988-2000); E.F. Hutton and Company (1984-1988)

n/a

1 Length of time served represents the date that each Board Member was first elected to the common board of Board Members which oversees a number of investment companies, including the fund, managed by the Advisor. For the Officers of the fund, the length of time served represents the date that each officer was first elected to serve as an officer of any fund overseen by the aforementioned common board of Board Members.
2 Appointed Chairman of the Board, effective January 1, 2007.
3 As a result of their respective positions held with the Advisor, these individuals are considered "interested persons" of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the fund.
4 Executive title, not a board directorship.
5 Address: 345 Park Avenue, New York, New York 10154.
6 Address: Two International Place, Boston, Massachusetts 02110.

The Trust's Statement of Additional Information ("SAI") includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: 1-800-621-1048.

Notes

vs2_backcover logo0About the Portfolios' Advisor

DWS Scudder is part of Deutsche Asset Management, which is the marketing name in the US for the asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.

An investment in DWS Money Market VIP is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although DWS Money Market VIP seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio.

The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.

This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by individual investors.

DWS Scudder Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 778-1482

SVS2-2 (48577 2/07)

 

ITEM 2.

CODE OF ETHICS

 

 

 

As of the end of the period, December 31, 2006, DWS Variable Series II has a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Principal Executive Officer and Principal Financial Officer.

 

There have been no amendments to, or waivers from, a provision of the code of ethics during the period covered by this report that would require disclosure under Item 2.

 

A copy of the code of ethics is filed as an exhibit to this Form N-CSR.

 

 

 

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT

 

 

 

The Fund’s Board of Directors/Trustees has determined that the Fund has at least one “audit committee financial expert” serving on its audit committee: Mr. William McClayton, Mr. Donald Dunaway and Mr. Robert Hoffman. Each of these audit committee members is “independent,” meaning that he is not an “interested person” of the Fund (as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940) and he does not accept any consulting, advisory, or other compensatory fee from the Fund (except in the capacity as a Board or committee member).

 

An “audit committee financial expert” is not an “expert” for any purpose, including for purposes of Section 11 of the Securities Act of 1933, as a result of being designated as an “audit committee financial expert.” Further, the designation of a person as an “audit committee financial expert” does not mean that the person has any greater duties, obligations, or liability than those imposed on the person without the “audit committee financial expert” designation. Similarly, the designation of a person as an “audit committee financial expert” does not affect the duties, obligations, or liability of any other member of the audit committee or board of directors.

 

 

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

 

DWS VARIABLE SERIES II

FORM N-CSR DISCLOSURE RE: AUDIT FEES

The following table shows the amount of fees that Ernst & Young, LLP (“E&Y”), the Trust’s auditor, billed to the Trust during the Trust’s last two fiscal years. The Audit Committee approved in advance all audit services and non-audit services that E&Y provided to the Trust.

The Audit Committee has delegated certain pre-approval responsibilities to its Chairman (or, in his absence, any other member of the Audit Committee).

Services that the Trust’s Auditor Billed to the Trust

 

Fiscal Year
Ended
December 31

Audit Fees Billed to Trust

Audit-Related
Fees Billed to Trust

Tax Fees Billed to Trust

All
Other Fees Billed to Trust

2006

$947,520

$0

$123,207

$0

2005

$1,071,665

$0

$146,136

$0

 

The above "Tax Fees" were billed for professional services rendered for tax return preparation.

 

 

Services that the Trust’s Auditor Billed to the Adviser and

Affiliated Fund Service Providers

The following table shows the amount of fees billed by E&Y to Deutsche Investment Management Americas, Inc. (“DeIM” or the “Adviser”), and any entity controlling, controlled by or under common control with DeIM (“Control Affiliate”) that provides ongoing services to the Trust (“Affiliated Fund Service Provider”), for engagements directly related to the Trust’s operations and financial reporting, during the Trust’s last two fiscal years.

 

Fiscal Year
Ended
December 31

Audit-Related
Fees Billed to Adviser and Affiliated Fund Service Providers

Tax Fees Billed to Adviser and Affiliated Fund Service Providers

All
Other Fees Billed to Adviser and Affiliated Fund Service Providers

2006

$80,000

$316,254

$0

2005

$355,000

$488,670

$0

 

The “Audit-Related Fees” were billed for services in connection with agreed upon procedures related to fund mergers and the above “Tax Fees” were billed in connection with tax compliance services and agreed upon procedures.Non-Audit Services

The following table shows the amount of fees that E&Y billed during the Trust’s last two fiscal years for non-audit services. The Audit Committee pre-approved all non-audit services that E&Y provided to the Adviser and any Affiliated Fund Service Provider that related directly to the Trust’s operations and financial reporting. The Audit Committee requested and received information from E&Y about any non-audit services that E&Y rendered during the Trust’s last fiscal year to the Adviser and any Affiliated Fund Service Provider. The Committee considered this information in evaluating E&Y’s independence.

 

Fiscal Year
Ended
December 31

Total
Non-Audit Fees Billed to Trust

(A)

Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (engagements related directly to the operations and financial reporting of the Trust)

(B)

Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (all other engagements)

(C)

Total of (A), (B)

and (C)

2006

$123,207

$316,254

$530,385

$969,846

2005

$146,136

$488,670

$40,721

$675,527

 

All other engagement fees were billed for services in connection with internal control reviews, agreed upon procedures and tax compliance for DeIM and other related entities that provide support for the operations of the trust.

 

In connection with the audit of the 2005 and 2006 financial statements, the Trust entered into an engagement letter with E&Y. The terms of the engagement letter required by E&Y, and agreed to by the Audit Committee, include provisions in which the parties consent to the sole jurisdiction of federal courts in New York, Boston or the Northern District of Illinois, as well as a waiver of right to a trial by jury and an exclusion of punitive damages.

 

 

 

 

 

 

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS

 

 

 

Not Applicable

 

 

ITEM 6.

SCHEDULE OF INVESTMENTS

 

 

 

Not Applicable

 

 

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

 

 

Not applicable.

 

 

ITEM 8.

PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

 

 

Not applicable.

 

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS

 

 

 

Not Applicable.

 

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

The primary function of the Nominating and Governance Committee is to identify and recommend individuals for membership on the Board and oversee the administration of the Board Governance Procedures and Guidelines. Shareholders may recommend candidates for Board positions by forwarding their correspondence by U.S. mail or courier service to the Fund's Secretary for the attention of the Chairman of the Nominating and Governance Committee, Two International Place, Boston, MA 02110. Suggestions for candidates must include a resume of the candidate.

 

 

ITEM 11.

CONTROLS AND PROCEDURES

 

 

 

(a)          The Chief Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on the evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

 

 

 

(b)          There have been no changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last half-year (the registrant’s second fiscal half-year in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting.

 

 

ITEM 12.

EXHIBITS

 

 

 

(a)(1)     Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as EX-99.CODE ETH.

 

 

 

(a)(2)     Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT.

 

 

 

(b)         Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit 99.906CERT.

 

 

 

Form N-CSR Item F

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Registrant:

DWS Variable Series II

 

By:

/s/Michael G. Clark

 

Michael G. Clark

President

 

Date:

February 23, 2007

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Registrant:

DWS Variable Series II

 

By:

/s/Michael G. Clark

 

Michael G. Clark

President

 

Date:

February 23, 2007

 

 

By:

/s/Paul Schubert

 

Paul Schubert

Chief Financial Officer and Treasurer

 

Date:

February 23, 2007