N-CSR 1 h42829nvcsr.txt FORM N-CSR - SHAREHOLDER REPORT OF INVESTMENT COMPANY ------------------------------ | OMB APPROVAL | |------------------------------| | OMB Number: 3235-0570 | | Expires: September 30, 2007 | | Estimated average burden | | hours per response: 19.4 | ------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07452 --------------------------------------------- AIM Variable Insurance Funds -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 11 Greenway Plaza, Suite 100 Houston, Texas 77046 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Philip A. Taylor 11 Greenway Plaza, Suite 100 Houston, Texas 77046 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (713) 626-1919 ---------------------------- Date of fiscal year end: 12/31 --------- Date of reporting period: 12/31/06 ------------ Item 1. Schedule of Investments. AIM V.I. BASIC BALANCED FUND DOMESTIC EQUITY Large-Cap Value Annual Report to Shareholders December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at [COVER GLOBE IMAGE] the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 or on AIM V.I. BASIC BALANCED FUND seeks long-term growth the AIM Web site, AIMinvestments.com. On of capital and current income. the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Unless otherwise stated, information presented in this report Activity. Next, select the Fund from the is as of December 31, 2006, and is based on total net assets. drop-down menu. The information is also available on the SEC Web site, sec.gov. =========================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING SALES [AIM INVESTMENTS LOGO] CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY - Registered Trademark - BEFORE INVESTING. =========================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Management's discussion of Fund performance AIM V.I. BASIC BALANCED FUND Process. First, the investment strategy ===================================================================================== is intended to preserve your capital PERFORMANCE SUMMARY while growing it at above-market rates over the long term. Second, our investments For the year ended December 31, 2006, Series I and Series II shares of AIM V.I. Basic have little in common with popular Balanced Fund, excluding variable product issuer charges, underperformed the Fund's benchmark indexes and most of our peers. broad market, style-specific and peer group indexes. And third, the Fund's short-term relative performance will naturally be different We attribute the Fund's underperformance versus its broad market and than the market and peers and have little style-specific indexes to below-market returns from selected investments in the information value since we don't own information technology health care and industrials sectors. Top contributors to many of the same stocks. performance were selected investments in the financials and consumer discretionary sectors. Our fixed income portfolio investment Your Fund's long-term performance information appears on pages 4-5. process is accomplished through the use of top-down strategies involving duration FUND VS. INDEXES management, yield-curve position and sector allocation. (Duration is the Total returns, 12/31/05-12/31/06, excluding variable product issuer charges. If measure of a debt security's sensitivity variable product issuer charges were included, returns would be lower. to interest rate changes, expressed in terms of years. Longer durations usually Series I Shares 10.55% are more sensitive to interest rate Series II Shares 10.26 movements. The yield curve traces the S&P 500 --Registered Trademark-- Index (Broad Market Index) 15.78 yields on debt securities of the same 60% Russell 1000 --Registered Trademark-- Value Index / quality but different maturities from the 40% Lehman Brothers U.S. Aggregate Bond Index (Style-Specific Index) 14.81 shortest to longest available.) In Lipper Mixed-Asset Target Allocation Moderate Funds Index (Peer Group Index)(1)12.02 addition, we use bottom-up strategies Lipper Balanced Funds Index (Former Peer Group Index) 11.60 involving credit analysis and selection of specific securities. By combining SOURCE: A I M MANAGEMENT GROUP INC., LIPPER INC. perspectives from both the portfolio and the security level, we seek to (1) During the year, Lipper reclassified AIM V.I. Basic Balanced Fund from the consistently add value over time while Lipper Balanced Funds category to the Lipper Mixed-Asset Target Allocation minimizing portfolio risk. Moderate Funds category. ==================================================================================== MARKET CONDITIONS AND YOUR FUND HOW WE INVEST Equity and fixed income markets posted healthy gains during the year as favorable We seek to create wealth by maintaining a - Companies have a measurable estimated economic data and solid corporate profits long-term investment horizon and investing intrinsic value. Importantly, this overshadowed housing market concerns and in companies that are selling at a estimated fair value is independent of investor uncertainty regarding interest significant discount to their estimated the company's stock price. rates and oil prices. intrinsic value--a value that is based on - Market prices are more volatile than the estimated future cash flows generated rusiness values, partly because investors The Fund's largest contributors during the by the business. The Fund's philosophy is regularly overreact to negative news. year included financial services holdings based on two elements that we believe have Since our application of this strategy extensive empirical evidence: is highly disciplined and relatively MORGAN STANLEY, JP MORGAN AND MERRILL unique, it is important to understand LYNCH. All benefited from a robust capital the benefits and limitations of our ==================================================================================== ========================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* By security type 1. U.S. Mortgage-Backed Securities 10.7% 1. UnitedHealth Group Inc. 2.8% Domestic Common Stocks & 2. Other Diversified Financial 2. Tyco International Ltd. 2.6 Other Equity Interests 65.2% Services 8.7 3. JPMorgan Chase & Co. 2.5 Bonds & Notes 3. Pharmaceuticals 5.0 4. Cardinal Health, Inc. 2.4 U.S. Mortgage-Backed Securities 25.4 4. Industrial Conglomerates 4.3 5. Fannie Mae 2.3 Five Other Security Types, Each With 10.7 5. Advertising 3.9 6. Citigroup Inc. 2.1 Less Than 2% of Total Net Assets 7. Cemex S.A. de C.V.-ADR (Mexico) 2.0 Money Market Funds 2.8 8. Omnicom Group Inc. 2.0 Plus Other Assets Less Liabilities Total Net Assets $90.09 million 9. Target Corp. 1.9 -4.1 10. First Data Corp. 1.9 Total Number of Holdings* 265 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ===================================================================================================================================
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AIM V.I. BASIC BALANCED FUND markets environment and rotation to CONTEXT FOR RESULTS Bret W. Stanley large-cap financials as investors [STANLEY Chartered Financial Analyst, anticipated an end to U.S. Federal Reserve As managers, we know a long-term PHOTO] senior portfolio manager, is Board interest rate increases. More investment horizon and attractive lead manager of AIM V.I. Basic important, Morgan Stanley and JP Morgan, potential upside to our estimate of Balanced Fund. Mr. Stanley under the leadership of new CEOs, showed portfolio intrinsic value are critical to earned a B.B.A. in finance from signs of improved operating and financial creating wealth. But we understand The University of Texas at Austin and an performance. maintaining a long-term investment horizon M.S. in finance from the University of is a challenge. So when shareholders Houston. A modest number of Fund holdings posted consider our short-term results, we price declines during the year. Among the encourage them to review our long-term Fund's largest detractors from performance results on pages 4-5. We are long-term R. Canon Coleman II were CA, WellPoint and Cendant. Before the investors who provide a portfolio that in [COLEMAN Chartered Financial close of the year, we sold our holdings in our opinion is distinct from market PHOTO] Analyst, portfolio manager, WellPoint. At the close of 2006, Cendant indexes and most of our peers. is manager of AIM V.I. split into three separate operating Basic Balanced Fund. Mr. Coleman earned a companies: Realogy (real estate), Wyndam Recent studies have shown short-term B.S. and an M.S. in accounting from the Worldwide (hospitality) and Avis Budget results have little information value and University of Florida. He also earned an Group (car rental). Following the split, the frequent trading of stocks or mutual M.B.A. from the Wharton School at the the Fund sold its positions in Wyndam and funds is a costly exercise--reducing University of Pennsylvania. Avis Budget while retaining Realogy. actual returns by several percentage points per year as shareholders Jan H. Friedli Enterprise software firm CA's stock price unknowingly exchange tomorrow's winner for [FRIEDLI Senior portfolio manager, declined as a result of investor concerns tomorrow's loser. In addition, a recent PHOTO] is manager of AIM V.I. regarding senior management turnover, Yale University study reveals half of all Basic Balanced Fund. Mr. weaker-than-expected quarterly earnings mutual funds charge an active management Friedli graduated cum laude from Villanova and a stock options issues. Despite these fee for essentially a closet-index University with a B.S. in computer science short-term headwinds, our estimate of CA's portfolio. While this may create smooth before earning an M.B.A. with honors from fundamental intrinsic value remained and innocuous short-term relative the University of Chicago. unchanged. performance, it typically leads to long-term underperformance. Brendan Gau The fixed income portion of the Fund [GAU Chartered Financial Analyst, maintained its defensive to neutral stance Considering these factors, your Fund is PHOTO] portfolio manager, is manager toward duration, which helped performance doing something different and old of AIM V.I. Basic Balanced Fund. as rates rose during the year. Offsetting fashioned--investing for the long term and He earned a B.A. degree in mathematics, that positive somewhat was a slight following a common-sense approach that has physics and economics from Rice University. overweight position relative to the Lehman produced a portfolio that is different Brothers U.S. Aggregate Bond Index in from common stock market indexes and more Scot W. Johnson shorter maturities, which hurt as those attractively valued, in our opinion. [JOHNSON Chartered Financial Analyst, maturities increased more than longer PHOTO] senior portfolio manager, is duration bonds. In closing manager of AIM V.I. Basic Balanced Fund. Mr. Johnson earned both his PORTFOLIO ASSESSMENT We thank you for your investment and for bachelor's degree in economics and an sharing our long-term horizon. M.B.A. in finance from Vanderbilt We believe the single most important University. indicator of the way AIM V.I. Basic The views and opinions expressed in Balanced Fund is positioned for potential management's discussion of Fund Matthew W. Seinsheimer success is not our historical investment performance are those of A I M Advisors, [SEINSHEIMER Chartered Financial Analyst, results or popular statistical measures, Inc. These views and opinions are subject PHOTO] senior portfolio manager, but the portfolio's estimated intrinsic to change at any time based on factors is manager of AIM V.I. value--the aggregate business value of the such as market and economic conditions. Basic Balanced Fund. Mr. Seinsheimer portfolio based on our estimate of These views and opinions may not be relied earned a B.B.A. from Southern Methodist intrinsic value for each individual upon as investment advice or University and an M.B.A. from The holding. At the close of the year, and in recommendations, or as an offer for a University of Texas at Austin. our opinion, the difference between the particular security. The information is market price and the estimated intrinsic not a complete analysis of every aspect of Michael J. Simon value of the portfolio was about average any market, country, industry, security or [SIMON Chartered Financial by the Fund's historical standards, and we the Fund. Statements of fact are from PHOTO] Analyst, senior portfolio believed this value content was greater sources considered reliable, but A I M manager, is manager of AIM than what was available in the broad Advisors, Inc. makes no representation or V.I. Basic Balanced Fund. Mr. Simon earned market. While there is no assurance that warranty as to their completeness or a B.B.A. in finance from Texas Christian market value will ever reflect our accuracy. Although historical performance University and an M.B.A. from the estimate of the portfolio's intrinsic is no guarantee of future results, these University of Chicago. value, we believe this provides the best insights may help you understand our indication that your Fund is positioned to investment management philosophy. Assisted by the Basic Value Team and potentially achieve its objective of Taxable Investment Grade Bond Team long-term growth of capital. FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. BASIC BALANCED FUND ========================================== RESTATED HISTORICAL PERFORMANCE OF SERIES INSURANCE FUNDS, IS CURRENTLY OFFERED AVERAGE ANNUAL TOTAL RETURNS I SHARES (FOR PERIODS PRIOR TO INCEPTION THROUGH INSURANCE COMPANIES ISSUING OF SERIES II SHARES) ADJUSTED TO REFLECT VARIABLE PRODUCTS. YOU CANNOT PURCHASE As of 12/31/06 THE RULE 12B-1 FEES APPLICABLE TO SERIES SHARES OF THE FUND DIRECTLY. PERFORMANCE SERIES I SHARES II SHARES. THE INCEPTION DATE OF SERIES I FIGURES GIVEN REPRESENT THE FUND AND ARE Inception (5/1/98) 3.80% SHARES IS MAY 1, 1998. THE PERFORMANCE OF NOT INTENDED TO REFLECT ACTUAL VARIABLE 5 Years 3.84 THE FUND'S SERIES I AND SERIES II SHARE PRODUCT VALUES. THEY DO NOT REFLECT SALES 1 Year 10.55 CLASSES WILL DIFFER PRIMARILY DUE TO CHARGES, EXPENSES AND FEES ASSESSED IN SERIES II SHARES DIFFERENT CLASS EXPENSES. CONNECTION WITH A VARIABLE PRODUCT. SALES Inception 3.54% CHARGES, EXPENSES AND FEES, WHICH ARE 5 Years 3.59 THE PERFORMANCE DATA QUOTED REPRESENT DETERMINED BY THE VARIABLE PRODUCT 1 Year 10.26 PAST PERFORMANCE AND CANNOT GUARANTEE ISSUERS, WILL VARY AND WILL LOWER THE ========================================== COMPARABLE FUTURE RESULTS; CURRENT TOTAL RETURN. ========================================== PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE CONTACT YOUR VARIABLE PRODUCT ISSUER OR PER NASD REQUIREMENTS, THE MOST RECENT CUMULATIVE TOTAL RETURNS FINANCIAL ADVISOR FOR THE MOST RECENT MONTH-END PERFORMANCE DATA AT THE FUND 6 months ended 12/31/06 MONTH-END VARIABLE PRODUCT PERFORMANCE. LEVEL, EXCLUDING VARIABLE PRODUCT CHARGES, Series I Shares 9.46% PERFORMANCE FIGURES REFLECT FUND EXPENSES, IS AVAILABLE ON THIS AIM AUTOMATED Series II Shares 9.26 REINVESTED DISTRIBUTIONS AND CHANGES IN INFORMATION LINE, 866-702-4402. AS ========================================== NET ASSET VALUE. INVESTMENT RETURN AND MENTIONED ABOVE, FOR THE MOST RECENT PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MONTH-END PERFORMANCE INCLUDING VARIABLE SERIES II SHARES' INCEPTION DATE IS MAY HAVE A GAIN OR LOSS WHEN YOU SELL PRODUCT CHARGES, PLEASE CONTACT YOUR JANUARY 24, 2002. RETURNS SINCE THAT DATE SHARES. VARIABLE PRODUCT ISSUER OR FINANCIAL ARE HISTORICAL. ALL OTHER RETURNS ARE THE ADVISOR. BLENDED RETURNS OF THE HISTORICAL AIM V.I. BASIC BALANCED FUND, A SERIES PERFORMANCE OF SERIES II SHARES SINCE PORTFOLIO OF AIM VARIABLE THEIR INCEPTION AND THE =================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND equivalents rather than equity securities values. The unmanaged Lehman Aggregate for risk management purposes, the Fund may Index, which represents the U.S. Prices of equity securities change in not achieve its investment objective. investment-grade fixed-rate bond market response to many factors including the (including government and corporate historical and prospective earnings of the If the seller of a repurchase agreement securities, mortgage pass-through issuer, the value of its assets, general in which the Fund invests defaults on its securities and asset-backed securities), economic conditions, interest rates, obligation or declares bankruptcy, the is compiled by Lehman Brothers, a global investor perceptions and market liquidity. Fund may experience delays in selling the investment bank. The Russell 1000 Value securities underlying the repurchase Index and the Russell 1000 Index are The value of convertible securities in agreement. trademarks/service marks of the Frank which the Fund invests may be affected by Russell Company. Russell --Registered market interest rates, the risk that the There is no guarantee that the Trademark-- is a trademark of the Frank issuer may default on interest or investment techniques and risk analyses Russell Company. principal payments and the value of the used by the Fund's portfolio managers will underlying common stock into which these produce the desired results. The unmanaged LIPPER BALANCED FUNDS securities may be converted. INDEX represents an average of the Interest rate increases may cause the 30 largest balanced funds tracked by Foreign securities have additional risks, price of a debt security to decrease. Lipper Inc., an independent mutual fund including exchange rate changes, political performance monitor. It is calculated and economic upheaval, the relative lack ABOUT INDEXES USED IN THIS REPORT daily, with adjustments for distributions of information about these companies, as of the ex-dividend dates. relatively low market liquidity and the The blended index used in this report is potential lack of strict financial and composed of 60% RUSSELL 1000 VALUE INDEX The unmanaged Lipper Mixed-Asset Target accounting controls and standards. AND 40% LEHMAN BROTHERS U.S. AGGREGATE Allocation Moderate Funds Index is an BOND INDEX (the Lehman Aggregate Index). equally weighted representation of the 10 Investing in emerging markets involves The unmanaged Russell 1000 --Registered largest moderate funds that by portfolio greater risk than investing in more INDEX represents the performance of practice maintain a mix of between 40%-60% established markets. The risks include the the stocks of large-capitalization equity securities, with the remainder relatively smaller size and lesser companies; the Value segment measures the invested in bonds, cash and cash liquidity of these markets, high inflation performance of Russell 1000 companies with equivalents. Lipper Inc.is an independent rates, adverse political developments and lower price/book ratios and lower mutual fund performance monitor. lack of timely information. forecasted growth To the extent the Fund holds cash or cash Continued on page 5
4 AIM V.I. BASIC BALANCED FUND Past performance cannot guarantee comparable future results. This chart, which is a logarithmic value of an investment, is constructed chart, presents the fluctuations in the with each segment representing a percent value of the Fund and its indexes. We change in the value of the investment. In believe that a logarithmic chart is more this chart, each segment represents a effective than other types of charts in doubling, or 100% change, in the value of illustrating changes in value during the the investment. In other words, the space early years shown in the chart. The between $5,000 and $10,000 is the same vertical axis, the one that indicates the size as the space between $10,000 and dollar $20,000. ==================================================================================================================================== Continued from page 4 The unmanaged STANDARD & POOR'S The Fund is not managed to track returns based on those net asset values COMPOSITE INDEX OF 500 STOCKS (the S&P the performance of any particular index, may differ from the net asset values and 500 Index) is an index of common stocks including the indexes defined here, and returns reported in the Financial frequently used as a general measure of consequently, the performance of the Fund Highlights. Additionally, the returns and U.S. stock market performance. may deviate significantly from the net asset values shown throughout this performance of the indexes. report are at the Fund level only and do In conjunction with the annual not include variable product issuer prospectus update on or about May 1, A direct investment cannot be made charges. If such charges were included, 2007, the AIM V.I. Basic Balanced Fund in an index. Unless otherwise indicated, the total returns would be lower. prospectus will be amended to reflect index results include reinvested that the Fund has elected to use the dividends, and they do not reflect sales Industry classifications used in Lipper Variable Underlying Funds (VUF) charges. Performance of an index of funds this report are generally according to Mixed-Asset Target Allocation Moderate reflects fund expenses; performance of a the Global Industry Classification Funds Index as its peer group rather than market index does not. Standard, which was developed by and is the Lipper Mixed-Asset Target Allocation the exclusive property and a service mark Moderate Funds Index or the Lipper OTHER INFORMATION of Morgan Stanley Capital International Balanced Funds Index. The Lipper VUF Inc. and Standard & Poor's. Mixed-Asset Target Allocation Moderate The returns shown in the Funds Index, recently published by Lipper management's discussion of Fund The Chartered Financial Analyst - Inc., comprises the largest underlying performance are based on net asset values Registered Trademark-- (CFA --Registered funds in each variable insurance category calculated for shareholder transactions. Trademark--) designation is a globally and does not include mortality and Generally accepted accounting principles recognized standard for measuring the expense fees. require adjustments to be made to the net competence and integrity of investment assets of the Fund at period end for professionals. financial reporting purposes, and as such, the net asset values for shareholder transactions and the
5 =============================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/98, Fund data from 5/1/98
60% Russell 1000 value Index Lipper Mixed-Asset AIM V.I. Basic Balanced 40% Lehman Brothers Target Allocation Date -Series I Shares S&P 500 Index U.S. Aggregate Bond Index Moderate Funds Index Lipper Balanced Funds Index =================================================================================================================================== 4/30/98 $ 10000 $ 10000 $ 10000 $ 10000 5/98 $ 9910 9828 9949 9933 9899 6/98 10150 10227 10059 10085 10081 7/98 10110 10119 9961 9958 9963 8/98 9681 8657 9137 9050 9105 9/98 10031 9212 9537 9464 9498 10/98 10381 9960 9960 9795 9853 11/98 10751 10564 10261 10154 10214 12/98 11303 11172 10483 10421 10591 1/99 11617 11639 10563 10493 10760 2/99 11221 11278 10400 10272 10501 3/99 11678 11729 10552 10498 10761 4/99 11830 12183 11157 10855 11113 5/99 11606 11895 11044 10735 10942 6/99 11942 12554 11222 10958 11244 7/99 11759 12164 11006 10740 11034 8/99 11647 12103 10759 10597 10918 9/99 11658 11772 10583 10424 10778 10/99 12195 12517 10964 10727 11090 11/99 12632 12771 10913 10740 11210 12/99 13484 13522 10923 10918 11541 1/00 13329 12843 10695 10659 11252 2/00 14022 12600 10270 10445 11224 3/00 14250 13832 11076 11069 11885 4/00 13453 13416 10986 10966 11668 5/00 12926 13141 11053 10983 11558 6/00 13732 13464 10842 11082 11742 7/00 13639 13254 10963 11098 11710 8/00 14445 14077 11393 11594 12233 9/00 13948 13334 11484 11466 11975 10/00 13700 13277 11684 11454 11965 11/00 12604 12231 11500 11076 11531 12/00 12916 12291 11931 11436 11817 1/01 13310 12727 12036 11642 12068 2/01 12357 11567 11877 11328 11599 3/01 11726 10835 11649 11020 11225 4/01 12326 11676 11973 11461 11696 5/01 12326 11755 12163 11580 11800 6/01 12025 11469 12020 11416 11619 7/01 11911 11356 12112 11381 11611 8/01 11311 10646 11876 11118 11281 9/01 10586 9786 11430 10565 10738 10/01 10958 9973 11467 10748 10918 11/01 11403 10738 11803 11113 11353 12/01 11440 10832 11940 11210 11435 1/02 11187 10674 11924 11091 11334 2/02 11008 10468 11981 11029 11257 3/02 11261 10861 12242 11265 11504 4/02 10839 10203 12085 11059 11227 5/02 10723 10128 12162 11040 11222 6/02 10164 9407 11785 10503 10743 7/02 9564 8674 11185 10035 10193 8/02 9637 8731 11311 10185 10297 9/02 9110 7783 10630 9641 9683 10/02 9469 8467 11083 9976 10086 11/02 9754 8965 11501 10350 10495 12/02 9485 8439 11296 10144 10213 1/03 9323 8218 11136 10049 10060 2/03 9247 8095 11019 9991 9984 3/03 9268 8173 11027 10063 10025 4/03 9723 8846 11646 10609 10567 5/03 10146 9311 12184 11068 11035 6/03 10190 9430 12265 11183 11118 7/03 10146 9597 12210 11127 11144 8/03 10320 9784 12356 11274 11332 9/03 10276 9680 12415 11361 11347 10/03 10624 10227 12825 11671 11721 11/03 10711 10317 12941 11757 11825 12/03 11038 10858 13473 12190 12248 1/04 11236 11057 13658 12345 12431 2/04 11458 11211 13893 12491 12601 3/04 11436 11042 13861 12449 12541 4/04 11192 10868 13514 12207 12277 5/04 11192 11017 13575 12226 12331 =================================================================================================================================== Source: A I M Management Group Inc., Lipper Inc.
=================================================================================================================================== [MOUNTAIN CHART] 6/04 11435 11231 13798 12381 12524 7/04 11004 10860 13736 12224 12288 8/04 11026 10903 13958 12366 12363 9/04 11092 11021 14103 12492 12547 10/04 11181 11190 14291 12643 12682 11/04 11545 11642 14679 12950 13024 12/04 11867 12038 15028 13280 13349 1/05 11756 11745 14906 13128 13177 2/05 11879 11992 15167 13292 13364 3/05 11768 11780 15011 13111 13180 4/05 11689 11557 14931 12975 13021 5/05 11868 11924 15211 13253 13320 6/05 11969 11941 15344 13409 13416 7/05 12159 12385 15555 13713 13714 8/05 12080 12272 15594 13722 13753 9/05 12114 12371 15661 13763 13808 10/05 11968 12165 15373 13514 13591 11/05 12294 12625 15703 13781 13921 12/05 12495 12629 15819 13907 14043 1/06 12780 12964 16188 14235 14378 2/06 12769 12999 16269 14245 14360 3/06 12917 13160 16337 14322 14500 4/06 12997 13337 16575 14450 14658 5/06 12724 12954 16316 14218 14368 6/06 12622 12971 16393 14236 14359 7/06 12713 13051 16720 14375 14426 8/06 12884 13361 16991 14619 14703 9/06 13133 13705 17254 14818 14915 10/06 13429 14151 17638 15167 15263 11/06 13566 14420 17962 15437 15557 12/06 13814 14622 18162 15579 15672 ===================================================================================================================================
AIM V.I. Basic Balanced Fund CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE You may use the information in this The hypothetical account values and table, together with the amount you expenses may not be used to estimate the As a shareholder of the Fund, you incur invested, to estimate the expenses that actual ending account balance or expenses ongoing costs, including management fees; you paid over the period. Simply divide you paid for the period. You may use this distribution and/or service fees (12b-1); your account value by $1,000 (for information to compare the ongoing costs and other Fund expenses. This example is example, an $8,600 account value divided of investing in the Fund and other funds. intended to help you understand your by $1,000 = 8.6), then multiply the To do so, compare this 5% hypothetical ongoing costs (in dollars) of investing result by the number in the table under example with the 5% hypothetical examples in the Fund and to compare these costs the heading entitled "Actual Expenses that appear in the shareholder reports of with ongoing costs of investing in other Paid During Period" to estimate the the other funds. mutual funds. The example is based on an expenses you paid on your account during investment of $1,000 invested at the this period. Please note that the expenses shown beginning of the period and held for the in the table are meant to highlight your entire period July 1, 2006, through HYPOTHETICAL EXAMPLE FOR COMPARISON ongoing costs. Therefore, the December 31, 2006. PURPOSES hypothetical information is useful in comparing ongoing costs, and will not The actual and hypothetical The table below also provides information help you determine the relative total expenses in the examples below do not about hypothetical account values and costs of owning different funds. represent the effect of any fees or other hypothetical expenses based on the Fund's expenses assessed in connection with a actual expense ratio and an assumed rate variable product; if they did, the of return of 5% per year before expenses, expenses shown would be higher while the which is not the Fund's actual return. ending account values shown would be The Fund's actual cumulative total lower. returns at net asset value after expenses for the six months ended December 31, ACTUAL EXPENSES 2006, appear in the table "Cumulative Total Returns" on page 4. The table below provides information about actual account values and actual expenses.
=================================================================================================================================== ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06) PERIOD2 (12/31/06) PERIOD2 RATIO =================================================================================================================================== Series I $ 1,000.00 $ 1,094.60 $ 4.80 $ 1,020.62 $ 4.63 0.96% Series II 1,000.00 1,094.60 6.12 1,019.36 5.90 1.16 ===================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6 APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. BASIC BALANCED FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory Board concluded that no changes should be Insurance Funds (the "Board") oversees services to be provided by AIM. The Board made to the Fund and that it was not the management of AIM V.I. Basic Balanced reviewed the services to be provided by necessary to change the Fund's portfolio Fund (the "Fund") and, as required by AIM under the Advisory Agreement. Based management team at this time. Although law, determines annually whether to on such review, the Board concluded that the independent written evaluation of the approve the continuance of the Fund's the range of services to be provided by Fund's Senior Officer (discussed below) advisory agreement with A I M Advisors, AIM under the Advisory Agreement was only considered Fund performance through Inc. ("AIM"). Based upon the appropriate and that AIM currently is the most recent calendar year, the Board recommendation of the Investments providing services in accordance with the also reviewed more recent Fund Committee of the Board, at a meeting held terms of the Advisory Agreement. performance, which did not change their on June 27, 2006, the Board, including conclusions. all of the independent trustees, approved - The quality of services to be provided the continuance of the advisory agreement by AIM. The Board reviewed the - Meetings with the Fund's portfolio (the "Advisory Agreement") between the credentials and experience of the managers and investment personnel. With Fund and AIM for another year, effective officers and employees of AIM who will respect to the Fund, the Board is meeting July 1, 2006. provide investment advisory services to periodically with such Fund's portfolio the Fund. In reviewing the qualifications managers and/or other investment The Board considered the factors of AIM to provide investment advisory personnel and believes that such discussed below in evaluating the services, the Board considered such individuals are competent and able to fairness and reasonableness of the issues as AIM's portfolio and product continue to carry out their Advisory Agreement at the meeting on June review process, various back office responsibilities under the Advisory 27, 2006 and as part of the Board's support functions provided by AIM and Agreement. ongoing oversight of the Fund. In their AIM's equity and fixed income trading deliberations, the Board and the operations. Based on the review of these - Overall performance of AIM. The Board independent trustees did not identify any and other factors, the Board concluded considered the overall performance of AIM particular factor that was controlling, that the quality of services to be in providing investment advisory and and each trustee attributed different provided by AIM was appropriate and that portfolio administrative services to the weights to the various factors. AIM currently is providing satisfactory Fund and concluded that such performance services in accordance with the terms of was satisfactory. One responsibility of the the Advisory Agreement. independent Senior Officer of the Fund is - Fees relative to those of clients of to manage the process by which the Fund's - The performance of the Fund relative to AIM with comparable investment proposed management fees are negotiated comparable funds. The Board reviewed the strategies. The Board reviewed the to ensure that they are negotiated in a performance of the Fund during the past effective advisory fee rate (before manner which is at arms' length and one, three and five calendar years waivers) for the Fund under the Advisory reasonable. To that end, the Senior against the performance of funds advised Agreement. The Board noted that this rate Officer must either supervise a by other advisors with investment was (i) above the effective advisory fee competitive bidding process or prepare an strategies comparable to those of the rate (before waivers) for a mutual fund independent written evaluation. The Fund. The Board noted that the Fund's advised by AIM with investment strategies Senior Officer has recommended an performance was above the median comparable to those of the Fund; (ii) independent written evaluation in lieu of performance of such comparable funds for above the effective sub-advisory fee rate a competitive bidding process and, upon the one year period and below such median for an offshore fund advised and the direction of the Board, has prepared performance for the three and five year sub-advised by AIM affiliates with such an independent written evaluation. periods. Based on this review and after investment strategies comparable to those Such written evaluation also considered taking account of all of the other of the Fund, although the total advisory certain of the factors discussed below. factors that the Board considered in fees for such offshore fund were above In addition, as discussed below, the determining whether to continue the those for the Fund; and (iii) above the Senior Officer made a recommendation to Advisory Agreement for the Fund, the effective sub-advisory fee rates for two the Board in connection with such written Board concluded that no changes should be Canadian mutual funds advised by an AIM evaluation. made to the Fund and that it was not affiliate and sub-advised by AIM with necessary to change the Fund's portfolio investment strategies comparable to those The discussion below serves as a management team at this time. Although of the Fund, although the total advisory summary of the Senior Officer's the independent written evaluation of the fees for one such Canadian mutual fund independent written evaluation and Fund's Senior Officer (discussed below) were above those for the Fund. The Board recommendation to the Board in connection only considered Fund performance through noted that AIM has agreed to waive therewith, as well as a discussion of the the most recent calendar year, the Board advisory fees of the Fund and to limit material factors and the conclusions with also reviewed more recent Fund the Fund's total operating expenses, as respect thereto that formed the basis for performance, which did not change their discussed below. Based on this review, the Board's approval of the Advisory conclusions. the Board concluded that the advisory fee Agreement. After consideration of all of rate for the Fund under the Advisory the factors below and based on its - The performance of the Fund relative to Agreement was fair and reasonable. informed business judgment, the Board indices. The Board reviewed the determined that the Advisory Agreement is performance of the Fund during the past - Fees relative to those of comparable in the best interests of the Fund and its one, three and five calendar years funds with other advisors. The Board shareholders and that the compensation to against the performance of the Lipper reviewed the advisory fee rate for the AIM under the Advisory Agreement is fair Variable Underlying Fund Balanced Index. Fund under the Advisory Agreement. The and reasonable and would have been The Board noted that the Fund's Board compared effective contractual obtained through arm's length performance was above the performance of advisory fee rates at a common asset negotiations. such Index for the one year period and level at the end of the past calendar below such Index for the three and five year and noted that the Fund's rate was Unless otherwise stated, year periods. Based on this review and comparable to the median rate of the information presented below is as of June after taking account of all of the other funds advised by other advisors with 27, 2006 and does not reflect any changes factors that the Board considered in investment strategies comparable to those that may have occurred since June 27, determining whether to continue the of the Fund that the Board reviewed. The 2006, including but not limited to Advisory Agreement for the Fund, the Board noted that AIM has agreed to waive changes to the Fund's performance, advisory fees of the Fund and to limit advisory fees, expense limitations and/or the Fund's total operating expenses, as fee waivers. dis-
(Continued) 7
AIM V.I. BASIC BALANCED FUND cussed below. Based on this review, the realize certain benefits upon investing - Benefits of soft dollars to AIM. The Board concluded that the advisory fee cash balances in AIM advised money market Board considered the benefits realized by rate for the Fund under the Advisory funds, including a higher net return, AIM as a result of brokerage transactions Agreement was fair and reasonable. increased liquidity, increased executed through "soft dollar" diversification or decreased transaction arrangements. Under these arrangements, - Expense limitations and fee waivers. costs. The Board also found that the Fund brokerage commissions paid by the Fund The Board noted that AIM has will not receive reduced services if it and/or other funds advised by AIM are contractually agreed to waive advisory invests its cash balances in such money used to pay for research and execution fees of the Fund through December 31, market funds. The Board noted that, to services. This research may be used by 2009 to the extent necessary so that the the extent the Fund invests uninvested AIM in making investment decisions for advisory fees payable by the Fund do not cash in affiliated money market funds, the Fund. The Board concluded that such exceed a specified maximum advisory fee AIM has voluntarily agreed to waive a arrangements were appropriate. rate, which maximum rate includes portion of the advisory fees it receives breakpoints and is based on net asset from the Fund attributable to such - AIM's financial soundness in light of levels. The Board considered the investment. The Board further determined the Fund's needs. The Board considered contractual nature of this fee waiver and that the proposed securities lending whether AIM is financially sound and has noted that it remains in effect until program and related procedures with the resources necessary to perform its December 31, 2009. The Board also noted respect to the lending Fund is in the obligations under the Advisory Agreement, that AIM has contractually agreed to best interests of the lending Fund and and concluded that AIM has the financial waive fees and/or limit expenses of the its respective shareholders. The Board resources necessary to fulfill its Fund through April 30, 2008 so that total therefore concluded that the investment obligations under the Advisory Agreement. annual operating expenses are limited to of cash collateral received in connection a specified percentage of average daily with the securities lending program in - Historical relationship between the net assets for each class of the Fund. the money market funds according to the Fund and AIM.In determining whether to The Board considered the contractual procedures is in the best interests of continue the Advisory Agreement for the nature of this fee waiver and noted that the lending Fund and its respective Fund, the Board also considered the prior it remains in effect until April 30, shareholders. relationship between AIM and the Fund, as 2008. The Board considered the effect well as the Board's knowledge of AIM's these fee waivers/expense limitations - Independent written evaluation and operations, and concluded that it was would have on the Fund's estimated recommendations of the Fund's Senior beneficial to maintain the current expenses and concluded that the levels of Officer. The Board noted that, upon their relationship, in part, because of such fee waivers/expense limitations for the direction, the Senior Officer of the knowledge. The Board also reviewed the Fund were fair and reasonable. Fund, who is independent of AIM and AIM's general nature of the non-investment affiliates, had prepared an independent advisory services currently performed by - Breakpoints and economies of scale. The written evaluation in order to assist the AIM and its affiliates, such as Board reviewed the structure of the Board in determining the reasonableness administrative, transfer agency and Fund's advisory fee under the Advisory of the proposed management fees of the distribution services, and the fees Agreement, noting that it includes one AIM Funds, including the Fund. The Board received by AIM and its affiliates for breakpoint. The Board reviewed the level noted that the Senior Officer's written performing such services. In addition to of the Fund's advisory fees, and noted evaluation had been relied upon by the reviewing such services, the trustees that such fees, as a percentage of the Board in this regard in lieu of a also considered the organizational Fund's net assets, would decrease as net competitive bidding process. In structure employed by AIM and its assets increase because the Advisory determining whether to continue the affiliates to provide those services. Agreement includes a breakpoint. The Advisory Agreement for the Fund, the Based on the review of these and other Board noted that, due to the Fund's asset Board considered the Senior Officer's factors, the Board concluded that AIM and levels at the end of the past calendar written evaluation and the recommendation its affiliates were qualified to continue year and the way in which the advisory made by the Senior Officer to the Board to provide non-investment advisory fee breakpoint has been structured, the that the Board consider whether the services to the Fund, including Fund has yet to benefit from the advisory fee waivers for certain equity administrative, transfer agency and breakpoint. The Board noted that AIM has AIM Funds, including the Fund, should be distribution services, and that AIM and contractually agreed to waive advisory simplified. The Board concluded that it its affiliates currently are providing fees of the Fund through December 31, would be advisable to consider this issue satisfactory non-investment advisory 2009 to the extent necessary so that the and reach a decision prior to the services. advisory fees payable by the Fund do not expiration date of such advisory fee exceed a specified maximum advisory fee waivers. - Other factors and current trends. The rate, which maximum rate includes Board considered the steps that AIM and breakpoints and is based on net asset - Profitability of AIM and its its affiliates have taken over the last levels. The Board concluded that the affiliates. The Board reviewed several years, and continue to take, in Fund's fee levels under the Advisory information concerning the profitability order to improve the quality and Agreement therefore would reflect of AIM's (and its affiliates') investment efficiency of the services they provide economies of scale at higher asset levels advisory and other activities and its to the Funds in the areas of investment and that it was not necessary to change financial condition. The Board considered performance, product line the advisory fee breakpoints in the the overall profitability of AIM, as well diversification, distribution, fund Fund's advisory fee schedule. as the profitability of AIM in connection operations, shareholder services and with managing the Fund. The Board noted compliance. The Board concluded that - Investments in affiliated money market that AIM's operations remain profitable, these steps taken by AIM have improved, funds. The Board also took into account although increased expenses in recent and are likely to continue to improve, the fact that uninvested cash and cash years have reduced AIM's profitability. the quality and efficiency of the collateral from securities lending Based on the review of the profitability services AIM and its affiliates provide arrangements, if any (collectively, "cash of AIM's and its affiliates' investment to the Fund in each of these areas, and balances") of the Fund may be invested in advisory and other activities and its support the Board's approval of the money market funds advised by AIM financial condition, the Board concluded continuance of the Advisory Agreement for pursuant to the terms of an SEC exemptive that the compensation to be paid by the the Fund. order. The Board found that the Fund may Fund to AIM under its Advisory Agreement was not excessive.
8 AIM V.I. Basic Balanced Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ----------------------------------------------------------------------- COMMON STOCKS & OTHER EQUITY INTERESTS-65.22% ADVERTISING-3.88% Interpublic Group of Cos., Inc. (The)(a) 141,932 $ 1,737,247 ----------------------------------------------------------------------- Omnicom Group Inc. 16,844 1,760,872 ======================================================================= 3,498,119 ======================================================================= AEROSPACE & DEFENSE-0.82% Honeywell International Inc. 16,332 738,860 ======================================================================= APPAREL RETAIL-1.06% Gap, Inc. (The) 49,123 957,899 ======================================================================= ASSET MANAGEMENT & CUSTODY BANKS-1.32% Bank of New York Co., Inc. (The) 30,276 1,191,966 ======================================================================= BREWERS-1.54% Molson Coors Brewing Co.-Class B 18,141 1,386,698 ======================================================================= BUILDING PRODUCTS-0.73% American Standard Cos. Inc. 14,306 655,930 ======================================================================= COMPUTER HARDWARE-1.90% Dell Inc.(a) 68,080 1,708,127 ======================================================================= CONSTRUCTION MATERIALS-2.05% Cemex S.A. de C.V.-ADR (Mexico)(a) 54,396 1,842,936 ======================================================================= CONSUMER ELECTRONICS-1.34% Koninklijke (Royal) Philips Electronics N.V. -New York Shares (Netherlands) 16,364 614,959 ----------------------------------------------------------------------- Sony Corp.-ADR (Japan) 13,734 588,227 ======================================================================= 1,203,186 ======================================================================= DATA PROCESSING & OUTSOURCED SERVICES-3.08% First Data Corp. 68,106 1,738,065 ----------------------------------------------------------------------- Western Union Co. 46,400 1,040,288 ======================================================================= 2,778,353 ======================================================================= ENVIRONMENTAL & FACILITIES SERVICES-1.64% Waste Management, Inc. 40,250 1,479,993 ======================================================================= FOOD RETAIL-1.15% Kroger Co. (The) 23,203 535,293 ----------------------------------------------------------------------- Safeway Inc. 14,439 499,012 ======================================================================= 1,034,305 ======================================================================= GENERAL MERCHANDISE STORES-1.94% Target Corp. 30,645 1,748,297 =======================================================================
SHARES VALUE -----------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS-2.72% Cardinal Health, Inc. 33,810 $ 2,178,378 ----------------------------------------------------------------------- McKesson Corp. 5,450 276,315 ======================================================================= 2,454,693 ======================================================================= HEALTH CARE EQUIPMENT-0.94% Baxter International Inc. 18,322 849,958 ======================================================================= HOME IMPROVEMENT RETAIL-1.12% Home Depot, Inc. (The) 25,029 1,005,165 ======================================================================= INDUSTRIAL CONGLOMERATES-4.32% General Electric Co. 42,033 1,564,048 ----------------------------------------------------------------------- Tyco International Ltd. 76,444 2,323,898 ======================================================================= 3,887,946 ======================================================================= INDUSTRIAL MACHINERY-1.09% Illinois Tool Works Inc. 21,359 986,572 ======================================================================= INSURANCE BROKERS-0.38% Marsh & McLennan Cos., Inc. 11,250 344,925 ======================================================================= INVESTMENT BANKING & BROKERAGE-3.52% Merrill Lynch & Co., Inc. 17,571 1,635,860 ----------------------------------------------------------------------- Morgan Stanley 18,820 1,532,513 ======================================================================= 3,168,373 ======================================================================= MANAGED HEALTH CARE-2.77% UnitedHealth Group Inc. 46,403 2,493,233 ======================================================================= MOVIES & ENTERTAINMENT-1.66% Walt Disney Co. (The) 43,533 1,491,876 ======================================================================= MULTI-LINE INSURANCE-1.27% Hartford Financial Services Group, Inc. (The) 12,239 1,142,021 ======================================================================= OIL & GAS DRILLING-1.71% Transocean Inc.(a) 19,006 1,537,395 ======================================================================= OIL & GAS EQUIPMENT & SERVICES-3.00% Halliburton Co. 42,131 1,308,168 ----------------------------------------------------------------------- Schlumberger Ltd. 22,034 1,391,667 ======================================================================= 2,699,835 ======================================================================= OTHER DIVERSIFIED FINANCIAL SERVICES-4.56% Citigroup Inc. 33,706 1,877,424 ----------------------------------------------------------------------- JPMorgan Chase & Co. 46,215 2,232,185 ======================================================================= 4,109,609 ======================================================================= PACKAGED FOODS & MEATS-1.27% Unilever N.V. (Netherlands)(b) 41,769 1,140,993 =======================================================================
AIM V.I. Basic Balanced Fund
SHARES VALUE ----------------------------------------------------------------------- PHARMACEUTICALS-5.02% Pfizer Inc. 52,858 $ 1,369,022 ----------------------------------------------------------------------- Sanofi-Aventis (France)(b) 17,011 1,566,668 ----------------------------------------------------------------------- Wyeth 31,150 1,586,158 ======================================================================= 4,521,848 ======================================================================= PROPERTY & CASUALTY INSURANCE-1.59% ACE Ltd. 23,720 1,436,720 ======================================================================= REAL ESTATE MANAGEMENT & DEVELOPMENT-0.59% Realogy Corp.(a) 17,605 533,784 ======================================================================= SYSTEMS SOFTWARE-2.96% CA Inc. 74,126 1,678,954 ----------------------------------------------------------------------- Microsoft Corp. 33,243 992,636 ======================================================================= 2,671,590 ======================================================================= THRIFTS & MORTGAGE FINANCE-2.28% Fannie Mae 34,580 2,053,706 ======================================================================= Total Common Stocks & Other Equity Interests (Cost $46,022,033) 58,754,911 ======================================================================= PRINCIPAL AMOUNT BONDS & NOTES-25.29% AEROSPACE & DEFENSE-0.45% Precision Castparts Corp., Unsec. Notes, 6.75%, 12/15/07(c) $ 230,000 232,249 ----------------------------------------------------------------------- Systems 2001 Asset Trust LLC (United Kingdom)- Series 2001, Class G, Pass Through Ctfs., (INS-MBIA Insurance Corp.) 6.66%, 09/15/13 (Acquired 02/09/05-10/27/05; Cost $183,200)(c)(d)(e) 166,225 174,147 ======================================================================= 406,396 ======================================================================= AGRICULTURAL PRODUCTS-0.30% Corn Products International Inc., Sr. Unsec. Notes, 8.25%, 07/15/07(c) 265,000 268,755 ======================================================================= APPAREL RETAIL-0.09% Gap Inc. (The), Unsec. Notes, 6.90%, 09/15/07(c) 80,000 80,830 ======================================================================= ASSET MANAGEMENT & CUSTODY BANKS-0.35% Bank of New York Co. Inc. (The), Sr. Unsec. Sub. Notes, 4.25%, 09/04/12(c) 35,000 34,736 ----------------------------------------------------------------------- GAMCO Investors, Inc., Sr. Unsec. Unsub. Notes, 5.22%, 02/17/07(c) 90,000 89,946 ----------------------------------------------------------------------- Mellon Capital II-Series B, Jr. Unsec. Gtd. Sub. Trust Pfd. Bonds, 8.00%, 01/15/27(c) 125,000 130,534 ----------------------------------------------------------------------- Nuveen Investments, Inc., Sr. Unsec. Sub. Notes, 5.50%, 09/15/15(c) 65,000 62,890 ======================================================================= 318,106 ======================================================================= AUTOMOBILE MANUFACTURERS-0.22% DaimlerChrysler North America Holding Corp., Notes, 4.13%, 03/07/07(c) 200,000 199,536 =======================================================================
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PRINCIPAL AMOUNT VALUE BROADCASTING & CABLE TV-2.12% CBS Corp., Sr. Unsec. Gtd. Global Notes, 5.63%, 05/01/07(c) $ 400,000 $ 400,048 ----------------------------------------------------------------------- Clear Channel Communications, Inc., Sr. Unsec. Notes, 3.13%, 02/01/07(c) 215,000 214,609 ----------------------------------------------------------------------- Comcast Cable Communications Holdings Inc., Unsec. Gtd. Global Notes, 9.46%, 11/15/22(c) 167,000 217,324 ----------------------------------------------------------------------- Unsec. Unsub. Global Notes, 8.38%, 05/01/07(c) 50,000 50,465 ----------------------------------------------------------------------- Comcast Corp., Sr. Sub. Deb., 10.63%, 07/15/12(c) 130,000 157,347 ----------------------------------------------------------------------- Cox Enterprises, Inc., Notes, 8.00%, 02/15/07 (Acquired 10/03/05-04/27/06; Cost $620,684)(c)(d) 600,000 601,446 ----------------------------------------------------------------------- Hearst-Argyle Television Inc., Sr. Unsec. Unsub. Notes, 7.00%, 11/15/07(c) 90,000 90,933 ----------------------------------------------------------------------- Time Warner Entertainment Co. L.P., Sr. Unsec. Deb., 8.38%, 03/15/23(c) 150,000 175,909 ======================================================================= 1,908,081 ======================================================================= BUILDING PRODUCTS-0.08% Masco Corp., Unsec. Notes, 4.63%, 08/15/07(c) 70,000 69,647 ======================================================================= CASINOS & GAMING-0.24% Harrah's Operating Co., Inc., Sr. Unsec. Gtd. Global Notes, 7.13%, 06/01/07(c) 215,000 215,591 ======================================================================= CONSUMER FINANCE-0.66% Capital One Capital I, Sub. Floating Rate Trust Pfd. Bonds, 6.92%, 02/01/27 (Acquired 09/16/04-04/12/06; Cost $294,885)(c)(d)(f) 290,000 292,424 ----------------------------------------------------------------------- Ford Motor Credit Co., Sr. Unsec. Notes, 4.95%, 01/15/08(c) 310,000 306,110 ======================================================================= 598,534 ======================================================================= DEPARTMENT STORES-0.20% JC Penney Corp. Inc., Unsec. Deb., 8.13%, 04/01/27(c) 180,000 183,681 ======================================================================= DIVERSIFIED BANKS-1.71% Bangkok Bank PCL (Hong Kong), Unsec. Sub. Notes, 9.03%, 03/15/29 (Acquired 04/22/05; Cost $75,121)(c)(d) 60,000 74,739 ----------------------------------------------------------------------- BankAmerica Institutional-Series A, Gtd. Trust Pfd. Bonds, 8.07%, 12/31/26 (Acquired 09/26/06; Cost $104,484)(c)(d) 100,000 103,801 ----------------------------------------------------------------------- BankBoston Capital Trust II-Series B, Gtd. Trust Pfd. Bonds, 7.75%, 12/15/26(c) 205,000 212,405 ----------------------------------------------------------------------- Barclays Bank PLC (United Kingdom), Floating Rate Global Notes, 4.47%, 08/08/07 (Acquired 04/06/06; Cost $99,481)(c)(d)(f) 100,000 100,035 ----------------------------------------------------------------------- Centura Capital Trust I, Gtd. Trust Pfd. Notes, 8.85%, 06/01/27 (Acquired 05/22/03; Cost $63,272)(c)(d) 50,000 52,855 ----------------------------------------------------------------------- First Union Institutional Capital I, Gtd. Trust Pfd. Bonds, 8.04%, 12/01/26(c) 100,000 103,751 ----------------------------------------------------------------------- Lloyds Bank PLC (United Kingdom)-Series 1, Unsec. Sub. Floating Rate Euro Notes, 5.63%(c)(f)(g) 130,000 114,381 -----------------------------------------------------------------------
AIM V.I. Basic Balanced Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- DIVERSIFIED BANKS-(CONTINUED) Mizuho Financial Group Cayman Ltd. (Cayman Islands), Gtd. Sub. Second Tier Euro Bonds, 8.38%(c)(g) $ 30,000 $ 31,711 ----------------------------------------------------------------------- National Bank of Canada (Canada), Floating Rate Euro Deb., 5.63%, 08/29/87(c)(f) 60,000 49,058 ----------------------------------------------------------------------- National Westminster Bank PLC (United Kingdom)- Series B, Unsec. Sub. Floating Rate Euro Notes, 5.69%(c)(f)(g) 100,000 86,427 ----------------------------------------------------------------------- NBD Bank N.A. Michigan, Unsec. Sub. Deb., 8.25%, 11/01/24(c) 50,000 62,325 ----------------------------------------------------------------------- RBS Capital Trust III, Sub. Trust Pfd. Global Notes, 5.51%(c)(g) 60,000 59,676 ----------------------------------------------------------------------- Sumitomo Mitsui Banking Corp. (Japan), Sub. Second Tier Euro Notes, 8.15%(c)(g) 90,000 93,362 ----------------------------------------------------------------------- Svenska Handelsbanken A.B. (Sweden), Unsec. Sub. Notes, 7.13%, (Acquired 07/26/06; Cost $251,830)(c)(d)(g) 250,000 251,812 ----------------------------------------------------------------------- VTB Capital S.A. (Russia), Sr. Floating Rate Notes, 6.12%, 09/21/07 (Acquired 12/14/05; Cost $140,000)(c)(d)(f) 140,000 140,402 ======================================================================= 1,536,740 ======================================================================= DIVERSIFIED CHEMICALS-0.15% Bayer Corp., Bonds, 6.20%, 02/15/08 (Acquired 08/01/06; Cost $80,562)(c)(d) 80,000 80,844 ----------------------------------------------------------------------- Hercules Inc., Unsec. Putable Deb., 6.60%, 08/01/07(c) 50,000 50,023 ======================================================================= 130,867 ======================================================================= DIVERSIFIED METALS & MINING-0.10% Reynolds Metals Co., Medium Term Notes, 7.00%, 05/15/09(c) 87,000 88,643 ======================================================================= ELECTRIC UTILITIES-0.75% Commonwealth Edison Co., Unsec. Notes, 7.63%, 01/15/07(c) 308,000 308,157 ----------------------------------------------------------------------- Portland General Electric Co.-Series 4, Sec. First Mortgage Medium Term Notes, 7.15%, 06/15/07(c) 35,000 35,207 ----------------------------------------------------------------------- Potomac Electric Power Co.-Series A, Medium Term Notes, 7.64%, 01/17/07(c) 100,000 100,062 ----------------------------------------------------------------------- PP&L Capital Funding Inc.-Series D, Unsec. Gtd. Medium Term Notes, 8.38%, 06/15/07(c) 55,000 55,694 ----------------------------------------------------------------------- Southern Co. Capital Trust I, Gtd. Trust Pfd. Notes, 8.19%, 02/01/37(c) 170,000 177,099 ======================================================================= 676,219 ======================================================================= FOOD RETAIL-0.71% Safeway Inc., Sr. Unsec. Notes, 4.80%, 07/16/07(c) 530,000 527,361 ----------------------------------------------------------------------- 7.00%, 09/15/07(c) 110,000 111,059 ======================================================================= 638,420 ======================================================================= FOREST PRODUCTS-0.26% Weyerhaeuser Co., Unsec. Unsub. Global Notes, 6.13%, 03/15/07(c) 235,000 235,282 =======================================================================
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PRINCIPAL AMOUNT VALUE HOME IMPROVEMENT RETAIL-0.07% Sherwin-Williams Co. (The), Sr. Notes, 6.85%, 02/01/07(c) $ 65,000 $ 65,063 ======================================================================= HOTELS, RESORTS & CRUISE LINES-1.04% Carnival Corp., Sr. Unsec. Gtd. Global Notes, 3.75%, 11/15/07(c) 21,000 20,692 ----------------------------------------------------------------------- Hyatt Equities LLC, Notes, 6.88%, 06/15/07 (Acquired 01/25/06-10/23/06; Cost $407,509)(c)(d) 402,000 403,773 ----------------------------------------------------------------------- Starwood Hotels & Resorts Worldwide, Inc., Sr. Gtd. Global Notes, 7.38%, 05/01/07(c) 514,000 515,928 ======================================================================= 940,393 ======================================================================= HOUSEWARES & SPECIALTIES-0.06% Newell Rubbermaid Inc., Unsec. Notes, 6.00%, 03/15/07(c) 15,000 15,010 ----------------------------------------------------------------------- Series A, Unsec. Unsub. Putable Medium Term Notes, 6.35%, 07/15/08(c) 40,000 40,479 ======================================================================= 55,489 ======================================================================= INSURANCE BROKERS-0.46% Aon Corp., Unsec. Notes, 6.95%, 01/15/07(c) 180,000 180,070 ----------------------------------------------------------------------- Marsh & McLennan Cos., Inc., Sr. Unsec. Global Notes, 5.38%, 03/15/07(c) 232,000 231,949 ======================================================================= 412,019 ======================================================================= INTEGRATED OIL & GAS-0.45% ConocoPhillips, Unsec. Deb., 7.13%, 03/15/28(c) 65,000 67,460 ----------------------------------------------------------------------- Husky Oil Ltd. (Canada), Yankee Bonds, 8.90%, 08/15/28(c) 325,000 341,250 ======================================================================= 408,710 ======================================================================= INTEGRATED TELECOMMUNICATION SERVICES-1.48% TCI Communications Financing III, Gtd. Trust Pfd. Bonds, 9.65%, 03/31/27(c) 525,000 555,922 ----------------------------------------------------------------------- TELUS Corp. (Canada), Yankee Notes, 7.50%, 06/01/07(c) 300,000 302,382 ----------------------------------------------------------------------- Verizon Communications Inc., Unsec. Deb., 8.75%, 11/01/21(c) 65,000 77,480 ----------------------------------------------------------------------- 7.90%, 02/01/27(c) 150,000 155,295 ----------------------------------------------------------------------- Verizon New York Inc., Unsec. Deb., 7.00%, 12/01/33(c) 90,000 92,180 ----------------------------------------------------------------------- Verizon Virginia Inc.-Series A, Unsec. Global Deb., 4.63%, 03/15/13(c) 160,000 150,944 ======================================================================= 1,334,203 ======================================================================= INTERNET RETAIL-0.09% Expedia, Inc., Putable Bonds, 7.46%, 08/15/13 (Acquired 08/16/06; Cost $80,000)(c)(d) 80,000 83,550 ======================================================================= INVESTMENT BANKING & BROKERAGE-0.03% Jefferies Group, Inc.-Series B, Sr. Unsec. Notes, 7.50%, 08/15/07(c) 30,000 30,351 =======================================================================
AIM V.I. Basic Balanced Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- LIFE & HEALTH INSURANCE-0.76% Prudential Holdings, LLC Series B, Bonds, (INS-Financial Security Assurance Inc.) 7.25%, 12/18/23 (Acquired 01/22/04-02/17/06; Cost $329,829)(c)(d)(e) $ 280,000 $ 324,178 ----------------------------------------------------------------------- Sun Life Canada (U.S.) Capital Trust, Gtd. Trust Pfd. Notes, 8.53% (Acquired 02/13/06-11/15/06; Cost $361,332)(c)(d)(g) 340,000 358,051 ======================================================================= 682,229 ======================================================================= MANAGED HEALTH CARE-0.22% Cigna Corp., Unsec. Notes, 7.40%, 05/15/07(c) 200,000 201,430 ======================================================================= METAL & GLASS CONTAINERS-0.02% Pactiv Corp., Unsec. Notes, 8.00%, 04/15/07(c) 20,000 20,132 ======================================================================= MOVIES & ENTERTAINMENT-0.88% News America Holdings Inc., Sr. Unsec. Gtd. Deb., 7.75%, 12/01/45(c) 125,000 142,334 ----------------------------------------------------------------------- Time Warner Cos., Inc., Notes, 8.18%, 08/15/07(c) 120,000 121,861 ----------------------------------------------------------------------- Unsec. Deb., 9.15%, 02/01/23(c) 155,000 192,899 ----------------------------------------------------------------------- Time Warner Inc., Sr. Unsec. Gtd. Global Notes, 6.15%, 05/01/07(c) 330,000 330,693 ======================================================================= 787,787 ======================================================================= MULTI-LINE INSURANCE-0.41% Liberty Mutual Insurance Co., Notes, 8.20%, 05/04/07 (Acquired 04/13/06; Cost $225,799)(c)(d) 220,000 221,907 ----------------------------------------------------------------------- Unitrin Inc., Sr. Unsec. Notes, 5.75%, 07/01/07(c) 150,000 150,249 ======================================================================= 372,156 ======================================================================= MULTI-UTILITIES-0.95% Ameren Corp., Bonds, 4.26%, 05/15/07(c) 140,000 139,401 ----------------------------------------------------------------------- Dominion Capital Trust I, Jr. Unsec. Gtd. Trust Pfd. Bonds, 7.83%, 12/01/27(c) 140,000 146,224 ----------------------------------------------------------------------- PSI Energy, Inc., Unsec. Deb., 7.85%, 10/15/07(c) 40,000 40,717 ----------------------------------------------------------------------- Sempra Energy, Sr. Notes, 4.62%, 05/17/07(c) 40,000 39,878 ----------------------------------------------------------------------- Tampa Electric Co., Unsec. Unsub. Notes, 5.38%, 08/15/07(c) 215,000 214,897 ----------------------------------------------------------------------- TE Products Pipeline Co., Sr. Unsec. Notes, 6.45%, 01/15/08(c) 30,000 29,964 ----------------------------------------------------------------------- Virginia Electric and Power Co.-Series A, Sr. Unsec. Unsub. Notes, 5.38%, 02/01/07(c) 240,000 239,966 ======================================================================= 851,047 ======================================================================= OFFICE REIT'S-0.11% EOP Operating L.P., Sr. Unsec. Notes, 6.76%, 06/15/07(c) 100,000 100,659 =======================================================================
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PRINCIPAL AMOUNT VALUE OIL & GAS EXPLORATION & PRODUCTION-0.47% Pemex Project Funding Master Trust, Unsec. Gtd. Unsub. Global Notes, 5.75%, 12/15/15(c) $ 165,000 $ 164,719 ----------------------------------------------------------------------- 8.63%, 02/01/22(c) 175,000 216,834 ----------------------------------------------------------------------- Varco International Inc., Sr. Unsec. Gtd. Notes, 7.50%, 02/15/08(c) 45,000 45,890 ======================================================================= 427,443 ======================================================================= OIL & GAS REFINING & MARKETING-0.06% Western Power Distribution Holdings Ltd. (United Kingdom), Unsec. Unsub. Notes, 7.38%, 12/15/28 (Acquired 01/25/05; Cost $56,019)(c)(d) 50,000 55,211 ======================================================================= OTHER DIVERSIFIED FINANCIAL SERVICES-3.17% BankAmerica Capital II-Series 2, Jr. Unsec. Gtd. Sub. Trust Pfd. Notes, 8.00%, 12/15/26(c) 80,000 82,978 ----------------------------------------------------------------------- Barnett Capital II, Gtd. Trust Pfd. Bonds, 7.95%, 12/01/26(c) 100,000 103,722 ----------------------------------------------------------------------- General Electric Capital Corp., Unsec. Floating Rate Putable Deb., 5.11%, 09/01/07(c)(f) 55,000 54,730 ----------------------------------------------------------------------- JPM Capital Trust I, Gtd. Trust Pfd. Notes, 7.54%, 01/15/27(c) 420,000 437,468 ----------------------------------------------------------------------- Mantis Reef Ltd. (Australia), Notes, 4.69%, 11/14/08 (Acquired 08/11/06; Cost $195,854)(c)(d) 200,000 196,778 ----------------------------------------------------------------------- Mizuho JGB Investment LLC-Series A, Sub. Bonds, 9.87% (Acquired 06/16/04-07/28/05; Cost $356,092)(c)(d)(g) 315,000 334,492 ----------------------------------------------------------------------- NB Capital Trust IV, Gtd. Trust Pfd. Bonds, 8.25%, 04/15/27(c) 460,000 481,684 ----------------------------------------------------------------------- Pemex Finance Ltd. (Mexico), Sr. Unsec. Global Notes, 8.02%, 05/15/07(c) 50,000 50,302 ----------------------------------------------------------------------- Series 1999-2, Class A1, Global Bonds, 9.69%, 08/15/09(c) 308,000 324,598 ----------------------------------------------------------------------- Regional Diversified Funding (Cayman Islands), Sr. Notes, 9.25%, 03/15/30 (Acquired 09/22/04; Cost $169,578)(c)(d) 143,333 162,821 ----------------------------------------------------------------------- Residential Capital LLC, Sr. Unsec. Floating Rate Global Notes, 6.74%, 06/29/07(c)(f) 150,000 150,727 ----------------------------------------------------------------------- Sr. Unsec. Gtd. Floating Rate Notes, 5.85%, 06/09/08(c)(f) 135,000 134,873 ----------------------------------------------------------------------- Textron Financial Corp.-Series E, Floating Rate Medium Term Notes, 6.94%, 12/01/07(c)(f) 100,000 101,001 ----------------------------------------------------------------------- Twin Reefs Pass-Through Trust, Floating Rate Pass Through Ctfs., 6.35% (Acquired 12/07/04; Cost $100,000)(c)(d)(f)(g) 100,000 100,190 ----------------------------------------------------------------------- Two-Rock Pass Through Trust (Bermuda), Floating Rate Pass Through Ctfs., 6.32% (Acquired 11/10/06; Cost $100,118)(c)(d)(f)(g) 100,000 98,522 -----------------------------------------------------------------------
AIM V.I. Basic Balanced Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- OTHER DIVERSIFIED FINANCIAL SERVICES-(CONTINUED) UFJ Finance Aruba AEC (Aruba), Gtd. Sub. Second Tier Euro Bonds, 8.75%(c)(g) $ 40,000 $ 42,237 ======================================================================= 2,857,123 ======================================================================= PAPER PRODUCTS-0.12% Union Camp Corp., Notes, 6.50%, 11/15/07(c) 105,000 105,970 ======================================================================= PROPERTY & CASUALTY INSURANCE-1.36% CNA Financial Corp., Sr. Unsec. Notes, 6.45%, 01/15/08(c) 185,000 186,623 ----------------------------------------------------------------------- Executive Risk Capital Trust-Series B, Gtd. Trust Pfd. Bonds, 8.68%, 02/01/27(c) 155,000 162,370 ----------------------------------------------------------------------- First American Capital Trust I, Gtd. Trust Pfd. Notes, 8.50%, 04/15/12(c) 285,000 302,416 ----------------------------------------------------------------------- Oil Casualty Insurance Ltd. (Bermuda), Unsec. Sub. Deb., 8.00%, 09/15/34 (Acquired 04/29/05-06/09/05; Cost $213,696)(c)(d) 200,000 199,302 ----------------------------------------------------------------------- Oil Insurance Ltd., Notes, 7.56% (Acquired 06/15/06; Cost $360,000)(c)(d)(g) 360,000 375,908 ======================================================================= 1,226,619 ======================================================================= PUBLISHING-0.22% New York Times Co., Medium Term Notes, 4.63%, 06/25/07(c) 200,000 199,148 ======================================================================= REAL ESTATE MANAGEMENT & DEVELOPMENT-0.21% Realogy Corp., Sr. Floating Rate Notes, 6.07%, 10/20/09 (Acquired 10/13/06; Cost $30,000)(c)(d)(f) 30,000 30,019 ----------------------------------------------------------------------- Sr. Notes, 6.50%, 10/15/16 (Acquired 10/13/06-10/16/06; Cost $95,137)(c)(d) 95,000 95,792 ----------------------------------------------------------------------- Southern Investments UK PLC (United Kingdom), Gtd. Trust Pfd. Yankee Notes, 8.23%, 02/01/27(c) 60,000 60,900 ======================================================================= 186,711 ======================================================================= REGIONAL BANKS-1.29% Cullen/Frost Capital Trust I, Unsec. Sub. Floating Rate Notes, 9.92%, 03/01/34(c)(f) 200,000 204,448 ----------------------------------------------------------------------- PNC Capital Trust C, Gtd. Floating Rate Trust Pfd. Bonds, 5.94%, 06/01/28(c)(f) 100,000 96,628 ----------------------------------------------------------------------- Popular North America Inc.-Series F, Medium Term Notes, 5.20%, 12/12/07(c) 220,000 218,555 ----------------------------------------------------------------------- Summit Capital Trust I-Series B, Gtd. Trust Pfd. Bonds, 8.40%, 03/15/27(c) 100,000 104,900 ----------------------------------------------------------------------- TCF National Bank, Sub. Notes, 5.00%, 06/15/14(c) 60,000 58,962 ----------------------------------------------------------------------- Western Financial Bank, Unsec. Sub. Deb., 9.63%, 05/15/12(c) 430,000 476,999 ======================================================================= 1,160,492 =======================================================================
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PRINCIPAL AMOUNT VALUE REINSURANCE-0.32% Reinsurance Group of America, Inc., Jr. Unsec. Sub. Deb., 6.75%, 12/15/65(c) $ 100,000 $ 100,501 ----------------------------------------------------------------------- Stingray Pass-Through Trust, Pass Through Ctfs., 5.90%, 01/12/15 (Acquired 01/07/05-11/03/05; Cost $196,920)(c)(d) 200,000 187,028 ======================================================================= 287,529 ======================================================================= RETAIL REIT'S-0.35% Developers Diversified Realty Corp., Sr. Medium Term Notes, 7.00%, 03/19/07(c) 140,000 140,437 ----------------------------------------------------------------------- JDN Realty Corp., Unsec. Sub. Notes, 6.95%, 08/01/07(c) 170,000 171,394 ======================================================================= 311,831 ======================================================================= SOVEREIGN DEBT-0.09% Russian Federation (Russia)-REGS, Unsec. Unsub. Euro Bonds, 10.00%, 06/26/07 (Acquired 05/14/04-05/18/04; Cost $90,094)(c)(d) 80,000 81,896 ======================================================================= SPECIALIZED CONSUMER SERVICES-0.10% Block Financial Corp., Sr. Unsec. Gtd. Unsub. Notes, 8.50%, 04/15/07(c) 91,000 91,704 ======================================================================= SPECIALIZED REIT'S-0.39% Health Care Property Investors, Inc., Floating Rate Medium Term Notes, 5.81%, 09/15/08(c)(f) 140,000 140,407 ----------------------------------------------------------------------- Sr. Medium Term Notes, 6.30%, 09/15/16(c) 110,000 112,121 ----------------------------------------------------------------------- Health Care REIT, Inc., Sr. Notes, 5.88%, 05/15/15(c) 100,000 98,905 ======================================================================= 351,433 ======================================================================= SPECIALTY CHEMICALS-0.17% ICI Wilmington Inc., Gtd. Notes, 7.05%, 09/15/07(c) 150,000 151,464 ======================================================================= STEEL-0.10% Commercial Metals Co., Unsec. Unsub. Notes, 6.80%, 08/01/07(c) 90,000 90,612 ======================================================================= THRIFTS & MORTGAGE FINANCE-0.54% Countrywide Home Loans, Inc.-Series E, Gtd. Medium Term Notes, 6.94%, 07/16/07(c) 100,000 100,795 ----------------------------------------------------------------------- Dime Capital Trust I-Series A, Gtd. Trust Pfd. Notes, 9.33%, 05/06/27(c) 65,000 68,773 ----------------------------------------------------------------------- Great Western Financial Trust II-Series A, Jr. Gtd. Sub. Trust Pfd. Notes, 8.21%, 02/01/27(c) 77,000 80,480 ----------------------------------------------------------------------- Greenpoint Capital Trust I, Gtd. Sub. Trust Pfd. Notes, 9.10%, 06/01/27(c) 165,000 174,741 ----------------------------------------------------------------------- Washington Mutual Capital I, Gtd. Sub. Trust Pfd. Notes, 8.38%, 06/01/27(c) 60,000 63,120 ======================================================================= 487,909 ======================================================================= TOBACCO-0.35% Altria Group, Inc., Unsec. Notes, 7.20%, 02/01/07(c) 311,000 311,370 =======================================================================
AIM V.I. Basic Balanced Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- TRUCKING-0.12% Roadway Corp., Sr. Sec. Gtd. Global Notes, 8.25%, 12/01/08(c) $ 100,000 $ 104,333 ======================================================================= WIRELESS TELECOMMUNICATION SERVICES-0.44% Alamosa Delaware Inc., Sr. Gtd. Global Notes, 8.50%, 01/31/12(c) 210,000 223,368 ----------------------------------------------------------------------- Sprint Nextel Corp., Deb., 9.25%, 04/15/22(c) 140,000 168,381 ======================================================================= 391,749 ======================================================================= Total Bonds & Notes (Cost $22,894,892) 22,781,093 ======================================================================= U.S. MORTGAGE-BACKED SECURITIES-10.66% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)-3.10% Federal Home Loan Mortgage Corp., Pass Through Ctfs., 7.00%, 06/01/15 to 06/01/32(c) 44,826 46,093 ----------------------------------------------------------------------- 6.00%, 04/01/16 to 11/01/33(c) 543,531 549,335 ----------------------------------------------------------------------- 5.50%, 10/01/18(c) 233,383 233,751 ----------------------------------------------------------------------- 7.50%, 11/01/30 to 05/01/31(c) 28,326 29,490 ----------------------------------------------------------------------- 6.50%, 05/01/32 to 08/01/32(c) 33,723 34,490 ----------------------------------------------------------------------- Pass Through Ctfs., TBA, 4.50%, 01/01/22(c)(h) 186,000 179,258 ----------------------------------------------------------------------- 5.00%, 01/01/22 to 01/01/37(c)(h) 681,460 657,617 ----------------------------------------------------------------------- 5.50%, 01/01/37(c)(h) 1,072,702 1,060,969 ======================================================================= 2,791,003 ======================================================================= FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-6.65% Federal National Mortgage Association, Pass Through Ctfs., 6.50%, 04/01/14 to 10/01/35(c) 511,809 524,344 ----------------------------------------------------------------------- 7.50%, 11/01/15(c) 3,672 3,804 ----------------------------------------------------------------------- 7.00%, 02/01/16 to 09/01/32(c) 74,633 76,823 ----------------------------------------------------------------------- 6.00%, 01/01/17(c) 5,626 5,711 ----------------------------------------------------------------------- 6.00%, 05/01/17(c) 95,192(i) 96,621 ----------------------------------------------------------------------- 5.00%, 04/01/18(c) 249,536 245,942 ----------------------------------------------------------------------- 4.50%, 11/01/18(c) 102,215 98,879 ----------------------------------------------------------------------- 8.00%, 08/01/21 to 12/01/23(c) 27,274 28,725 ----------------------------------------------------------------------- Pass Through Ctfs., TBA, 5.00%, 01/01/22(c)(h) 727,770 715,489 ----------------------------------------------------------------------- 5.50%, 01/01/22 to 01/01/37(c)(h) 3,212,840 3,186,824 ----------------------------------------------------------------------- 6.00%, 01/01/37(c)(h) 999,650 1,006,523 ======================================================================= 5,989,685 =======================================================================
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PRINCIPAL AMOUNT VALUE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)-0.91% Government National Mortgage Association, Pass Through Ctfs., 7.50%, 06/15/23 to 10/15/31(c) $ 37,362 $ 39,011 ----------------------------------------------------------------------- 8.50%, 11/15/24(c) 91,548 98,911 ----------------------------------------------------------------------- 8.00%, 08/15/25(c) 12,835 13,595 ----------------------------------------------------------------------- 6.50%, 03/15/29 to 12/15/33(c) 129,389 132,965 ----------------------------------------------------------------------- 6.00%, 09/15/31 to 05/15/33(c) 313,041 318,072 ----------------------------------------------------------------------- 5.50%, 12/15/33 to 02/15/34(c) 222,654 221,861 ======================================================================= 824,415 ======================================================================= Total U.S. Mortgage-Backed Securities (Cost $9,631,085) 9,605,103 ======================================================================= ASSET-BACKED SECURITIES-1.19% COLLATERALIZED MORTGAGE OBLIGATIONS-0.13% Federal Home Loan Bank-Series TQ-2015, Class A, Pass Through Ctfs., 5.07%, 10/20/15(c) 118,407 117,044 ======================================================================= OTHER DIVERSIFIED FINANCIAL SERVICES-0.95% Citicorp Lease Pass-Through Trust-Series 1999-1, Class A2, Pass Through Ctfs., 8.04%, 12/15/19 (Acquired 11/04/98-02/09/06; Cost $1,354,303)(c)(d) 325,000 383,008 ----------------------------------------------------------------------- LILACS Repackaging 2005-I Series A, Sr. Sec. Notes, 5.14%, 01/15/64 (Acquired 07/14/05; Cost $489,556)(d)(j) 489,556 475,516 ======================================================================= 858,524 ======================================================================= PROPERTY & CASUALTY INSURANCE-0.11% North Front Pass-Through Trust, Pass Through Ctfs. Bonds, 5.81%, 12/15/24 (Acquired 12/08/04; Cost $100,000)(c)(d) 100,000 98,764 ======================================================================= Total Asset-Backed Securities (Cost $1,069,420) 1,074,332 ======================================================================= SHARES ======================================================================= PREFERRED STOCKS-0.59% LIFE & HEALTH INSURANCE-0.12% Aegon N.V., 6.38% Pfd. (Netherlands) 4,100 106,477 ======================================================================= THRIFTS & MORTGAGE FINANCE-0.33% Fannie Mae, Series J, 6.45% Floating Rate Pfd.,(f) 2,950 148,090 ----------------------------------------------------------------------- Series K, 5.40% Floating Rate Pfd.,(f) 2,950 147,648 ======================================================================= 295,738 ======================================================================= WIRELESS TELECOMMUNICATION SERVICES-0.14% Telephone & Data Systems, Inc.-Series A, 7.60% Pfd. 5,000 125,350 ======================================================================= Total Preferred Stocks (Cost $527,542) 527,565 =======================================================================
AIM V.I. Basic Balanced Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- MUNICIPAL OBLIGATIONS-0.56% Detroit (City of), Michigan; Series 2005 A-1, Taxable Capital Improvement Limited Tax GO (INS-Ambac Assurance Corp.), 4.96%, 04/01/20(c)(e) $ 65,000 $ 61,063 ----------------------------------------------------------------------- Series 2005, Taxable COP (INS-Financial Guaranty Insurance Co.), 4.95%, 06/15/25(c)(e) 80,000 73,747 ----------------------------------------------------------------------- Indianapolis (City of), Indiana Local Public Improvement Bond Bank; Series 2005 A, Taxable RB, 4.87%, 07/15/16(c) 50,000 48,081 ----------------------------------------------------------------------- 5.22%, 07/15/20(c) 50,000 48,768 ----------------------------------------------------------------------- 5.28%, 01/15/22(c) 25,000 24,342 ----------------------------------------------------------------------- Industry (City of), California Urban Development Agency (Project 3); Series 2003, Taxable Allocation RB, (INS-MBIA Insurance Corp.) 6.10%, 05/01/24(c)(e) 125,000 128,212 ----------------------------------------------------------------------- Phoenix (City of), Arizona Civic Improvement Corp.; Series 2004, Taxable Rental Car Facility Charge RB (INS-Financial Guaranty Insurance Co.), 3.69%, 07/01/07(c)(e) 50,000 49,605 ----------------------------------------------------------------------- 4.21%, 07/01/08(c)(e) 75,000 73,895 ======================================================================= Total Municipal Obligations (Cost $522,940) 507,713 =======================================================================
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PRINCIPAL AMOUNT VALUE COMMERCIAL PAPER-0.31% BROADCASTING & CABLE TV-0.31% Cox Communications Inc., Floating Rate Commercial Paper, 5.62%, 8/15/07 (Acquired 11/03/06; Cost $280,000)(c)(d)(f) $ 280,000 $ 280,048 ======================================================================= U.S. GOVERNMENT AGENCY SECURITIES-0.22% FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-0.22% Unsec. Floating Rate Global Notes, 3.20%, 02/17/09 (Cost $200,000)(c)(f) 200,000 195,646 ======================================================================= SHARES ======================================================================= MONEY MARKET FUNDS-3.19% Liquid Assets Portfolio-Institutional Class(k) 1,436,490 1,436,490 ----------------------------------------------------------------------- Premier Portfolio-Institutional Class(k) 1,436,490 1,436,490 ======================================================================= Total Money Market Funds (Cost $2,872,980) 2,872,980 ======================================================================= TOTAL INVESTMENTS-107.23% (Cost $84,020,892) 96,599,391 ======================================================================= OTHER ASSETS LESS LIABILITIES-(7.23)% (6,510,107) ======================================================================= NET ASSETS-100.00% $90,089,284 _______________________________________________________________________ =======================================================================
Investment Abbreviations: ADR - American Depositary Receipt COP - Certificates of Participation Ctfs - Certificates Deb. - Debentures GO - General Obligation Bonds Gtd. - Guaranteed INS - Insurer Jr. - Junior LILACS - Life Insurance and Life Annuities Backed Charitable Securities Pfd. - Preferred RB - Revenue Bonds REGS - Regulation S REIT - Real Estate Investment Trust Sec. - Secured Sr. - Senior Sub. - Subordinated TBA - To Be Announced Unsec. - Unsecured Unsub. - Unsubordinated
Notes to Schedule of Investments: (a) Non-income producing security. (b) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $2,707,661, which represented 3.01% of the Fund's Net Assets. See Note 1A. (c) In accordance with the procedures established by the Board of Trustees, security fair valued based on an evaluated quote provided by an independent pricing service. The aggregate value of these securities at December 31, 2006 was $33,968,419, which represented 37.71% of the Fund's Net Assets. See Note 1A. (d) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $6,419,259, which represented 7.13% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (e) Principal and/or interest payments are secured by the bond insurance company listed. (f) Interest or dividend rate is redetermined periodically. Rate shown is the rate in effect on December 31, 2006. (g) Perpetual bond with no specified maturity date. (h) Security purchased on forward commitment basis. This security is subject to dollar roll transactions. See Note 1I. (i) All or a portion of the principal balance was pledged as collateral to cover margin requirements for open futures contracts. See Note 1N and Note 8. (j) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The value of this security considered illiquid at December 31, 2006 represented 0.53% of the Fund's Net Assets. (k) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Basic Balanced Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $81,147,912) $ 93,726,411 ---------------------------------------------------------------- Investments in affiliated money market funds (cost $2,872,980) 2,872,980 ================================================================ Total investments (cost $84,020,892) 96,599,391 ================================================================ Foreign currencies, at value (cost $2,616) 2,632 ---------------------------------------------------------------- Cash 15,808 ---------------------------------------------------------------- Receivables for: Investments sold 2,235,859 ---------------------------------------------------------------- Dividends and Interest 525,908 ---------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 37,679 ---------------------------------------------------------------- Other assets 1,961 ================================================================ Total assets 99,419,238 ________________________________________________________________ ================================================================ LIABILITIES: Payables for: Investments purchased 9,095,983 ---------------------------------------------------------------- Fund shares reacquired 87,963 ---------------------------------------------------------------- Dividends 87 ---------------------------------------------------------------- Trustee deferred compensation and retirement plans 43,755 ---------------------------------------------------------------- Unrealized depreciation on credit default swap agreements 1,151 ---------------------------------------------------------------- Variation margin 6,100 ---------------------------------------------------------------- Accrued administrative services fees 49,190 ---------------------------------------------------------------- Accrued distribution fees -- Series II 3,687 ---------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,632 ---------------------------------------------------------------- Accrued transfer agent fees 756 ---------------------------------------------------------------- Accrued operating expenses 37,650 ================================================================ Total liabilities 9,329,954 ================================================================ Net assets applicable to shares outstanding $ 90,089,284 ________________________________________________________________ ================================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $ 93,060,770 ---------------------------------------------------------------- Undistributed net investment income 1,981,205 ---------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities, foreign currencies, futures contracts, option contracts and credit default swap agreements (17,457,342) ---------------------------------------------------------------- Unrealized appreciation of investment securities, foreign currencies, futures contracts and credit default swap agreements 12,504,651 ================================================================ $ 90,089,284 ________________________________________________________________ ================================================================ NET ASSETS: Series I $ 84,211,678 ________________________________________________________________ ================================================================ Series II $ 5,877,606 ________________________________________________________________ ================================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 7,065,409 ________________________________________________________________ ================================================================ Series II 496,436 ________________________________________________________________ ================================================================ Series I: Net asset value per share $ 11.92 ________________________________________________________________ ================================================================ Series II: Net asset value per share $ 11.84 ________________________________________________________________ ================================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Interest $1,731,382 ---------------------------------------------------------------- Dividends (net of foreign withholding taxes of $16,154) 1,001,583 ---------------------------------------------------------------- Dividends from affiliated money market funds 118,877 ================================================================ Total investment income 2,851,842 ================================================================ EXPENSES: Advisory fees 695,975 ---------------------------------------------------------------- Administrative services fees 244,188 ---------------------------------------------------------------- Custodian fees 27,190 ---------------------------------------------------------------- Distribution fees -- Series II 14,454 ---------------------------------------------------------------- Transfer agent fees 8,986 ---------------------------------------------------------------- Trustees' and officer's fees and benefits 17,758 ---------------------------------------------------------------- Other 76,000 ================================================================ Total expenses 1,084,551 ================================================================ Less: Fees waived and expense offset arrangements (225,715) ================================================================ Net expenses 858,836 ================================================================ Net investment income 1,993,006 ================================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES, FUTURES CONTRACTS, OPTION CONTRACTS AND CREDIT DEFAULT SWAP AGREEMENTS: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $4,495) 3,788,604 ---------------------------------------------------------------- Foreign currencies 2,327 ---------------------------------------------------------------- Futures contracts (18,476) ---------------------------------------------------------------- Option contracts written 5,950 ---------------------------------------------------------------- Credit default swap agreements (523) ================================================================ 3,777,882 ================================================================ Change in net unrealized appreciation (depreciation) of: Investment securities 3,500,176 ---------------------------------------------------------------- Foreign currencies 104 ---------------------------------------------------------------- Futures contracts (90,765) ---------------------------------------------------------------- Credit default swap agreements (1,151) ================================================================ 3,408,364 ================================================================ Net gain from investment securities, foreign currencies, futures contracts, option contracts and credit default swap agreements 7,186,246 ================================================================ Net increase in net assets resulting from operations $9,179,252 ________________________________________________________________ ================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Basic Balanced Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 1,993,006 $ 1,647,423 ------------------------------------------------------------------------------------------ Net realized gain from investment securities, foreign currencies, futures contracts, option contracts and credit default swap agreements 3,777,882 2,363,092 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities, foreign currencies, futures contracts and credit default swap agreements 3,408,364 914,805 ========================================================================================== Net increase in net assets resulting from operations 9,179,252 4,925,320 ========================================================================================== Distributions to shareholders from net investment income: Series I (1,595,527) (1,309,455) ------------------------------------------------------------------------------------------ Series II (98,205) (72,217) ========================================================================================== Decrease in net assets resulting from distributions (1,693,732) (1,381,672) ========================================================================================== Share transactions-net: Series I (13,432,639) (11,775,262) ------------------------------------------------------------------------------------------ Series II (466,801) 23,488 ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (13,899,440) (11,751,774) ========================================================================================== Net increase (decrease) in net assets (6,413,920) (8,208,126) ========================================================================================== NET ASSETS: Beginning of year 96,503,204 104,711,330 ========================================================================================== End of year (including undistributed net investment income of $1,981,205 and $1,628,613, respectively) $ 90,089,284 $ 96,503,204 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Basic Balanced Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Basic Balanced Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital and current income. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Swap agreements are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service are valued based on a model which may include end of day net present values, spreads, ratings, industry, and company performance. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Paydown gains and losses on mortgage and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Basic Balanced Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. DOLLAR ROLL TRANSACTIONS -- The Fund may engage in dollar roll transactions with respect to mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a mortgage-backed security held in the Fund to a financial institution such as a bank or broker-dealer, and simultaneously agrees to purchase a substantially similar security (same type, coupon and maturity) from the institution at an agreed upon price and future date. The mortgage-backed securities to be purchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. Based on the typical structure of dollar roll transactions by the Fund, the dollar roll transactions are accounted for as financing transactions in which the Fund receives compensation as either a "fee" or a "drop". "Fee" income which is agreed upon amongst the parties at the commencement of the dollar roll and the "drop" which is the difference between the selling price and the repurchase price of the mortgage-backed securities are amortized to income. During the period between the sale and purchase settlement dates, the Fund will not be entitled to receive interest and principal payments on securities purchased and not yet settled. Proceeds of the sale may be invested in short-term instruments, and the income from these investments, together with any additional fee income received on the sale, could generate income for the Fund exceeding the yield on the security sold. Dollar roll transactions are considered borrowings under the 1940 Act. At the time the Fund enters into the dollar roll, it will segregate liquid assets having a dollar value equal to the purchase price. Dollar roll transactions involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities that the Fund has sold but is obligated to purchase under the agreement. In the event that the buyer of securities in a dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale of the securities may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to purchase the securities. The return earned by the Fund with the proceeds of the dollar roll transaction may not exceed the return on the securities sold. J. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. AIM V.I. Basic Balanced Fund The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. K. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. L. COVERED CALL OPTIONS -- The Fund may write call options, including options on futures. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. An option on a futures contract gives the holder the right to receive a cash "exercise settlement amount" equal to the difference between the exercise price of the option and the value of the underlying futures contract on the exercise date. The value of a futures contract fluctuates with changes in the market values of the securities underlying the futures contract. In writing futures contract options, the principal risk is that the Fund could bear a loss on the options that would be only partially offset (or not offset at all) by the increased value or reduced cost of underlying portfolio securities. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. M. PUT OPTIONS PURCHASED AND WRITTEN -- The Fund may purchase and write put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the underlying portfolio securities. The Fund may write put options to earn additional income in the form of option premiums if it expects the price of the underlying instrument to remain stable or rise during the option period so that the option will not be exercised. The risk in this strategy is that the price of the underlying securities may decline by an amount greater than the premium received. Put options written are reported as a liability in the Statement of Assets and Liabilities. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. N. FUTURES CONTRACTS -- The Fund may purchase or sell futures contracts. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities as collateral for the account of the broker (the Fund's agent in acquiring the futures position). During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contracts at the end of each day's trading. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contracts are closed, the Fund recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Fund's basis in the contract. If the Fund were unable to liquidate a futures contract and/or enter into an offsetting closing transaction, the Fund would continue to be subject to market risk with respect to the value of the contracts and continue to be required to maintain the margin deposits on the futures contracts. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. O. SWAP AGREEMENTS -- The Fund may enter into various swap transactions, including interest rate, index, currency exchange rate and credit default swap contracts ("CDS") for investment purposes or to manage interest rate, currency or credit risk. Interest rate, index, and currency exchange rate swap agreements are two-party contracts entered into primarily to exchange the returns (or differentials in rates of returns) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. A CDS is an agreement between two parties ("Counterparties") to exchange the credit risk of an issuer. A buyer of a CDS is said to buy protection by paying a fixed payment over the life of the agreement to the seller of the CDS. If a defined credit event occurs (such as payment default or bankruptcy), the Fund as a protection buyer would cease paying its fixed payment, the Fund would deliver the corresponding bonds, or other similar bonds issued by the same reference entity to the seller, and the seller would pay the full notional value, or the "par value", of the referenced obligation to the Fund. A AIM V.I. Basic Balanced Fund seller of a CDS is said to sell protection and thus would receive the fixed payment stream. If a credit event occurs, the Fund as a protection seller would cease to receive the fixed payment stream, the Fund would pay the buyer the full notional value of the referenced obligation, and the Fund would receive the corresponding bonds or similar bonds issued by the same reference entity. If no credit event occurs, the Fund receives the fixed payment over the life of the agreement. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the CDS. Because the CDS is a bilateral agreement between Counterparties, the transaction can alternatively be settled by a cash payment in the case of a credit event. Changes in the value of swap agreements are recognized as unrealized gains (losses) in the Statement of Operations by "marking to market" on a daily basis to reflect the value of the swap agreement at the end of each trading day. The Fund accrues for the fixed payments on swap agreements on a daily basis with the net amount accrued recorded as a component of realized gain (loss) on the Statement of Operations. A liquidation payment received or made at the termination of a swap agreement is recorded as realized gain (loss) on the Statement of Operations. The Fund segregates liquid securities having a value at least equal to the amount of the potential obligation of a Fund under any swap transaction. Entering into these agreements involves, to varying degrees, lack of liquidity and elements of credit, market, and counterparty risk in excess of amounts recognized on the Statement of Assets and Liabilities. P. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $150 million 0.75% =================================================================== Over $150 million 0.50% __________________________________________________________________ ===================================================================
Through December 31, 2009, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $150 million 0.62% -------------------------------------------------------------------- Next $4.85 billion 0.50% -------------------------------------------------------------------- Next $5 billion 0.475% ==================================================================== Over $10 billion 0.45% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 0.91% and Series II shares to 1.16% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $223,387. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $194,188 for services provided by insurance companies. AIM V.I. Basic Balanced Fund The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED REALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND GAIN FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME (LOSS) ------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ 850,068 $16,959,474 $(16,373,052) $ -- $1,436,490 $ 59,416 $ -- ------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio- Institutional Class 850,068 8,195,310 (9,045,378) -- -- 26,494 -- ------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class -- 9,533,285 (8,096,795) -- 1,436,490 32,967 -- =============================================================================================================================== Total Investments in Affiliates $1,700,136 $34,688,069 $(33,515,225) $ -- $2,872,980 $118,877 $ -- _______________________________________________________________________________________________________________________________ ===============================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $106,888, which resulted in net realized gains of $4,495, and securities purchases of $1,135,179. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $2,328. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,109 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing AIM V.I. Basic Balanced Fund fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--FUTURES CONTRACTS On December 31, 2006, $95,192 principal amount of U.S. Mortgage-Backed obligations were pledged as collateral to cover margin requirements for open futures contracts.
OPEN FUTURES CONTRACTS AT PERIOD END -------------------------------------------------------------------------------------------------------------------------- UNREALIZED NUMBER OF MONTH/ VALUE APPRECIATION CONTRACT CONTRACTS COMMITMENT 12/31/06 (DEPRECIATION) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 2 Year Notes 8 Mar-07/Long $ 1,632,250 $ (6,239) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 10 Year Notes 48 Mar-07/Long 5,158,500 (60,354) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 30 Year Bonds 8 Mar-07/Long 891,500 (18,199) ========================================================================================================================== $ 7,682,250 $(84,792) ========================================================================================================================== Eurodollar GLOBEX2 etrading 18 Dec-07/Short $(4,277,250) $ 4,367 -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 5 Year Notes 6 Mar-07/Short (630,375) 4,688 ========================================================================================================================== $(4,907,625) $ 9,055 ========================================================================================================================== Total Open Futures contracts $ 2,774,625 $(75,737) __________________________________________________________________________________________________________________________ ==========================================================================================================================
NOTE 9--CREDIT DEFAULT SWAPS AGREEMENTS
OPEN CREDIT DEFAULT SWAP AGREEMENTS AT PERIOD-END --------------------------------------------------------------------------------------------------------------------------------- NOTIONAL UNREALIZED REFERENCE BUY/SELL PAY/RECEIVE EXPIRATION AMOUNT APPRECIATION COUNTERPARTY ENTITY PROTECTION FIXED RATE DATE (000) (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------------------- Leman Brothers Inc. Dow Jones CDX.NA.IG Buy 0.40% 12/20/2011 $650 $(1,151) _________________________________________________________________________________________________________________________________ =================================================================================================================================
NOTE 10--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ------------------------------------------------------------------------------------------------------------ CALL OPTION CONTRACTS PUT OPTION CONTRACTS --------------------- --------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED ------------------------------------------------------------------------------------------------------------ Beginning of period -- $ -- -- $ -- ------------------------------------------------------------------------------------------------------------ Written 12 2,049 25 4,078 ------------------------------------------------------------------------------------------------------------ Closed -- -- (15) (2,331) ------------------------------------------------------------------------------------------------------------ Expired (12) (2,049) (10) (1,747) ============================================================================================================ End of period -- $ -- -- $ -- ____________________________________________________________________________________________________________ ============================================================================================================
AIM V.I. Basic Balanced Fund NOTE 11--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from ordinary income $1,693,732 $1,381,672 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 2,019,021 ---------------------------------------------------------------------------- Unrealized appreciation -- investments 12,430,720 ---------------------------------------------------------------------------- Temporary book/tax differences (38,139) ---------------------------------------------------------------------------- Capital loss carryover (17,383,088) ---------------------------------------------------------------------------- Shares of beneficial interest 93,060,770 ============================================================================ Total net assets $ 90,089,284 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales, the recognition of gains (losses) on dollar roll transactions, the realization for tax purpose of unrealized gains (losses) on certain future contracts and credit default swap agreements. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $104, credit default swap agreements of $(336) and remaining proceeds to be received on Candescent Technologies Corp. of $2,936. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund utilized $3,340,947 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2009 $ 1,166,135 ----------------------------------------------------------------------------- December 31, 2010 16,216,953 ============================================================================= Total capital loss carryforward $17,383,088 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. NOTE 12--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $38,554,193 and $52,307,864, respectively. During the same period, purchases and sales of U.S. Treasury obligations were $1,635,728 and $2,649,468.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $13,791,363 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (1,363,347) =============================================================================== Net unrealized appreciation of investment securities $12,428,016 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $84,171,375.
NOTE 13--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of defaulted bonds, foreign currency transactions, paydowns on mortgage-backed securities, treatment of partnerships and credit default swaps agreements, on December 31, 2006, undistributed net investment income was increased by $53,318 and undistributed net realized gain (loss) was decreased by $53,318. This reclassification had no effect on the net assets of the Fund. AIM V.I. Basic Balanced Fund NOTE 14--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(a) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 360,135 $ 4,088,599 6,962,166 $ 72,685,111 ---------------------------------------------------------------------------------------------------------------------- Series II 47,372 532,918 271,411 2,830,503 ====================================================================================================================== Issued as reinvestment of dividends: Series I 134,985 1,595,527 119,258 1,309,455 ---------------------------------------------------------------------------------------------------------------------- Series II 8,358 98,205 6,619 72,217 ====================================================================================================================== Reacquired: Series I (1,679,810) (19,116,765) (8,187,375) (85,769,828) ---------------------------------------------------------------------------------------------------------------------- Series II (97,098) (1,097,924) (276,220) (2,879,232) ====================================================================================================================== (1,226,058) $(13,899,440) (1,104,141) $(11,751,774) ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 84% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 15--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Basic Balanced Fund NOTE 16--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 10.99 $ 10.59 $ 9.99 $ 8.75 $ 10.84 -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.25 0.18 0.13 0.14 0.18 -------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 0.91 0.38 0.62 1.29 (2.02) ==================================================================================================================== Total from investment operations 1.16 0.56 0.75 1.43 (1.84) ==================================================================================================================== Less dividends from net investment income (0.23) (0.16) (0.15) (0.19) (0.25) ==================================================================================================================== Net asset value, end of period $ 11.92 $ 10.99 $ 10.59 $ 9.99 $ 8.75 ____________________________________________________________________________________________________________________ ==================================================================================================================== Total return(b) 10.55% 5.29% 7.52% 16.36% (17.02)% ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $84,212 $90,633 $99,070 $97,665 $82,866 ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.91%(c) 0.95% 1.12% 1.11% 1.17% -------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.15%(c) 1.15% 1.12% 1.11% 1.17% ==================================================================================================================== Ratio of net investment income to average net assets 2.16%(c) 1.68% 1.24% 1.47% 1.90% ____________________________________________________________________________________________________________________ ==================================================================================================================== Portfolio turnover rate 44% 44% 51% 131% 90% ____________________________________________________________________________________________________________________ ====================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, with if included would reduce total returns. (c) Ratios are based on average daily net assets of $87,015,154.
SERIES II -------------------------------------------------------- JANUARY 24, 2002 (DATE SALES YEAR ENDED DECEMBER 31, COMMENCED) TO --------------------------------------- DECEMBER 31 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $10.91 $10.53 $ 9.95 $ 8.73 $ 10.70 ---------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.22 0.15 0.10 0.12 0.14 ---------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 0.91 0.37 0.62 1.29 (1.86) ====================================================================================================================== Total from investment operations 1.13 0.52 0.72 1.41 (1.72) ====================================================================================================================== Less dividends from net investment income (0.20) (0.14) (0.14) (0.19) (0.25) ====================================================================================================================== Net asset value, end of period $11.84 $10.91 $10.53 $ 9.95 $ 8.73 ______________________________________________________________________________________________________________________ ====================================================================================================================== Total return(b) 10.36% 4.91% 7.24% 16.15% (16.12)% ______________________________________________________________________________________________________________________ ====================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $5,878 $5,870 $5,642 $4,133 $ 733 ______________________________________________________________________________________________________________________ ====================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.16%(c) 1.20% 1.37% 1.36% 1.42%(d) ---------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.40%(c) 1.40% 1.37% 1.36% 1.42%(d) ====================================================================================================================== Ratio of net investment income to average net assets 1.91%(c) 1.43% 0.99% 1.22% 1.65%(d) ______________________________________________________________________________________________________________________ ====================================================================================================================== Portfolio turnover rate(e) 44% 44% 51% 131% 90% ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $5,781,500. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Basic Balanced Fund NOTE 17--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Basic Balanced Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Basic Balanced Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Basic Balanced Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Basic Balanced Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 48.17% U.S. Treasury Obligations* 0.34%
* The above percentages are based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Basic Balanced Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Funds, Inc. (21 portfolios) Formerly: Partner, Deloitte & Touche -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Basic Balanced Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M N/A Management Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family N/A of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud N/A Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. BASIC VALUE FUND Large-Cap Value ANNUAL REPORT TO SHAREHOLDERS - DECEMBER 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can [COVER GLOBE IMAGE] obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM AIM V.I. BASIC VALUE FUND seeks to provide Web site, AIMinvestments.com. On the home page, long-term growth of capital. scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT click on Proxy Voting Activity. Next, select the IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --REGISTERED TRADEMARK-- EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. BASIC VALUE FUND MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE naturally be different than the market ========================================================================================= and peers and have little information value since we don't own many of the same PERFORMANCE SUMMARY stocks. For the year ended December 31, 2006, Series I and Series II shares of AIM V.I. Basic MARKET CONDITIONS AND YOUR FUND Value Fund, excluding variable product issuer charges, underperformed the S&P 500 --Registered Trademark-- Index, the Russell 1000 --Registered Trademark-- Value Index Equity markets posted healthy gains and the Lipper Large-Cap Value Funds Index. during the year as favorable economic data and solid corporate profits We attribute the Fund's underperformance versus its broad market and style-specific overshadowed housing market concerns and indexes to below-market returns from selected investments in the information investor uncertainty regarding interest technology, health care and industrials sectors. Top contributors to performance were rates and oil prices. The selected investments in the financials and consumer discretionary sectors. telecommunication services and energy sectors led the market for the year while Your Fund's long-term performance appears on pages 4-5. information technology and health care stocks generally trailed. FUND VS. INDEXES The Fund's largest contributors during Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. If the year were financial services holdings variable product issuer charges were included, returns would be lower. MORGAN STANLEY, JP MORGAN AND MERRILL LYNCH. All benefited from a robust Series I Shares 13.20% capital markets environment and rotation Series II Shares 12.94 to large-cap financials as investors S&P 500 Index (Broad Market Index) 15.78 anticipated an end to Federal Reserve Russell 1000 Value Index (Style-Specific Index) 22.25 Board interest rate increases. More Lipper Large-Cap Value Funds Index (Peer Group Index) 18.28 important, Morgan Stanley and JP Morgan, Source: Lipper Inc. under the leadership of new CEOs, showed ========================================================================================= signs of improved operating and financial performance. HOW WE INVEST - Market prices are more volatile than business values, partly because investors The Fund's investment in WALT DISNEY We seek to create wealth by maintaining a regularly overreact to negative news. also made a significant contribution to long-term investment horizon and investing performance during the year. Disney's in companies that are selling at a Since our application of this strategy is stock experienced a steady rise during significant discount to their estimated highly disciplined and relatively unique, it 2006 and ended the year up 44% as intrinsic value -- a value that is based is important to understand the benefits and virtually all of the company's business on the estimated future cash flows limitations of our process. First, the lines experienced healthy market share generated by the business. The Fund's investment strategy is intended to preserve and earnings growth. Of particular note philosophy is based on two elements that your capital while growing it at were positive developments at Disney's we believe have extensive empirical above-market rates over the long term. television networks, ABC and ESPN, theme evidence: Second, our investments have little in parks and movie studios. common with popular benchmark indexes and - Companies have a measurable estimated most of our peers. And third, the Fund's A modest number of Fund holdings posted intrinsic value. Importantly, this short-term relative performance will price declines during the year. The estimated fair value is independent of the Fund's largest detractors from company's stock price. performance were CA and UNITEDHEALTH GROUP. Enterprise software firm CA's stock price declined during the year as a result of investor concerns regarding sen-
================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* By sector Financials 22.4% 1.Pharmaceuticals 7.6% 1.UnitedHealth Group Inc. 4.2% Health Care 18.0 2.Other Diversified Financial Services 6.7 2.Tyco International Ltd. 4.0 Consumer Discretionary 17.4 3.Industrial Conglomerates 6.6 3.JPMorgan Chase & Co. 3.7 Information Technology 13.5 4.Advertising 6.2 4.Cardinal Health, Inc. 3.6 Industrials 11.7 5.Investment Banking & Brokerage 5.5 5.Fannie Mae 3.5 Energy 7.1 6.Cemex S.A. de C.V.-ADR (Mexico) 3.2 Consumer Staples 5.6 Total Net Assets $828.81 million 7.Interpublic Group of Cos., Inc. Materials 3.2 Total Number of Holdings* 43 (The) 3.2 Money Market Funds 8.Omnicom Group Inc. 3.0 Plus Other Assets Less Liabilities 1.1 9.Citigroup Inc. 3.0 10.Transocean Inc. 2.9 *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ====================================================================================================================================
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AIM V.I. BASIC VALUE FUND ior management turnover, best indication that your Fund is positioned [STANLEY Bret W. Stanley Chartered weaker-than-expected quarterly earnings to potentially achieve its objective of PHOTO] Financial Analyst, senior and stock options issues. Despite these long-term growth of capital. portfolio manager, is lead short-term headwinds, our estimate of CA's manager of AIM V.I. Basic Value Fund. He fundamental intrinsic value remained CONTEXT FOR RESULTS began his investment career in 1988 and unchanged. joined AIM in 1998. Mr. Stanley earned a We know a long-term investment horizon and B.B.A. in finance from The University of A stock options scandal and near-term attractive potential upside to our estimate Texas at Austin and an M.S. in finance uncertainty regarding industry of portfolio intrinsic value are critical to from the University of Houston. fundamentals caused UnitedHealth's stock creating wealth. But we understand to decline 30% during the first half of maintaining a long-term investment horizon [COLEMAN R. Canon Coleman II 2006. By mid-year, the stock recovered is a challenge. So, when shareholders PHOTO] Chartered Financial from its lows as implications of the consider our short-term results we encourage Analyst, portfolio manager, options issue became clearer, a new CEO them to review our long-term results on is manager of AIM V.I. Basic Value Fund. was announced and company operating pages 4 - 5. We are long-term investors who He began his investment career in 1996 fundamentals remained strong. UnitedHealth provide a portfolio that in our opinion is and joined AIM in 2000. Mr. Coleman was among the first investments made by distinct from market indexes and most of our earned a B.S. and an M.S. in accounting current management over seven years ago, peers. from the University of Florida. He also and our long term investment case for the earned an M.B.A. from the Wharton School company remained unchanged. We added to Recent studies have shown short-term at the University of Pennsylvania. our position at mid year and UnitedHealth results have little information value and was the Fund's largest holding at the the frequent trading of stocks or mutual [SEINSHEIMER Matthew W. Seinsheimer close of the year. funds is a costly exercise -- reducing PHOTO] Chartered Financial actual returns by several percentage points Analyst, senior portfolio During the year, we continued to reduce per year as shareholders unknowingly manager, is manager of AIM V.I. Basic the Fund's energy sector exposure because exchange tomorrow's winner for tomorrow's Value Fund. He began his investment we concluded equity valuations warranted loser. In addition, a recent Yale University career in 1992 and joined AIM in 1998. He less exposure to the sector. study reveals half of all mutual funds earned a B.B.A. from Southern Methodist charge an active management fee for University and an M.B.A. from The During the year, we also sold our essentially a closet-index portfolio. While University of Texas at Austin. positions in AVIS BUDGET GROUP, CERIDIAN, this may create smooth and innocuous HCA, MASCO, MGIC INVESTMENT CORPORATION, short-term relative performance, it [SIMON Michael J. Simon Chartered PARKER HANNIFIN, RADIAN and WYNDAM typically leads to long-term PHOTO] Financial Analyst, senior WORLDWIDE based on valuation and other underperformance. portfolio manager, is portfolio considerations. We initiated manager of AIM V.I. Basic Value Fund. He positions in Dell, Microsoft, Marsh & Considering these factors, your Fund is began his investment career in 1989 and McLennan and Home Depot. While Dell's and doing something different and old fashioned joined AIM in 2001. Mr. Simon earned a Microsoft's growth and business models are -- investing for the long term and following B.B.A. in finance from Texas Christian in the early stages of a transition, we a common-sense approach that has produced a University and an M.B.A. from the believed their market valuations did not portfolio that is different from common University of Chicago. reflect the long-term positives of their stock market indexes and more attractively dominant market positions and the valued, in our opinion. Assisted by the Basic Value Team compelling economics of their businesses. IN CLOSING PORTFOLIO ASSESSMENT We thank you for your investment in AIM V.I. We believe the single most important Basic Value Fund and for sharing our indicator of the way AIM V.I. Basic Value long-term horizon. Fund is positioned for potential success is not our historical investment results The views and opinions expressed in or popular statistical measures, but the management's discussion of Fund performance portfolio's estimated intrinsic value -- are those of A I M Advisors, Inc. These the aggregate business value of the views and opinions are subject to change at portfolio based on our estimate of any time based on factors such as market and intrinsic value for each individual economic conditions. These views and holding. At the close of the year, and in opinions may not be relied upon as our opinion, the difference between the investment advice or recommendations, or as market price and the estimated intrinsic an offer for a particular security. The value of the portfolio was about average information is not a complete analysis of by the Fund's historical standards, and we every aspect of any market, country, believed this value content was greater industry, security or the Fund. Statements than what was available in the broad of fact are from sources considered market. While there is no assurance that reliable, but A I M Advisors, Inc. makes no market value will ever reflect our representation or warranty as to their estimate of the portfolio's intrinsic completeness or accuracy. Although value, we believe this provides the historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
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AIM V.I. BASIC VALUE FUND YOUR FUND'S LONG-TERM PERFORMANCE =========================================== AVERAGE ANNUAL TOTAL RETURNS THE PERFORMANCE OF THE FUND'S SERIES I AND OF THE FUND DIRECTLY. PERFORMANCE FIGURES SERIES II SHARE CLASSES WILL DIFFER GIVEN REPRESENT THE FUND AND ARE NOT As of 12/31/06 PRIMARILY DUE TO DIFFERENT CLASS EXPENSES. INTENDED TO REFLECT ACTUAL VARIABLE SERIES I SHARES PRODUCT VALUES. THEY DO NOT REFLECT SALES Inception (9/10/01) 6.82% THE PERFORMANCE DATA QUOTED REPRESENT PAST CHARGES, EXPENSES AND FEES ASSESSED IN 5 Years 6.70 PERFORMANCE AND CANNOT GUARANTEE COMPARABLE CONNECTION WITH A VARIABLE PRODUCT. SALES 1 Year 13.20 FUTURE RESULTS; CURRENT PERFORMANCE MAY BE CHARGES, EXPENSES AND FEES, WHICH ARE LOWER OR HIGHER. PLEASE CONTACT YOUR DETERMINED BY THE VARIABLE PRODUCT SERIES II SHARES VARIABLE PRODUCT ISSUER OR FINANCIAL ADVISOR ISSUERS, WILL VARY AND WILL LOWER THE Inception (9/10/01) 6.57% FOR THE MOST RECENT MONTH-END VARIABLE TOTAL RETURN. 5 Years 6.44 PRODUCT PERFORMANCE. PERFORMANCE FIGURES 1 Year 12.94 REFLECT FUND EXPENSES, REINVESTED PER NASD REQUIREMENTS, THE MOST RECENT =========================================== DISTRIBUTIONS AND CHANGES IN NET ASSET MONTH-END PERFORMANCE DATA AT THE FUND VALUE. INVESTMENT RETURN AND PRINCIPAL VALUE LEVEL, EXCLUDING VARIABLE PRODUCT CUMULATIVE TOTAL RETURNS WILL FLUCTUATE SO THAT YOU MAY HAVE A GAIN CHARGES, IS AVAILABLE ON THIS AIM OR LOSS WHEN YOU SELL SHARES. AUTOMATED INFORMATION LINE, 866-702-4402. 6 months ended 12/31/06 AS MENTIONED ABOVE, FOR THE MOST RECENT Series I Shares 12.12% AIM V.I. BASIC VALUE FUND, A SERIES MONTH-END PERFORMANCE INCLUDING VARIABLE Series II Shares 11.94 PORTFOLIO OF AIM VARIABLE INSURANCE FUNDS, PRODUCT CHARGES, PLEASE CONTACT YOUR IS CURRENTLY OFFERED THROUGH INSURANCE VARIABLE PRODUCT ISSUER OR FINANCIAL COMPANIES ISSUING VARIABLE PRODUCTS. YOU ADVISOR. CANNOT PURCHASE SHARES ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND Investing in a fund that invests in quently used as a general measure of U.S. smaller companies involves risks not stock market performance. Prices of equity securities change in associated with investing in more response to many factors including the established companies, such as business In conjunction with the annual historical and prospective earnings of the risk, stock price fluctuations and prospectus update on or about May 1, issuer, the value of its assets, general illiquidity. 2007, the AIM V.I. Basic Value Fund economic conditions, interest rates, prospectus will be amended to reflect investor perceptions and market liquidity. ABOUT INDEXES USED IN THIS REPORT that the Fund has elected to use the Lipper Variable Underlying Funds (VUF) Foreign securities have additional The unmanaged LIPPER LARGE-CAP VALUE FUNDS Large-Cap Value Funds Index as its peer risks, including exchange rate changes, INDEX represents an average of the group index rather than the Lipper political and economic upheaval, the performance of the 30 largest large-capita Large-Cap Value Funds Index. The Lipper relative lack of information about these lization value funds tracked by Lipper Inc., VUF Large-Cap Value Funds Index, recently companies, relatively low market liquidity an independent mutual fund performance published by Lipper Inc., comprises the and the potential lack of strict financial monitor. largest underlying funds in each variable and accounting controls and standards. insurance category and does not include The unmanaged RUSSELL 1000 VALUE INDEX is mortality and expense fees. To the extent the Fund holds cash or a subset of the unmanaged RUSSELL 1000 -- cash equivalents rather than equity REGISTERED TRADEMARK-- Index, which The Fund is not managed to track the securities for risk management purposes, represents the performance of the stocks of performance of any particular index, the Fund may not achieve its investment large-capitalization companies; the Value including the indexes defined here, and objective. subset measures the performance of Russell consequently, the performance of the Fund 1000 companies with lower price/book ratios may deviate significantly from the If the seller of a repurchase agreement and lower forecasted growth values. The performance of the indexes. in which the Fund invests defaults on its Russell 1000 Value Index and the Russell obligation or declares bankruptcy, the 1000 Index are trademarks/service marks of A direct investment cannot be made in Fund may experience delays in selling the the Frank Russell Company. Russell an index. Unless otherwise indicated, securities underlying the repurchase --REGISTERED TRADEMARK-- is a trademark of index results include reinvested agreement. the Frank Russell Company. dividends, and they do not reflect sales charges. Performance of an index of funds There is no guarantee that the The unmanaged STANDARD & POOR'S COMPOSITE reflects fund expenses; performance of a investment techniques and risk analyses INDEX OF 500 STOCKS (the S&P 500 Index) is market index does not. used by the Fund's portfolio managers will an index of common stocks fre- produce the desired results. Continued on page 5
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AIM V.I. BASIC VALUE FUND Past performance cannot guarantee each segment representing a percent change comparable future results. in the value of the investment. In this chart, each segment represents a doubling, This chart, which is a logarithmic or 100% change, in the value of the chart, presents the fluctuations in the investment. In other words, the space value of the Fund and its indexes. We between $5,000 and $10,000 is the same size believe that a logarithmic chart is more as the space between $10,000 and $20,000. effective than other types of charts in illustrating changes in value during the early years shown in the chart. The vertical axis, the one that indicates the dollar value of an investment, is constructed with ==================================================================================================================================== Continued from page 4 OTHER INFORMATION Industry classifications used in this report are generally according to the Global The returns shown in the management's Industry Classification Standard, which was discussion of Fund performance are based developed by and is the exclusive property on net asset values calculated for and a service mark of Morgan Stanley Capital shareholder transactions. Generally International Inc. and Standard & Poor's. accepted accounting principles require adjustments to be made to the net assets The Chartered Financial Analyst of the Fund at period end for financial --REGISTERED TRADEMARK-- (CFA --REGISTERED reporting purposes, and as such, the net TRADEMARK--) designation is a globally asset values for shareholder transactions recognized standard for measuring the and the returns based on those net asset competence and integrity of investment values may differ from the net asset professionals. values and returns reported in the Financial Highlights. Additionally, the returns and net asset values shown throughout this report are at the Fund level only and do not include variable product issuer charges. If such charges were included, the total returns would be lower.
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=================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 8/31/01,Fund data from 09/10/01 AIM V.I. Basic Value Fund AIM V.I. Basic Value Fund Lipper Large-Cap Value Date -Series I Shares -Series II Shares S&P 500 Index Russell 1000 Value Index Funds Index ---------------------------------------------------------------------------------------------------------------------------------- 8/31/01 $ 10000 $ 10000 $ 10000 9/01 $ 9210 $ 9210 9193 9296 9220 10/01 9270 9270 9368 9216 9280 11/01 9950 9950 10086 9752 9875 12/01 10263 10258 10175 9982 10024 1/02 10183 10178 10026 9905 9839 2/02 9992 9987 9833 9921 9784 3/02 10723 10717 10203 10390 10216 4/02 10342 10337 9585 10034 9781 5/02 10292 10287 9514 10084 9794 6/02 9281 9267 8837 9505 9111 7/02 8289 8276 8148 8621 8324 8/02 8430 8426 8201 8687 8380 9/02 7418 7406 7311 7721 7411 10/02 7888 7876 7954 8293 7955 11/02 8509 8497 8421 8815 8454 12/02 7988 7966 7927 8432 8051 1/03 7808 7786 7720 8228 7860 2/03 7528 7506 7604 8009 7663 3/03 7497 7476 7677 8022 7658 4/03 8168 8147 8309 8728 8305 5/03 9008 8978 8747 9292 8816 6/03 9038 9007 8858 9408 8917 7/03 9308 9277 9015 9548 9041 8/03 9628 9597 9190 9697 9194 9/03 9428 9397 9093 9602 9090 10/03 9898 9857 9607 10190 9592 11/03 10089 10048 9691 10328 9710 12/03 10673 10618 10199 10964 10306 1/04 10833 10779 10387 11157 10462 2/04 11053 10998 10531 11396 10682 3/04 11013 10959 10372 11297 10555 4/04 10863 10799 10209 11021 10360 5/04 10963 10899 10349 11133 10436 6/04 11234 11170 10550 11396 10665 7/04 10623 10559 10201 11235 10409 8/04 10553 10489 10242 11395 10484 9/04 10682 10610 10353 11572 10608 10/04 10873 10799 10511 11764 10721 11/04 11443 11370 10936 12359 11187 12/04 11854 11770 11308 12773 11542 1/05 11644 11559 11033 12546 11318 2/05 11895 11800 11265 12962 11636 3/05 11675 11579 11066 12784 11446 4/05 11404 11309 10856 12555 11220 5/05 11624 11530 11201 12857 11482 6/05 11834 11740 11217 12998 11599 7/05 12225 12120 11634 13374 11977 8/05 12034 11930 11528 13316 11925 9/05 12145 12039 11621 13503 12040 10/05 11834 11719 11427 13160 11789 11/05 12294 12180 11859 13593 12194 12/05 12534 12409 11863 13674 12264 1/06 12980 12854 12177 14205 12622 2/06 12919 12794 12210 14292 12645 3/06 13162 13027 12362 14485 12805 4/06 13244 13107 12528 14853 13123 5/06 12788 12651 12168 14478 12802 6/06 12656 12520 12184 14571 12812 7/06 12616 12480 12259 14925 13008 8/06 12829 12692 12551 15175 13247 9/06 13164 13015 12874 15477 13556 10/06 13589 13431 13293 15984 13959 11/06 13792 13633 13545 16349 14200 12/06 14194 14014 13735 16716 14507 =================================================================================================================================== Source: Lipper Inc.
AIM V.I. BASIC VALUE FUND CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE ACTUAL EXPENSES Fund's actual return. The Fund's actual cumulative total returns at net asset As a shareholder of the Fund, you incur The table below provides information about value after expenses for the six months ongoing costs, including management fees; actual account values and actual expenses. ended December 31, 2006, appear in the distribution and/or service (12b-1) fees; You may use the information in this table, table "Cumulative Total Returns" on page and other Fund expenses. This example is together with the amount you invested, to 4. intended to help you understand your estimate the expenses that you paid over the ongoing costs (in dollars) of investing in period. Simply divide your account value by The hypothetical account values and the Fund and to compare these costs with $1,000 (for example, an $8,600 account value expenses may not be used to estimate the ongoing costs of investing in other mutual divided by $1,000 = 8.6), then multiply the actual ending account balance or expenses funds. The example is based on an result by the number in the table under the you paid for the period. You may use this investment of $1,000 invested at the heading entitled "Actual Expenses Paid information to compare the ongoing costs beginning of the period and held for the During Period" to estimate the expenses you of investing in the Fund and other funds. entire period July 1, 2006, through paid on your account during this period. To do so, compare this 5% hypothetical December 31, 2006. example with the 5% hypothetical examples HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES that appear in the shareholder reports of The actual and hypothetical expenses in the other funds. the examples below do not represent the The table below also provides information effect of any fees or other expenses about hypothetical account values and Please note that the expenses shown in assessed in connection with a variable hypothetical expenses based on the Fund's the table are meant to highlight your product; if they did, the expenses shown actual expense ratio and an assumed rate of ongoing costs. Therefore, the would be higher while the ending account return of 5% per year before expenses, which hypothetical information is useful in values shown would be lower. is not the comparing ongoing costs, and will not help you determine the relative total costs of owning different funds. ====================================================================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ----------------------------------------------------------------------------------------------------------------------------------- Series I $1,000.00 $1,121.20 $5.19 $1,020.32 $4.94 0.97% Series II 1,000.00 1,119.40 6.52 1,019.06 6.21 1.22 ====================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6
AIM V.I. BASIC VALUE FUND APPROVAL OF INVESTMENT ADVISORY AGREEMENT The Board of Trustees of AIM Variable - The nature and extent of the advisory Fund's Senior Officer (discussed below) Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board only considered Fund performance through management of AIM V.I. Basic Value Fund reviewed the services to be provided by AIM the most recent calendar year, the Board (the "Fund") and, as required by law, under the Advisory Agreement. Based on such also reviewed more recent Fund determines annually whether to approve the review, the Board concluded that the range performance, which did not change their continuance of the Fund's advisory of services to be provided by AIM under the conclusions. agreement with A I M Advisors, Inc. Advisory Agreement was appropriate and that ("AIM"). Based upon the recommendation of AIM currently is providing services in - Meetings with the Fund's portfolio the Investments Committee of the Board, at accordance with the terms of the Advisory managers and investment personnel. With a meeting held on June 27, 2006, the Agreement. respect to the Fund, the Board is meeting Board, including all of the independent periodically with such Fund's portfolio trustees, approved the continuance of the - The quality of services to be provided by managers and/or other investment advisory agreement (the "Advisory AIM. The Board reviewed the credentials and personnel and believes that such Agreement") between the Fund and AIM for experience of the officers and employees of individuals are competent and able to another year, effective July 1, 2006. AIM who will provide investment advisory continue to carry out their services to the Fund. In reviewing the responsibilities under the Advisory The Board considered the factors qualifications of AIM to provide investment Agreement. discussed below in evaluating the fairness advisory services, the Board considered such and reasonableness of the Advisory issues as AIM's portfolio and product review - Overall performance of AIM. The Board Agreement at the meeting on June 27, 2006 process, various back office support considered the overall performance of AIM and as part of the Board's ongoing functions provided by AIM and AIM's equity in providing investment advisory and oversight of the Fund. In their and fixed income trading operations. Based portfolio administrative services to the deliberations, the Board and the on the review of these and other factors, Fund and concluded that such performance independent trustees did not identify any the Board concluded that the quality of was satisfactory. particular factor that was controlling, services to be provided by AIM was and each trustee attributed different appropriate and that AIM currently is - Fees relative to those of clients of weights to the various factors. providing satisfactory services in AIM with comparable investment accordance with the terms of the Advisory strategies. The Board reviewed the One responsibility of the independent Agreement. effective advisory fee rate (before Senior Officer of the Fund is to manage waivers) for the Fund under the Advisory the process by which the Fund's proposed - The performance of the Fund relative to Agreement. The Board noted that this rate management fees are negotiated to ensure comparable funds. The Board reviewed the was (i) above the effective advisory fee that they are negotiated in a manner which performance of the Fund during the past one rates (before waivers) for three mutual is at arms' length and reasonable. To that and three calendar years against the funds advised by AIM with investment end, the Senior Officer must either performance of funds advised by other strategies comparable to those of the supervise a competitive bidding process or advisors with investment strategies Fund; (ii) above the effective prepare an independent written evaluation. comparable to those of the Fund. The Board sub-advisory fee rate for one offshore The Senior Officer has recommended an noted that the Fund's performance in such fund advised and sub-advised by AIM independent written evaluation in lieu of periods was above the median performance of affiliates with investment strategies a competitive bidding process and, upon such comparable funds. Based on this review comparable to those of the Fund, although the direction of the Board, has prepared and after taking account of all of the other the total advisory fees for such offshore such an independent written evaluation. factors that the Board considered in fund were above those for the Fund; (iii) Such written evaluation also considered determining whether to continue the Advisory above the effective sub-advisory fee rate certain of the factors discussed below. In Agreement for the Fund, the Board concluded for one variable insurance fund addition, as discussed below, the Senior that no changes should be made to the Fund sub-advised by an AIM affiliate and Officer made a recommendation to the Board and that it was not necessary to change the offered to insurance company separate in connection with such written Fund's portfolio management team at this accounts with investment strategies evaluation. time. Although the independent written comparable to those of the Fund, although evaluation of the Fund's Senior Officer the total advisory fees for such variable The discussion below serves as a (discussed below) only considered Fund insurance fund were above those for the summary of the Senior Officer's performance through the most recent calendar Fund; and (iv) comparable to or below the independent written evaluation and year, the Board also reviewed more recent total advisory fee rates for three recommendation to the Board in connection Fund performance, which did not change their separately managed accounts/wrap accounts therewith, as well as a discussion of the conclusions. managed by an AIM affiliate with material factors and the conclusions with investment strategies comparable to those respect thereto that formed the basis for - The performance of the Fund relative to of the Fund and above the total advisory the Board's approval of the Advisory indices. The Board reviewed the performance fee rates for 39 separately managed Agreement. After consideration of all of of the Fund during the past one and three accounts/wrap accounts managed by an AIM the factors below and based on its calendar years against the performance of affiliate with investment strategies informed business judgment, the Board the Lipper Variable Underlying Fund comparable to those of the Fund. The determined that the Advisory Agreement is Large-Cap Value Index. The Board noted that Board noted that AIM has agreed to waive in the best interests of the Fund and its the Fund's performance in such periods was advisory fees of the Fund and to limit shareholders and that the compensation to comparable to the performance of such Index. the Fund's total operating expenses, as AIM under the Advisory Agreement is fair Based on this review and after taking discussed below. Based on this review, and reasonable and would have been account of all of the other factors that the the Board concluded that the advisory fee obtained through arm's length Board considered in determining whether to rate for the Fund under the Advisory negotiations. continue the Advisory Agreement for the Agreement was fair and reasonable. Fund, the Board concluded that no changes Unless otherwise stated, information should be made to the Fund and that it was - Fees relative to those of comparable presented below is as of June 27, 2006 and not necessary to change the Fund's portfolio funds with other advisors. The Board does not reflect any changes that may have management team at this time. Although the reviewed the advisory fee rate for the occurred since June 27, 2006, including independent written evaluation of the Fund under the Advisory Agreement. The but not limited to changes to the Fund's Board compared effective contractual performance, advisory fees, expense advisory fee rates at a common asset limitations and/or fee waivers. level at the end of the past calendar year and noted that the Fund's rate was comparable to the median rate of the funds advised by other advisors (continued)
7
AIM V.I. BASIC VALUE FUND with investment strategies comparable to exemptive order. The Board found that the - Benefits of soft dollars to AIM. The those of the Fund that the Board reviewed. Fund may realize certain benefits upon Board considered the benefits realized by The Board noted that AIM has agreed to investing cash balances in AIM advised money AIM as a result of brokerage transactions waive advisory fees of the Fund and to market funds, including a higher net return, executed through "soft dollar" limit the Fund's total operating expenses, increased liquidity, increased arrangements. Under these arrangements, as discussed below. Based on this review, diversification or decreased transaction brokerage commissions paid by the Fund the Board concluded that the advisory fee costs. The Board also found that the Fund and/or other funds advised by AIM are rate for the Fund under the Advisory will not receive reduced services if it used to pay for research and execution Agreement was fair and reasonable. invests its cash balances in such money services. This research may be used by market funds. The Board noted that, to the AIM in making investment decisions for - Expense limitations and fee waivers. The extent the Fund invests uninvested cash in the Fund. The Board concluded that such Board noted that AIM has contractually affiliated money market funds, AIM has arrangements were appropriate. agreed to waive advisory fees of the Fund voluntarily agreed to waive a portion of the through December 31, 2009 to the extent advisory fees it receives from the Fund - AIM's financial soundness in light of necessary so that the advisory fees attributable to such investment. The Board the Fund's needs. The Board considered payable by the Fund do not exceed a further determined that the proposed whether AIM is financially sound and has specified maximum advisory fee rate, which securities lending program and related the resources necessary to perform its maximum rate includes breakpoints and is procedures with respect to the lending Fund obligations under the Advisory Agreement, based on net asset levels. The Board is in the best interests of the lending Fund and concluded that AIM has the financial considered the contractual nature of this and its respective shareholders. The Board resources necessary to fulfill its fee waiver and noted that it remains in therefore concluded that the investment of obligations under the Advisory Agreement. effect until December 31, 2009. The Board cash collateral received in connection with also noted that AIM has contractually the securities lending program in the money - Historical relationship between the agreed to waive fees and/or limit expenses market funds according to the procedures is Fund and AIM. In determining whether to of the Fund through April 30, 2008 so that in the best interests of the lending Fund continue the Advisory Agreement for the total annual operating expenses are and its respective shareholders. Fund, the Board also considered the prior limited to a specified percentage of relationship between AIM and the Fund, as average daily net assets for each class of - Independent written evaluation and well as the Board's knowledge of AIM's the Fund. The Board considered the recommendations of the Fund's Senior operations, and concluded that it was contractual nature of this fee waiver and Officer. The Board noted that, upon their beneficial to maintain the current noted that it remains in effect until direction, the Senior Officer of the Fund, relationship, in part, because of such April 30, 2008. The Board considered the who is independent of AIM and AIM's knowledge. The Board also reviewed the effect these fee waivers/expense affiliates, had prepared an independent general nature of the non-investment limitations would have on the Fund's written evaluation in order to assist the advisory services currently performed by estimated expenses and concluded that the Board in determining the reasonableness of AIM and its affiliates, such as levels of fee waivers/expense limitations the proposed management fees of the AIM administrative, transfer agency and for the Fund were fair and reasonable. Funds, including the Fund. The Board noted distribution services, and the fees that the Senior Officer's written evaluation received by AIM and its affiliates for - Breakpoints and economies of scale. The had been relied upon by the Board in this performing such services. In addition to Board reviewed the structure of the Fund's regard in lieu of a competitive bidding reviewing such services, the trustees advisory fee under the Advisory Agreement, process. In determining whether to continue also considered the organizational noting that it includes three breakpoints. the Advisory Agreement for the Fund, the structure employed by AIM and its The Board reviewed the level of the Fund's Board considered the Senior Officer's affiliates to provide those services. advisory fees, and noted that such fees, written evaluation and the recommendation Based on the review of these and other as a percentage of the Fund's net assets, made by the Senior Officer to the Board that factors, the Board concluded that AIM and have decreased as net assets increased the Board consider whether the advisory fee its affiliates were qualified to continue because the Advisory Agreement includes waivers for certain equity AIM Funds, to provide non-investment advisory breakpoints. The Board noted that, due to including the Fund, should be simplified. services to the Fund, including the Fund's asset levels at the end of the The Board concluded that it would be administrative, transfer agency and past calendar year and the way in which advisable to consider this issue and reach a distribution services, and that AIM and the advisory fee breakpoints have been decision prior to the expiration date of its affiliates currently are providing structured, the Fund has yet to fully such advisory fee waivers. satisfactory non-investment advisory benefit from the breakpoints. The Board services. noted that AIM has contractually agreed to - Profitability of AIM and its affiliates. waive advisory fees of the Fund through The Board reviewed information concerning - Other factors and current trends. The December 31, 2009 to the extent necessary the profitability of AIM's (and its Board considered the steps that AIM and so that the advisory fees payable by the affiliates') investment advisory and other its affiliates have taken over the last Fund do not exceed a specified maximum activities and its financial condition. The several years, and continue to take, in advisory fee rate, which maximum rate Board considered the overall profitability order to improve the quality and includes breakpoints and is based on net of AIM, as well as the profitability of AIM efficiency of the services they provide asset levels. The Board concluded that the in connection with managing the Fund. The to the Funds in the areas of investment Fund's fee levels under the Advisory Board noted that AIM's operations remain performance, product line Agreement therefore reflect economies of profitable, although increased expenses in diversification, distribution, fund scale and that it was not necessary to recent years have reduced AIM's operations, shareholder services and change the advisory fee breakpoints in the profitability. Based on the review of the compliance. The Board concluded that Fund's advisory fee schedule. profitability of AIM's and its affiliates' these steps taken by AIM have improved, investment advisory and other activities and and are likely to continue to improve, - Investments in affiliated money market its financial condition, the Board concluded the quality and efficiency of the funds. The Board also took into account that the compensation to be paid by the Fund services AIM and its affiliates provide the fact that uninvested cash and cash to AIM under its Advisory Agreement was not to the Fund in each of these areas, and collateral from securities lending excessive. support the Board's approval of the arrangements, if any (collectively, "cash continuance of the Advisory Agreement for balances") of the Fund may be invested in the Fund. money market funds advised by AIM pursuant to the terms of an SEC
8 AIM V.I. Basic Value Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ----------------------------------------------------------------------- COMMON STOCKS & OTHER EQUITY INTERESTS-98.95% ADVERTISING-6.21% Interpublic Group of Cos., Inc. (The)(a) 2,167,752 $ 26,533,284 ----------------------------------------------------------------------- Omnicom Group Inc. 238,670 24,950,562 ======================================================================= 51,483,846 ======================================================================= APPAREL RETAIL-2.01% Gap, Inc. (The) 853,480 16,642,860 ======================================================================= ASSET MANAGEMENT & CUSTODY BANKS-2.03% Bank of New York Co., Inc. (The) 426,976 16,810,045 ======================================================================= BREWERS-2.17% Molson Coors Brewing Co.-Class B 235,096 17,970,738 ======================================================================= BUILDING PRODUCTS-2.52% American Standard Cos. Inc. 455,493 20,884,354 ======================================================================= COMPUTER HARDWARE-2.80% Dell Inc.(a) 926,106 23,236,000 ======================================================================= CONSTRUCTION MATERIALS-3.22% Cemex S.A. de C.V.-ADR (Mexico)(a) 787,079 26,666,237 ======================================================================= CONSUMER ELECTRONICS-1.03% Koninklijke (Royal) Philips Electronics N.V.-New York Shares (Netherlands) 227,109 8,534,756 ======================================================================= DATA PROCESSING & OUTSOURCED SERVICES-4.59% First Data Corp. 920,025 23,479,038 ----------------------------------------------------------------------- Western Union Co. 648,950 14,549,459 ======================================================================= 38,028,497 ======================================================================= ENVIRONMENTAL & FACILITIES SERVICES-2.58% Waste Management, Inc. 582,781 21,428,857 ======================================================================= FOOD RETAIL-1.70% Kroger Co. (The) 320,341 7,390,267 ----------------------------------------------------------------------- Safeway Inc. 194,560 6,723,994 ======================================================================= 14,114,261 ======================================================================= GENERAL MERCHANDISE STORES-2.82% Target Corp. 410,496 23,418,797 ======================================================================= HEALTH CARE DISTRIBUTORS-4.08% Cardinal Health, Inc. 465,533 29,994,291 ----------------------------------------------------------------------- McKesson Corp. 74,941 3,799,509 ======================================================================= 33,793,800 ======================================================================= HOME IMPROVEMENT RETAIL-1.63% Home Depot, Inc. (The) 335,651 13,479,744 =======================================================================
SHARES VALUE -----------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES-6.61% General Electric Co. 575,129 $ 21,400,550 ----------------------------------------------------------------------- Tyco International Ltd. 1,097,050 33,350,320 ======================================================================= 54,750,870 ======================================================================= INSURANCE BROKERS-0.56% Marsh & McLennan Cos., Inc. 152,100 4,663,386 ======================================================================= INVESTMENT BANKING & BROKERAGE-5.50% Merrill Lynch & Co., Inc. 245,573 22,862,846 ----------------------------------------------------------------------- Morgan Stanley 279,121 22,728,823 ======================================================================= 45,591,669 ======================================================================= LIFE SCIENCES TOOLS & SERVICES-2.21% Waters Corp.(a) 374,945 18,361,057 ======================================================================= MANAGED HEALTH CARE-4.18% UnitedHealth Group Inc. 644,970 34,654,238 ======================================================================= MOVIES & ENTERTAINMENT-2.50% Walt Disney Co. (The) 605,015 20,733,864 ======================================================================= MULTI-LINE INSURANCE-0.94% Genworth Financial Inc.-Class A 227,502 7,782,843 ======================================================================= OIL & GAS DRILLING-2.86% Transocean Inc.(a) 292,738 23,679,577 ======================================================================= OIL & GAS EQUIPMENT & SERVICES-4.26% Halliburton Co. 607,075 18,849,679 ----------------------------------------------------------------------- Weatherford International Ltd.(a) 393,880 16,460,245 ======================================================================= 35,309,924 ======================================================================= OTHER DIVERSIFIED FINANCIAL SERVICES-6.67% Citigroup Inc. 437,997 24,396,433 ----------------------------------------------------------------------- JPMorgan Chase & Co. 639,657 30,895,433 ======================================================================= 55,291,866 ======================================================================= PACKAGED FOODS & MEATS-1.70% Unilever N.V. (Netherlands)(b) 515,587 14,084,156 ======================================================================= PHARMACEUTICALS-7.55% Pfizer Inc. 721,082 18,676,024 ----------------------------------------------------------------------- Sanofi-Aventis (France)(b) 237,064 21,832,963 ----------------------------------------------------------------------- Wyeth 432,945 22,045,559 ======================================================================= 62,554,546 ======================================================================= PROPERTY & CASUALTY INSURANCE-2.37% ACE Ltd. 324,516 19,655,934 ======================================================================= REAL ESTATE MANAGEMENT & DEVELOPMENT-0.85% Realogy Corp.(a) 232,395 7,046,216 =======================================================================
AIM V.I. Basic Value Fund
SHARES VALUE ----------------------------------------------------------------------- SEMICONDUCTOR EQUIPMENT-1.79% Novellus Systems, Inc.(a) 431,501 $ 14,852,265 ======================================================================= SPECIALIZED CONSUMER SERVICES-1.18% H&R Block, Inc. 424,800 9,787,392 ======================================================================= SYSTEMS SOFTWARE-4.35% CA Inc. 1,001,964 22,694,485 ----------------------------------------------------------------------- Microsoft Corp. 446,613 13,335,864 ======================================================================= 36,030,349 =======================================================================
SHARES VALUE -----------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE-3.48% Fannie Mae 485,345 $ 28,824,640 ======================================================================= Total Common Stocks & Other Equity Interests (Cost $587,386,627) 820,147,584 ======================================================================= MONEY MARKET FUNDS-1.59% Liquid Assets Portfolio-Institutional Class(c) 6,586,888 6,586,888 ----------------------------------------------------------------------- Premier Portfolio-Institutional Class(c) 6,586,888 6,586,888 ======================================================================= Total Money Market Funds (Cost $13,173,776) 13,173,776 ======================================================================= TOTAL INVESTMENTS-100.54% (Cost $600,560,403) 833,321,360 ======================================================================= OTHER ASSETS LESS LIABILITIES-(0.54)% (4,511,978) ======================================================================= NET ASSETS-100.00% $828,809,382 _______________________________________________________________________ =======================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) Non-income producing security. (b) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $35,917,119, which represented 4.33% of the Fund's Net Assets. See Note 1A. (c) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Basic Value Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $587,386,627) $820,147,584 ------------------------------------------------------------- Investments in affiliated money market funds (cost $13,173,776) 13,173,776 ------------------------------------------------------------- Total investments (cost $600,560,403) 833,321,360 ------------------------------------------------------------- Foreign currencies, at value (cost $30,932) 31,185 ------------------------------------------------------------- Receivables for: Fund shares sold 369,918 ------------------------------------------------------------- Dividends 929,688 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 20,163 ============================================================= Total assets 834,672,314 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 4,364,083 ------------------------------------------------------------- Fund shares reacquired 574,307 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 58,357 ------------------------------------------------------------- Accrued administrative services fees 594,907 ------------------------------------------------------------- Accrued distribution fees -- Series II 211,628 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 5,587 ------------------------------------------------------------- Accrued transfer agent fees 7,176 ------------------------------------------------------------- Accrued operating expenses 46,887 ============================================================= Total liabilities 5,862,932 ============================================================= Net assets applicable to shares outstanding $828,809,382 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $554,432,588 ------------------------------------------------------------- Undistributed net investment income 3,491,769 ------------------------------------------------------------- Undistributed net realized gain from investment securities and foreign currencies 38,122,717 ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 232,762,308 ============================================================= $828,809,382 _____________________________________________________________ ============================================================= NET ASSETS: Series I $489,351,956 _____________________________________________________________ ============================================================= Series II $339,457,426 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 36,642,765 _____________________________________________________________ ============================================================= Series II 25,642,540 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 13.35 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 13.24 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $202,862) $ 11,563,595 ------------------------------------------------------------- Dividends from affiliated money market funds 843,504 ============================================================= Total investment income 12,407,099 ============================================================= EXPENSES: Advisory fees 5,871,702 ------------------------------------------------------------- Administrative services fees 2,219,812 ------------------------------------------------------------- Custodian fees 93,321 ------------------------------------------------------------- Distribution fees -- Series II 851,531 ------------------------------------------------------------- Transfer agent fees 42,976 ------------------------------------------------------------- Trustees' and officer's fees and benefits 39,078 ------------------------------------------------------------- Other 123,330 ============================================================= Total expenses 9,241,750 ============================================================= Less: Fees waived and expense offset arrangements (402,057) ============================================================= Net expenses 8,839,693 ============================================================= Net investment income 3,567,406 ============================================================= REALIZED AND UNREALIZED GAIN FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain from: Investment securities (includes net gains from securities sold to affiliates of $212,589) 40,013,801 ------------------------------------------------------------- Foreign currencies 20,938 ============================================================= 40,034,739 ============================================================= Change in net unrealized appreciation of: Investment securities 57,600,955 ------------------------------------------------------------- Foreign currencies 1,119 ============================================================= 57,602,074 ============================================================= Net gain from investment securities and foreign currencies 97,636,813 ============================================================= Net increase in net assets resulting from operations $101,204,219 _____________________________________________________________ =============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Basic Value Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 3,567,406 $ 2,343,966 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 40,034,739 34,203,699 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities and foreign currencies 57,602,074 9,606,598 ========================================================================================== Net increase in net assets resulting from operations 101,204,219 46,154,263 ========================================================================================== Distributions to shareholders from net investment income: Series I (1,857,288) (426,072) ------------------------------------------------------------------------------------------ Series ll (415,065) -- ========================================================================================== Total distributions from net investment income (2,272,353) -- ========================================================================================== Distributions to shareholders from net realized gains: Series l (20,535,697) (5,437,294) ------------------------------------------------------------------------------------------ Series ll (14,423,526) (4,139,818) ========================================================================================== Total distributions from net realized gains (34,959,223) (9,577,112) ========================================================================================== Decrease in net assets resulting from distributions (37,231,576) (10,003,184) ========================================================================================== Share transactions-net: Series l (34,896,912) (30,575,554) ------------------------------------------------------------------------------------------ Series ll (50,991,677) (5,292,288) ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (85,888,589) (35,867,842) ========================================================================================== Net increase (decrease) in net assets (21,915,946) 283,237 ========================================================================================== NET ASSETS: Beginning of year 850,725,328 850,442,091 ========================================================================================== End of year (including undistributed net investment income of $3,491,769 and $2,175,778, respectively) $828,809,382 $850,725,328 __________________________________________________________________________________________ ==========================================================================================
NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Basic Value Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). AIM V.I. Basic Value Fund Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these AIM V.I. Basic Value Fund arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $500 million 0.725% -------------------------------------------------------------------- Next $500 million 0.70% -------------------------------------------------------------------- Next $500 million 0.675% -------------------------------------------------------------------- Over $1.5 billion 0.65% ___________________________________________________________________ ====================================================================
Through December 31, 2009, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.695% -------------------------------------------------------------------- Next $250 million 0.67% -------------------------------------------------------------------- Next $500 million 0.645% -------------------------------------------------------------------- Next $1.5 billion 0.62% -------------------------------------------------------------------- Next $2.5 billion 0.595% -------------------------------------------------------------------- Next $2.5 billion 0.57% -------------------------------------------------------------------- Next $2.5 billion 0.545% -------------------------------------------------------------------- Over $10 billion 0.52% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit AIM V.I. Basic Value Fund to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $393,306. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $198,820 for accounting and fund administrative services and reimbursed $2,020,992 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $3,971,140 $ 97,595,667 $ (94,979,919) $ -- $ 6,586,888 $421,482 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 54,638,652 (48,051,764) -- 6,586,888 235,297 -- ---------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 3,971,140 62,646,682 (66,617,822) -- -- 186,725 -- ================================================================================================================================== Total Investments in Affiliates $7,942,280 $214,881,001 $(209,649,505) $ -- $13,173,776 $843,504 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $1,290,319, which resulted in net realized gains of $212,589, and securities purchases of $8,027,233. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $8,751. AIM V.I. Basic Value Fund NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $6,726 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $ 4,476,018 $ 4,240,393 ---------------------------------------------------------------------------------------- Long-term capital gain 32,755,558 5,762,791 ======================================================================================== Total distributions $37,231,576 $10,003,184 ________________________________________________________________________________________ ========================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 3,959,969 ---------------------------------------------------------------------------- Undistributed long-term gain 40,654,668 ---------------------------------------------------------------------------- Net unrealized appreciation -- investments 229,817,509 ---------------------------------------------------------------------------- Temporary book/tax differences (55,352) ---------------------------------------------------------------------------- Shares of beneficial interest 554,432,588 ============================================================================ Total net assets $828,809,382 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis net unrealized appreciation on investments amount includes appreciation on foreign currencies of $1,351. AIM V.I. Basic Value Fund The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $123,749,507 and $232,339,862, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------ Aggregate unrealized appreciation of investment securities $237,587,516 ------------------------------------------------------------------------------ Aggregate unrealized (depreciation) of investment securities (7,771,358) ============================================================================== Net unrealized appreciation of investment securities $229,816,158 ______________________________________________________________________________ ============================================================================== Cost of investments for tax purposes is $603,505,202.
NOTE 10-- RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions on December 31, 2006, undistributed net investment income was increased by $20,938 and undistributed net realized gain was decreased by $20,938. This reclassification had no effect on the net assets of the Fund. NOTE 11--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006(A) 2005 ---------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------- Sold: Series I 1,696,765 $ 21,715,334 8,650,711 $102,288,763 ------------------------------------------------------------------------------------------------------------------------- Series II 7,249,058 88,895,732 5,591,052 65,583,748 ========================================================================================================================= Issued as reinvestment of dividends: Series I 1,691,639 22,363,469 470,853 5,857,415 ------------------------------------------------------------------------------------------------------------------------- Series II 1,131,836 14,838,368 335,752 4,139,818 ========================================================================================================================= Reacquired: Series I (6,148,598) (78,975,715) (11,690,247) (138,721,732) ------------------------------------------------------------------------------------------------------------------------- Series II (12,371,865) (154,725,777) (6,368,816) (75,015,854) ========================================================================================================================= (6,751,165) $ (85,888,589) (3,010,695) $(35,867,842) _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in aggregate they own 63% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 12--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Basic Value Fund NOTE 13--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ---------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 12.37 $ 11.84 $ 10.66 $ 7.98 $ 10.25 ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.07(a) 0.05 0.02 0.00 0.02(a) ------------------------------------------------------------------------------------------------------------------------ Net gains (losses) on securities (both realized and unrealized) 1.54 0.63 1.16 2.68 (2.29) ======================================================================================================================== Total from investment operations 1.61 0.68 1.18 2.68 (2.27) ======================================================================================================================== Less distributions: Dividends from net investment income (0.05) (0.01) -- (0.00) (0.00) ------------------------------------------------------------------------------------------------------------------------ Distributions from net realized gains (0.58) (0.14) -- -- -- ======================================================================================================================== Total distributions (0.63) (0.15) -- (0.00) (0.00) ======================================================================================================================== Net asset value, end of period $ 13.35 $ 12.37 $ 11.84 $ 10.66 $ 7.98 ________________________________________________________________________________________________________________________ ======================================================================================================================== Total return(b) 13.12% 5.74% 11.07% 33.63% (22.15)% ________________________________________________________________________________________________________________________ ======================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $489,352 $487,332 $496,837 $309,384 $97,916 ________________________________________________________________________________________________________________________ ======================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.97%(c) 0.97% 1.02% 1.04% 1.16% ------------------------------------------------------------------------------------------------------------------------ Without fee waivers and/or expense reimbursements 1.02%(c) 1.02% 1.02% 1.04% 1.16% ======================================================================================================================== Ratio of net investment income to average net assets 0.54%(c) 0.38% 0.17% 0.01% 0.18% ________________________________________________________________________________________________________________________ ======================================================================================================================== Portfolio turnover rate 15% 16% 14% 18% 22% ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $480,344,970.
SERIES II ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.26 $ 11.76 $ 10.61 $ 7.96 $ 10.25 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.04(a) 0.02 (0.01) (0.02) (0.01)(a) ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.54 0.62 1.16 2.67 (2.28) ========================================================================================================================= Total from investment operations 1.58 0.64 1.15 2.65 (2.29) ========================================================================================================================= Less distributions: Dividends from net investment income (0.02) -- -- (0.00) (0.00) ------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.58) (0.14) -- -- -- ========================================================================================================================= Total distributions (0.60) (0.14) -- (0.00) (0.00) ========================================================================================================================= Net asset value, end of period $ 13.24 $ 12.26 $ 11.76 $ 10.61 $ 7.96 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(b) 12.94% 5.43% 10.84% 33.29% (22.34)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $339,457 $363,393 $353,605 $253,877 $104,597 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.22%(c) 1.22% 1.27% 1.29% 1.41% ------------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.27%(c) 1.27% 1.27% 1.29% 1.41% ========================================================================================================================= Ratio of net investment income (loss) to average net assets 0.29%(c) 0.13% (0.08)% (0.24)% (0.07)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 15% 16% 14% 18% 22% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $340,612,509. AIM V.I. Basic Value Fund NOTE 14--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Basic Value Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Basic Value Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Basic Value Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Basic Value Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $32,755,558 Corporate Dividends Received Deduction* 100%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Basic Value Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Basic Value Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. CAPITAL APPRECIATION FUND LARGE-CAP GROWTH Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's [COVER GLOBE IMAGE] Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, AIM V.I. CAPITAL APPRECIATION FUND scroll down and click on AIM Funds Proxy Policy. seeks to achieve growth of capital. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AS Fund from the drop-down menu. The information is OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. also available on the SEC Web site, sec.gov. ========================================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ========================================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. CAPITAL APPRECIATION FUND ========================================================================================== Stocks ranked highest by our PER FORMANCE SUMMARY quantitative model are the primary focus of our fundamental research, which seeks For the year ended December 31, 2006, AIM V.I. Capital Appreciation Fund produced positive to determine the company's earnings returns but underperformed the S&P 500 --Registered Trademark-- Index and the Russell 1000 drivers and to identify potential --Registered Trademark-- Growth Index. upside-to-earnings estimates. Our team meets with company management to The Fund underperformed its broad market index and its style-specific index largely evaluate products and services and the due to stock selection in the health care and information technology (IT) sectors. The quality of management. We also analyze Fund's holdings generally underperformed those of the indexes in each of these sectors. relevant trends within the respective Overweight positions in these two sectors also detracted from the Fund's performance industry, as well evaluate the relative to the S&P 500 Index. competitive landscape. We believe stocks that pass our quantitative and Your Fund's long-term performance appears on pages 4 - 5. fundamental screens are more likely to outperform over time. FUND VS. INDEXES We construct the portfolio using a TOTAL RETURNS, 12/31/05 - 12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF VARIABLE bottom-up strategy -- focusing on stocks PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. rather than industries or sectors. While there are no formal sector guidelines or Series I Shares 6.30% constraints, internal controls and Series II Shares 6.06 proprietary software help us monitor S&P 500 Index (Broad Market Index) 15.78 risk levels and sector concentration. Russell 1000 Growth Index (Style-Specific Index) 9.07 Lipper Multi-Cap Growth Funds Index (Peer Group Index) 9.21 Our sell process is designed to SOURCE: LIPPER INC. avoid high-risk situations we believe ========================================================================================== lead to underperformance, including: HOW WE INVEST - Earnings. We focus on companies exhibiting - Deteriorating business prospects. strong growth in revenues, earnings and cash We believe a growth investment strategy is flows. - Extended valuation. an essential component of a diversified portfolio. - Quality. We seek companies with - Slowing earnings growth. sustainable earnings growth and management Our investment process combines teams with efficient capital allocation that - Weakened balance sheet and cash flow quantitative and fundamental analysis to creates long-term value for shareholders. statement. uncover companies exhibiting long-term, sustainable earnings and cash flow growth - Valuation. We focus on companies that are MARKET CONDITIONS AND YOUR FUND that is not yet reflected in investor attractively valued given their growth expectations or equity valuations. potential. Domestic equities posted solid returns during the 12-month reporting period, Our quantitative model ranks companies - Risk assessment. We seek to avoid with several major market indexes based on factors we have found to be highly high-risk companies as defined below. reaching near-multiyear highs. Strong correlated with outperformance in the growth economic growth, favorable corporate universe, including: earnings results and continued benign inflation supported equities, despite high energy prices, a
==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector Information Technology 27.7% 1.Pharmaceuticals 8.5% 1. Cisco Systems, Inc. 2.8% Health Care 16.4 2 Aerospace & Defense 6.4 2. Amdocs Ltd. 2.3 Industrials 14.7 3.Investment Banking & Brokerage 5.8 3. Apple Computer, Inc. 2.2 Consumer Discretionary 13.4 4.Computer Hardware 5.1 4. JPMorgan Chase & Co. 2.0 Financials 11.8 5 Communications Equipment 5.1 5. Microsoft Corp. 2.0 Energy 5.1 6. Goldman Sachs Group, Inc. (The) 2.0 Consumer Staples 3.3 Total Net Assets $1.58 billion 7. Roche Holding A.G. (Switzerland) 2.0 Materials 3.2 8. Hewlett-Packard Co. 1.8 Telecommunication Services 2.2 Total Number of Holdings* 95 9. Merrill Lynch & Co., Inc. 1.8 Money Market Funds Plus 10. Health Net Inc. 1.7 Other Assets Less Liabilities 2.2 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
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AIM V.I. CAPITAL APPRECIATION FUND slowing housing market and the U.S. Federal Some of the underperformance in the Lanny H. Sachnowitz Reserve Board's (the Fed) tightening health care and IT sectors was offset by [SACHNOWITZ Senior portfolio manager, campaign. outperformance in other sectors, including PHOTO] is lead manager of AIM industrials, financials and materials. The V.I. Capital Appreciation Although mixed signals from the Fed Fund outperformed the Russell 1000 Growth Fund. He joined AIM in 1987 as a money created some market volatility in May and Index by the widest margin in the market trader and research analyst. In June, the market began to rally when the Fed industrials sector due mostly to strong 1990, Mr. Sachnowitz's trading left interest rates unchanged at several stock selection in several industries that responsibilities were expanded to meetings beginning in August. In addition, benefited from solid global economic include head of equity trading. He was the price of crude oil and other commodities expansion. Many of the better-performing named a portfolio manager in 1991. Mr. stabilized. industrials stocks were from the electrical Sachnowitz earned a B.S. in finance from equipment industry, including Fund holdings the University of Southern California For the year, small-cap stocks led the EMERSON ELECTRIC and ABB LTD. and an M.B.A. from the University of market higher, large- and mid-cap stocks Houston. also had double-digit returns. Additionally, In the materials sector, the Fund's value stocks outperformed growth stocks. outperformance was driven by an overweight Kirk L. Anderson Positive performance was broad among S&P 500 position in metals and mining stocks and [ANDERSON Portfolio manager, is sectors, with the highest returns in stock selection in the chemicals industry. PHOTO] manager of AIM V.I. telecommunication services, energy, Many metals and mining stocks, including Capital Appreciation utilities and financials. Brazilian steel holding COMPANHIA VALE DO Fund. He joined AIM in 1994 and was RIO DOCE, performed well due to rising named a portfolio manager in 2003. Mr. The Fund benefited from positive commodity prices. Chemical holding SYNGENTA Anderson earned a B.A. in political absolute performance in eight of 10 market also performed well. science from Texas A&M University and an sectors, with the greatest positive impact M.S. in finance from the University of on performance coming from holdings in the Our investment process resulted in an Houston. industrials, financials and consumer overweight position in the financials discretionary sectors. Overall, the Fund sector. Fund holdings that contributed to James G. Birdsall underperformed the Russell 1000 Growth performance included GOLDMAN SACHS, MERRILL Portfolio manager, is Index, largely as a result of stock LYNCH and MORGAN STANLEY. Favorable capital [BIRDSALL manager of AIM V.I. selection in two sectors -- health care and markets and solid merger and acquisition PHOTO] Capital Appreciation IT. activity continued to drive these stocks Fund. He has been during the reporting period. associated with AIM since 1995 and was In the health care sector, much of the named a portfolio manager in 1999. Mr. Fund's underperformance was due to weak We reduced our exposure to the energy, Birdsall earned a B.B.A. with a performance by several health care provider materials and health care sectors due to concentration in finance from Stephen F. and services holdings, including insurers less upside-to-earnings estimates. Proceeds Austin State University before earning Aetna and Cigna. We sold both stocks from these sales were invested primarily in an M.B.A with a concentration in finance following disappointing earnings results and attractive opportunities in the and international business from the reduced confidence in their management telecommunication services and IT sectors. University of St. Thomas. teams. Additionally, eye-care company Alcon was a significant detractor from Fund In closing Robert J. Lloyd performance, and we sold this holding before Chartered Financial the close of the year. We are pleased to have provided positive [LLOYD Analyst, portfolio returns for the year and thank you for your PHOTO] manager, is manager of Despite posting positive IT sector commitment to AIM V.I. Capital Appreciation AIM V.I. Capital returns, the Fund also underperformed the Fund. Appreciation Fund. He joined AIM in 2000 Russell 1000 Growth Index in this sector. and was named portfolio manager in 2001. Underperformance resulted largely from The views and opinions expressed in He served eight years in the U.S. Navy weakness in software holdings RED HAT and management's discussion of Fund performance as a Naval Flight Officer flying the CITRIX SYSTEMS, semiconductor holdings PMC are those of A I M Advisors, Inc. These S-3B Viking. Mr. Lloyd earned a B.B.A. SIERRA and ANALOG DEVICES and internet views and opinions are subject to change at degree from the University of Notre Dame services firm EBAY. All of these holdings any time based on factors such as market and and an M.B.A. from the University of were subsequently sold. However, some of economic conditions. These views and Chicago. this underperformance was offset by opinions may not be relied upon as contributions from other IT holdings, investment advice or recommendations, or as Assisted by the Large/Multi-Cap Growth including CISCO SYSTEMS, FREESCALE an offer for a particular security. The Team SEMICONDUCTOR and AMDOCS. Freescale's stock information is not a complete analysis of price appreciated dramatically following the every aspect of any market, country, announcement that a consortium of private industry, security or the Fund. Statements equity firms was acquiring the company. We of fact are from sources considered subsequently sold the stock to lock in our reliable, but A I M Advisors, Inc. makes no gains. representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of FOR A DISCUSSION OF THE RISKS OF future results, these insights may help you INVESTING IN YOUR FUND, INDEXES USED IN understand our investment management THIS REPORT AND YOUR FUND'S LONG-TERM philosophy. PERFORMANCE, PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. CAPITAL APPRECIATION FUND ============================================ AVERAGE ANNUAL TOTAL RETURNS SERIES II SHARES INCEPTION DATE IS AUGUST AIM V.I. CAPITAL APPRECIATION 21, 2001. RETURNS SINCE THAT DATE ARE FUND, A SERIES PORTFOLIO OF AIM VARIABLE As of 12/31/06 HISTORICAL. ALL OTHER RETURNS ARE THE INSURANCE FUNDS, IS CURRENTLY OFFERED SERIES I SHARES BLENDED RETURNS OF THE HISTORICAL THROUGH INSURANCE COMPANIES ISSUING Inception (5/5/93) 8.79% PERFORMANCE OF SERIES II SHARES SINCE VARIABLE PRODUCTS. YOU CANNOT PURCHASE 10 Years 4.93 THEIR INCEPTION AND THE RESTATED SHARES OF THE FUND DIRECTLY. 5 Years 3.86 HISTORICAL PERFORMANCE OF SERIES I 1 Year 6.30 SHARES (FOR PERIODS PRIOR TO INCEPTION OF PERFORMANCE FIGURES GIVEN SERIES II SHARES) ADJUSTED TO REFLECT THE REPRESENT THE FUND AND ARE NOT INTENDED SERIES II SHARES RULE 12B-1 FEES APPLICABLE TO SERIES II TO REFLECT ACTUAL VARIABLE PRODUCT 10 Years 4.67% SHARES. THE INCEPTION DATE OF SERIES I VALUES. THEY DO NOT REFLECT SALES 5 Years 3.61 SHARES IS MAY 5, 1993. THE PERFORMANCE OF CHARGES, EXPENSES AND FEES ASSESSED IN 1 Year 6.06 THE FUND'S SERIES I AND SERIES II SHARE CONNECTION WITH A VARIABLE PRODUCT. ============================================ CLASSES WILL DIFFER PRIMARILY DUE TO SALES CHARGES, EXPENSES AND FEES, WHICH DIFFERENT CLASS EXPENSES. ARE DETERMINED BY THE VARIABLE PRODUCT ============================================ ISSUERS, WILL VARY AND WILL LOWER THE CUMULATIVE TOTAL RETURNS TOTAL RETURN. THE PERFORMANCE DATA QUOTED REPRESENT 6 months ended 12/31/06 PAST PERFORMANCE AND CANNOT GUARANTEE PER NASD REQUIREMENTS, THE MOST Series I Shares 6.69% COMPARABLE FUTURE RESULTS; CURRENT RECENT MONTH-END PERFORMANCE DATA AT THE Series II Shares 6.58 PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE FUND LEVEL, EXCLUDING VARIABLE PRODUCT CONTACT YOUR VARIABLE PRODUCT ISSUER OR CHARGES, IS AVAILABLE ON THIS AIM FINANCIAL ADVISOR FOR THE MOST RECENT AUTOMATED INFORMATION LINE, MONTH-END VARIABLE PRODUCT PERFORMANCE. 866-702-4402. AS MENTIONED ABOVE, FOR PERFORMANCE FIGURES REFLECT FUND EXPENSES, THE MOST RECENT MONTH-END PERFORMANCE REINVESTED DISTRIBUTIONS AND CHANGES IN NET INCLUDING VARIABLE PRODUCT CHARGES, ASSET VALUE. INVESTMENT RETURN AND PRINCIPAL PLEASE CONTACT YOUR VARIABLE PRODUCT VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE A ISSUER OR FINANCIAL ADVISOR. GAIN OR LOSS WHEN YOU SELL SHARES. ====================================================================================================================================
PRINCIPAL RISKS OF INVESTING IN THE FUND risk management purposes, the Fund may not is a trademark/service mark of the Frank achieve its investment objective. Russell Company. Russell --REGISTERED Prices of equity securities change in TRADEMARK-- is a trademark of the Frank response to many factors including the If the seller of a repurchase Russell Company. historical and prospective earnings of the agreement in which the Fund invests defaults issuer, the value of its assets, general on its obligation or declares bankruptcy, The unmanaged LIPPER MULTI-CAP economic conditions, interest rates, the Fund may experience delays in selling GROWTH FUNDS INDEX represents an average investor perceptions and market liquidity. the securities underlying the repurchase of the performance of the 30 largest agreement. multi-capitalization growth funds Investing in a fund that invests in tracked by Lipper Inc., an independent smaller companies involves risks not There is no guarantee that the mutual fund performance monitor. associated with investing in more investment techniques and risk analyses used established companies, such as business by the Fund's portfolio managers will In conjunction with the annual risk, stock price fluctuations and produce the desired results. prospectus update on or about May 1, illiquidity. 2007, the AIM V.I. Capital Appreciation ABOUT INDEXES USED IN THIS REPORT Fund prospectus will be amended to Foreign securities have additional reflect that the Fund has elected to use risks, including exchange rate changes, The unmanaged STANDARD & POOR'S Composite the Lipper Variable Underlying Funds political and economic upheaval, the Index of 500 Stocks (the S&P 500 Index) is (VUF) Multi-Cap Growth Funds Category relative lack of information about these an index of common stocks frequently used as Average as its peer group rather than companies, relatively low market liquidity a general measure of U.S. stock market the Lipper Multi-Cap Growth Funds Index. and the potential lack of strict financial performance. The Lipper VUF Multi-Cap Growth Funds and accounting controls and standards. Category Average, recently published by The unmanaged RUSSELL 1000 GROWTH Lipper Inc., comprises the underlying Investing in emerging markets involves INDEX is a subset of the unmanaged RUSSELL funds in each variable insurance greater risk than investing in more 1000 --Registered Trademark-- Index, which category and does not include mortality established markets. The risks include the represents the performance of the stocks of and expense fees. relatively smaller size and lesser liquidity large-capitalization companies; the Growth of these markets, high inflation rates, subset measures the performance of Russell The Fund is not managed to track adverse political developments and lack of 1000 companies with higher price/book ratios the performance of any particular index, timely information. and higher forecasted growth values. The including the indexes defined here, and Russell 1000 Growth Index consequently, the performance of the To the extent the Fund holds cash or Fund may deviate significantly from the cash equivalents rather than equity performance of the indexes. securities for Continued on page 5
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AIM V.I. CAPITAL APPRECIATION FUND Past performance cannot guarantee comparable value of an investment, is constructed with future results. each segment representing a percent change in the value of the investment. In this This chart, which is a logarithmic chart, each segment represents a doubling, chart, presents the fluctuations in the or 100% change, in the value of the value of the Fund and its indexes. We investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same size effective than other types of charts in as the space between $10,000 and $20,000, illustrating changes in value during the and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ==================================================================================================================================== Continued from page 4 A direct investment cannot be made in principles require adjustments to be made to Industry classifications used in an index. Unless otherwise indicated, index the net assets of the Fund at period end for this report are generally according to results include reinvested dividends, and financial reporting purposes, and as such, the Global Industry Classification they do not reflect sales charges. the net asset values for shareholder Standard, which was developed by and is Performance of an index of funds reflects transactions and the returns based on those the exclusive property and a service fund expenses; performance of a market index net asset values may differ from the net mark of Morgan Stanley Capital does not. asset values and returns reported in the International Inc. and Standard & Financial Highlights. Additionally, the Poor's. OTHER INFORMATION returns and net asset values shown throughout this report are at the Fund level The Chartered Financial Analyst The returns shown in management's discussion only and do not include variable product --Registered Trademark-- (CFA of Fund performance are based on net asset issuer charges. If such charges were --Registered Trademark--) designation is values calculated for shareholder included, the total returns would be lower. a globally recognized standard for transactions. Generally accepted accounting measuring the competence and integrity of investment professionals.
5
============================================================================================================ [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT INDEX DATA FROM 4/30/93, FUND DATA FROM 5/5/93 AIM V.I. CAPITAL APPRECIATION FUND LIPPER MULTI-CAP DATE -SERIES I SHARES S&P 500 INDEX RUSSELL 1000 GROWTH INDEX GROWTH FUNDS INDEX 4/30/93 $10000 $10000 $10000 5/93 $10320 10267 10350 10544 6/93 10200 10297 10256 10645 7/93 10390 10255 10072 10648 8/93 10990 10644 10486 11184 9/93 11370 10562 10409 11422 10/93 11440 10780 10698 11555 11/93 11261 10678 10626 11206 12/93 11950 10807 10809 11583 1/94 12590 11174 11060 11968 2/94 12831 10871 10857 11776 3/94 11820 10398 10332 11144 4/94 11940 10531 10380 11154 5/94 11770 10703 10537 11119 6/94 11099 10441 10225 10657 7/94 11378 10784 10575 10962 8/94 12209 11225 11163 11570 9/94 12239 10950 11012 11391 10/94 12620 11196 11271 11614 11/94 12070 10789 10910 11161 12/94 12249 10949 11092 11256 1/95 12098 11232 11330 11253 2/95 12750 11670 11804 11708 3/95 13343 12013 12149 12089 4/95 13624 12367 12414 12336 5/95 13996 12860 12846 12658 6/95 15101 13159 13342 13428 7/95 16537 13595 13897 14286 8/95 16677 13629 13912 14404 9/95 17259 14204 14553 14801 10/95 16888 14153 14563 14613 11/95 17089 14773 15129 15099 12/95 16621 15058 15216 15052 1/96 16772 15570 15725 15280 2/96 17666 15715 16013 15730 3/96 17647 15866 16033 15823 4/96 18732 16100 16455 16526 5/96 19324 16514 17030 16980 6/96 18601 16577 17053 16615 7/96 17005 15845 16054 15411 8/96 17980 16180 16468 16087 9/96 19346 17090 17667 17131 10/96 19035 17561 17774 17091 11/96 19979 18887 19108 18066 12/96 19547 18513 18734 17739 1/97 20403 19669 20048 18590 2/97 19559 19824 19913 18077 3/97 18362 19011 18835 17144 4/97 18694 20144 20086 17688 5/97 20535 21376 21535 19188 6/97 21180 22326 22397 19908 7/97 23353 24102 24378 21741 8/97 23082 22753 22951 21146 9/97 24190 23998 24080 22484 10/97 22649 23198 23190 21490 11/97 22398 24271 24175 21626 12/97 22192 24687 24446 21810 1/98 21764 24960 25177 21905 2/98 23814 26759 27071 23728 3/98 24609 28129 28150 24885 4/98 25222 28417 28540 25173 5/98 24069 27929 27730 24217 6/98 25039 29063 29428 25461 7/98 24163 28755 29234 24841 8/98 19683 24601 24846 20242 9/98 21346 26178 26755 21701 10/98 22388 28304 28905 22922 11/98 23736 30019 31104 24517 12/98 26480 31748 33909 27218 1/99 26954 33075 35900 28891 2/99 25250 32047 34260 27385 3/99 26386 33329 36064 28944 4/99 27228 34620 36110 29647 5/99 27114 33803 35000 29074 6/99 29006 35674 37452 31108 7/99 28156 34565 36262 30407 8/99 28018 34394 36854 30103 ============================================================================================================
Source: Lipper Inc.
==================================================================================================================================== [MOUNTAIN CHART] 9/99 28206 33452 36080 29930 10/99 30257 35568 38805 32039 11/99 32853 36291 40898 34608 12/99 38300 38425 45152 39834 1/00 37645 36495 43035 39430 2/00 42576 35805 45139 45734 3/00 43619 39305 48369 45554 4/00 40283 38123 46068 41735 5/00 37874 37342 43748 38920 6/00 41456 38261 47064 42780 7/00 41046 37664 45102 41437 8/00 46439 40002 49185 45925 9/00 43834 37891 44533 43135 10/00 40854 37730 42425 40630 11/00 33124 34757 36172 33975 12/00 34124 34928 35027 35033 1/01 35783 36166 37447 35743 2/01 30229 32871 31090 30511 3/01 26910 30790 27706 27241 4/01 29588 33180 31211 30567 5/01 29289 33403 30751 30402 6/01 28759 32590 30039 29861 7/01 27675 32269 29288 28249 8/01 25306 30251 26893 25811 9/01 22120 27809 24208 21975 10/01 23391 28339 25478 23548 11/01 25738 30512 27926 25816 12/01 26180 30780 27873 26218 1/02 25722 30331 27381 25478 2/02 24624 29746 26245 23896 3/02 26119 30865 27152 25321 4/02 24611 28994 24936 23783 5/02 24154 28781 24333 23093 6/02 22465 26732 22082 20940 7/02 20417 24649 20868 18973 8/02 20368 24810 20931 18829 9/02 18789 22116 18759 17369 10/02 20465 24061 20480 18696 11/02 21296 25476 21593 19866 12/02 19801 23980 20101 18399 1/03 19270 23353 19613 18095 2/03 19185 23002 19523 17972 3/03 19450 23225 19887 18258 4/03 20751 25137 21357 19592 5/03 21777 26460 22423 21032 6/03 22053 26798 22732 21275 7/03 22874 27271 23297 21935 8/03 23740 27801 23877 22812 9/03 22945 27507 23621 22372 10/03 24583 29062 24948 23957 11/03 25102 29318 25209 24394 12/03 25625 30854 26081 24909 1/04 26094 31420 26614 25531 2/04 26300 31857 26783 25868 3/04 25856 31376 26286 25790 4/04 25049 30885 25980 24925 5/04 25567 31308 26465 25513 6/04 26158 31916 26795 26060 7/04 24544 30860 25281 24220 8/04 24122 30984 25156 23879 9/04 24834 31319 25395 24800 10/04 25447 31798 25791 25333 11/04 26602 33084 26678 26697 12/04 27326 34209 27724 27715 1/05 26555 33376 26800 26715 2/05 27073 34077 27085 27017 3/05 26410 33475 26591 26446 4/05 25470 32840 26085 25476 5/05 26649 33884 27347 27043 6/05 26710 33933 27246 27189 7/05 28096 35194 28578 28796 8/05 28071 34873 28210 28659 9/05 28854 35155 28340 29121 10/05 28361 34569 28064 28590 11/05 29518 35875 29275 30119 12/05 29739 35888 29183 30244 1/06 31185 36838 29695.7 31805.4 2/06 30789 36938 29649 31277 3/06 31512 37397 30086 31987 4/06 31704 37899 30045 32238 5/06 29837 36810 29027 30353 6/06 29631 36859 28912 30285 7/06 28644 37086 28362 29365 8/06 29272 37967 29247 30095 9/06 30188 38945 30050 30786 10/06 30828 40213 31107 32052 11/06 31540 40976 31724 33037 12/06 31610 41551 31831 33029 ====================================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. CAPITAL APPRECIATION FUND EXAMPLE ACTUAL EXPENSES Fund's actual return. The Fund's actual cumulative total returns at net asset As a shareholder of the Fund, you incur The table below provides information about value after expenses for the six months ongoing costs, including management fees; actual account values and actual expenses. ended December 31, 2006, appear in the distribution and/or service fees (12b-1); You may use the information in this table, table "Cumulative Total Returns" on page and other Fund expenses. This example is together with the amount you invested, to 4. intended to help you understand your ongoing estimate the expenses that you paid over the costs (in dollars) of investing in the Fund period. Simply divide your account value by The hypothetical account values and to compare these costs with ongoing $1,000 (for example, an $8,600 account value and expenses may not be used to estimate costs of investing in other mutual funds. divided by $1,000 = 8.6), then multiply the the actual ending account balance or The example is based on an investment of result by the number in the table under the expenses you paid for the period. You $1,000 invested at the beginning of the heading entitled "Actual Expenses Paid may use this information to compare the period and held for the entire period July During Period" to estimate the expenses you ongoing costs of investing in the Fund 1, 2006, through December 31, 2006. paid on your account during this period. and other funds. To do so, compare this 5% hypothetical example with the 5% The actual and hypothetical expenses HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES hypothetical examples that appear in the in the examples below do not represent the shareholder reports of the other funds. effect of any fees or other expenses The table below also provides information assessed in connection with a variable about hypothetical account values and Please note that the expenses product; if they did, the expenses shown hypothetical expenses based on the Fund's shown in the table are meant to would be higher while the ending account actual expense ratio and an assumed rate of highlight your ongoing costs. Therefore, values shown would be lower. return of 5% per year before expenses, which the hypothetical information is useful is not the in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. =================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $ 1,066.90 $ 4.74 $ 1,020.62 $ 4.63 0.91% Series II 1,000.00 1,065.80 6.04 1,019.36 5.90 1.16
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ================================================================================ 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. CAPITAL APPRECIATION FUND The Board of Trustees of AIM Variable provided by AIM. The Board reviewed the essary to change the Fund's portfolio Insurance Funds (the "Board") oversees the services to be provided by AIM under the management team at this time. Although management of AIM V.I. Capital Appreciation Advisory Agreement. Based on such review, the independent written evaluation of Fund (the "Fund") and, as required by law, the Board concluded that the range of the Fund's Senior Officer (discussed determines annually whether to approve the services to be provided by AIM under the below) only considered Fund performance continuance of the Fund's advisory agreement Advisory Agreement was appropriate and that through the most recent calendar year, with A I M Advisors, Inc. ("AIM"). Based AIM currently is providing services in the Board also reviewed more recent Fund upon the recommendation of the Investments accordance with the terms of the Advisory performance, which did not change their Committee of the Board, at a meeting held on Agreement. conclusions. June 27, 2006, the Board, including all of the independent trustees, approved the - The quality of services to be provided by - Meetings with the Fund's portfolio continuance of the advisory agreement (the AIM. The Board reviewed the credentials and managers and investment personnel. With "Advisory Agreement") between the Fund and experience of the officers and employees of respect to the Fund, the Board is AIM for another year, effective July 1, AIM who will provide investment advisory meeting periodically with such Fund's 2006. services to the Fund. In reviewing the portfolio managers and/or other qualifications of AIM to provide investment investment personnel and believes that The Board considered the factors advisory services, the Board considered such such individuals are competent and able discussed below in evaluating the fairness issues as AIM's portfolio and product review to continue to carry out their and reasonableness of the Advisory Agreement process, various back office support responsibilities under the Advisory at the meeting on June 27, 2006 and as part functions provided by AIM and AIM's equity Agreement. of the Board's ongoing oversight of the and fixed income trading operations. Based Fund. In their deliberations, the Board and on the review of these and other factors, - Overall performance of AIM. The Board the independent trustees did not identify the Board concluded that the quality of considered the overall performance of any particular factor that was controlling, services to be provided by AIM was AIM in providing investment advisory and and each trustee attributed different appropriate and that AIM currently is portfolio administrative services to the weights to the various factors. providing satisfactory services in Fund and concluded that such performance accordance with the terms of the Advisory was satisfactory. One responsibility of the independent Agreement. Senior Officer of the Fund is to manage the - Fees relative to those of clients of process by which the Fund's proposed - The performance of the Fund relative to AIM with comparable investment management fees are negotiated to ensure comparable funds. The Board reviewed the strategies. The Board reviewed the that they are negotiated in a manner which performance of the Fund during the past one, effective advisory fee rate (before is at arms' length and reasonable. To that three and five calendar years against the waivers) for the Fund under the Advisory end, the Senior Officer must either performance of funds advised by other Agreement. The Board noted that this supervise a competitive bidding process or advisors with investment strategies rate was (i) comparable to the effective prepare an independent written evaluation. comparable to those of the Fund. The Board advisory fee rates (before waivers) for The Senior Officer has recommended an noted that the Fund's performance was above two mutual funds advised by AIM with independent written evaluation in lieu of a the median performance of such comparable investment strategies comparable to competitive bidding process and, upon the funds for the one and five year periods and those of the Fund; (ii) below the direction of the Board, has prepared such an below such median performance for the three effective advisory fee rate (before independent written evaluation. Such written year period. Based on this review and after waivers) for a variable insurance fund evaluation also considered certain of the taking account of all of the other factors advised by AIM and offered to insurance factors discussed below. In addition, as that the Board considered in determining company separate accounts with discussed below, the Senior Officer made a whether to continue the Advisory Agreement investment strategies comparable to recommendation to the Board in connection for the Fund, the Board concluded that no those of the Fund; (iii) above the with such written evaluation. changes should be made to the Fund and that effective sub-advisory fee rate for one it was not necessary to change the Fund's offshore fund advised and sub-advised by The discussion below serves as a portfolio management team at this time. AIM affiliates with investment summary of the Senior Officer's independent Although the independent written evaluation strategies comparable to those of the written evaluation and recommendation to the of the Fund's Senior Officer (discussed Fund, although the total advisory fees Board in connection therewith, as well as a below) only considered Fund performance for such offshore fund were above those discussion of the material factors and the through the most recent calendar year, the for the Fund; (iv) above the effective conclusions with respect thereto that formed Board also reviewed more recent Fund sub-advisory fee rates for five variable the basis for the Board's approval of the performance, which did not change their insurance funds sub-advised by an AIM Advisory Agreement. After consideration of conclusions. affiliate and offered to insurance all of the factors below and based on its company separate accounts with informed business judgment, the Board - The performance of the Fund relative to investment strategies comparable to determined that the Advisory Agreement is in indices. The Board reviewed the performance those of the Fund, although the total the best interests of the Fund and its of the Fund during the past one, three and advisory fees for such variable shareholders and that the compensation to five calendar years against the performance insurance funds were above those for the AIM under the Advisory Agreement is fair and of the Lipper Variable Underlying Fund Multi Fund; and (v) above the total advisory reasonable and would have been obtained Cap Growth Index. The Board noted that the fee rate for a separately managed through arm's length negotiations. Fund's performance was below the performance account/wrap account managed by an AIM of such Index for the one and three year affiliate with investment strategies Unless otherwise stated, information periods and comparable to such Index for the comparable to those of the Fund. The presented below is as of June 27, 2006 and five year period. Based on this review and Board noted that AIM has agreed to waive does not reflect any changes that may have after taking account of all of the other advisory fees of the Fund and to limit occurred since June 27, 2006, including but factors that the Board considered in the Fund's total operating expenses, as not limited to changes to the Fund's determining whether to continue the Advisory discussed below. Based on this review, performance, advisory fees, expense Agreement for the Fund, the Board concluded the Board concluded that the advisory limitations and/or fee waivers. that no changes should be made to the Fund fee rate for the Fund under the Advisory and that it was not nec- Agreement was fair and reasonable. - The nature and extent of the advisory services to be - Fees relative to those of comparable funds with other advisors. The Board reviewed the advisory fee rate for the Fund under the Advisory Agreement. The Board compared effective contractual advisory fee rates at a common asset level at the end of the past calendar (continued)
7
AIM V.I. CAPITAL APPRECIATION FUND year and noted that the Fund's rate was realize certain benefits upon investing cash - Benefits of soft dollars to AIM. The below the median rate of the funds advised balances in AIM advised money market funds, Board considered the benefits realized by other advisors with investment strategies including a higher net return, increased by AIM as a result of brokerage comparable to those of the Fund that the liquidity, increased diversification or transactions executed through "soft Board reviewed. The Board noted that AIM has decreased transaction costs. The Board also dollar" arrangements. Under these agreed to waive advisory fees of the Fund found that the Fund will not receive reduced arrangements, brokerage commissions pai and to limit the Fund's total operating services if it invests its cash balances in by the Fund and/or other funds advised expenses, as discussed below. Based on this such money market funds. The Board noted by AIM are used to pay for research and review, the Board concluded that the that, to the extent the Fund invests execution services. This research may be advisory fee rate for the Fund under the uninvested cash in affiliated money market used by AIM in making investment Advisory Agreement was fair and reasonable. funds, AIM has voluntarily agreed to waive a decisions for the Fund. The Board portion of the advisory fees it receives concluded that such arrangements were - Expense limitations and fee waivers. The from the Fund attributable to such appropriate. Board noted that AIM has contractually investment. The Board further determined agreed to waive advisory fees of the Fund that the proposed securities lending program - AIM's financial soundness in light of through December 31, 2009 to the extent and related procedures with respect to the the Fund's needs. The Board considered necessary so that the advisory fees payable lending Fund is in the best interests of the whether AIM is financially sound and has by the Fund do not exceed a specified lending Fund and its respective the resources necessary to perform its maximum advisory fee rate, which maximum shareholders. The Board therefore concluded obligations under the Advisory rate includes breakpoints and is based on that the investment of cash collateral Agreement, and concluded that AIM has net asset levels. The Board considered the received in connection with the securities the financial resources necessary to contractual nature of this fee waiver and lending program in the money market funds fulfill its obligations under the noted that it remains in effect until according to the procedures is in the best Advisory Agreement. December 31, 2009. The Board noted that AIM interests of the lending Fund and its has contractually agreed to waive fees respective shareholders. - Historical relationship between the and/or limit expenses of the Fund through Fund and AIM. In determining whether to April 30, 2008 in an amount necessary to - Independent written evaluation and continue the Advisory Agreement for the limit total annual operating expenses to a recommendations of the Fund's Senior Fund, the Board also considered the specified percentage of average daily net Officer. The Board noted that, upon their prior relationship between AIM and the assets for each class of the Fund. The Board direction, the Senior Officer of the Fund, Fund, as well as the Board's knowledge considered the contractual nature of this who is independent of AIM and AIM's of AIM's operations, and concluded that fee waiver/expense limitation and noted that affiliates, had prepared an independent it was beneficial to maintain the it remains in effect until April 30, 2008. written evaluation in order to assist the current relationship, in part, because The Board considered the effect these fee Board in determining the reasonableness of of such knowledge. The Board also waivers/expense limitations would have on the proposed management fees of the AIM reviewed the general nature of the the Fund's estimated expenses and concluded Funds, including the Fund. The Board noted non-investment advisory services that the levels of fee waivers/expense that the Senior Officer's written evaluation currently performed by AIM and its limitations for the Fund were fair and had been relied upon by the Board in this affiliates, such as administrative, reasonable. regard in lieu of a competitive bidding transfer agency and distribution process. In determining whether to continue services, and the fees received by AIM - Breakpoints and economies of scale. The the Advisory Agreement for the Fund, the and its affiliates for performing such Board reviewed the structure of the Fund's Board considered the Senior Officer's services. In addition to reviewing such advisory fee under the Advisory Agreement, written evaluation and the recommendation services, the trustees also considered noting that it includes one breakpoint. The made by the Senior Officer to the Board that the organizational structure employed by Board reviewed the level of the Fund's the Board consider whether the advisory fee AIM and its affiliates to provide those advisory fees, and noted that such fees, as waivers for certain equity AIM Funds, services. Based on the review of these a percentage of the Fund's net assets, have including the Fund, should be simplified. and other factors, the Board concluded decreased as net assets increased because The Board concluded that it would be that AIM and its affiliates were the Advisory Agreement includes a advisable to consider this issue and reach a qualified to continue to provide breakpoint. The Board noted that AIM has decision prior to the expiration date of non-investment advisory services to the contractually agreed to waive advisory fees such advisory fee waivers. Fund, including administrative, transfer of the Fund through December 31, 2009 to the agency and distribution services, and extent necessary so that the advisory fees - Profitability of AIM and its affiliates. that AIM and its affiliates currently payable by the Fund do not exceed a The Board reviewed information concerning are providing satisfactory specified maximum advisory fee rate, which the profitability of AIM's (and its non-investment advisory services. maximum rate includes breakpoints and is affiliates') investment advisory and other based on net asset levels. The Board activities and its financial condition. The - Other factors and current trends. The concluded that the Fund's fee levels under Board considered the overall profitability Board considered the steps that AIM and the Advisory Agreement therefore reflect of AIM, as well as the profitability of AIM its affiliates have taken over the last economies of scale and that it was not in connection with managing the Fund. The several years, and continue to take, in necessary to change the advisory fee Board noted that AIM's operations remain order to improve the quality and breakpoints in the Fund's advisory fee profitable, although increased expenses in efficiency of the services they provide schedule. recent years have reduced AIM's to the Funds in the areas of investment profitability. Based on the review of the performance, product line - Investments in affiliated money market profitability of AIM's and its affiliates' diversification, distribution, fund funds. The Board also took into account the investment advisory and other activities and operations, shareholder services and fact that uninvested cash and cash its financial condition, the Board concluded compliance. The Board concluded that collateral from securities lending that the compensation to be paid by the Fund these steps taken by AIM have improved, arrangements, if any (collectively, "cash to AIM under its Advisory Agreement was not and are likely to continue to improve, balances") of the Fund may be invested in excessive. the quality and efficiency of the money market funds advised by AIM pursuant services AIM and its affiliates provide to the terms of an SEC exemptive order. The to the Fund in each of these areas, and Board found that the Fund may support the Board's approval of the continuance of the Advisory Agreement for the Fund.
8 AIM V.I. Capital Appreciation Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE -------------------------------------------------------------------------- DOMESTIC COMMON STOCKS-85.20% AEROSPACE & DEFENSE-6.42% Boeing Co. (The) 145,102 $ 12,890,862 -------------------------------------------------------------------------- General Dynamics Corp. 292,679 21,760,684 -------------------------------------------------------------------------- Precision Castparts Corp. 259,082 20,280,939 -------------------------------------------------------------------------- Spirit Aerosystems Holdings Inc.-Class A(a) 575,000 19,245,250 -------------------------------------------------------------------------- United Technologies Corp. 432,982 27,070,034 ========================================================================== 101,247,769 ========================================================================== APPAREL RETAIL-2.13% Aeropostale, Inc.(a) 410,733 12,679,328 -------------------------------------------------------------------------- DSW Inc.-Class A(a)(b) 215,188 8,299,801 -------------------------------------------------------------------------- Limited Brands, Inc. 436,185 12,623,194 ========================================================================== 33,602,323 ========================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-0.75% Carter's, Inc.(a) 462,946 11,805,123 ========================================================================== APPLICATION SOFTWARE-4.10% Adobe Systems Inc.(a) 391,766 16,109,418 -------------------------------------------------------------------------- Amdocs Ltd.(a) 933,250 36,163,437 -------------------------------------------------------------------------- BEA Systems, Inc.(a) 975,000 12,265,500 ========================================================================== 64,538,355 ========================================================================== BIOTECHNOLOGY-2.60% Amgen Inc.(a) 285,988 19,535,840 -------------------------------------------------------------------------- Gilead Sciences, Inc.(a) 329,596 21,400,669 ========================================================================== 40,936,509 ========================================================================== COMMUNICATIONS EQUIPMENT-4.06% Cisco Systems, Inc.(a) 1,610,000 44,001,300 -------------------------------------------------------------------------- Motorola, Inc. 971,014 19,964,048 ========================================================================== 63,965,348 ========================================================================== COMPUTER & ELECTRONICS RETAIL-1.30% Best Buy Co., Inc. 416,349 20,480,207 ========================================================================== COMPUTER HARDWARE-5.11% Apple Computer, Inc.(a) 415,000 35,208,600 -------------------------------------------------------------------------- Dell Inc.(a) 650,000 16,308,500 -------------------------------------------------------------------------- Hewlett-Packard Co. 703,709 28,985,774 ========================================================================== 80,502,874 ========================================================================== COMPUTER STORAGE & PERIPHERALS-1.00% Seagate Technology 597,423 15,831,709 ========================================================================== CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS-1.02% Terex Corp.(a) 247,925 16,010,996 ==========================================================================
SHARES VALUE --------------------------------------------------------------------------
DATA PROCESSING & OUTSOURCED SERVICES-1.14% Global Payments Inc. 156,290 $ 7,236,227 -------------------------------------------------------------------------- VeriFone Holdings, Inc.(a)(b) 302,701 10,715,615 ========================================================================== 17,951,842 ========================================================================== DEPARTMENT STORES-2.30% J.C. Penney Co., Inc. 310,000 23,981,600 -------------------------------------------------------------------------- Nordstrom, Inc. 246,991 12,186,536 ========================================================================== 36,168,136 ========================================================================== DRUG RETAIL-0.56% Longs Drug Stores Corp. 209,220 8,866,744 ========================================================================== ELECTRICAL COMPONENTS & EQUIPMENT-2.97% Acuity Brands, Inc. 169,033 8,796,477 -------------------------------------------------------------------------- Cooper Industries, Ltd.-Class A 190,661 17,241,474 -------------------------------------------------------------------------- Emerson Electric Co. 472,683 20,840,594 ========================================================================== 46,878,545 ========================================================================== ELECTRONIC EQUIPMENT MANUFACTURERS-1.10% Amphenol Corp.-Class A 211,699 13,142,274 -------------------------------------------------------------------------- Mettler-Toledo International Inc.(a) 53,589 4,225,493 ========================================================================== 17,367,767 ========================================================================== ENVIRONMENTAL & FACILITIES SERVICES-0.86% Waste Management, Inc. 370,083 13,607,952 ========================================================================== GENERAL MERCHANDISE STORES-1.42% Family Dollar Stores, Inc. 760,666 22,310,334 ========================================================================== HEALTH CARE EQUIPMENT-0.73% Becton, Dickinson and Co. 163,691 11,482,924 ========================================================================== HEALTH CARE FACILITIES-1.29% Manor Care, Inc. 224,366 10,527,253 -------------------------------------------------------------------------- VCA Antech, Inc.(a) 303,424 9,767,218 ========================================================================== 20,294,471 ========================================================================== HEALTH CARE SERVICES-0.81% Quest Diagnostics Inc. 239,460 12,691,380 ========================================================================== HOME ENTERTAINMENT SOFTWARE-1.20% Electronic Arts Inc.(a) 376,862 18,978,770 ========================================================================== HOUSEHOLD PRODUCTS-1.03% Colgate-Palmolive Co. 248,005 16,179,846 ========================================================================== HYPERMARKETS & SUPER CENTERS-1.00% Costco Wholesale Corp. 298,023 15,756,476 ==========================================================================
AIM V.I. Capital Appreciation Fund
SHARES VALUE -------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES-1.07% McDermott International, Inc.(a) 331,704 $ 16,870,465 ========================================================================== INTEGRATED OIL & GAS-1.42% Occidental Petroleum Corp. 459,471 22,435,969 ========================================================================== INTERNET SOFTWARE & SERVICES-1.08% Google Inc.-Class A(a) 37,000 17,037,760 ========================================================================== INVESTMENT BANKING & BROKERAGE-5.81% Goldman Sachs Group, Inc. (The) 156,000 31,098,600 -------------------------------------------------------------------------- Merrill Lynch & Co., Inc. 302,053 28,121,134 -------------------------------------------------------------------------- Morgan Stanley 245,606 19,999,697 -------------------------------------------------------------------------- Schwab (Charles) Corp. (The) 635,000 12,280,900 ========================================================================== 91,500,331 ========================================================================== IT CONSULTING & OTHER SERVICES-1.01% Accenture Ltd.-Class A 431,573 15,937,991 ========================================================================== MANAGED HEALTH CARE-2.49% Health Net Inc.(a) 560,582 27,277,920 -------------------------------------------------------------------------- UnitedHealth Group Inc. 223,000 11,981,790 ========================================================================== 39,259,710 ========================================================================== MOVIES & ENTERTAINMENT-1.34% News Corp.-Class A 985,308 21,164,416 ========================================================================== MULTI-LINE INSURANCE-1.91% Assurant, Inc. 356,049 19,671,707 -------------------------------------------------------------------------- HCC Insurance Holdings, Inc. 324,589 10,416,061 ========================================================================== 30,087,768 ========================================================================== OIL & GAS EQUIPMENT & SERVICES-2.95% Baker Hughes Inc. 206,754 15,436,254 -------------------------------------------------------------------------- BJ Services Co. 258,704 7,585,201 -------------------------------------------------------------------------- Cameron International Corp.(a) 172,047 9,127,094 -------------------------------------------------------------------------- National-Oilwell Varco Inc.(a) 233,735 14,299,907 ========================================================================== 46,448,456 ========================================================================== OIL & GAS REFINING & MARKETING-0.75% Valero Energy Corp. 230,000 11,766,800 ========================================================================== OTHER DIVERSIFIED FINANCIAL SERVICES-2.03% JPMorgan Chase & Co. 663,233 32,034,154 ========================================================================== PHARMACEUTICALS-5.28% Abbott Laboratories 252,436 12,296,158 -------------------------------------------------------------------------- Johnson & Johnson 193,916 12,802,334 -------------------------------------------------------------------------- Merck & Co. Inc. 427,859 18,654,652 --------------------------------------------------------------------------
SHARES VALUE --------------------------------------------------------------------------
PHARMACEUTICALS-(CONTINUED) Pfizer Inc. 761,100 $ 19,712,490 -------------------------------------------------------------------------- Wyeth 386,155 19,663,013 ========================================================================== 83,128,647 ========================================================================== PROPERTY & CASUALTY INSURANCE-0.81% Chubb Corp. (The) 242,696 12,841,045 ========================================================================== REGIONAL BANKS-0.50% Cullen/Frost Bankers, Inc. 140,717 7,854,823 ========================================================================== RESTAURANTS-2.23% Burger King Holdings Inc.(a)(b) 732,146 15,448,280 -------------------------------------------------------------------------- Darden Restaurants, Inc. 492,017 19,764,323 ========================================================================== 35,212,603 ========================================================================== SEMICONDUCTORS-2.51% Microchip Technology Inc. 470,717 15,392,446 -------------------------------------------------------------------------- Texas Instruments Inc. 548,684 15,802,099 -------------------------------------------------------------------------- Xilinx, Inc. 351,892 8,378,549 ========================================================================== 39,573,094 ========================================================================== SOFT DRINKS-0.74% PepsiCo, Inc. 185,811 11,622,478 ========================================================================== SPECIALTY STORES-1.98% Office Depot, Inc.(a) 61,178 2,335,164 -------------------------------------------------------------------------- OfficeMax Inc. 260,447 12,931,194 -------------------------------------------------------------------------- PetSmart, Inc. 550,111 15,876,203 ========================================================================== 31,142,561 ========================================================================== SYSTEMS SOFTWARE-4.39% MICROS Systems, Inc.(a) 144,944 7,638,549 -------------------------------------------------------------------------- Microsoft Corp. 1,059,367 31,632,699 -------------------------------------------------------------------------- Sybase, Inc.(a) 257,290 6,355,063 -------------------------------------------------------------------------- Symantec Corp.(a) 1,130,144 23,563,502 ========================================================================== 69,189,813 ========================================================================== Total Domestic Common Stocks (Cost $1,123,033,829) 1,342,565,284 ========================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-12.57% AUSTRALIA-0.74% BHP Billiton Ltd. (Diversified Metals & Mining)(c) 583,038 11,592,478 ========================================================================== BRAZIL-0.77% Companhia Vale do Rio Doce-ADR (Steel)(b) 405,000 12,044,700 ========================================================================== CANADA-1.01% Research In Motion Ltd. (Communications Equipment)(a) 125,000 15,972,500 ========================================================================== HONG KONG-0.70% China Mobile Ltd. (Wireless Telecommunication Services)(c) 1,273,000 11,003,313 ==========================================================================
AIM V.I. Capital Appreciation Fund
SHARES VALUE -------------------------------------------------------------------------- &x JAPAN-2.43% FANUC Ltd. (Industrial Machinery)(c) 152,369 $ 14,942,323 -------------------------------------------------------------------------- KDDI Corp. (Wireless Telecommunication Services)(c) 1,900 12,895,851 -------------------------------------------------------------------------- Komatsu Ltd. (Construction & Farm Machinery & Heavy Trucks)(c) 522,252 10,519,531 ========================================================================== 38,357,705 ========================================================================== MEXICO-0.64% America Movil S.A. de C.V.-Series L-ADR (Wireless Telecommunication Services) 224,475 10,150,759 ========================================================================== SWITZERLAND-5.47% ABB Ltd. (Heavy Electrical Equipment)(c) 610,158 10,935,133 -------------------------------------------------------------------------- Novartis A.G.-ADR (Pharmaceuticals) 320,604 18,415,494 -------------------------------------------------------------------------- Roche Holding A.G. (Pharmaceuticals)(c) 172,041 30,781,766 -------------------------------------------------------------------------- Syngenta A.G. (Fertilizers & Agricultural Chemicals)(a)(c) 75,835 14,105,497 -------------------------------------------------------------------------- UBS A.G. (Diversified Capital Markets)(c) 196,896 11,921,081 ========================================================================== 86,158,971 ========================================================================== UNITED KINGDOM-0.81% Rio Tinto PLC (Diversified Metals & Mining)(c) 223,817 11,894,759 -------------------------------------------------------------------------- Shire PLC (Pharmaceuticals)(c) 43,985 908,851 ========================================================================== 12,803,610 ========================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $166,427,609) 198,084,036 ==========================================================================
SHARES VALUE --------------------------------------------------------------------------
MONEY MARKET FUNDS-1.27% Liquid Assets Portfolio-Institutional Class(d) 10,033,388 $ 10,033,388 -------------------------------------------------------------------------- Premier Portfolio-Institutional Class(d) 10,033,388 10,033,388 ========================================================================== Total Money Market Funds (Cost $20,066,776) 20,066,776 ========================================================================== TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-99.04% (Cost $1,309,528,214) 1,560,716,096 ========================================================================== INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED-1.54% MONEY MARKET FUNDS-1.54% Liquid Assets Portfolio-Institutional Class(d)(e) 24,258,490 24,258,490 ========================================================================== Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $24,258,490) 24,258,490 ========================================================================== TOTAL INVESTMENTS-100.58% (Cost $1,333,786,704) 1,584,974,586 ========================================================================== OTHER ASSETS LESS LIABILITIES-(0.58)% (9,099,155) ========================================================================== NET ASSETS-100.00% $$1,575,875,431 __________________________________________________________________________ ==========================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) Non-income producing security. (b) All or a portion of this security was out on loan at December 31, 2006. (c) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $141,500,583, which represented 8.98% of the Fund's Net Assets. See Note 1A. (d) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (e) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Appreciation Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $1,289,461,438)* $1,540,649,320 ------------------------------------------------------------- Investments in affiliated money market funds (cost $44,325,266) 44,325,266 ============================================================= Total investments (cost $1,333,786,704) 1,584,974,586 ============================================================= Foreign currencies, at value (cost $464) 477 ------------------------------------------------------------- Receivables for: Investments sold 34,308,321 ------------------------------------------------------------- Fund shares sold 279,599 ------------------------------------------------------------- Dividends 1,012,520 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 213,339 ------------------------------------------------------------- Other assets 387 ============================================================= Total assets $1,620,789,229 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 15,110,889 ------------------------------------------------------------- Fund shares reacquired 3,747,450 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 332,863 ------------------------------------------------------------- Collateral upon return of securities loaned 24,258,490 ------------------------------------------------------------- Accrued administrative services fees 1,021,815 ------------------------------------------------------------- Accrued distribution fees-Series II 231,286 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 8,584 ------------------------------------------------------------- Accrued transfer agent fees 14,612 ------------------------------------------------------------- Accrued operating expenses 187,809 ============================================================= Total liabilities 44,913,798 ============================================================= Net assets applicable to shares outstanding $1,575,875,431 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $1,640,989,509 ------------------------------------------------------------- Undistributed net investment income (loss) (321,756) ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (315,981,607) ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 251,189,285 ============================================================= $1,575,875,431 _____________________________________________________________ ============================================================= NET ASSETS: Series I $1,204,559,249 _____________________________________________________________ ============================================================= Series II $ 371,316,182 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I $ 45,942,155 _____________________________________________________________ ============================================================= Series II $ 14,332,628 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 26.22 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 25.91 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $23,197,471 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $270,364) $ 12,550,076 ------------------------------------------------------------- Dividends from affiliated money market funds (includes securities lending income of $164,363) 1,330,444 ------------------------------------------------------------- Interest 8,561 ============================================================= Total investment income 13,889,081 ============================================================= EXPENSES: Advisory fees 8,764,720 ------------------------------------------------------------- Administrative services fees 3,684,721 ------------------------------------------------------------- Custodian fees 234,767 ------------------------------------------------------------- Distribution fees-Series II 920,561 ------------------------------------------------------------- Transfer agent fees 79,777 ------------------------------------------------------------- Trustees' and officer's fees and benefits 59,015 ------------------------------------------------------------- Other 227,790 ============================================================= Total expenses 13,971,351 ============================================================= Less: Fees waived and expense offset arrangements (32,473) ============================================================= Net expenses 13,938,878 ============================================================= Net investment income (loss) (49,797) ============================================================= REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $8,312) 156,046,277 ------------------------------------------------------------- Foreign currencies (83,094) ============================================================= 155,963,183 ============================================================= Change in net unrealized appreciation (depreciation) of: Investment securities (94,496,592) ------------------------------------------------------------- Foreign currencies (14,081) ============================================================= (94,510,673) ============================================================= Net gain from investment securities and foreign currencies 61,452,510 ============================================================= Net increase in net assets resulting from operations $ 61,402,713 _____________________________________________________________ =============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Appreciation Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ---------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) $ (49,797) $ 607,946 ---------------------------------------------------------------------------------------------- Net realized gain from investment securities and foreign currencies 155,963,183 99,452,610 ---------------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investment securities and foreign currencies (94,510,673) (5,854,578) ============================================================================================== Net increase in net assets resulting from operations 61,402,713 94,205,978 ============================================================================================== Distributions to shareholders from net investment income-Series I (692,340) (505,822) ---------------------------------------------------------------------------------------------- Share transactions-net: Series I 337,314,470 (131,492,019) ---------------------------------------------------------------------------------------------- Series II 15,761,962 175,908,989 ============================================================================================== Net increase in net assets resulting from share transactions 353,076,432 44,416,970 ============================================================================================== Net increase in net assets 413,786,805 138,117,126 ============================================================================================== NET ASSETS: Beginning of year 1,162,088,626 1,023,971,500 ============================================================================================== End of year (including undistributed net investment income (loss) of $(321,756) and $574,433, respectively) $1,575,875,431 $1,162,088,626 ______________________________________________________________________________________________ ==============================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Appreciation Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Capital Appreciation Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Capital Appreciation Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.65% ------------------------------------------------------------------- Over $250 million 0.60% __________________________________________________________________ ===================================================================
AIM V.I. Capital Appreciation Fund Effective May 1, 2006 through December 31, 2009, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.695% -------------------------------------------------------------------- Next $750 million 0.625% -------------------------------------------------------------------- Next $1.5 billion 0.62% -------------------------------------------------------------------- Next $2.5 billion 0.595% -------------------------------------------------------------------- Next $2.5 billion 0.57% -------------------------------------------------------------------- Next $2.5 billion 0.545% -------------------------------------------------------------------- Over $10 billion 0.52% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund will also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $6,238. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $341,189 for accounting and fund administrative services and reimbursed $3,343,532 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. AIM V.I. Capital Appreciation Fund INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ----------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $14,102,149 $238,647,945 $(242,716,706) $ -- $10,033,388 $ 574,763 $ -- ----------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 14,102,149 107,157,998 (121,260,147) -- -- 266,489 -- ----------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 139,578,290 (129,544,902) -- 10,033,388 324,829 -- =================================================================================================================================== Subtotal $28,204,298 $485,384,233 $(493,521,755) $ -- $20,066,776 $1,166,081 $ -- ===================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ----------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $66,155,830 $281,614,900 $(323,512,240) $ -- $24,258,490 $ 164,363 $ -- =================================================================================================================================== Total Investments in Affiliates $94,360,128 $766,999,133 $(817,033,995) $ -- $44,325,266 $1,330,444 $ -- ___________________________________________________________________________________________________________________________________ ===================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $7,677,987, which resulted in net realized gains of $8,312, and securities purchases of $43,868,910. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $26,235. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $8,676 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. AIM V.I. Capital Appreciation Fund NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $23,197,471 were on loan to brokers. The loans were secured by cash collateral of $24,258,490 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $164,363 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------- Distributions paid from ordinary income $692,340 $505,822 __________________________________________________________________________________ ==================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ------------------------------------------------------------------------------ Unrealized appreciation-investments $ 243,452,108 ------------------------------------------------------------------------------ Temporary book/tax differences (288,691) ------------------------------------------------------------------------------ Post-October currency loss deferral (33,066) ------------------------------------------------------------------------------ Capital loss carryforward (308,244,429) ------------------------------------------------------------------------------ Shares of beneficial interest 1,640,989,509 ============================================================================== Total net assets $1,575,875,431 ______________________________________________________________________________ ==============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and certain straddles. The tax-basis unrealized appreciation on investments amount includes appreciation on foreign currencies of $1,403. AIM V.I. Capital Appreciation Fund The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing 214,210,240 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $155,628,370 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2009 $ 69,344,321 ----------------------------------------------------------------------------- December 31, 2010 182,587,156 ----------------------------------------------------------------------------- December 31, 2011 56,312,952 ============================================================================= Total capital loss carryforward $308,244,429 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above has been reduced for limitations in effect as of that date, if any, to the extent required by the Internal Revenue Code. To the extent that unrealized gains as of the dates May 1, 2006, the date of the reorganization of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund into the Fund and November 6, 2006, the date of the reorganization of AIM V.I. Demographic Trends Fund into the Fund are realized on securities held in each fund at such dates of the reorganizations, the capital loss carryforward may be further limited for up to five years from the dates of the reorganizations. NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $1,652,875,191 and $1,501,608,607, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------ Aggregate unrealized appreciation of investment securities $257,762,958 ------------------------------------------------------------------------------ Aggregate unrealized (depreciation) of investment securities (14,312,253) ============================================================================== Net unrealized appreciation of investment securities $243,450,705 ______________________________________________________________________________ ============================================================================== Cost of investments for tax purposes is $1,341,523,881.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions, net operating losses and expenses related to the plans of reorganization, on December 31, 2006, undistributed net investment income (loss) was decreased by $13,439, undistributed net realized gain (loss) was increased by $247,040,560 and shares of beneficial interest decreased by $247,027,121. Further, as a result of tax deferrals acquired in the reorganizations of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund into the Fund on May 1, 2006 and the reorganization of AIM V.I. Demographic Trends Fund into the Fund on November 6, 2006, undistributed net investment income (loss) was decreased by $140,613, undistributed net realized gain (loss) was decreased by $395,351,656 and shares of beneficial interest increased by $395,492,269. These reclassifications had no effect on the net assets of the Fund. AIM V.I. Capital Appreciation Fund NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006(a) 2005 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------------------------------------------------------- Sold: Series I 5,977,566 $ 149,575,490 7,080,254 $ 158,159,074 -------------------------------------------------------------------------------------------------------------------------- Series II 2,823,485 70,459,146 8,650,154 194,868,060 ========================================================================================================================== Issued as reinvestment of dividends: Series I 24,351 639,944 17,427 439,171 ========================================================================================================================== Issued in connection with acquisitions:(b) Series I 18,028,541 472,256,763 -- -- -------------------------------------------------------------------------------------------------------------------------- Series II 1,104,876 28,680,379 -- -- ========================================================================================================================== Reacquired: Series I (11,438,432) (285,157,727) (12,847,505) (290,090,264) -------------------------------------------------------------------------------------------------------------------------- Series II (3,482,328) (83,377,563) (851,863) (18,959,071) ========================================================================================================================== 13,038,059 $ 353,076,432 2,048,467 $ 44,416,970 __________________________________________________________________________________________________________________________ ==========================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 52% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. (b) As of the opening of business on May 1, 2006, the Fund acquired all the net assets of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund pursuant to the plans of reorganization approved by the Trustees of the Fund on November 14, 2005 and by the shareholders of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund, respectively on April 4, 2006. The acquisitions were accomplished by a tax-free exchange of 16,894,072 shares of the Fund for 11,361,885 shares outstanding of AIM V.I. Aggressive Growth Fund and 15,600,092 shares outstanding of AIM V.I. Growth Fund as of the close of business on April 28, 2006. Each class of shares of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund was exchanged for the like class of shares of the Fund based on the relative net asset value of AIM V.I. Aggressive Growth Fund and AIM V.I. Growth Fund to the net asset value of the Fund on the close of business, April 28, 2006. AIM V.I. Aggressive Growth Fund's net assets as of the close of business on April 28, 2006 of $155,800,373 including $27,776,076 of unrealized appreciation and AIM V.I. Growth Fund's net assets as of the close of business on April 28, 2006 of $288,359,981 including $64,941,780 of unrealized appreciation, were combined with the net assets of the Fund immediately before the acquisition of $1,269,556,120. The combined aggregate net assets of the Fund subsequent to the reorganization were $1,713,716,474. () In addition, as of the opening of business on November 6, 2006, the Fund acquired all the net assets of AIM V.I. Demographic Trends Fund pursuant to a plan of reorganization approved by the Trustees of the Fund on August 1, 2006 and by the shareholders of AIM V.I. Demographic Trends Fund on October 31, 2006. The acquisition was accomplished by a tax free exchange of 2,239,345 shares of the Fund for 10,236,579 shares of AIM V.I. Demographic Trends Fund shares outstanding as of the close of business on November 3, 2006. Each class of shares of AIM V.I. Demographic Trends Fund was exchanged for the like class of shares of the Fund based on the relative net asset value of AIM V.I. Demographic Trends Fund to the net asset value of the Fund on the close of business, November 3, 2006. AIM V.I. Demographic Trends Fund 's net assets as of the close of business on November 3, 2006 of $56,776,788 including $4,497,179 of unrealized appreciation, were combined with the net assets of the Fund immediately before the acquisition of $,1,506,731,773. The combined aggregate net assets of the Fund subsequent to the reorganization were $1,563,508,561. NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and intends for the Fund to adopt the FIN 48 provisions during the fiscal year ending 2007. AIM V.I. Capital Appreciation Fund NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 24.67 $ 22.69 $ 21.28 $ 16.43 $ 21.72 -------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.01 0.03 0.02(a) (0.04)(b) (0.05)(b) -------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.55 1.97 1.39 4.89 (5.24) ================================================================================================================================ Total from investment operations 1.56 2.00 1.41 4.85 (5.29) ================================================================================================================================ Less dividends from net investment income (0.01) (0.02) -- -- -- ================================================================================================================================ Net asset value, end of period $ 26.22 $ 24.67 $ 22.69 $ 21.28 $ 16.43 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Total return(c) 6.34% 8.79% 6.62% 29.52% (24.35)% ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratios/supplemental data: Net assets, end of period (000s omitted) $1,204,559 $822,899 $886,990 $938,820 $763,038 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.91%(d) 0.89% 0.91% 0.85% 0.85% ================================================================================================================================ Ratio of net investment income (loss) to average net assets 0.06%(d) 0.11% 0.09%(a) (0.23)% (0.27)% ________________________________________________________________________________________________________________________________ ================================================================================================================================ Portfolio turnover rate 120% 97% 74% 61% 67% ________________________________________________________________________________________________________________________________ ================================================================================================================================
(a) Net investment income per share and the ratio of net investment income to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.04) and (0.17)%, respectively. (b) Calculated using average shares outstanding. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios based on average daily net assets of $1,071,728,909.
SERIES II ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 24.43 $ 22.50 $ 21.16 $ 16.38 $ 21.70 -------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.05) (0.03) (0.02)(a) (0.09)(b) (0.09)(b) -------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.53 1.96 1.36 4.87 (5.23) ================================================================================================================================ Total from investment operations 1.48 1.93 1.34 4.78 (5.32) ================================================================================================================================ Net asset value, end of period $ 25.91 $ 24.43 $ 22.50 $ 21.16 $ 16.38 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Total return(c) 6.06% 8.58% 6.33% 29.18% (24.52)% ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratios/supplemental data: Net assets, end of period (000s omitted) $371,316 $339,190 $136,982 $70,466 $23,893 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.16%(d) 1.14% 1.16% 1.10% 1.10% ================================================================================================================================ Ratio of net investment income (loss) to average net assets (0.19)%(d) (0.14)% (0.16)%(a) (0.48)% (0.52)% ________________________________________________________________________________________________________________________________ ================================================================================================================================ Portfolio turnover rate 120% 97% 74% 61% 67% ________________________________________________________________________________________________________________________________ ================================================================================================================================
(a) Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.08) and (0.42)%, respectively. (b) Calculated using average shares outstanding. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $368,224,387. NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related AIM V.I. Capital Appreciation Fund NOTE 15--LEGAL PROCEEDINGS--(CONTINUED) activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor--Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Capital Appreciation Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Capital Appreciation Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Capital Appreciation Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Capital Appreciation Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 99.66%
* The above percentages are based on ordinary income dividends paid to shareholders during the fund's fiscal year. AIM V.I. Capital Appreciation Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Funds, Inc. (21 portfolios) Formerly: Partner, Deloitte & Touche -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Capital Appreciation Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General N/A Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. CAPITAL DEVELOPMENT FUND Mid-Cap Growth ANNUAL REPORT TO SHAREHOLDERS - DECEMBER 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's [COVER GLOBE IMAGE] Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, AIM V.I. CAPITAL DEVELOPMENT FUND scroll down and click on AIM Funds Proxy Policy. seeks to provide long-term growth of capital. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT Fund from the drop-down menu. The information is IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ = Registered Trademark = EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Management's discussion of Fund performance AIM V.I. CAPITAL DEVELOPMENT FUND ========================================================================================== Risk management plays an important PERFORMANCE SUMMARY role in portfolio construction, as our target portfolio attempts to limit For the year ended December 31, 2006, AIM V.I. Capital Development Fund, excluding volatility and downside risk. We seek to variable product issuer charges, produced double-digit returns and outperformed the broad accomplish this goal by investing in market, as measured by the S&P 500 --Registered Trademark-- Index, and the Fund's sectors, industries and companies with style-specific index, the Russell Midcap --Registered Trademark-- Growth Index. attractive fundamental prospects. We limit the Fund's sector exposure and Solid stock selection and strong performance by mid-cap stocks enabled the Fund to also seek to minimize stock-specific outperform the large-cap oriented S&P 500 Index. Stock selection across sectors also risk by building a diversified portfolio enabled the Fund to outperform the Russell Midcap Growth Index. of 100 to 120 holdings with an approximate weight of 1% at the time of Your Fund's long-term performance appears on pages 4 - 5. purchase. FUND VS. INDEXES We consider selling a stock for any of the following reasons: Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. - The stock is overvalued based on our If variable product issuer charges were analysis. included, returns would be lower. - A change in fundamental metrics Series I Shares 16.52% indicates potential problems. Series II Shares 16.26 S&P 500 Index (Broad Market Index) 15.78 - A change in market capitalization -- Russell Midcap Growth Index (Style-Specific Index) 10.66 if a stock grows and moves into the Lipper Mid-Cap Growth Funds Index (Peer Group Index) 11.02 large-cap range. SOURCE: LIPPER INC. ========================================================================================== - A better stock candidate with higher potential return is found. How we invest - Earnings - focus on companies exhibiting strong growth in earnings, revenue and cash Market conditions and your Fund We believe a growth investment strategy is flows an essential component of a diversified Domestic equities posted solid returns portfolio. - Quality - focus on companies with during the year, leaving several major sustainable earnings growth and management market indexes near multi-year highs. Our investment process combines teams that profitably reinvest shareholder Strong economic growth, favorable quantitative and fundamental analysis to cash flow corporate earnings and continued benign uncover companies exhibiting long-term, inflation benefited equities, offsetting sustainable earnings and cash flow growth - Valuation - focus on companies that are high energy prices, a slowing housing that is not yet reflected by the stock's attractively valued given their growth market and the U.S. Federal Reserve market price. potential Board's (the Fed) tightening campaign. Our quantitative model ranks companies Stocks that are ranked highest by our While small cap stocks continued based on factors we have found to be highly quantitative model are the focus of our to lead the market higher, large- and correlated with outperformance in the fundamental research efforts. Our mid-cap stocks also had double-digit mid-cap growth universe, including: fundamental analysis focuses on identifying returns. Value stocks outperformed both industries and companies with strong growth stocks. Positive performance was drivers of growth. broad among Russell Midcap Growth Index sectors, with the best returns found in telecommunication services, materials and utilities.
==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ==================================================================================================================================== By sector 1. Aerospace & Defense 6.2% 1. Precision Castparts Corp. 1.6% Information Technology 18.3% 2. Application Software 5.1 2. CB Richard Ellis Group, Health Care 17.6 3. Wireless Telecommunication Services 4.5 Inc.-Class A 1.5 Industrials 16.9 4. Managed Health Care 3.6 3. Corrections Corp. of America 1.4 Consumer Discretionary 16.4 5. Pharmaceuticals 3.3 4. NII Holdings Inc. 1.3 Financials 10.5 Total Net Assets $277.66 million 5. Polo Ralph Lauren Corp. 1.3 Energy 7.2 Total Number of Holdings* 112 6. Foster Wheeler Ltd. 1.3 Telecommunication Services 5.5 7. Scientific Games Corp.-Class A 1.2 Consumer Staples 1.8 8. Security Capital Assurance Ltd. 1.2 Materials 1.5 9. Burger King Holdings Inc. 1.2 Money Market Funds 10. Spirit Aerosystems Plus Other Assets Less Liabilities 4.3 Holdings Inc.-Class A 1.2 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
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The Fund benefited from positive Our investment process led us to AIM V.I. CAPITAL DEVELOPMENT FUND absolute performance in nine out of 10 increase the Fund's exposure in the In closing economic sectors, with the highest positive telecommunication services sector, as we Although we are pleased to have provided impact on performance coming from holdings identified a number of attractive investment positive returns for our investors for in the industrials, consumer discretionary opportunities. Within this sector, the the reporting period, we are always and information technology sectors. On a Fund's overweight position and stock striving to improve performance and help relative basis, the Fund outperformed the selection drove outperformance versus the you meet your financial goals. We thank Russell Midcap Growth Index in seven out of Russell Midcap Growth Index as the you for your commitment to AIM V.I. 10 sectors, with the widest margin of telecommunication services sector was the Capital Development Fund. outperformance in the industrials, consumer top-performing sector in the Russell Midcap discretionary, energy and telecommunication Growth Index during the year. THE VIEWS AND OPINIONS EXPRESSED IN SERVICES SECTORS. MANAGEMENT'S DISCUSSION OF FUND One other specific area of strength PERFORMANCE ARE THOSE OF A I M Advisors, The industrials sector rallied during for the Fund was the information technology INC. THESE VIEWS AND OPINIONS ARE the period, and the Fund benefited from (IT) sector, where our investment process SUBJECT TO CHANGE AT ANY TIME BASED ON solid performance from holdings in a number led us to invest in a number of stocks in FACTORS SUCH AS MARKET AND ECONOMIC of different industries. Two of the Fund's the IT services, semiconductors and CONDITIONS. THESE VIEWS AND OPINIONS MAY holdings that made significant contributions semiconductor equipment and electronic NOT BE RELIED UPON AS INVESTMENT ADVICE to performance were IHS and MANITOWOC. IHS, equipment and instruments industries that OR RECOMMENDATIONS, OR AS AN OFFER FOR A a publisher of technical documents focusing performed well in 2006. One example is MEMC PARTICULAR SECURITY. THE INFORMATION IS on engineering, energy and regulatory ELECTRONIC MATERIALS, a leading supplier of NOT A COMPLETE ANALYSIS OF EVERY ASPECT issues, was the leading contributor to Fund silicon wafers to manufacturers of solar OF ANY MARKET, COUNTRY, INDUSTRY, performance for the year. Manitowoc, a energy equipment and semiconductors. Other SECURITY OR THE FUND. STATEMENTS OF FACT company that makes cranes and other IT holdings that drove Fund performance ARE FROM SOURCES CONSIDERED RELIABLE, material-handling equipment, was also a top included private-label credit card services BUT A I M ADVISORS, INC. MAKES NO contributor to Fund performance for the holding ALLIANCE DATA SYSTEMS and electronic REPRESENTATION OR WARRANTY AS TO THEIR year. We subsequently sold the stock. equipment maker AMPHENOL. COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE Despite facing a number of different The Fund underperformed relative to OF FUTURE RESULTS, THESE INSIGHTS MAY head-winds, consumer spending was resilient the Russell Midcap Growth Index in three HELP YOU UNDERSTAND OUR INVESTMENT throughout much of the year, and the Fund sectors -- financials, utilities and MANAGEMENT PHILOSOPHY. BENEFITED from solid stock selection in a materials. The widest margin of variety of different areas, including the underperformance was in the financials Paul J. Rasplicka textiles, apparel, and luxury goods sector, where stock selection and an Chartered Financial industry. Holdings that made key underweight position in real estate [RASPLICKA Analyst and senior contributions included POLO RALPH Lauren and investment trust (REIT) holdings were the PHOTO] portfolio manager, COACH. The Fund also benefited by not owning key detractors from performance. However, is lead manager of many of the home builder stocks that one holding that offset some of this AIM V.I. Capital performed poorly during the year. underperformance in the financials sector Development Fund. Mr. Rasplicka began was commercial real estate services holding his investment career in 1982. A native The energy sector experienced wide CB RICHARD ELLIS, which was up over 60% for of Denver, Mr. Rasplicka is a magna cum swings but finished positive for 2006. In the year. laude graduate of the University of this volatile environment, the Fund Colorado at Boulder with a B.S. in benefited from strong stock selection and an Underperformance in the utilities business administration. He received overweight position relative to the sector was largely due to the Fund's an M.B.A. from the University of style-specific index. Within this sector, underweight position, as many utilities Chicago. He is also a Chartered the top contributor to Fund performance was stocks performed well during the reporting Investment Counselor. AVENTINE RENEWABLE ENERGY HOLDINGS, one of period. the leading producers and marketers of ethanol, a grain alcohol mainly used as a An underweight position and stock Assisted by the Mid Cap Growth/GARP fuel additive in gasoline to reduce vehicle selection in the materials sector also (Growth at a Reasonable Price) Team emissions and enhance engine performance. contributed to underperformance. In this Aventine's stock price was up close to 75% sector, SMURFIT STONE CONTAINER detracted during the year due to strong demand and from Fund returns. We subsequently sold this rising prices for ethanol. Ethanol was in holding due to deteriorating fundamentals. strong demand after many refiners phased out the use of MTBE, a fuel additive, due to During the reporting period, the most legal concerns. However, we sold the Fund's significant changes to portfolio positioning position in the stock before the end of the included additions to the industrials and year. financials sectors, and a reduction in the IT and energy sector. All changes to the Fund were based on our bottom-up stock FOR A DISCUSSION OF THE RISKS OF selection process of identifying high INVESTING IN YOUR FUND, INDEXES USED IN quality growth companies trading at what we THIS REPORT AND YOUR FUND'S LONG-TERM believe are attractive valuations. PERFORMANCE, PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE ============================================ AIM V.I. CAPITAL DEVELOPMENT FUND AVERAGE ANNUAL TOTAL RETURNS RESTATED HISTORICAL PERFORMANCE OF SERIES I A SERIES PORTFOLIO OF AIM VARIABLE SHARES (FOR PERIODS PRIOR TO INCEPTION OF INSURANCE FUNDS, IS CURRENTLY OFFERED As of 12/31/06 SERIES II SHARES) ADJUSTED TO REFLECT THE THROUGH INSURANCE COMPANIES ISSUING SERIES I SHARES RULE 12b-1 FEES APPLICABLE TO SERIES II VARIABLE PRODUCTS. YOU CANNOT PURCHASE Inception (5/1/98) 7.57% SHARES. THE INCEPTION DATE OF SERIES I SHARES OF THE FUND DIRECTLY. PERFORMANCE 5 Years 9.44 SHARES IS MAY 1, 1998. THE PERFORMANCE OF FIGURES GIVEN REPRESENT THE FUND AND ARE 1 Year 16.52 THE FUND'S SERIES I AND SERIES II SHARE NOT INTENDED TO REFLECT ACTUAL VARIABLE CLASSES WILL DIFFER PRIMARILY DUE TO PRODUCT VALUES. THEY DO NOT REFLECT SERIES II SHARES DIFFERENT CLASS EXPENSES. SALES CHARGES, EXPENSES AND FEES Inception 7.31% ASSESSED IN CONNECTION WITH A VARIABLE 5 Years 9.16 THE PERFORMANCE DATA QUOTED REPRESENT PRODUCT. SALES CHARGES, EXPENSES AND 1 Year 16.26 PAST PERFORMANCE AND CANNOT GUARANTEE FEES, WHICH ARE DETERMINED BY THE ============================================ COMPARABLE FUTURE RESULTS; CURRENT VARIABLE PRODUCT ISSUERS, WILL VARY AND PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE WILL LOWER THE TOTAL RETURN. ============================================ CONTACT YOUR VARIABLE PRODUCT ISSUER OR CUMULATIVE TOTAL RETURNS FINANCIAL ADVISOR FOR THE MOST RECENT PER NASD REQUIREMENTS, THE MOST MONTH-END VARIABLE PRODUCT PERFORMANCE. RECENT MONTH-END PERFORMANCE DATA AT THE 6 months ended 12/31/06 PERFORMANCE FIGURES REFLECT FUND EXPENSES, FUND LEVEL, EXCLUDING VARIABLE PRODUCT Series I Shares 7.32% REINVESTED DISTRIBUTIONS AND CHANGES IN NET CHARGES, IS AVAILABLE ON THIS AIM Series II Shares 7.17 ASSET VALUE. INVESTMENT RETURN AND PRINCIPAL AUTOMATED INFORMATION LINE, ============================================ VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE A 866-702-4402. AS MENTIONED ABOVE, FOR SERIES II SHARES' INCEPTION DATE IS AUGUST GAIN OR LOSS WHEN YOU SELL SHARES. THE MOST RECENT MONTH-END PERFORMANCE 21, 2001. RETURNS SINCE THAT DATE ARE INCLUDING VARIABLE PRODUCT CHARGES, HISTORICAL. ALL OTHER RETURNS ARE THE AIM V.I. CAPITAL DEVELOPMENT FUND, PLEASE CONTACT YOUR VARIABLE PRODUCT BLENDED RETURNS OF THE HISTORICAL ISSUER OR FINANCIAL ADVISOR. PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE ====================================================================================================================================
Principal risks of investing in the Fund To the extent the Fund holds cash or Russell Midcap companies with higher cash equivalents rather than equity price/book ratios and higher forecasted Prices of equity securities change in securities for risk management purposes, the growth values. response to many factors including the Fund may not achieve its investment historical and prospective earnings of the objective. The Russell Midcap Growth Index is issuer, the value of its assets, general a trademark/service mark of the Frank economic conditions, interest rates, If the seller of a repurchase Russell Company. Russell--Registered investor perceptions and market liquidity. agreement in which the Fund invests defaults Trademark--is a trademark of the Frank on its obligation or declares bankruptcy, Russell Company. Investing in a fund that invests in the Fund may experience delays in selling smaller companies involves risks not the securities underlying the repurchase The unmanaged LIPPER MID-CAP associated with investing in more agreement. GROWTH FUNDS INDEX represents an average established companies, such as business of the performance of the 30 largest risk, stock price fluctuations and There is no guarantee that the mid-capitalization growth funds tracked illiquidity. investment techniques and risk analyses used by Lipper Inc., an independent mutual by the Fund's portfolio managers will fund performance monitor. Foreign securities have additional produce the desired results. risks, including exchange rate changes, In conjunction with the annual political and economic upheaval, the About indexes used in this report prospectus update on or about May 1, relative lack of information about these 2007, the AIM V.I Capital Development companies, relatively low market liquidity The unmanaged STANDARD & POOR'S COMPOSITE Fund prospectus will be amended to and the potential lack of strict financial INDEX OF 500 STOCKS (the S&P 500 Index) is reflect that the Fund has elected to use and accounting controls and standards. an index of common stocks frequently used as the Lipper Variable Underlying Funds a general measure of U.S. stock market (VUF) Mid-Cap Growth Funds Index as its Investing in emerging markets involves performance. peer group rather than the Lipper greater risk than investing in more Mid-Cap Growth Funds Index. The Lipper established markets. The risks include the The unmanaged RUSSELL MIDCAP GROWTH VUF Mid-Cap Growth Funds Index, recently relatively smaller size and lesser liquidity INDEX is a subset of the Russell Midcap published by Lipper Inc., comprises the of these markets, high inflation rates, Index, which represents the performance of largest underlying funds in each adverse political developments and lack of the stocks of domestic mid-capitalization variable insurance category and does not timely information. companies; the Growth subset measures the include mortality and expense fees. performance of The Fund is not managed to track the performance of any particular index, including Continued on page 5
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Past performance cannot guarantee comparable value of an investment, is constructed with AIM V.I. Capital Development Fund future results. each segment representing a percent change in the value of the investment. In this This chart, which is a logarithmic chart, each segment represents a doubling, chart, presents the fluctuations in the or 100% change, in the value of the value of the Fund and its indexes. We investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same size effective than other types of charts in as the space between $10,000 and $20,000. illustrating changes in value during the early years shown in the chart. The vertical axis, the one that indicates the dollar ====================================================================================================================================
Continued from page 4
the indexes defined here, and consequently, Industry classifications used in this the performance of the Fund may deviate report are generally according to the Global significantly from the performance of the Industry Classification Standard, which was index. developed by and is the exclusive property and a service mark of Morgan Stanley Capital A direct investment cannot be made in International Inc. and Standard & Poor's. an index. Unless otherwise indicated, index results include reinvested dividends, and The Chartered Financial Analyst - they do not reflect sales charges. Registered Trademark-- (CFA --Registered Performance of an index of funds reflects Trademark--) designation is a globally fund expenses; performance of a market index recognized standard for measuring the does not. competence and integrity of investment professionals. Other information The returns shown in management's discussion of Fund performance are based on net asset values calculated for shareholder transactions. Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the net asset values and reported in the Financial Highlights. Additionally, the returns and net asset values shown throughout this report are at the Fund level only and do not include variable product issuer charges. If such charges were included, the total returns would be lower.
5 ================================================================================ [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/98, Fund data from 05/01/98
AIM V.I. CAPITAL DEVELOPMENT FUND S&P 500 RUSSELL MIDCAP GROWTH LIPPER MID-CAP GROWTH FUNDS DATE -SERIES I SHARES INDEX INDEX INDEX 4/30/98 $ 10000 $ 10000 $ 10000 5/98 $ 9430 9828 9589 9417 6/98 9530 10227 9860 9850 7/98 8840 10119 9438 9195 8/98 7120 8657 7636 7212 9/98 7760 9212 8214 7964 10/98 7970 9960 8819 8257 11/98 8480 10564 9414 8885 12/98 9249 11172 10389 10031 1/99 9139 11639 10700 10529 2/99 8346 11278 10177 9711 3/99 8547 11729 10744 10403 4/99 8788 12183 11233 10830 5/99 8888 11895 11089 10785 6/99 9431 12554 11863 11654 7/99 9360 12164 11485 11495 8/99 8958 12103 11366 11437 9/99 9209 11772 11269 11770 10/99 9580 12517 12140 12811 11/99 10534 12771 13397 14418 12/99 11941 13522 15717 17426 1/00 11740 12843 15714 17126 2/00 14432 12600 19018 21419 3/00 14402 13832 19037 19911 4/00 13317 13416 17189 17284 5/00 12544 13141 15936 15731 6/00 13336 13464 17627 18175 7/00 12955 13254 16511 17421 8/00 14371 14077 19001 19699 9/00 13799 13334 18072 18753 10/00 13487 13277 16835 17236 11/00 11981 12231 13177 13632 12/00 13044 12291 13871 14615 1/01 13356 12727 14663 14813 2/01 12363 11567 12127 12591 3/01 11398 10835 10391 11255 4/01 12473 11676 12123 12739 5/01 12764 11755 12066 12844 6/01 12894 11469 12073 12794 7/01 12552 11356 11258 12121 8/01 11990 10646 10442 11309 9/01 10393 9786 8717 9678 10/01 10614 9973 9633 10217 11/01 11418 10738 10670 11056 12/01 11990 10832 11075 11535 1/02 11728 10674 10716 11094 2/02 11688 10468 10108 10543 3/02 12622 10861 10880 11207 4/02 12521 10203 10304 10835 5/02 12280 10128 9996 10473 6/02 11407 9407 8893 9532 7/02 10052 8674 8029 8504 8/02 9941 8731 8001 8403 9/02 8987 7783 7366 7881 10/02 9298 8467 7936 8278 11/02 9840 8965 8557 8770 12/02 9428 8439 8040 8251 1/03 9258 8218 7961 8129 2/03 9167 8095 7892 8003 3/03 9227 8173 8039 8118 4/03 9830 8846 8586 8687 5/03 10533 9311 9413 9406 6/03 10804 9430 9547 9553 7/03 11075 9597 9888 9930 8/03 11527 9784 10432 10418 9/03 11266 9680 10230 10068 10/03 12130 10227 11055 10858 11/03 12452 10317 11350 11116 12/03 12763 10858 11474 11173 1/04 13124 11057 11853 11456 2/04 13465 11211 12052 11614 3/04 13475 11042 12029 11611 4/04 13093 10868 11689 11243 5/04 13164 11017 11965 11487
================================================================================ SOURCE: LIPPER INC. [MOUNTAIN CHART] ======================================================================================== 6/04 13455 11231 12156 11764 7/04 12661 10860 11351 10928 8/04 12490 10903 11211 10739 9/04 13002 11021 11629 11198 10/04 13313 11190 12024 11529 11/04 14136 11642 12645 12170 12/04 14738 12038 13250 12741 1/05 14467 11745 12896 12330 2/05 14648 11992 13222 12489 3/05 14387 11780 13029 12240 4/05 13685 11557 12514 11650 5/05 14468 11924 13230 12341 6/05 14850 11941 13476 12624 7/05 15663 12385 14263 13351 8/05 15673 12272 14176 13309 9/05 15764 12371 14359 13541 10/05 15162 12165 13936 13165 11/05 15945 12625 14693 13877 12/05 16156 12629 14854 13962 1/06 17401 12964 15743 14920 2/06 17401 12999 15549 14792 3/06 18014 13160 15984 15285 4/06 18475 13337 16052 15428 5/06 17581 12954 15296 14569 6/06 17541 12971 15234 14576 7/06 16939 13051 14688 13959 8/06 17290 13361 15026 14188 9/06 17590 13705 15369 14391 10/06 18203 14151 15959 14895 11/06 18916 14420 16585 15514 12/06 18828 14622 16437 15501 ========================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES Example You may use the information in this table, AIM V.I. CAPITAL DEVELOPMENT FUND together with the amount you invested, to The hypothetical account values As a shareholder of the Fund, you incur estimate the expenses that you paid over the and expenses may not be used to estimate ongoing costs, including management fees; period. Simply divide your account value by the actual ending account balance or distribution and/or service (12b-1) fees; $1,000 (for example, an $8,600 account value expenses you paid for the period. You and other Fund expenses. This example is divided by $1,000 = 8.6), then multiply the may use this information to compare the intended to help you understand your ongoing result by the number in the table under the ongoing costs of investing in the Fund costs (in dollars) of investing in the Fund heading entitled "Actual Expenses Paid and other funds. To do so, compare this and to compare these costs with ongoing During Period" to estimate the expenses you 5% hypothetical example with the 5% costs of investing in other mutual funds. paid on your account during this period. hypothetical examples that appear in the The example is based on an investment of shareholder reports of the other funds. $1,000 invested at the beginning of the Hypothetical example for comparison purposes period and held for the entire period July Please note that the expenses 1, 2006, through December 31, 2006. The table below also provides information shown in the table are meant to about hypothetical account values and highlight your ongoing costs. Therefore, The actual and hypothetical expenses hypothetical expenses based on the Fund's the hypothetical information is useful in the examples below do not represent the actual expense ratio and an assumed rate of in comparing ongoing costs only, and effect of any fees or other expenses return of 5% per year before expenses, which will not help you determine the relative assessed in connection with a variable is not the Fund's actual return. The Fund's total costs of owning different funds. product; if they did, the expenses shown actual cumulative total returns at net asset would be higher while the ending account value after expenses for the six months values shown would be lower. ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. Actual expenses The table below provides information about actual account values and actual expenses.
================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $ 1,073.20 $ 5.64 $1,019.76 $ 5.50 1.08% Series II 1,000.00 1,071.70 6.95 1,018.50 6.77 1.33
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ================================================================================ 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. CAPITAL DEVELOPMENT FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory for the Fund, the Board concluded that Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board no changes should be made to the Fund management of AIM V.I. Capital Development reviewed the services to be provided by AIM and that it was not necessary to change Fund (the "Fund") and, as required by law, under the Advisory Agreement. Based on such the Fund's portfolio management team at determines annually whether to approve the review, the Board concluded that the range this time. Although the independent continuance of the Fund's advisory agreement of services to be provided by AIM under the written evaluation of the Fund's Senior with A I M Advisors, Inc. ("AIM"). Based Advisory Agreement was appropriate and that Officer (discussed below) only upon the recommendation of the Investments AIM currently is providing services in considered Fund performance through the Committee of the Board, at a meeting held on accordance with the terms of the Advisory most recent calendar year, the Board June 27, 2006, the Board, including all of Agreement. also reviewed more recent Fund the independent trustees, approved the performance, which did not change their continuance of the advisory agreement (the - The quality of services to be provided by conclusions. "Advisory Agreement") between the Fund and AIM. The Board reviewed the credentials and AIM for another year, effective July 1, experience of the officers and employees of - Meetings with the Fund's portfolio 2006. AIM who will provide investment advisory managers and investment personnel. With services to the Fund. In reviewing the respect to the Fund, the Board is The Board considered the factors qualifications of AIM to provide investment meeting periodically with such Fund's discussed below in evaluating the fairness advisory services, the Board considered such portfolio managers and/or other and reasonableness of the Advisory Agreement issues as AIM's portfolio and product review investment personnel and believes that at the meeting on June 27, 2006 and as part process, various back office support such individuals are competent and able of the Board's ongoing oversight of the functions provided by AIM and AIM's equity to continue to carry out their Fund. In their deliberations, the Board and and fixed income trading operations. Based responsibilities under the Advisory the independent trustees did not identify on the review of these and other factors, Agreement. any particular factor that was controlling, the Board concluded that the quality of and each trustee attributed different services to be provided by AIM was - Overall performance of AIM. The Board weights to the various factors. appropriate and that AIM currently is considered the overall performance of providing satisfactory services in AIM in providing investment advisory and One responsibility of the independent accordance with the terms of the Advisory portfolio administrative services to the Senior Officer of the Fund is to manage the Agreement. Fund and concluded that such performance process by which the Fund's proposed was satisfactory. management fees are negotiated to ensure - The performance of the Fund relative to that they are negotiated in a manner which comparable funds. The Board reviewed the - Fees relative to those of clients of is at arms' length and reasonable. To that performance of the Fund during the past one, AIM with comparable investment end, the Senior Officer must either three and five calendar years against the strategies. The Board reviewed the supervise a competitive bidding process or performance of funds advised by other effective advisory fee rate (before prepare an independent written evaluation. advisors with investment strategies waivers) for the Fund under the Advisory The Senior Officer has recommended an comparable to those of the Fund. The Board Agreement. The Board noted that this independent written evaluation in lieu of a noted that the Fund's performance was below rate was (i) above the effective competitive bidding process and, upon the the median performance of such comparable advisory fee rates (before waivers) for direction of the Board, has prepared such an funds for the one year period and above such two mutual funds advised by AIM with independent written evaluation. Such written median performance for the three and five investment strategies comparable to evaluation also considered certain of the year periods. Based on this review and after those of the Fund; (ii) the same as the factors discussed below. In addition, as taking account of all of the other factors effective advisory fee rate (before discussed below, the Senior Officer made a that the Board considered in determining waivers) for a variable insurance fund recommendation to the Board in connection whether to continue the Advisory Agreement advised by AIM and offered to insurance with such written evaluation. for the Fund, the Board concluded that no company separate accounts with changes should be made to the Fund and that investment strategies comparable to The discussion below serves as a it was not necessary to change the Fund's those of the Fund; (iii) above the summary of the Senior Officer's independent portfolio management team at this time. effective sub-advisory fee rate for one written evaluation and recommendation to the Although the independent written evaluation offshore fund advised and sub-advised by Board in connection therewith, as well as a of the Fund's Senior Officer (discussed AIM affiliates with investment discussion of the material factors and the below) only considered Fund performance strategies comparable to those of the conclusions with respect thereto that formed through the most recent calendar year, the Fund, although the total advisory fees the basis for the Board's approval of the Board also reviewed more recent Fund for such offshore fund were above those Advisory Agreement. After consideration of performance, which did not change their for the Fund; and (iv) above the all of the factors below and based on its conclusions. effective sub-advisory fee rates for two informed business judgment, the Board variable insurance funds sub-advised by determined that the Advisory Agreement is in - The performance of the Fund relative to an AIM affiliate and offered to the best interests of the Fund and its indices. The Board reviewed the performance insurance company separate accounts with shareholders and that the compensation to of the Fund during the past one, three and investment strategies comparable to AIM under the Advisory Agreement is fair and five calendar years against the performance those of the Fund, although the total reasonable and would have been obtained of the Lipper Variable Underlying Fund advisory fees for such variable through arm's length negotiations. Mid-Cap Growth Index. The Board noted that insurance funds were the same as or the Fund's performance was comparable to the above those for the Fund. The Board Unless otherwise stated, information performance of such Index for the one and noted that AIM has agreed to waive presented below is as of June 27, 2006 and three year periods and above such Index for advisory fees of the Fund and to limit does not reflect any changes that may have the five year period. Based on this review the Fund's total operating expenses, as occurred since June 27, 2006, including but and after taking account of all of the other discussed below. Based on this review, not limited to changes to the Fund's factors that the Board considered in the Board concluded that the advisory performance, advisory fees, expense determining whether to continue the Advisory fee rate for the Fund under the Advisory limitations and/or fee waivers. Agreement Agreement was fair and reasonable. - Fees relative to those of comparable funds with other advisors. The Board reviewed the advisory fee rate for the Fund under the Advisory Agreement. The Board compared effective contractual advisory fee rates at a common asset level at the end of the past calendar (continued)
7
AIM V.I. Capital Development Fund year and noted that the Fund's rate was the Fund may be invested in money market Advisory Agreement was not excessive. comparable to the median rate of the funds funds advised by AIM pursuant to the terms advised by other advisors with investment of an SEC exemptive order. The Board found - Benefits of soft dollars to AIM. The strategies comparable to those of the Fund that the Fund may realize certain benefits Board considered the benefits realized that the Board reviewed. The Board noted upon investing cash balances in AIM advised by AIM as a result of brokerage that AIM has agreed to waive advisory fees money market funds, including a higher net transactions executed through "soft of the Fund and to limit the Fund's total return, increased liquidity, increased dollar" arrangements. Under these operating expenses, as discussed below. diversification or decreased transaction arrangements, brokerage commissions paid Based on this review, the Board concluded costs. The Board also found that the Fund by the Fund and/or other funds advised that the advisory fee rate for the Fund will not receive reduced services if it by AIM are used to pay for research and under the Advisory Agreement was fair and invests its cash balances in such money execution services. This research may be reasonable. market funds. The Board noted that, to the used by AIM in making investment extent the Fund invests uninvested cash in decisions for the Fund. The Board - Expense limitations and fee waivers. The affiliated money market funds, AIM has concluded that such arrangements were Board noted that AIM has contractually voluntarily agreed to waive a portion of the appropriate. agreed to waive advisory fees of the Fund advisory fees it receives from the Fund through April 30, 2008 to the extent attributable to such investment. The Board - AIM's financial soundness in light of necessary so that the advisory fees payable further determined that the proposed the Fund's needs. The Board considered by the Fund do not exceed a specified securities lending program and related whether AIM is financially sound and has maximum advisory fee rate, which maximum procedures with respect to the lending Fund the resources necessary to perform its rate includes breakpoints and is based on is in the best interests of the lending Fund obligations under the Advisory net asset levels. The Board considered the and its respective shareholders. The Board Agreement, and concluded that AIM has contractual nature of this fee waiver and therefore concluded that the investment of the financial resources necessary to noted that it remains in effect until April cash collateral received in connection with fulfill its obligations under the 30, 2008. The Board noted that AIM has the securities lending program in the money Advisory Agreement. contractually agreed to waive fees and/or market funds according to the procedures is limit expenses of the Fund through April 30, in the best interests of the lending Fund - Historical relationship between the 2008 in an amount necessary to limit total and its respective shareholders. Fund and AIM. In determining whether to annual operating expenses to a specified continue the Advisory Agreement for the percentage of average daily net assets for - Independent written evaluation and Fund, the Board also considered the each class of the Fund. The Board considered recommendations of the Fund's Senior prior relationship between AIM and the the contractual nature of this fee Officer. The Board noted that, upon their Fund, as well as the Board's knowledge waiver/expense limitation and noted that it direction, the Senior Officer of the Fund, of AIM's operations, and concluded that remains in effect through April 30, 2008. who is independent of AIM and AIM's it was beneficial to maintain the The Board considered the effect these fee affiliates, had prepared an independent current relationship, in part, because waivers/expense limitations would have on written evaluation in order to assist the of such knowledge. The Board also the Fund's estimated expenses and concluded Board in determining the reasonableness of reviewed the general nature of the that the levels of fee waivers/expense the proposed management fees of the AIM non-investment advisory services limitations for the Fund were fair and Funds, including the Fund. The Board noted currently performed by AIM and its reasonable. that the Senior Officer's written evaluation affiliates, such as administrative, had been relied upon by the Board in this transfer agency and distribution - Breakpoints and economies of scale. The regard in lieu of a competitive bidding services, and the fees received by AIM Board reviewed the structure of the Fund's process. In determining whether to continue and its affiliates for performing such advisory fee under the Advisory Agreement, the Advisory Agreement for the Fund, the services. In addition to reviewing such noting that it includes one breakpoint. The Board considered the Senior Officer's services, the trustees also considered Board reviewed the level of the Fund's written evaluation and the recommendation the organizational structure employed by advisory fees, and noted that such fees, as made by the Senior Officer to the Board that AIM and its affiliates to provide those a percentage of the Fund's net assets, would the Board consider whether the advisory fee services. Based on the review of these decrease as net assets increase because the waivers for certain equity AIM Funds, and other factors, the Board concluded Advisory Agreement includes a breakpoint. including the Fund, should be simplified. that AIM and its affiliates were The Board noted that, due to the Fund's The Board concluded that it would be qualified to continue to provide asset levels at the end of the past calendar advisable to consider this issue and reach a non-investment advisory services to the year and the way in which the advisory fee decision prior to the expiration date of Fund, including administrative, transfer breakpoint has been structured, the Fund has such advisory fee waivers. agency and distribution services, and yet to benefit from the breakpoint. The that AIM and its affiliates currently Board noted that AIM has contractually - Profitability of AIM and its affiliates. are providing satisfactory agreed to waive advisory fees of the Fund The Board reviewed information concerning non-investment advisory services. through April 30, 2008 to the extent the profitability of AIM's (and its necessary so that the advisory fees payable affiliates') investment advisory and other - Other factors and current trends. The by the Fund do not exceed a specified activities and its financial condition. The Board considered the steps that AIM and maximum advisory fee rate, which maximum Board considered the overall profitability its affiliates have taken over the last rate includes breakpoints and is based on of AIM, as well as the profitability of AIM several years, and continue to take, in net asset levels. The Board concluded that in connection with managing the Fund. The order to improve the quality and the Fund's fee levels under the Advisory Board noted that AIM's operations remain efficiency of the services they provide Agreement therefore would reflect economies profitable, although increased expenses in to the Funds in the areas of investment of scale at higher asset levels and that it recent years have reduced AIM's performance, product line was not necessary to change the advisory fee profitability. Based on the review of the diversification, distribution, fund breakpoints in the Fund's advisory fee profitability of AIM's and its affiliates' operations, shareholder services and schedule. investment advisory and other activities and compliance. The Board concluded that its financial condition, the Board concluded these steps taken by AIM have improved, - Investments in affiliated money market that the compensation to be paid by the Fund and are likely to continue to improve, funds. The Board also took into account the to AIM under its the quality and efficiency of the fact that uninvested cash and cash services AIM and its affiliates provide collateral from securities lending to the Fund in each of these areas, and arrangements, if any (collectively, "cash support the Board's approval of the balances") of continuance of the Advisory Agreement for the Fund.
8 AIM V.I. Capital Development Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE --------------------------------------------------------------------- COMMON STOCKS & OTHER EQUITY INTERESTS-95.67% ADVERTISING-1.29% Clear Channel Outdoor Holdings, Inc.-Class A(a) 86,112 $ 2,403,386 --------------------------------------------------------------------- Lamar Advertising Co.-Class A(a) 18,194 1,189,706 ===================================================================== 3,593,092 ===================================================================== AEROSPACE & DEFENSE-6.18% AerCap Holdings N.V. (Netherlands)(a) 119,300 2,765,374 --------------------------------------------------------------------- Armor Holdings, Inc.(a) 50,815 2,787,203 --------------------------------------------------------------------- KBR, Inc.(a)(b) 51,787 1,354,748 --------------------------------------------------------------------- L-3 Communications Holdings, Inc. 31,714 2,593,571 --------------------------------------------------------------------- Precision Castparts Corp. 55,290 4,328,101 --------------------------------------------------------------------- Spirit Aerosystems Holdings Inc.-Class A(a) 99,760 3,338,967 ===================================================================== 17,167,964 ===================================================================== AGRICULTURAL PRODUCTS-0.87% Bunge Ltd. 33,433 2,424,227 ===================================================================== AIR FREIGHT & LOGISTICS-0.94% Robinson (C.H.) Worldwide, Inc. 63,824 2,609,763 ===================================================================== ALTERNATIVE CARRIERS-0.98% Level 3 Communications, Inc.(a) 484,353 2,712,377 ===================================================================== APPAREL RETAIL-1.77% Abercrombie & Fitch Co.-Class A 37,676 2,623,380 --------------------------------------------------------------------- DSW Inc.-Class A(a)(b) 30,739 1,185,603 --------------------------------------------------------------------- Talbots, Inc. (The) 45,556 1,097,900 ===================================================================== 4,906,883 ===================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-3.30% Carter's, Inc.(a) 105,391 2,687,471 --------------------------------------------------------------------- Coach, Inc.(a) 64,598 2,775,130 --------------------------------------------------------------------- Polo Ralph Lauren Corp. 47,458 3,685,588 ===================================================================== 9,148,189 ===================================================================== APPLICATION SOFTWARE-5.14% Amdocs Ltd.(a) 76,003 2,945,116 --------------------------------------------------------------------- BEA Systems, Inc.(a) 106,965 1,345,620 --------------------------------------------------------------------- Cadence Design Systems, Inc.(a) 140,510 2,516,534 --------------------------------------------------------------------- Citrix Systems, Inc.(a) 88,457 2,392,762 ---------------------------------------------------------------------
SHARES VALUE ---------------------------------------------------------------------
APPLICATION SOFTWARE-(CONTINUED) Informatica Corp.(a) 216,236 $ 2,640,242 --------------------------------------------------------------------- TIBCO Software Inc.(a) 257,707 2,432,754 ===================================================================== 14,273,028 ===================================================================== ASSET MANAGEMENT & CUSTODY BANKS-0.77% Ameriprise Financial, Inc. 39,211 2,137,000 ===================================================================== BIOTECHNOLOGY-2.32% Celgene Corp.(a)(c) 39,400 2,266,682 --------------------------------------------------------------------- Genzyme Corp.(a) 45,400 2,795,732 --------------------------------------------------------------------- MedImmune, Inc.(a) 42,200 1,366,014 ===================================================================== 6,428,428 ===================================================================== CASINOS & GAMING-1.23% Scientific Games Corp.-Class A(a) 113,096 3,418,892 ===================================================================== COMMUNICATIONS EQUIPMENT-0.49% Comverse Technology, Inc.(a) 63,851 1,347,895 ===================================================================== COMPUTER STORAGE & PERIPHERALS-3.20% Emulex Corp.(a) 141,840 2,767,298 --------------------------------------------------------------------- Logitech International S.A. (Switzerland)(a) 90,317 2,582,163 --------------------------------------------------------------------- Network Appliance, Inc.(a) 40,114 1,575,678 --------------------------------------------------------------------- Seagate Technology 73,477 1,947,141 ===================================================================== 8,872,280 ===================================================================== CONSTRUCTION & ENGINEERING-2.34% Foster Wheeler Ltd.(a) 66,550 3,669,567 --------------------------------------------------------------------- Washington Group International, Inc.(a) 47,474 2,838,470 ===================================================================== 6,508,037 ===================================================================== CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS-0.72% Joy Global Inc. 41,178 1,990,545 ===================================================================== CONSUMER ELECTRONICS-0.95% Harman International Industries, Inc. 26,365 2,634,127 ===================================================================== DATA PROCESSING & OUTSOURCED SERVICES-2.96% Alliance Data Systems Corp.(a) 43,671 2,728,127 --------------------------------------------------------------------- CheckFree Corp.(a) 68,941 2,768,671 --------------------------------------------------------------------- Fidelity National Information Services, Inc. 67,900 2,722,111 ===================================================================== 8,218,909 =====================================================================
AIM V.I. Capital Development Fund
SHARES VALUE --------------------------------------------------------------------- DEPARTMENT STORES-0.95% Nordstrom, Inc. 53,680 $ 2,648,571 ===================================================================== DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES-2.54% Corrections Corp. of America(a) 84,728 3,832,248 --------------------------------------------------------------------- IHS Inc.-Class A(a) 81,807 3,229,740 ===================================================================== 7,061,988 ===================================================================== DRUG RETAIL-0.95% Shoppers Drug Mart Corp. (Canada) 61,600 2,645,473 ===================================================================== ELECTRICAL COMPONENTS & EQUIPMENT-1.04% Cooper Industries, Ltd.-Class A 31,848 2,880,015 ===================================================================== ELECTRONIC EQUIPMENT MANUFACTURERS-1.32% Agilent Technologies, Inc.(a) 29,581 1,030,898 --------------------------------------------------------------------- Amphenol Corp.-Class A 42,308 2,626,481 ===================================================================== 3,657,379 ===================================================================== ELECTRONIC MANUFACTURING SERVICES-0.91% Molex Inc. 79,479 2,513,921 ===================================================================== FERTILIZERS & AGRICULTURAL CHEMICALS-0.55% Potash Corp. of Saskatchewan Inc. (Canada) 10,634 1,525,766 ===================================================================== HEALTH CARE DISTRIBUTORS-1.02% Schein (Henry), Inc.(a) 57,735 2,827,860 ===================================================================== HEALTH CARE EQUIPMENT-0.51% ResMed Inc.(a) 29,000 1,427,380 ===================================================================== HEALTH CARE FACILITIES-1.62% Psychiatric Solutions, Inc.(a) 80,500 3,020,360 --------------------------------------------------------------------- United Surgical Partners International, Inc.(a) 51,957 1,472,981 ===================================================================== 4,493,341 ===================================================================== HEALTH CARE SERVICES-1.93% DaVita, Inc.(a) 44,700 2,542,536 --------------------------------------------------------------------- Pediatrix Medical Group, Inc.(a) 57,552 2,814,293 ===================================================================== 5,356,829 ===================================================================== HEALTH CARE SUPPLIES-0.51% PolyMedica Corp.(b) 35,100 1,418,391 ===================================================================== HEALTH CARE TECHNOLOGY-0.89% Cerner Corp.(a) 54,305 2,470,878 =====================================================================
SHARES VALUE ---------------------------------------------------------------------
HOTELS, RESORTS & CRUISE LINES-2.13% Hilton Hotels Corp. 84,033 $ 2,932,752 --------------------------------------------------------------------- Starwood Hotels & Resorts Worldwide, Inc. 47,801 2,987,562 ===================================================================== 5,920,314 ===================================================================== HOUSEWARES & SPECIALTIES-1.16% Jarden Corp.(a) 92,441 3,216,022 ===================================================================== INSURANCE BROKERS-0.80% National Financial Partners Corp. 50,391 2,215,692 ===================================================================== INTERNET SOFTWARE & SERVICES-0.48% WebEx Communications, Inc.(a) 38,526 1,344,172 ===================================================================== INVESTMENT BANKING & BROKERAGE-2.65% E*TRADE Financial Corp.(a) 57,675 1,293,073 --------------------------------------------------------------------- FBR Capital Markets Corp. (Acquired 07/14/06; Cost $1,110,000)(a)(d)(e) 74,000 1,110,000 --------------------------------------------------------------------- Lazard Ltd.-Class A (Bermuda) 41,852 1,981,274 --------------------------------------------------------------------- Schwab (Charles) Corp. (The) 153,471 2,968,129 ===================================================================== 7,352,476 ===================================================================== INVESTMENT COMPANIES-EXCHANGE TRADED FUNDS-0.74% iShares Nasdaq Biotechnology Index Fund(b) 26,300 2,045,088 ===================================================================== IT CONSULTING & OTHER SERVICES-0.90% Cognizant Technology Solutions Corp.-Class A(a) 32,490 2,506,928 ===================================================================== LIFE SCIENCES TOOLS & SERVICES-1.11% Invitrogen Corp.(a) 24,600 1,392,114 --------------------------------------------------------------------- Pharmaceutical Product Development, Inc. 52,600 1,694,772 ===================================================================== 3,086,886 ===================================================================== MANAGED HEALTH CARE-3.63% Aveta, Inc. (Acquired 12/21/05-02/21/06; Cost $2,162,718)(a)(d)(e) 157,251 2,673,267 --------------------------------------------------------------------- Coventry Health Care, Inc.(a) 55,160 2,760,758 --------------------------------------------------------------------- Health Net Inc.(a) 59,300 2,885,538 --------------------------------------------------------------------- Humana Inc.(a) 31,600 1,747,796 ===================================================================== 10,067,359 ===================================================================== MARINE-0.94% American Commercial Lines Inc.(a) 40,008 2,620,924 ===================================================================== OFFICE SERVICES & SUPPLIES-1.12% Knoll, Inc. 140,893 3,099,646 =====================================================================
AIM V.I. Capital Development Fund
SHARES VALUE --------------------------------------------------------------------- OIL & GAS DRILLING-1.88% ENSCO International Inc. 51,400 $ 2,573,084 --------------------------------------------------------------------- Noble Corp. 34,700 2,642,405 ===================================================================== 5,215,489 ===================================================================== OIL & GAS EQUIPMENT & SERVICES-2.62% FMC Technologies, Inc.(a) 43,900 2,705,557 --------------------------------------------------------------------- Grant Prideco, Inc.(a) 61,294 2,437,662 --------------------------------------------------------------------- Weatherford International Ltd.(a) 51,000 2,131,290 ===================================================================== 7,274,509 ===================================================================== OIL & GAS EXPLORATION & PRODUCTION-1.72% Rosetta Resources, Inc.(a)(f) 116,100 2,167,587 --------------------------------------------------------------------- Southwestern Energy Co.(a) 74,500 2,611,225 ===================================================================== 4,778,812 ===================================================================== OIL & GAS STORAGE & TRANSPORTATION-0.97% Williams Cos., Inc. (The) 103,400 2,700,808 ===================================================================== PHARMACEUTICALS-3.34% Allergan, Inc. 23,000 2,754,020 --------------------------------------------------------------------- Barr Pharmaceuticals Inc.(a) 54,900 2,751,588 --------------------------------------------------------------------- Medicis Pharmaceutical Corp.-Class A 43,900 1,542,207 --------------------------------------------------------------------- Shire PLC-ADR (United Kingdom) 36,200 2,235,712 ===================================================================== 9,283,527 ===================================================================== PROPERTY & CASUALTY INSURANCE-2.25% LandAmerica Financial Group, Inc. 45,519 2,872,704 --------------------------------------------------------------------- Security Capital Assurance Ltd. 121,417 3,379,035 ===================================================================== 6,251,739 ===================================================================== PUBLISHING-0.96% R.H. Donnelley Corp.(a) 42,654 2,675,685 ===================================================================== REAL ESTATE MANAGEMENT & DEVELOPMENT-1.53% CB Richard Ellis Group, Inc.-Class A(a) 127,876 4,245,483 ===================================================================== REGIONAL BANKS-1.17% Centennial Bank Holdings Inc.(a)(f) 121,445 1,148,870 --------------------------------------------------------------------- Signature Bank(a) 67,877 2,102,829 ===================================================================== 3,251,699 ===================================================================== RESTAURANTS-1.21% Burger King Holdings Inc.(a) 159,756 3,370,852 =====================================================================
SHARES VALUE ---------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT-1.22% Lam Research Corp.(a) 20,282 $ 1,026,675 --------------------------------------------------------------------- MEMC Electronic Materials, Inc.(a) 60,216 2,356,854 ===================================================================== 3,383,529 ===================================================================== SEMICONDUCTORS-1.14% Advanced Micro Devices, Inc.(a) 63,156 1,285,224 --------------------------------------------------------------------- Microsemi Corp.(a) 95,949 1,885,398 ===================================================================== 3,170,622 ===================================================================== SPECIALIZED FINANCE-1.20% Chicago Mercantile Exchange Holdings Inc.-Class A 6,524 3,325,609 ===================================================================== SPECIALTY STORES-1.44% Office Depot, Inc.(a) 68,991 2,633,387 --------------------------------------------------------------------- PetSmart, Inc. 47,741 1,377,805 ===================================================================== 4,011,192 ===================================================================== STEEL-0.98% Allegheny Technologies, Inc. 29,945 2,715,413 ===================================================================== TECHNOLOGY DISTRIBUTORS-0.49% Arrow Electronics, Inc.(a) 43,368 1,368,260 ===================================================================== THRIFTS & MORTGAGE FINANCE-0.16% People's Choice Financial Corp. (Acquired 12/21/04-06/09/06; Cost $1,869,515)(d)(e) 220,654 441,308 ===================================================================== TRADING COMPANIES & DISTRIBUTORS-1.04% WESCO International, Inc.(a) 49,275 2,897,863 ===================================================================== WIRELESS TELECOMMUNICATION SERVICES-4.50% American Tower Corp.-Class A(a) 71,482 2,664,849 --------------------------------------------------------------------- Crown Castle International Corp.(a) 38,454 1,242,064 --------------------------------------------------------------------- Leap Wireless International, Inc.(a) 35,876 2,133,546 --------------------------------------------------------------------- NII Holdings Inc.(a) 57,207 3,686,419 --------------------------------------------------------------------- SBA Communications Corp.-Class A(a) 100,485 2,763,337 ===================================================================== 12,490,215 ===================================================================== Total Common Stocks & Other Equity Interests (Cost $219,603,883) 265,647,549 =====================================================================
NUMBER OF EXERCISE EXPIRATION CONTRACTS PRICE DATE ---------------------------------------------------------------------------------------------- CALL OPTIONS PURCHASED-0.03% CASINOS & GAMING-0.03% Harrah's Entertainment, Inc. (Cost $64,521)(d) 321 $80 Jan-07 96,477 ==============================================================================================
AIM V.I. Capital Development Fund
SHARES VALUE --------------------------------------------------------------------- MONEY MARKET FUNDS-12.36% Liquid Assets Portfolio-Institutional Class(g) 17,152,937 $ 17,152,937 --------------------------------------------------------------------- Premier Portfolio-Institutional Class(g) 17,152,937 17,152,937 ===================================================================== Total Money Market Funds (Cost $34,305,874) 34,305,874 ===================================================================== TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-108.06% (Cost $253,974,278) 300,049,900 ===================================================================== INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-1.52% Liquid Assets Portfolio(g)(h) 2,108,462 2,108,462 --------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class(g)(h) 2,108,462 2,108,462 ===================================================================== Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $4,216,924) 4,216,924 ===================================================================== TOTAL INVESTMENTS-109.58% (Cost $258,191,202) 304,266,824 ===================================================================== OTHER ASSETS LESS LIABILITIES-(9.58)% (26,608,910) ===================================================================== NET ASSETS-100.00% $277,657,914 _____________________________________________________________________ =====================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) Non-income producing security. (b) All or a portion of this security was out on loan at December 31, 2006. (c) A portion of this security is subject to call options written. See Note 1K and Note 9. (d) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The aggregate value of these securities considered illiquid at December 31, 2006 was $4,321,052, which represented 1.56% of the Fund's Net Assets. (e) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $4,224,575, which represented 1.52% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (f) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The aggregate value of these securities at December 31, 2006 was $3,316,457, which represented 1.19% of the Fund's Net Assets. See Note 1A. (g) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (h) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Development Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $219,668,404)* $265,744,026 ------------------------------------------------------------- Investments in affiliated money market funds (cost $38,522,798) 38,522,798 ============================================================= Total investments (cost $258,191,202) 304,266,824 ============================================================= Receivables for: Investments sold 39,693 ------------------------------------------------------------- Fund shares sold 134,122 ------------------------------------------------------------- Dividends 105,126 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 38,098 ============================================================= Total assets 304,583,863 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 22,076,527 ------------------------------------------------------------- Fund shares reacquired 249,866 ------------------------------------------------------------- Options written, at value (premiums received $60,617) 63,981 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 47,805 ------------------------------------------------------------- Collateral upon return of securities loaned 4,216,924 ------------------------------------------------------------- Accrued administrative services fees 151,060 ------------------------------------------------------------- Accrued distribution fees-Series II 75,753 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,942 ------------------------------------------------------------- Accrued transfer agent fees 2,995 ------------------------------------------------------------- Accrued operating expenses 37,096 ============================================================= Total liabilities 26,925,949 ============================================================= Net assets applicable to shares outstanding $277,657,914 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $204,571,039 ------------------------------------------------------------- Undistributed net investment income (loss) (42,127) ------------------------------------------------------------- Undistributed net realized gain from investment securities, foreign currencies and option contracts 27,056,645 ------------------------------------------------------------- Unrealized appreciation of investment securities, foreign currencies and option contracts 46,072,357 ============================================================= $277,657,914 ============================================================= NET ASSETS: Series I $148,667,546 _____________________________________________________________ ============================================================= Series II $128,990,368 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 8,067,394 _____________________________________________________________ ============================================================= Series II 7,093,007 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 18.43 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 18.19 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $4,078,421 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $6,390) $ 868,779 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $48,197) 501,584 ============================================================ Total investment income 1,370,363 ============================================================ EXPENSES: Advisory fees 1,709,822 ------------------------------------------------------------ Administrative services fees 613,485 ------------------------------------------------------------ Custodian fees 33,495 ------------------------------------------------------------ Distribution fees-Series II 256,263 ------------------------------------------------------------ Transfer agent fees 25,802 ------------------------------------------------------------ Trustees' and officer's fees and benefits 21,140 ------------------------------------------------------------ Other 76,078 ============================================================ Total expenses 2,736,085 ============================================================ Less: Fees waived and expense offset arrangements (17,485) ============================================================ Net expenses 2,718,600 ============================================================ Net investment income (loss) (1,348,237) ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES AND OPTION CONTRACTS: Net realized gain from: Investment securities (includes net gains (losses) from securities sold to affiliates of $(62,732)) 28,699,124 ------------------------------------------------------------ Foreign currencies 16,243 ------------------------------------------------------------ Option contracts written 31,810 ============================================================ 28,747,177 ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities 6,375,399 ------------------------------------------------------------ Foreign currencies 56 ------------------------------------------------------------ Option contracts written (3,364) ============================================================ 6,372,091 ============================================================ Net gain from investment securities, foreign currencies and option contracts 35,119,268 ============================================================ Net increase in net assets resulting from operations $33,771,031 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Development Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) $ (1,348,237) $ (615,055) ------------------------------------------------------------------------------------------ Net realized gain from investment securities, foreign currencies and option contracts 28,747,177 15,864,577 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities, foreign currencies and option contracts 6,372,091 2,049,753 ========================================================================================== Net increase in net assets resulting from operations 33,771,031 17,299,275 ========================================================================================== Distributions to shareholders from net realized gains: Series I (2,202,279) -- ------------------------------------------------------------------------------------------ Series II (2,172,661) -- ========================================================================================== Decrease in net assets resulting from distributions (4,374,940) -- ========================================================================================== Share transactions-net: Series I 14,360,380 (5,082,619) ------------------------------------------------------------------------------------------ Series II 32,838,781 5,478,755 ========================================================================================== Net increase in net assets resulting from share transactions 47,199,161 396,136 ========================================================================================== Net increase in net assets 76,595,252 17,695,411 ========================================================================================== NET ASSETS: Beginning of year 201,062,662 183,367,251 ========================================================================================== End of year (including undistributed net investment income (loss) of $(42,127) and $(35,292), respectively) $277,657,914 $201,062,662 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Capital Development Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Capital Development Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Capital Development Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains or investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. AIM V.I. Capital Development Fund L. PUT OPTIONS PURCHASED -- The Fund may purchase put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the securities hedged. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $350 million 0.75% -------------------------------------------------------------------- Over $350 million 0.625% ___________________________________________________________________ ====================================================================
Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.745% -------------------------------------------------------------------- Next $250 million 0.73% -------------------------------------------------------------------- Next $500 million 0.715% -------------------------------------------------------------------- Next $1.5 billion 0.70% -------------------------------------------------------------------- Next $2.5 billion 0.685% -------------------------------------------------------------------- Next $2.5 billion 0.67% -------------------------------------------------------------------- Next $2.5 billion 0.655% -------------------------------------------------------------------- Over $10 billion 0.64% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the total annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $13,606. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the AIM V.I. Capital Development Fund maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $62,435 for accounting and fund administrative services and reimbursed $551,050 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $2,131,393 $ 69,793,956 $ (54,772,412) $ -- $17,152,937 $226,490 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 46,833,721 (29,680,784) -- 17,152,937 110,035 -- ---------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 2,131,393 27,613,809 (29,745,202) -- -- 116,862 -- ================================================================================================================================== Subtotal $4,262,786 $144,241,486 $(114,198,398) $ -- $34,305,874 $453,387 $ -- ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $2,628,362 $ 18,130,936 $ (18,650,836) $ -- $ 2,108,462 $ 24,045 $ -- ---------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 2,628,362 18,130,936 (18,650,836) -- 2,108,462 24,152 -- ================================================================================================================================== Subtotal $5,256,724 $ 36,261,872 $ (37,301,672) $ -- $ 4,216,924 $ 48,197 $ -- ================================================================================================================================== Total Investments in Affiliates $9,519,510 $180,503,358 $(151,500,070) $ -- $38,522,798 $501,584 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $14,139,514, which resulted in net realized gains (losses) of $(62,732), and securities purchases of $10,792,859. AIM V.I. Capital Development Fund NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $3,879. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,549 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $4,078,421 were on loan to brokers. The loans were secured by cash collateral of $4,216,924 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $48,197 for securities lending transactions, which are net of compensation to counterparties. AIM V.I. Capital Development Fund NOTE 9--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ----------------------------------------------------------------------------------- CALL OPTION CONTRACTS --------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ----------------------------------------------------------------------------------- Beginning of period -- $ -- ----------------------------------------------------------------------------------- Written 1,030 136,437 ----------------------------------------------------------------------------------- Exercised (260) (44,010) ----------------------------------------------------------------------------------- Expired (420) (31,810) =================================================================================== End of period 350 $ 60,617 ___________________________________________________________________________________ ===================================================================================
OPEN CALL OPTIONS WRITTEN AT PERIOD END --------------------------------------------------------------------------------------------------------------------------------- UNREALIZED CONTRACT STRIKE NUMBER OF PREMIUMS VALUE APPRECIATION MONTH PRICE CONTRACTS RECEIVED 12/31/06 (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------------------- Celgene Corp. Jan-07 $58 350 $60,617 $63,981 $(3,364) _________________________________________________________________________________________________________________________________ =================================================================================================================================
NOTE 10--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------- Distributions paid from: Ordinary income $ 262,849 $ -- ---------------------------------------------------------------------------------- Long-term capital gain 4,112,091 -- ================================================================================== Total distributions $4,374,940 $ -- __________________________________________________________________________________ ==================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 10,029,801 ---------------------------------------------------------------------------- Undistributed long-term gain 17,305,814 ---------------------------------------------------------------------------- Unrealized appreciation -- investments 45,793,387 ---------------------------------------------------------------------------- Temporary book/tax differences (42,127) ---------------------------------------------------------------------------- Shares of beneficial interest 204,571,039 ============================================================================ Total net assets $277,657,914 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales the deferral of losses on certain straddles. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $98 and option contracts written of $(3,364). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. AIM V.I. Capital Development Fund NOTE 11--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $297,251,035 and $263,359,586, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $49,119,644 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (3,322,991) =============================================================================== Net unrealized appreciation of investment securities $45,796,653 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $258,470,171.
NOTE 12--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions, partnership investments and net operating losses, on December 31, 2006, undistributed net investment income (loss) was increased by $1,341,402, undistributed net realized gain was decreased by $1,336,390 and shares of beneficial interest decreased by $5,012. This reclassification had no effect on the net assets of the Fund. NOTE 13--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006(A) 2005 -------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------------------------------------------------- Sold: Series I 2,145,804 $38,715,460 2,974,458 $ 42,960,820 ----------------------------------------------------------------------------------------------------------------------- Series II 2,681,069 46,879,330 1,426,079 20,815,915 ======================================================================================================================= Issued as reinvestment of dividends: Series I 117,706 2,202,279 -- -- ----------------------------------------------------------------------------------------------------------------------- Series II 117,632 2,172,661 -- -- ======================================================================================================================= Reacquired: Series I (1,511,376) (26,557,359) (3,289,224) (48,043,439) ----------------------------------------------------------------------------------------------------------------------- Series II (944,292) (16,213,210) (1,085,094) (15,337,160) ======================================================================================================================= 2,606,543 $47,199,161 26,219 $ 396,136 _______________________________________________________________________________________________________________________ =======================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 76% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 14--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Capital Development Fund NOTE 15 -- FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I --------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 16.09 $ 14.68 $ 12.71 $ 9.39 $ 11.94 ----------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.07) (0.04) (0.03)(a) (0.01) (0.01)(a) ----------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.73 1.45 2.00 3.33 (2.54) ======================================================================================================================= Total from investment operations 2.66 1.41 1.97 3.32 (2.55) ======================================================================================================================= Less distributions from net realized gains (0.32) -- -- -- -- ======================================================================================================================= Net asset value, end of period $ 18.43 $ 16.09 $ 14.68 $ 12.71 $ 9.39 _______________________________________________________________________________________________________________________ ======================================================================================================================= Total return(b) 16.52% 9.61% 15.50% 35.36% (21.36)% _______________________________________________________________________________________________________________________ ======================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $148,668 $117,674 $112,028 $93,813 $70,018 _______________________________________________________________________________________________________________________ ======================================================================================================================= Ratio of expenses to average net assets 1.08%(c)(d) 1.09% 1.10% 1.13% 1.14% ======================================================================================================================= Ratio of net investment income (loss) to average net assets (0.48)%(c) (0.22)% (0.21)% (0.13)% (0.08)% _______________________________________________________________________________________________________________________ ======================================================================================================================= Portfolio turnover rate 119% 125% 93% 95% 121% _______________________________________________________________________________________________________________________ =======================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $125,471,170. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.09% for the year ended December 31, 2006.
SERIES II ------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.92 $ 14.57 $ 12.64 $ 9.36 $ 11.94 --------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.10) (0.07) (0.06)(a) (0.03) (0.03)(a) --------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.69 1.42 1.99 3.31 (2.55) ===================================================================================================================== Total from investment operations 2.59 1.35 1.93 3.28 (2.58) ===================================================================================================================== Less distributions from net realized gains (0.32) -- -- -- -- ===================================================================================================================== Net asset value, end of period $ 18.19 $ 15.92 $ 14.57 $ 12.64 $ 9.36 _____________________________________________________________________________________________________________________ ===================================================================================================================== Total return(b) 16.26% 9.27% 15.27% 35.04% (21.61)% _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $128,990 $83,388 $71,339 $33,550 $14,969 _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratio of expenses to average net assets 1.33%(c)(d) 1.34% 1.35% 1.38% 1.39% ===================================================================================================================== Ratio of net investment income (loss) to average net assets (0.73)%(c) (0.47)% (0.46)% (0.38)% (0.33)% _____________________________________________________________________________________________________________________ ===================================================================================================================== Portfolio turnover rate 119% 125% 93% 95% 121% _____________________________________________________________________________________________________________________ =====================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $102,505,185. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.34% for the year ended December 31, 2006. NOTE 16--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil AIM V.I. Capital Development Fund NOTE 16--LEGAL PROCEEDINGS--(CONTINUED) penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Capital Development Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Capital Development Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Capital Development Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, and the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Capital Development Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006:
FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $4,112,091 Corporate Dividends Received Deduction* 99.43%
* The above percentages are based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Capital Development Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Capital Development Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
Domestic Equity AIM V.I. CORE EQUITY FUND Large-Cap Blend Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 [COVER GLOBE IMAGE] or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from AIM V.I. CORE EQUITY FUND seeks to our Client Services department at 800-410-4246 provide growth of capital. or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Unless otherwise stated, information presented Web site. Go to AIMinvestments.com, access the About in this report is as of December 31, 2006, Us tab, click on Required Notices and then click on and is based on total net assets. Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ============================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING SALES [AIM INVESTMENTS LOGO] CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY -- Registered Trademark -- BEFORE INVESTING. ============================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. CORE EQUITY FUND MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE Business analysis allows us to identify key drivers of the company, understand ===================================================================================== industry challenges and evaluate the sustainability of competitive PERFORMANCE SUMMARY advantages. Financial analysis provides vital insights into historical and For the year ended December 31, 2006, AIM V. I. Core Equity potential ROIC, a key indicator of Fund posted positive returns, outperforming the Fund's business quality and the caliber of style-specific and the broad market benchmarks. The Fund management. Both the business and delivered positive results in all major sectors, and financial analyses serve as a basis to holdings in consumer staples and information technology (IT) construct valuation models that help us delivered returns significantly in excess of the estimate a company's value. We use three style-specific index. The Fund's cash weighting and an primary valuation techniques -- underweight position in financials relative to the discounted cash flow, traditional style-specific index detracted from returns. absolute and industry-relative valuation multiples and net asset value. Your Fund's long-term performance appears on pages 4 - 5. Our risk management strategy includes FUND VS. INDEXES in-depth fundamental research, as well as diversifying Fund holdings across Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. industries and sectors and generally If variable product issuer charges were included, returns would be lower. limiting the size of individual holdings to less than 25% of the portfolio. Series I Shares 16.70% Series II Shares 16.42 We consider selling a stock when: S&P 500 --REGISTERED TRADEMARK-- Index (Broad Market Index) 15.78 Russell 1000 --REGISTERED TRADEMARK-- Index (Style-Specific Index) 15.46 - The value of the stock exceeds our Lipper Large-Cap Core Funds Index (Peer Group Index) 13.39 best-case appraisal of its worth. SOURCE: LIPPER INC. - We haven't seen, nor do we envision, a demonstrable improvement in ===================================================================================== fundamentals. HOW WE INVEST capital (ROIC) and appreciation - More compelling investment potential. The process we use to opportunities exist. We manage your Fund as a large-cap identify potential investments includes core fund, seeking to deliver solid three phases: MARKET CONDITIONS AND YOUR FUND absolute investment results as well as downside protection in difficult - Business analysis to determine both Fiscal year 2006 proved to be a better markets. We believe the Fund can the attractiveness of an industry and year for investors than most serve as cornerstone of, or ballast the company's competitive position prognosticators had expected. The within, a well-diversified market's version of the Goldilocks fable portfolio by complementing more - Financial analysis to determine ROIC played out as Wall Street eventually style-specific value and growth levels and trends and to understand came to the conclusion that the economy investments. capital allocation decisions is "just right." However, investors should remember that in this We conduct intensive - Valuation analysis to identify fundamental research to gain a attractively valued companies thorough understanding of a company's business prospects, return on invested ==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector 1. Pharmaceuticals 7.7% 1. Tyco International Ltd. 2.9% Information Technology 16.9% 2. Industrial Conglomerates 5.8 2. Exxon Mobil Corp. 2.9 Consumer Staples 15.8 3. Packaged Foods & Meats 5.2 3. Berkshire Hathaway Inc.-Class A 2.7 Industrials 12.7 4. Property & Casualty Insurance 5.1 4. AT&T Inc. 2.5 Financials 12.6 5. Communications Equipment 4.4 5. Cadbury Schweppes PLC Health Care 9.6 (United Kingdom) 2.5 Energy 9.5 6. Microsoft Corp. 2.5 Consumer Discretionary 7.0 Total Net Assets $2.74 billion Telecommunication Services 3.7 7. Cisco Systems, Inc. 2.3 Utilities 1.8 Total Number of Holdings* 65 8. Estee Lauder Cos. Inc. (The) MONEY MARKET FUNDS PLUS -Class A 2.1 OTHER ASSETS LESS LIABILITIES 10.4 9. Waste Management, Inc. 2.1 10. Amgen Inc. 1.9 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
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AIM V.I. CORE EQUITY FUND classic children's tale, the bears tics" -- sustainable growth prospects, The defensive positioning of the Fund eventually do come home. high ROIC, productive capital led to an overweight position in allocation practices and opportunistic consumer staples versus the Strong economic data propelled the valuations -- that in our view are style-specific index, while markets early in the year, with necessary to deliver competitive significant underweight positions small-cap stocks leading the way. long-term returns and mitigate remained in the financials and However, several uncertainties downside risk. consumer discretionary sectors. persisted throughout the year. Ben Additionally, the Fund has acquired Bernanke was appointed the new Attractive valuation, paired with more both foreign common shares and chairman of the U.S. Federal Reserve stable cash-flow generating business American Depository Receipts to take Board (the Fed); Middle East tensions models, led to the Fund's overweight advantage of compelling risk/reward escalated; U.S. residential housing position in consumer staples relative opportunities in high-quality foreign markets showed signs of cooling; and to the style-specific benchmark and companies. Total exposure to foreign rising energy prices heightened resulted in higher sector returns. Our stocks remained below the 25% inflation concerns. As a result, the analysis suggests that consumer limitation mandated by the Fund's markets contracted midway through the staples companies tend to be more prospectus. year as investors anticipated a profitable in a slower growth economic potential economic downturn. This environment. A top performer in 2006 IN CLOSING downturn in stock prices affected the was HEINEKEN N.V. We originally more economically sensitive small-cap invested in 2004 based on what we As a core manager, we are committed to stocks more than large caps. believed to be a unique valuation adding value with superior opportunity created by widespread risk-adjusted returns and lower However, small companies led the rally investor skepticism about the firm's overall volatility versus more that ensued during the second half of ability to increase revenues and aggressive equity investments. As 2006 and trended positively until profits. Management gradually gained always, we thank you for your year-end. the respect of investors after several continued investment in the AIM V.I. beneficial acquisitions drove market Core Equity Fund. With continued strong broad market share expansion in high-growth markets returns, 2006 caps several years of worldwide. These successful capital The views and opinions expressed in strong market performance without a allocation decisions have proved management's discussion of Fund significant market correction. In four profitable for shareholders such as performance are those of A I M out of the last five years, small caps us, who invested amid controversy and Advisors, Inc. These views and (as represented by the Russell 2000 with a long-term perspective. opinions are subject to change at any --Registered Trademark-- Index) have time based on factors such as market out- performed large caps (as CISCO SYSTEMS INC. was also a top and economic conditions. These views represented by the Russell 1000 performer in 2006. We first invested and opinions may not be relied upon as Index). Telecommunications, REITs and in 2005, when slow business growth investment advice or recommendations, energy issues were the best markets, reduced valuations to what we believed or as an offer for a particular while IT and health care lagged the were unjustifiably low levels for an security. The information is not a broader index. industry-leading franchise. Cisco complete analysis of every aspect of management has since focused on any market, country, industry, Your Fund's returns were fairly strong reigniting growth with new products, security or the Fund. Statements of across most sectors, with notable acquisitions and heavy investment in fact are from sources considered strength within consumer staples and their sales and distribution reliable, but A I M Advisors, Inc. IT, thanks largely to strong stock capabilities. As a result, revenues makes no representation or warranty as selection. We positioned the Fund have increased and management is to their completeness or accuracy. slightly more defensively than the optimistic. Although historical performance is no style-specific index because our guarantee of future results, these fundamental research indicated that The financials sector detracted from insights may help you understand our valuations were extended in the more the Fund's relative returns in 2006. investment management philosophy. speculative and economically sensitive We believed that regional banks in parts of the market. These extended particular exhibited a higher risk Ronald S. Sloan valuations reflected an elevated profile and less upside potential than [SLOAN Chartered Financial Analyst, appetite for risk among investors who we require because of increased PHOTO] senior portfolio manager, is lead believe that a Goldilocks scenario of potential for consumer loan defaults manager of AIM V.I. Core Equity slower, but stable, growth and stable resulting from recent lenient lending Fund. Mr. Sloan has been in the investment inflation expectations sets the stage restrictions. In addition, some industry since 1971. He joined AIM in 1998. for further stock market appreciation. financial firms' valuations are Mr. Sloan attended the University of trading well above their historical Missouri, where he earned both a B.S. in Our emphasis on capital preservation averages. business administration and an M.B.A. -- which has been and continues to be one of our consistent objectives as The Fund's cash position also Assisted by the Mid/Large Cap Core Team managers of your Fund -- requires us detracted from overall returns. While to gain an understanding of downside we regret this detraction, our long-term For a discussion of the risks of investing risk. Irrespective of broad market investment perspective and commitment to in your Fund, indexes used in this report trends, we consistently seek companies investing prudently discourages spending and your Fund's long-term performance, that display what we refer to as "core cash solely to "chase" market performance, please see pages 4-5. characteris- which could create unnecessary risk.
3 AIM V.I. CORE EQUITY FUND YOUR FUND'S LONG-TERM PERFORMANCE ====================================== AVERAGE ANNUAL TOTAL RETURNS AND THE RESTATED HISTORICAL PERFORMANCE INSURANCE COMPANIES ISSUING VARIABLE OF SERIES I SHARES (FOR PERIODS PRIOR TO PRODUCTS. YOU CANNOT PURCHASE SHARES OF As of 12/31/06 INCEPTION OF THE SERIES II SHARES) THE FUND DIRECTLY. PERFORMANCE FIGURES SERIES I SHARES ADJUSTED TO REFLECT THE RULE 12B-1 FEES GIVEN REPRESENT THE FUND AND ARE NOT Inception (5/2/94) 9.64% APPLICABLE TO THE SERIES II SHARES. THE INTENDED TO REFLECT ACTUAL VARIABLE 10 Years 7.17 PERFORMANCE OF THE FUND'S SERIES I AND PRODUCT VALUES. THEY DO NOT REFLECT 5 Years 7.06 SERIES II SHARE CLASSES WILL DIFFER SALES CHARGES, EXPENSES AND FEES 1 Year 16.70 PRIMARILY DUE TO DIFFERENT CLASS ASSESSED IN CONNECTION WITH A VARIABLE EXPENSES. PRODUCT. SALES CHARGES, EXPENSES AND SERIES II SHARES FEES, WHICH ARE DETERMINED BY THE 10 Years 6.91% THE PERFORMANCE DATA QUOTED REPRESENT VARIABLE PRODUCT ISSUERS, WILL VARY AND 5 Years 6.80 PAST PERFORMANCE AND CANNOT GUARANTEE WILL LOWER THE TOTAL RETURN. 1 Year 16.42 COMPARABLE FUTURE RESULTS; CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. PER NASD REQUIREMENTS, THE MOST RECENT ======================================= PLEASE CONTACT YOUR VARIABLE PRODUCT MONTH-END PERFORMANCE DATA AT THE FUND ======================================= ISSUER OR FINANCIAL ADVISOR FOR THE MOST LEVEL, EXCLUDING VARIABLE PRODUCT RECENT MONTH-END VARIABLE PRODUCT CHARGES, IS AVAILABLE ON THIS AIM CUMULATIVE TOTAL RETURNS PERFORMANCE. PERFORMANCE FIGURES REFLECT AUTOMATED INFORMATION LINE, FUND EXPENSES, REINVESTED DISTRIBUTIONS 866-702-4402. AS MENTIONED ABOVE, FOR 6 months ended 12/31/06 AND CHANGES IN NET ASSET VALUE. THE MOST RECENT MONTH-END PERFORMANCE Series I Shares 12.16% INCLUDING VARIABLE PRODUCT CHARGES, Series II Shares 12.00 INVESTMENT RETURN AND PRINCIPAL VALUE PLEASE CONTACT YOUR VARIABLE PRODUCT WILL FLUCTUATE SO THAT YOU MAY HAVE A ISSUER OR FINANCIAL ADVISOR. ======================================= GAIN OR LOSS WHEN YOU SELL SHARES. SERIES II SHARES' INCEPTION DATE IS AIM V.I. CORE EQUITY FUND, A SERIES OCTOBER 24, 2001. RETURNS SINCE THAT PORTFOLIO OF AIM VARIABLE INSURANCE DATE ARE HISTORICAL. ALL OTHER RETURNS FUNDS, IS CURRENTLY OFFERED THROUGH ARE THE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF THE FUND'S SERIES II SHARES SINCE THEIR INCEPTION ================================================================================================================================= Principal risks of investing in the Fund smaller size and lesser liquidity of The unmanaged Russell 1000 Index these markets, high inflation rates, represents the performance of the stocks Prices of equity securities change in adverse political developments and lack of large-capitalization companies. response to many factors including the of timely information. historical and prospective earnings of The unmanaged Lipper Large-Cap Core the issuer, the value of its assets, To the extent the Fund holds cash or Funds Index represents an average of the general economic conditions, interest cash equivalents rather than equity performance of the 30 largest rates, investor perceptions and market securities for risk management purposes, large-capitalization core equity funds liquidity. the Fund may not achieve its investment tracked by Lipper Inc., an independent objective. mutual fund performance monitor. The value of convertible securities in which the Fund invests may be affected If the seller of a repurchase agreement The unmanaged Russell 2000 Index by market interest rates, the risk that in which the Fund invests defaults on represents the performance of the stocks the issuer may default on interest or its obligation or declares bankruptcy, of small-capitalization companies. principal payments and the value of the the Fund may experience delays in underlying common stock into which these selling the securities underlying the The Russell 1000 Index and the Russell securities may be converted. repurchase agreement. 2000 Index are trademarks/service marks of the Frank Russell Company. Russell Foreign securities have additional There is no guarantee that the --REGISTERED TRADEMARK-- is a trademark risks, including exchange rate changes, investment techniques and risk analyses of the Frank Russell Company. political and economic upheaval, the used by the Fund's portfolio managers relative lack of information about these will produce the desired results. In conjunction with the annual companies, relatively low market prospectus update on or about May 1, liquidity and the potential lack of About indexes used in this report 2007, the AIM V.I. Core Equity Fund strict financial and accounting controls prospectus will be amended to reflect and standards. The unmanaged Standard & Poor's that the Fund has elected to use the Composite Index of 500 Stocks (the S&P Lipper Variable Underlying Funds (VUF) Investing in emerging markets involves 500 Index) is an index of common stocks Large-Cap Core Funds Index as its peer greater risk than investing in more frequently used as a general measure of group rather than the Lipper Large-Cap established markets. The risks include U.S. stock market performance. Core Funds Index. The Lipper VUF the relatively Large-Cap Core Funds Index, recently published by Lipper Inc. Continued on page 5
4 AIM V.I. CORE EQUITY FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. This chart, which is a logarithmic In this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value value of the Fund and its indexes. We of the investment. In other words, the believe that a logarithmic chart is more space between $5,000 and $10,000 is the effective than other types of charts in same size as the space between $10,000 illustrating changes in value during the and $20,000, and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ================================================================================================================================ Continued from page 4 comprises the largest underlying funds Other information level only and do not include variable in each variable insurance category and product issuer charges. If such charges does not include mortality and expense The returns shown in management's were included, the total returns would fees. discussion of Fund performance are based be lower. on net asset values calculated for The Fund is not managed to track the shareholder transactions. Generally Industry classifications used in this performance of any particular index, accepted accounting principles require report are generally according to the including the indexes defined here, and adjustments to be made to the net assets Global Industry Classification Standard, consequently, the performance of the of the Fund at period end for financial which was developed by and is the Fund may deviate significantly from the reporting purposes, and as such, the net exclusive property and a service mark of performance of the index. asset values for shareholder Morgan Stanley Capital International transactions and the returns based on Inc. and Standard & Poor's. A direct investment cannot be made in those net asset values may differ from an index. Unless otherwise indicated, the net asset values and returns The Chartered Financial Analyst --Regis- index results include reinvested reported in the Financial Highlights. Tered Trademark-- (CFA --Registered dividends, and they do not reflect sales Additionally, the returns and net asset Trademark--) designation is a globally charges. Performance of an index of values shown throughout this report are recognized standard for measuring the funds reflects fund expenses; performance at the Fund competence and integrity of investment of a market index does not. professionals.
5
=========================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/94, Fund data from 5/2/94 AIM V.I. CORE EQUITY FUND DATE -SERIES I SHARES S&P 500 INDEX RUSSELL 1000 INDEX LIPPER LARGE-CAP CORE FUNDS INDEX 4/30/94 $ 10000 $ 10000 $ 10000 5/94 $ 9820 10163 10133 10079 6/94 9770 9915 9862 9813 7/94 10030 10240 10183 10107 8/94 10450 10659 10613 10468 9/94 10194 10399 10366 10249 10/94 10345 10632 10562 10414 11/94 9903 10245 10182 10047 12/94 9999 10397 10327 10140 1/95 10090 10666 10594 10319 2/95 10454 11081 11025 10674 3/95 10867 11408 11309 10939 4/95 11202 11744 11609 11180 5/95 11577 12212 12055 11541 6/95 12014 12495 12374 11844 7/95 12562 12910 12847 12248 8/95 12724 12942 12944 12267 9/95 13301 13488 13476 12726 10/95 13058 13440 13415 12667 11/95 13454 14029 14013 13162 12/95 13388 14299 14227 13361 1/96 13684 14785 14687 13754 2/96 13968 14923 14878 13921 3/96 14052 15066 15011 14048 4/96 14401 15288 15240 14252 5/96 14707 15682 15606 14537 6/96 14644 15742 15623 14558 7/96 13884 15047 14870 13963 8/96 14327 15364 15274 14280 9/96 15161 16228 16133 15020 10/96 15277 16676 16490 15319 11/96 16228 17935 17707 16312 12/96 16057 17580 17421 16012 1/97 16998 18678 18454 16887 2/97 16934 18824 18524 16867 3/97 15930 18052 17690 16144 4/97 16720 19129 18647 17039 5/97 17990 20299 19841 18073 6/97 18739 21201 20664 18857 7/97 20427 22887 22355 20346 8/97 19455 21606 21300 19311 9/97 20641 22789 22468 20305 10/97 19744 22029 21740 19679 11/97 20097 23048 22683 20322 12/97 20187 23443 23144 20691 1/98 20337 23702 23316 20895 2/98 21610 25411 24978 22376 3/98 22615 26711 26238 23482 4/98 22583 26984 26508 23720 5/98 21985 26521 25934 23315 6/98 23097 27598 26894 24423 7/98 23118 27306 26571 24226 8/98 19384 23361 22599 20600 9/98 20379 24859 24121 21624 10/98 22154 26878 26026 23246 11/98 23609 28506 27637 24628 12/98 25774 30148 29398 26264 1/99 27174 31408 30447 27182 2/99 26133 30432 29480 26342 3/99 27902 31649 30610 27402 4/99 28293 32875 31890 28136 5/99 27532 32099 31201 27390 6/99 29528 33876 32791 28918 7/99 28441 32823 31789 28070 8/99 28418 32660 31492 27784 9/99 28060 31766 30626 27031 10/99 29741 33775 32684 28687 11/99 30978 34462 33525 29390 12/99 34597 36489 35545 31345 1/00 33317 34656 34090 30078 2/00 34456 34000 33999 30068 3/00 37467 37324 37097 32683 4/00 34991 36202 35860 31615 5/00 33031 35460 34933 30810 =========================================================================================================================== SOURCE: LIPPER INC.
=================================================================================================================== [MOUNTAIN CHART] 6/00 34980 36333 35823 31938 7/00 35057 35765 35228 31440 8/00 37851 37986 37836 33609 9/00 35330 35981 36079 31819 10/00 33875 35828 35645 31451 11/00 29044 33006 32385 28685 12/00 29561 33167 32777 29036 1/01 30826 34343 33855 29858 2/01 26357 31214 30697 27079 3/01 23523 29238 28658 25417 4/01 26221 31508 30961 27349 5/01 26266 31719 31170 27503 6/01 25420 30948 30466 26772 7/01 24505 30643 30050 26384 8/01 22552 28726 28219 24830 9/01 19945 26407 25826 22946 10/01 20825 26911 26363 23487 11/01 22745 28974 28393 25025 12/01 22813 29228 28696 25309 1/02 22395 28802 28332 24910 2/02 22158 28247 27767 24492 3/02 23073 29309 28908 25326 4/02 22316 27533 27252 24002 5/02 22305 27331 27011 23827 6/02 21130 25385 25018 22181 7/02 19458 23406 23167 20533 8/02 19661 23560 23288 20702 9/02 18159 21002 20787 18692 10/02 19175 22848 22514 20144 11/02 20102 24192 23831 21043 12/02 19257 22771 22483 19935 1/03 18622 22176 21938 19412 2/03 18225 21843 21598 19154 3/03 18316 22054 21822 19315 4/03 19620 23870 23584 20739 5/03 20935 25126 24928 21744 6/03 21117 25447 25256 21959 7/03 21413 25896 25759 22305 8/03 21980 26400 26282 22736 9/03 21640 26121 26013 22442 10/03 22364 27598 27538 23540 11/03 22830 27840 27868 23738 12/03 23960 29299 29203 24880 1/04 24224 29837 29758 25231 2/04 24660 30251 30170 25529 3/04 24075 29795 29758 25129 4/04 24304 29328 29221 24739 5/04 24476 29730 29642 24990 6/04 24934 30307 30176 25437 7/04 24156 29305 29117 24537 8/04 24089 29422 29260 24552 9/04 24296 29741 29630 24834 10/04 24570 30195 30108 25170 11/04 25268 31416 31397 26125 12/04 26112 32485 32533 26942 1/05 25545 31693 31714 26333 2/05 26388 32360 32427 26824 3/05 25950 31787 31913 26333 4/05 25418 31185 31325 25746 5/05 25731 32176 32435 26580 6/05 25857 32222 32568 26671 7/05 26770 33420 33834 27619 8/05 26676 33115 33542 27366 9/05 26884 33383 33853 27683 10/05 26260 32827 33260 27351 11/05 27324 34067 34526 28399 12/05 27499 34079 34572 28482 1/06 28508 34981 35541 29280 2/06 28602 35076 35621 29149 3/06 29083 35512 36125 29675 4/06 29400 35989 36558 29984 5/06 28697 34954 35479 29075 6/06 28614 35001 35525 29100 7/06 28814 35217 35603 29000 8/06 29494 36053 36457 29720 9/06 30279 36982 37322 30347 10/06 31005 38186 38589 31358 11/06 31722 38911 39412 31971 12/06 32088 39457 39917 32295 ===================================================================================================================
AIM V.I. CORE EQUITY FUND CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE ACTUAL EXPENSES 5% per year before expenses, which is not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information actual cumulative total returns at net ongoing costs, including management about actual account values and actual asset value after expenses for the six fees; distribution and/or service expenses. You may use the information in months ended December 31, 2006, appear (12b-1) fees; and other Fund expenses. this table, together with the amount you in the table "Cumulative Total Returns" This example is intended to help you invested, to estimate the expenses that on page 4. understand your ongoing costs (in you paid over the period. Simply divide dollars) of investing in the Fund and to your account value by $1,000 (for The hypothetical account values and compare these costs with ongoing costs example, an $8,600 account value divided expenses may not be used to estimate the of investing in other mutual funds. The by $1,000 = 8.6), then multiply the actual ending account balance or example is based on an investment of result by the number in the table under expenses you paid for the period. You $1,000 invested at the beginning of the the heading entitled "Actual Expenses may use this information to compare the period and held for the entire period Paid During Period" to estimate the ongoing costs of investing in the Fund July 1, 2006, through December 31, 2006. expenses you paid on your account during and other funds. To do so, compare this this period. 5% hypothetical example with the 5% The actual and hypothetical expenses hypothetical examples that appear in the in the examples below do not represent HYPOTHETICAL EXAMPLE FOR COMPARISON shareholder reports of the other funds. the effect of any fees or other expenses PURPOSES assessed in connection with a variable Please note that the expenses shown in product; if they did, the expenses shown The table below also provides the table are meant to highlight your would be higher while the ending account information about hypothetical account ongoing costs. Therefore, the values shown would be lower. values and hypothetical expenses based hypothetical information is useful in on the Fund's actual expense ratio and comparing ongoing costs, and will not an assumed rate of return of help you determine the relative total costs of owning different funds. ===================================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ Series I $ 1,000.00 $ 1,121.60 $ 4.76 $ 1,020.72 $ 4.53 0.89% Series II 1,000.00 1,120.00 6.09 1,019.46 5.80 1.14 ==================================================================================================================================== (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year.
6 APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. CORE EQUITY FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory performance through the most recent Insurance Funds (the "Board") oversees services to be provided by AIM. The calendar year, the Board also reviewed the management of AIM V.I. Core Equity Board reviewed the services to be more recent Fund performance, which did Fund (the "Fund") and, as required by provided by AIM under the Advisory not change their conclusions. law, determines annually whether to Agreement. Based on such review, the approve the continuance of the Fund's Board concluded that the range of services - Meetings with the Fund's portfolio advisory agreement with A I M Advisors, to be provided by AIM under the Advisory managers and investment personnel. With Inc. ("AIM"). Based upon the Agreement was appropriate and that AIM respect to the Fund, the Board is recommendation of the Investments currently is providing services in meeting periodically with such Fund's Committee of the Board, at a meeting accordance with the terms of the portfolio managers and/or other held on June 27, 2006, the Board, Advisory Agreement. investment personnel and believes that including all of the independent such individuals are competent and able trustees, approved the continuance of - The quality of services to be provided to continue to carry out their the advisory agreement (the "Advisory by AIM. The Board reviewed the responsibilities under the Advisory Agreement") between the Fund and AIM for credentials and experience of the Agreement. another year, effective July 1, 2006. officers and employees of AIM who will provide investment advisory services to - Overall performance of AIM. The Board The Board considered the factors the Fund. In reviewing the considered the overall performance of discussed below in evaluating the qualifications of AIM to provide AIM in providing investment advisory and fairness and reasonableness of the investment advisory services, the Board portfolio administrative services to the Advisory Agreement at the meeting on considered such issues as AIM's Fund and concluded that such performance June 27, 2006 and as part of the Board's portfolio and product review process, was satisfactory. ongoing oversight of the Fund. In their various back office support functions deliberations, the Board and the provided by AIM and AIM's equity and - Fees relative to those of clients of independent trustees did not identify fixed income trading operations. Based AIM with comparable investment any particular factor that was on the review of these and other strategies. The Board reviewed the controlling, and each trustee attributed factors, the Board concluded that the effective advisory fee rate (before different weights to the various quality of services to be provided by waivers) for the Fund under the Advisory factors. AIM was appropriate and that AIM Agreement. The Board noted that this currently is providing satisfactory rate was (i) above the effective One responsibility of the independent services in accordance with the terms of advisory fee rate (before waivers) for a Senior Officer of the Fund is to manage the Advisory Agreement. mutual fund advised by AIM with the process by which the Fund's proposed investment strategies comparable to management fees are negotiated to ensure - The performance of the Fund relative those of the Fund, below the effective that they are negotiated in a manner to comparable funds. The Board reviewed advisory fee rate (before waivers) for a which is at arms' length and reasonable. the performance of the Fund during the second mutual fund advised by AIM with To that end, the Senior Officer must past one, three and five calendar years investment strategies comparable to either supervise a competitive bidding against the performance of funds advised those of the Fund, and comparable to the process or prepare an independent by other advisors with investment effective advisory fee rates (before written evaluation. The Senior Officer strategies comparable to those of the waivers) for two other mutual funds has recommended an independent written Fund. The Board noted that the Fund's advised by AIM with investment evaluation in lieu of a competitive performance in such periods was below strategies comparable to those of the bidding process and, upon the direction the median performance of such Fund; (ii) above the effective of the Board, has prepared such an comparable funds. Based on this review sub-advisory fee rate for one variable independent written evaluation. Such and after taking account of all of the insurance fund sub-advised by an AIM written evaluation also considered other factors that the Board considered affiliate and offered to insurance certain of the factors discussed below. in determining whether to continue the company separate accounts with In addition, as discussed below, the Advisory Agreement for the Fund, the investment strategies comparable to Senior Officer made a recommendation to Board concluded that no changes should those of the Fund, although the total the Board in connection with such be made to the Fund and that it was not advisory fees for such variable written evaluation. necessary to change the Fund's portfolio insurance fund were above those for the management team at this time. Although Fund; and (iii) above the total advisory The discussion below serves as a summary the independent written evaluation of fee rates for 78 separately managed of the Senior Officer's independent the Fund's Senior Officer (discussed accounts/wrap accounts managed by an AIM written evaluation and recommendation to below) only considered Fund performance affiliate with investment strategies the Board in connection therewith, as through the most recent calendar year, comparable to those of the Fund and well as a discussion of the material the Board also reviewed more recent Fund comparable to or below the total factors and the conclusions with respect performance, which did not change their advisory fee rates for 10 separately thereto that formed the basis for the conclusions. managed accounts/wrap accounts managed Board's approval of the Advisory by an AIM affiliate with investment Agreement. After consideration of all of - The performance of the Fund relative strategies comparable to those of the the factors below and based on its to indices. The Board reviewed the Fund. The Board noted that AIM has informed business judgment, the Board performance of the Fund during the past agreed to waive advisory fees of the determined that the Advisory Agreement one, three and five calendar years Fund and to limit the Fund's total is in the best interests of the Fund and against the performance of the Lipper operating expenses, as discussed below. its shareholders and that the Variable Underlying Fund Large-Cap Core Based on this review, the Board compensation to AIM under the Advisory Index. The Board noted that the Fund's concluded that the advisory fee rate for Agreement is fair and reasonable and performance in such periods was below the Fund under the Advisory Agreement would have been obtained through arm's the performance of such Index. Based on was fair and reasonable. length negotiations. this review and after taking account of all of the other factors that the Board - Fees relative to those of comparable Unless otherwise stated, information considered in determining whether to funds with other advisors. The Board presented below is as of June 27, 2006 continue the Advisory Agreement for the reviewed the advisory fee rate for the and does not reflect any changes that Fund, the Board concluded that no Fund under the Advisory Agreement. The may have occurred since June 27, 2006, changes should be made to the Fund and Board compared effective contractual including but not limited to changes to that it was not necessary to change the advisory fee rates at a common asset the Fund's performance, advisory fees, Fund's portfolio management team at this level at the end of the past calendar expense limitations and/or fee waivers. time. Although the independent written year and noted that the Fund's rate was evaluation of the Fund's Senior Officer comparable to the median rate of the (discussed below) only considered Fund funds advised by other advisors with investment strategies comparable to those of the (continued)
7 AIM V.I. CORE EQUITY FUND Fund that the Board reviewed. The Board higher net return, increased liquidity, - Benefits of soft dollars to AIM. The noted that AIM has agreed to waive increased diversification or decreased Board considered the benefits realized advisory fees of the Fund and to limit transaction costs. The Board also found by AIM as a result of brokerage the Fund's total operating expenses, as that the Fund will not receive reduced transactions executed through "soft discussed below. Based on this review, services if it invests its cash balances dollar" arrangements. Under these the Board concluded that the advisory in such money market funds. The Board arrangements, brokerage commissions paid fee rate for the Fund under the Advisory noted that, to the extent the Fund by the Fund and/or other funds advised Agreement was fair and reasonable. invests uninvested cash in affiliated by AIM are used to pay for research and money market funds, AIM has voluntarily execution services. This research may be - Expense limitations and fee waives. agreed to waive a portion of the used by AIM in making investment The Board noted that AIM has advisory fees it receives from the Fund decisions for the Fund. The Board contractually agreed to waive advisory attributable to such investment. The concluded that such arrangements were fees of the Fund through December 31, Board further determined that the appropriate. 2009 to the extent necessary so that the proposed securities lending program and advisory fees payable by the Fund do not related procedures with respect to the - AIM's financial soundness in light of exceed a specified maximum advisory fee lending Fund is in the best interests of the Fund's needs. The Board considered rate, which maximum rate includes the lending Fund and its respective whether AIM is financially sound and has breakpoints and is based on net asset shareholders. The Board therefore the resources necessary to perform its levels. The Board considered the concluded that the investment of cash obligations under the Advisory contractual nature of this fee waiver collateral received in connection with Agreement, and concluded that AIM has and noted that it remains in effect the securities lending program in the the financial resources necessary to until December 31, 2009. The Board noted money market funds according to the fulfill its obligations under the that AIM has contractually agreed to procedures is in the best interests of Advisory Agreement. waive fees and/or limit expenses of the the lending Fund and its respective Fund through April 30, 2008 in an amount shareholders. - Historical relationship between the necessary to limit total annual Fund and AIM. In determining whether to operating expenses to a specified - Independent written evaluation and continue the Advisory Agreement for the percentage of average daily net assets recommendations of the Fund's Senior Fund, the Board also considered the for each class of the Fund. The Board Officer. The Board noted that, upon prior relationship between AIM and the considered the contractual nature of their direction, the Senior Officer of Fund, as well as the Board's knowledge this fee waiver/expense limitation and the Fund, who is independent of AIM and of AIM's operations, and concluded that noted that it remains in effect through AIM's affiliates, had prepared an it was beneficial to maintain the April 30, 2008. The Board considered the independent written evaluation in order current relationship, in part, because effect these fee waivers/expense to assist the Board in determining the of such knowledge. The Board also limitations would have on the Fund's reasonableness of the proposed reviewed the general nature of the estimated expenses and concluded that management fees of the AIM Funds, non-investment advisory services the levels of fee waivers/expense including the Fund. The Board noted that currently performed by AIM and its limitations for the Fund were fair and the Senior Officer's written evaluation affiliates, such as administrative, reasonable. had been relied upon by the Board in transfer agency and distribution this regard in lieu of a competitive services, and the fees received by AIM - Breakpoints and economies of scale. bidding process. In determining whether and its affiliates for performing such The Board reviewed the structure of the to continue the Advisory Agreement for services. In addition to reviewing such Fund's advisory fee under the Advisory the Fund, the Board considered the services, the trustees also considered Agreement, noting that it includes one Senior Officer's written evaluation and the organizational structure employed by breakpoint. The Board reviewed the level the recommendation made by the Senior AIM and its affiliates to provide those of the Fund's advisory fees, and noted Officer to the Board that the Board services. Based on the review of these that such fees, as a percentage of the consider whether the advisory fee and other factors, the Board concluded Fund's net assets, have decreased as net waivers for certain equity AIM Funds, that AIM and its affiliates were assets increased because the Advisory including the Fund, should be qualified to continue to provide Agreement includes a breakpoint. The simplified. The Board concluded that it non-investment advisory services to the Board noted that AIM has contractually would be advisable to consider this Fund, including administrative, transfer agreed to waive advisory fees of the issue and reach a decision prior to the agency and distribution services, and Fund through December 31, 2009 to the expiration date of such advisory fee that AIM and its affiliates currently extent necessary so that the advisory waivers. are providing satisfactory fees payable by the Fund do not exceed a non-investment advisory services. specified maximum advisory fee rate, - Profitability of AIM and its which maximum rate includes breakpoints affiliates. The Board reviewed - Other factors and current trends. The and is based on net asset levels. The information concerning the profitability Board considered the steps that AIM and Board concluded that the Fund's fee of AIM's (and its affiliates') its affiliates have taken over the last levels under the Advisory Agreement investment advisory and other activities several years, and continue to take, in therefore reflect economies of scale and and its financial condition. The Board order to improve the quality and that it was not necessary to change the considered the overall profitability of efficiency of the services they provide advisory fee breakpoints in the Fund's AIM, as well as the profitability of AIM to the Funds in the areas of investment advisory fee schedule. in connection with managing the Fund. performance, product line The Board noted that AIM's operations diversification, distribution, fund - Investments in affiliated money market remain profitable, although increased operations, shareholder services and funds. The Board also took into account expenses in recent years have reduced compliance. The Board concluded that the fact that uninvested cash and cash AIM's profitability. Based on the review these steps taken by AIM have improved, collateral from securities lending of the profitability of AIM's and its and are likely to continue to improve, arrangements, if any (collectively, affiliates' investment advisory and the quality and efficiency of the "cash balances") of the Fund may be other activities and its financial services AIM and its affiliates provide invested in money market funds advised condition, the Board concluded that the to the Fund in each of these areas, and by AIM pursuant to the terms of an SEC compensation to be paid by the Fund to support the Board's approval of the exemptive order. The Board found that AIM under its Advisory Agreement was not continuance of the Advisory Agreement the Fund may realize certain benefits excessive. for the Fund. upon investing cash balances in AIM advised money market funds, including a
8 AIM V.I. Core Equity Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE --------------------------------------------------------------------------- DOMESTIC COMMON STOCKS AND OTHER EQUITY INTERESTS-70.07% AEROSPACE & DEFENSE-2.12% Northrop Grumman Corp. 440,732 $ 29,837,556 --------------------------------------------------------------------------- United Technologies Corp. 450,000 28,134,000 =========================================================================== 57,971,556 =========================================================================== AIR FREIGHT & LOGISTICS-0.45% United Parcel Service, Inc.-Class B 165,650 12,420,437 =========================================================================== APPAREL RETAIL-1.02% Gap, Inc. (The) 1,439,177 28,063,951 =========================================================================== BIOTECHNOLOGY-1.89% Amgen Inc.(a) 757,322 51,732,666 =========================================================================== BROADCASTING & CABLE TV-0.59% Clear Channel Communications, Inc. 458,229 16,285,459 =========================================================================== COMMUNICATIONS EQUIPMENT-3.05% Cisco Systems, Inc.(a) 2,264,331 61,884,166 --------------------------------------------------------------------------- Corning Inc.(a) 1,164,363 21,785,232 =========================================================================== 83,669,398 =========================================================================== COMPUTER HARDWARE-1.50% International Business Machines Corp. 421,808 40,978,647 =========================================================================== COMPUTER STORAGE & PERIPHERALS-2.15% EMC Corp.(a) 2,516,796 33,221,707 --------------------------------------------------------------------------- Seagate Technology 967,025 25,626,163 =========================================================================== 58,847,870 =========================================================================== DATA PROCESSING & OUTSOURCED SERVICES-1.03% Automatic Data Processing, Inc. 574,700 28,303,975 =========================================================================== ELECTRIC UTILITIES-1.82% FPL Group, Inc. 915,170 49,803,551 =========================================================================== ENVIRONMENTAL & FACILITIES SERVICES-2.11% Waste Management, Inc. 1,575,218 57,920,766 =========================================================================== FOOD DISTRIBUTORS-1.25% Sysco Corp. 931,630 34,246,719 =========================================================================== FOOD RETAIL-1.04% Kroger Co. (The) 1,232,847 28,441,780 =========================================================================== HYPERMARKETS & SUPER CENTERS-1.56% Wal-Mart Stores, Inc. 926,264 42,774,872 ===========================================================================
SHARES VALUE ---------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES-5.75% 3M Co. 369,201 $ 28,771,834 --------------------------------------------------------------------------- General Electric Co. 1,299,094 48,339,287 --------------------------------------------------------------------------- Tyco International Ltd. 2,641,762 80,309,565 =========================================================================== 157,420,686 =========================================================================== INDUSTRIAL MACHINERY-1.01% Dover Corp. 561,733 27,536,152 =========================================================================== INSURANCE BROKERS-0.94% Marsh & McLennan Cos., Inc. 838,646 25,712,886 =========================================================================== INTEGRATED OIL & GAS-2.91% Exxon Mobil Corp. 1,039,869 79,685,161 =========================================================================== INTEGRATED TELECOMMUNICATION SERVICES-2.53% AT&T Inc. 1,941,329 69,402,512 =========================================================================== INVESTMENT BANKING & BROKERAGE-1.17% Morgan Stanley 392,167 31,934,159 =========================================================================== MOVIES & ENTERTAINMENT-1.61% News Corp.-Class A 2,050,160 44,037,437 =========================================================================== MULTI-LINE INSURANCE-1.10% Genworth Financial Inc.-Class A 878,338 30,047,943 =========================================================================== OFFICE ELECTRONICS-1.58% Xerox Corp. 2,552,318 43,261,790 =========================================================================== OIL & GAS EQUIPMENT & SERVICES-2.80% Schlumberger Ltd. 424,454 26,808,515 --------------------------------------------------------------------------- Smith International, Inc. 532,024 21,850,226 --------------------------------------------------------------------------- Weatherford International Ltd.(a) 669,193 27,965,575 =========================================================================== 76,624,316 =========================================================================== OIL & GAS EXPLORATION & PRODUCTION-1.11% XTO Energy, Inc. 648,928 30,532,062 =========================================================================== OTHER DIVERSIFIED FINANCIAL SERVICES-1.41% Citigroup Inc. 694,401 38,678,136 =========================================================================== PACKAGED FOODS & MEATS-0.91% General Mills, Inc. 431,197 24,836,947 ===========================================================================
AIM V.I. Core Equity Fund
SHARES VALUE --------------------------------------------------------------------------- PERSONAL PRODUCTS-3.71% Avon Products, Inc. 1,301,335 $ 42,996,108 --------------------------------------------------------------------------- Estee Lauder Cos. Inc. (The)-Class A 1,434,114 58,540,534 =========================================================================== 101,536,642 =========================================================================== PHARMACEUTICALS-4.56% Bristol-Myers Squibb Co. 1,476,697 38,866,665 --------------------------------------------------------------------------- Forest Laboratories, Inc.(a) 531,935 26,915,911 --------------------------------------------------------------------------- Merck & Co. Inc. 659,589 28,758,081 --------------------------------------------------------------------------- Pfizer Inc. 1,169,437 30,288,418 =========================================================================== 124,829,075 =========================================================================== PROPERTY & CASUALTY INSURANCE-5.07% Berkshire Hathaway Inc.-Class A(a) 681 74,903,190 --------------------------------------------------------------------------- Chubb Corp. (The) 474,478 25,104,631 --------------------------------------------------------------------------- XL Capital Ltd.-Class A 538,500 38,782,770 =========================================================================== 138,790,591 =========================================================================== PUBLISHING-1.65% Gannett Co., Inc. 343,862 20,789,897 --------------------------------------------------------------------------- McGraw-Hill Cos., Inc. (The) 360,651 24,531,481 =========================================================================== 45,321,378 =========================================================================== RAILROADS-1.22% Union Pacific Corp. 362,840 33,388,537 =========================================================================== SEMICONDUCTORS-0.98% Analog Devices, Inc. 820,305 26,963,425 =========================================================================== SOFT DRINKS-1.72% Coca-Cola Co. (The) 978,724 47,223,433 =========================================================================== SPECIALIZED FINANCE-0.43% Moody's Corp. 168,568 11,641,306 =========================================================================== SYSTEMS SOFTWARE-4.32% Microsoft Corp. 2,241,616 66,934,654 --------------------------------------------------------------------------- Symantec Corp.(a) 2,467,798 51,453,588 =========================================================================== 118,388,242 =========================================================================== Total Domestic Common Stocks and Other Equity Interests (Cost $1,542,274,149) 1,919,254,463 =========================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-19.52% ARGENTINA-1.31% Tenaris S.A.-ADR (Oil & Gas Equipment & Services) 719,280 35,884,879 =========================================================================== FINLAND-1.36% Nokia Oyj-ADR (Communications Equipment) 1,831,976 37,225,752 ===========================================================================
SHARES VALUE ---------------------------------------------------------------------------
FRANCE-2.39% Lucent Technologies Inc.-Wts., expiring 12/10/07 (Communications Equipment)(a) 2 $ 0 --------------------------------------------------------------------------- Renault S.A. (Automobile Manufacturers) 243,920 29,305,220 =========================================================================== Total S.A. (Integrated Oil & Gas) 500,460 36,109,022 =========================================================================== 65,414,242 =========================================================================== ISRAEL-1.27% Teva Pharmaceutical Industries Ltd.-ADR (Pharmaceuticals) 1,117,025 34,717,137 =========================================================================== JAPAN-0.90% Nintendo Co., Ltd. (Home Entertainment Software)(b) 95,000 24,629,069 =========================================================================== NETHERLANDS-4.28% Heineken N.V. (Brewers)(b) 771,656 36,671,216 --------------------------------------------------------------------------- Koninklijke (Royal) Phillips Electronics N.V. (Consumer Electronics)(b) 785,567 29,618,338 --------------------------------------------------------------------------- Unilever N.V. (Packaged Foods & Meats)(b) 1,860,576 50,824,872 =========================================================================== 117,114,426 =========================================================================== SOUTH KOREA-1.21% SK Telecom Co., Ltd.-ADR (Wireless Telecommunication Services)(c) 1,250,631 33,116,709 =========================================================================== SWITZERLAND-1.16% UBS A.G. (Diversified Capital Markets)(b) 526,068 31,850,822 =========================================================================== UNITED KINGDOM-5.64% Barclays PLC (Diversified Banks)(b) 2,538,870 36,161,414 --------------------------------------------------------------------------- Cadbury Schweppes PLC (Packaged Foods & Meats) 6,265,464 67,062,242 --------------------------------------------------------------------------- GlaxoSmithKline PLC-ADR (Pharmaceuticals) 973,453 51,359,380 =========================================================================== 154,583,036 =========================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $417,790,376) 534,536,072 =========================================================================== MONEY MARKET FUNDS-10.22% Liquid Assets Portfolio-Institutional Class(d) 140,001,437 140,001,437 --------------------------------------------------------------------------- Premier Portfolio-Institutional Class(d) 140,001,437 140,001,437 =========================================================================== Total Money Market Funds (Cost $280,002,874) 280,002,874 =========================================================================== TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-99.81% (Cost $2,240,067,399) 2,733,793,409 ===========================================================================
AIM V.I. Core Equity Fund
SHARES VALUE --------------------------------------------------------------------------- INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED-0.69% MONEY MARKET FUNDS-0.69% Liquid Assets Portfolio-Institutional Class(d)(e) 18,777,590 $ 18,777,590 =========================================================================== Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $18,777,590) 18,777,590 =========================================================================== TOTAL INVESTMENTS-100.50% (Cost $2,258,844,989) 2,752,570,999 =========================================================================== OTHER ASSETS LESS LIABILITIES-(0.50)% (13,589,884) =========================================================================== NET ASSETS-100.00% $2,738,981,115 ___________________________________________________________________________ ===========================================================================
Investment Abbreviations: ADR - American Depositary Receipt Wts. - Warrants
Notes to Schedule of Investments: (a) Non-income producing security. (b) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $209,755,731, which represented 7.66% of the Fund's Net Assets. See Note 1A. (c) All or a portion of this security was out on loan at December 31, 2006. (d) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (e) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Core Equity Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $1,960,064,525)* $2,453,790,535 ------------------------------------------------------------- Investments in affiliated money market funds (cost $298,780,464) 298,780,464 ============================================================= Total investments (cost $2,258,844,989) 2,752,570,999 ============================================================= Foreign currencies, at value (cost $104,732) 105,368 ------------------------------------------------------------- Cash 664,437 ------------------------------------------------------------- Receivables for: Fund shares sold 5,375,173 ------------------------------------------------------------- Dividends 4,051,762 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 195,884 ------------------------------------------------------------- Other assets 99,298 ============================================================= Total assets 2,763,062,921 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Fund shares reacquired 2,980,245 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 421,768 ------------------------------------------------------------- Collateral upon return of securities loaned 18,777,590 ------------------------------------------------------------- Accrued administrative services fees 1,729,500 ------------------------------------------------------------- Accrued distribution fees -- Series II 24,480 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 11,024 ------------------------------------------------------------- Accrued transfer agent fees 12,606 ------------------------------------------------------------- Accrued operating expenses 124,593 ============================================================= Total liabilities 24,081,806 ============================================================= Net assets applicable to shares outstanding $2,738,981,115 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $2,876,266,621 ------------------------------------------------------------- Undistributed net investment income 26,018,906 ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (657,143,896) ------------------------------------------------------------- Unrealized appreciation (depreciation) of investment securities and foreign currencies 493,839,484 ============================================================= $2,738,981,115 _____________________________________________________________ ============================================================= NET ASSETS: Series I $2,699,252,340 _____________________________________________________________ ============================================================= Series II $ 39,728,775 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 99,181,155 _____________________________________________________________ ============================================================= Series II 1,470,378 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 27.22 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 27.02 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $18,742,945 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $967,849) $ 35,794,801 ------------------------------------------------------------- Dividends from affiliated money market funds (includes securities lending income of $253,791) 14,114,716 ------------------------------------------------------------- Interest 10,538 ============================================================= Total investment income 49,920,055 ============================================================= EXPENSES: Advisory fees 13,537,705 ------------------------------------------------------------- Administrative services fees 5,785,524 ------------------------------------------------------------- Custodian fees 262,422 ------------------------------------------------------------- Distribution fees -- Series II 62,257 ------------------------------------------------------------- Transfer agent fees 57,996 ------------------------------------------------------------- Trustees' and officer's fees and benefits 89,354 ------------------------------------------------------------- Other 212,544 ============================================================= Total expenses 20,007,802 ============================================================= Less: Fees waived and expense offset arrangements (112,236) ============================================================= Net expenses 19,895,566 ============================================================= Net investment income 30,024,489 ============================================================= REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES AND OPTION CONTRACTS: Net realized gain from: Investment securities (includes net gains (losses) from securities sold to affiliates of $(30,817)) 133,329,157 ------------------------------------------------------------- Foreign currencies 55,004 ============================================================= 133,384,161 ============================================================= Change in net unrealized appreciation (depreciation) of: Investment securities 152,060,978 ------------------------------------------------------------- Foreign currencies (10,014) ------------------------------------------------------------- Option contracts written 1,241,093 ============================================================= 153,292,057 ============================================================= Net gain from investment securities, foreign currencies and option contracts 286,676,218 ============================================================= Net increase in net assets resulting from operations $316,700,707 _____________________________________________________________ =============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Core Equity Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ---------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 30,024,489 $ 14,628,715 ---------------------------------------------------------------------------------------------- Net realized gain from investment securities and foreign currencies 133,384,161 109,888,305 ---------------------------------------------------------------------------------------------- Change in net unrealized appreciation of investment securities and foreign currencies 153,292,057 (58,233,272) ============================================================================================== Net increase in net assets resulting from operations 316,700,707 66,283,748 ============================================================================================== Distributions to shareholders from net investment income: Series I (14,522,140) (18,751,304) ---------------------------------------------------------------------------------------------- Series II (203,586) (48,282) ---------------------------------------------------------------------------------------------- Decrease in net assets resulting from distributions (14,725,726) (18,799,586) ============================================================================================== Share transactions-net: Series I 1,153,932,649 (288,279,283) ---------------------------------------------------------------------------------------------- Series II 32,686,606 (453,871) ============================================================================================== Net increase (decrease) in net assets resulting from share transactions 1,186,619,255 (288,733,154) ============================================================================================== Net increase (decrease) in net assets 1,488,594,236 (241,248,992) ============================================================================================== NET ASSETS: Beginning of year 1,250,386,879 1,491,635,871 ============================================================================================== End of year (including undistributed net investment income of $26,018,906 and $7,410,542, respectively) $2,738,981,115 $1,250,386,879 ______________________________________________________________________________________________ ==============================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Core Equity Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Core Equity Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Core Equity Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. AIM V.I. Core Equity Fund L. PUT OPTIONS PURCHASED -- The Fund may purchase put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the securities hedged. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.65% ------------------------------------------------------------------- Over $250 million 0.60% __________________________________________________________________ ===================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund will also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $73,332. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $450,609 for accounting and fund administrative services and reimbursed $5,334,915 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and to reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Core Equity Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ------------------------------------------------------------------------------------------------------------------------------------ Liquid Assets Portfolio-Institutional Class $10,200,588 $ 432,534,254 $(302,733,405) $ -- $140,001,437 $ 6,928,319 $ -- ------------------------------------------------------------------------------------------------------------------------------------ STIC Prime Portfolio-Institutional Class 10,200,588 331,417,294 (341,617,882) -- -- 1,838,198 -- ------------------------------------------------------------------------------------------------------------------------------------ Premier Portfolio-Institutional Class -- 315,403,186 (175,401,749) -- 140,001,437 5,094,408 -- ==================================================================================================================================== Subtotal $20,401,176 $1,079,354,734 $(819,753,036) $ -- $280,002,874 $13,860,925 $ -- ____________________________________________________________________________________________________________________________________ ====================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ------------------------------------------------------------------------------------------------------------------------------------ Liquid Assets Portfolio-Institutional Class $ -- $ 225,843,235 $ (207,065,645) $ -- $ 18,777,590 $ 253,791 $ -- ==================================================================================================================================== Total Investments in Affiliates $20,401,176 $1,305,197,969 $(1,026,818,681) $ -- $298,780,464 $14,114,716 $ -- ____________________________________________________________________________________________________________________________________ ====================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $1,628,734, which resulted in net realized gains (losses) of $(30,817), and securities purchases of $12,464,247. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) transfer agency credits which result from balances in Demand Deposit Accounts (DDA) used by the transfer agent for clearing shareholder transactions, (ii) custodian credits which result from periodic overnight cash balances at the custodian and (iii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $38,904. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $10,911 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate AIM V.I. Core Equity Fund available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $18,742,945 were on loan to brokers. The loans were secured by cash collateral of $18,777,590 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $253,791 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ------------------------------------------------------------------------------------ CALL OPTION CONTRACTS ---------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ------------------------------------------------------------------------------------ Beginning of period 6,610 $ 703,775 ------------------------------------------------------------------------------------ Exercised (6,610) (703,775) ==================================================================================== End of period -- $ -- ____________________________________________________________________________________ ====================================================================================
NOTE 10--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------------- Distributions paid from ordinary income $14,725,726 $18,799,586 ________________________________________________________________________________________ ========================================================================================
AIM V.I. Core Equity Fund TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ------------------------------------------------------------------------------ Undistributed ordinary income $ 26,408,536 ------------------------------------------------------------------------------ Unrealized appreciation -- investments 487,792,647 ------------------------------------------------------------------------------ Temporary book/tax differences (389,630) ------------------------------------------------------------------------------ Capital Loss carryover (651,097,059) ------------------------------------------------------------------------------ Shares of beneficial interest 2,876,266,621 ============================================================================== Total net assets $2,738,981,115 ______________________________________________________________________________ ==============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's net unrealized appreciation difference is attributable primarily to losses on wash sales. The tax-basis unrealized appreciation on investments amount includes appreciation on foreign currencies of $14,367. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $620,301,601 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $111,534,892 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2009 $472,694,739 ----------------------------------------------------------------------------- December 31, 2010 157,184,466 ----------------------------------------------------------------------------- December 31, 2011 21,217,854 ============================================================================= Total capital loss carryforward $651,097,059 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. To the extent that unrealized gains as of May 1, 2006, the date of the reorganization of AIM V.I. Core Stock Fund and AIM V.I. Premier Equity Fund, into the Fund are realized on securities held in each Fund at such date, the capital loss carryforward may be further limited for up to five years from the date of the reorganization. NOTE 11--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $612,819,737 and $575,606,069, respectively. UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ---------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $498,072,123 ---------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (10,293,843) ============================================================================ Net unrealized appreciation of investment securities $487,778,280 ____________________________________________________________________________ ============================================================================ Cost of investments for tax purposes is $2,264,792,719.
NOTE 12--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of defaulted bonds, capital loss carryforward limitations, foreign currency transactions and expenses related to the plans of reorganization, on December 31, 2006, undistributed net investment income was increased by $3,494,124, undistributed net realized gain (loss) was decreased by $3,464,948 and shares of beneficial interest decreased by $29,176. Further, as a result of tax deferrals acquired in the reorganizations of AIM V.I. Core Stock Fund and V.I. Premier Equity Fund into the Fund on May 1, 2006, undistributed net investment income was decreased by $184,523, undistributed net realized gain (loss) was decreased by $584,829,644 and shares of beneficial interest increased by $585,014,167. These reclassifications had no effect on the net assets of the Fund. AIM V.I. Core Equity Fund NOTE 13--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2006(A) 2005 ----------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------------------------------------------------------- Sold: Series I 6,743,339 $ 168,070,113 5,782,887 $ 128,067,074 --------------------------------------------------------------------------------------------------------------------------- Series II 392,367 10,002,894 46,605 1,038,635 =========================================================================================================================== Issued as reinvestment of dividends: Series I 506,735 13,717,305 791,528 18,751,304 --------------------------------------------------------------------------------------------------------------------------- Series II 7,574 203,586 2,048 48,282 =========================================================================================================================== Issued in connection with acquisitions(b): Series I 64,659,654 1,621,011,995 -- -- --------------------------------------------------------------------------------------------------------------------------- Series II 1,126,308 28,069,390 -- -- =========================================================================================================================== Reacquired: Series I (25,886,608) (648,866,764) (19,247,047) (435,097,661) --------------------------------------------------------------------------------------------------------------------------- Series II (221,253) (5,589,264) (68,927) (1,540,788) =========================================================================================================================== 47,328,116 $1,186,619,255 (12,692,906) $(288,733,154) ___________________________________________________________________________________________________________________________ ===========================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 56% of the outstanding shares of the Fund. ADI has an agreement with these entities to sell Fund shares. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as securities brokerage, distribution, third party record keeping and account servicing. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. (b) As of the opening of business on May 1, 2006, the Fund acquired all the net assets of AIM V.I. Core Stock Fund and AIM V.I. Premier Equity Fund pursuant to the plans of reorganization approved by the Trustees of the Fund on November 14, 2005 and by the shareholders of AIM V.I. Core Stock Fund and AIM V.I. Premier Equity Fund, respectively on April 4, 2006. The acquisition was accomplished by a tax-free exchange of 65,785,962 shares of the Fund for 4,265,009 shares outstanding of AIM V.I. Core Stock Fund and 67,047,704 shares outstanding of AIM V.I. Premier Equity Fund as of the close of business on April 28, 2006. Each class of shares of AIM V.I. Core Stock Fund and AIM V.I. Premier Equity Fund was exchanged for the like class of shares of the Fund based on the relative net asset value of AIM V.I. Core Stock Fund and AIM V.I. Premier Equity Fund, respectively to the net asset value of the Fund on the close of business, April 28, 2006. AIM V.I. Core Stock Fund 's net assets as of the close of business on April 28, 2006 of $85,632,841 including $5,569,111 of unrealized appreciation and AIM V.I. Premier Equity Fund's net assets as of the close of business on April 28, 2006 of $1,563,448,544 including $199,249,945 of unrealized appreciation, were combined with the net assets of the Fund immediately before the acquisition of $1,233,787,778. The combined aggregate net assets of the Fund subsequent to the reorganization were $2,882,869,163. NOTE 14--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and intends for the Fund to adopt the FIN 48 provisions during 2007. AIM V.I. Core Equity Fund NOTE 15--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 23.45 $ 22.60 $ 20.94 $ 16.99 $ 20.20 --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.34(a) 0.24(a) 0.30(b) 0.17(a) 0.12(a) --------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 3.58 0.96 1.58 3.97 (3.27) ================================================================================================================================= Total from investment operations 3.92 1.20 1.88 4.14 (3.15) ================================================================================================================================= Less dividends from net investment income (0.15) (0.35) (0.22) (0.19) (0.06) ================================================================================================================================= Net asset value, end of period $ 27.22 $ 23.45 $ 22.60 $ 20.94 $ 16.99 _________________________________________________________________________________________________________________________________ ================================================================================================================================= Total return(c) 16.70% 5.31% 8.97% 24.42% (15.58)% _________________________________________________________________________________________________________________________________ ================================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $2,699,252 $1,246,529 $1,487,462 $1,555,475 $1,385,050 _________________________________________________________________________________________________________________________________ ================================================================================================================================= Ratio of expenses to average net assets 0.89%(d) 0.89% 0.91% 0.81%(e) 0.78% ================================================================================================================================= Ratio of net investment income to average net assets 1.35%(d) 1.08% 1.25%(b) 0.91% 0.67% _________________________________________________________________________________________________________________________________ ================================================================================================================================= Portfolio turnover rate 45% 52% 52% 31% 113% _________________________________________________________________________________________________________________________________ =================================================================================================================================
(a) Calculated using average shares outstanding. (b) Net investment income per share and the ratio of net investment income to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income per share and the ratio of net investment income to average net assets excluding the special dividend are $0.23 and 0.92%, respectively. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $2,210,548,014. (e) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 0.82%.
SERIES II --------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------- 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 23.33 $22.48 $20.85 $16.94 $ 20.19 ----------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.28(a) 0.18(a) 0.21(b) 0.12(a) 0.07(a) ----------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 3.55 0.96 1.60 3.96 (3.26) ================================================================================================================= Total from investment operations 3.83 1.14 1.81 4.08 (3.19) ================================================================================================================= Less dividends from net investment income (0.14) (0.29) (0.18) (0.17) (0.06) ================================================================================================================= Net asset value, end of period $ 27.02 $23.33 $22.48 $20.85 $ 16.94 _________________________________________________________________________________________________________________ ================================================================================================================= Total return(c) 16.42% 5.08% 8.67% 24.15% (15.79)% _________________________________________________________________________________________________________________ ================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $39,729 $3,858 $4,173 $3,808 $ 1,949 _________________________________________________________________________________________________________________ ================================================================================================================= Ratio of expenses to average net assets 1.14%(d) 1.14% 1.16% 1.06%(e) 1.03% ================================================================================================================= Ratio of net investment income to average net assets 1.10%(d) 0.83% 1.00%(b) 0.66% 0.42% _________________________________________________________________________________________________________________ ================================================================================================================= Portfolio turnover rate 45% 52% 52% 31% 113% _________________________________________________________________________________________________________________ =================================================================================================================
(a) Calculated using average shares outstanding. (b) Net investment income per share and the ratio of net investment income to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income per share and the ratio of net investment income to average net assets excluding the special dividend are $0.14 and 0.67%, respectively. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $24,902,857. (e) After fee waivers and/or expense reimbursements. Ratio of expense to average net assets prior to fee waivers and/or expense reimbursements was 1.07%. AIM V.I. Core Equity Fund NOTE 16--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Core Equity Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Core Equity Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Core Equity Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Core Equity Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 100%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Core Equity Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Funds, Inc. (21 portfolios) Formerly: Partner, Deloitte & Touche -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Core Equity Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family N/A of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud N/A Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
FIXED INCOME AIM V.I. DIVERSIFIED Intermediate-Term Taxable INCOME FUND Investment Grade Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, [COVER GLOBE IMAGE] sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services AIM V.I. DIVERSIFIED INCOME FUND seeks department at 800-410-4246 or on the AIM to achieve a high level of current income. Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT click on Proxy Voting Activity. Next, IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND [AIM INVESTMENTS LOGO] PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE -- Registered Trademark -- INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. DIVERSIFIED INCOME FUND - An unanticipated change occurs involving an individual issuer or sector. ======================================================================================= PERFORMANCE SUMMARY Market conditions and your Fund For the year ended December 31, 2006, AIM V.I. Diversified Income The U.S. economy continued to show signs Fund Series I shares, excluding variable product issuer charges, of deceleration in growth by the end of slightly outperformed its broad market and style-specific indexes. As 2006. Growth in real gross domestic bond market returns in 2006 were primarily driven by the uncertainty product (GDP) slipped to a 2.0% annualized over economic growth and strong performance of higher yielding rate in the third quarter, down from a securities, the Fund's defensive to neutral stance in duration as 2.6% pace in the second quarter and from a well as its positions in mortgage-backed securities and high yield surprisingly strong 5.6% in the first bonds contributed to relative outperformance during the year. quarter. The slowdown was mostly attributable to softening in the housing Your Fund's long-term performance appears on pages 4-5. sector. However, the deceleration in homebuilding did not noticeably impact FUND VS. INDEXES other segments of the economy, as consumer spending and business investment remained Total returns, 12/31/05-12/31/06, excluding variable product issuer solid. charges. If variable product issuer charges were included, returns would be lower. On December 12, as widely anticipated by financial markets, the U.S. Federal Series I Shares 4.48% Reserve Board (the Fed) decided to keep Series II Shares 4.17 the federal funds target rate at 5.25%. Lehman Brothers U.S. Aggregate Bond Index (Broad Market Index) 4.33 This was the fourth consecutive meeting Lehman Brothers U.S. Credit Index (Style-Specific Index) 4.26 that the Fed left the rate unchanged after Lipper BBB Rated Funds Index (Peer Group Index) 5.28 17 consecutive rate increases. While this ======================================================================================= pause benefited the financial markets, the Fed reiterated that some inflation risks persist and that future target interest How we invest of the bond market. Our focus is on bonds rate actions would continue to depend on that are attractively valued relative to incoming economic data. We seek to provide consistent returns the rest of the bond market. while minimizing risk. Our security The U.S. Treasury yield curve, which selection process involves both top-down In evaluating the credit quality of represents the yields of Treasury analysis, which takes account of overall a security, we use input from various securities with different maturities, was economic and market trends and bottom-up rating agencies and Wall Street inverted for much of 2006, as the Fed analysis, which includes an evaluation of fixed-income and equity analysts, and raised short rates through June. That individual bond issuers. conduct our own internal credit analysis. meant that shorter term Treasuries were generally yielding more than longer term We look for potential investments in We consider selling a bond when: Treasuries, a reversal of the norm. The all sectors of the bond market: domestic two- to 10-year spread was inverted by 11 and foreign governments, U.S. corporate - It becomes fully valued. basis points (0.11%) on December 29. bonds, mortgages, asset-backed securities, money markets, high yield debt and - Overall market and economic trends convertible corporate bonds. We make indicate that sector emphasis should be allocation decisions based on performance changed. and valuations among the different areas - Fundamentals, such as credit quality ratings, deteriorate for an individual issuer or a sector. ==================================================================================================================================== PORTFOLIO COMPOSITION TOP 10 FIXED INCOME ISSUERS* By industry 1. Ford Motor Credit Co. 3.9% Total Net Assets $47.46 million Other Diversified Financial Services 14.3% 2. General Motors Acceptance Corp. 3.3 3. Patrons' Legacy 3.0 Total Number of Holdings* 205 Consumer Finance 9.1 4. Pemex Project Funding Master Trust 2.5 Diversified Banks 7.8 5. Regional Diversified Funding Broadcasting & Cable TV 7.4 Property & Casualty Insurance 5.7 (Cayman Islands) 2.1 Integrated Telecommunication Services 5.5 6. Oil Insurance Ltd. 1.9 Municipal Obligations 3.2 7. First American Capital Trust I 1.8 Regional Banks 3.2 8. Citicorp Lease Pass-Through Trust 1.7 Life & Health Insurance 3.1 9. Mizuho JGB Investments LLC 1.6 Other Industries, Each With 10. Federal National Mortgage Less Than 3% Of Total Net Assets 38.8 Association (FNMA) 1.6 Money Market Funds The Fund's holdings are subject to change, and there is no assurance that the Fund Plus Other Assets Less Liabilities 1.9 will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
2 In 2006, the bond market was year-end level since 1996. Our strategy of AIM V.I. DIVERSIFIED INCOME FUND Jan H. characterized by low volatility. While overweighting the high yield [FRIEDLI FriedliSenior there was more price movement during the benefited performance for the year. PHOTO] sector portfolio first few months of the year, the second manager, is lead half of 2006 was calmer due to a fairly portfolio manager of complacent market. AIM V.I. The Fund maintained a small position Diversified Income Fund. He began his The fixed income markets were in mortgage-backed securities (MBS) as we investment career in 1990 and joined AIM focused on the benchmark 10-year Treasury viewed mortgage bonds as offering in 1999. Mr. Friedli graduated cum laude note, which finished the year with a attractive yields and relatively small from Villanova University with a B.S. in slight gain, despite the Fed's actions prepayment risk by historical standards. computer science before earning an M.B.A. over the past two years. Reflective of our Considering the MBS market delivered solid with honors from the University of belief that the Fed would hike interest performance for the year, the Fund's Chicago. rates to slow economic growth, we weight in mortgages had a positive effect tactically traded duration focusing on the on performance. Peter Ehret shorter end of the yield curve. Duration [EHRET Chartered Financial is a measure of a bond's sensitivity to In the non-dollar sector, we PHOTO] Analyst, senior interest rate changes. Shorter duration primarily had exposure to the U.K. portfoliomanager,is bonds tend to be less sensitive to manager of interest-rate changes. We used two- and government bond market through government AIM V.I. Diversified Income Fund. Mr. five-year U.S. Treasury Note futures to bond futures. The use of U.K. government Ehret joined AIM in 2001. He graduated cum shorten the Fund's duration, as we viewed bond futures allowed us to gain exposure laude with a B.S. in economics from the the yields on the 10-year U.S. Treasuries to U.K. interest rates without the University of Minnesota. He also earned an to be in the lower range. Our overall exposure to the British pound. In M.S. in real estate appraisal and defensive to neutral stance toward addition, throughout the year we held investment analysis from the University of duration benefited performance, as exposure in a corporate bond of a Japanese Wisconsin-Madison interest rates rose over the year. finance company. The interest rate risk in this position was hedged with Japanese Brendan D. Gau In our view, gaining an exposure to government futures. Additionally, we [GAU Chartered Financial the U.S. Treasury market through U.S. actively managed the currency exposure in PHOTO] Analyst, is manager of Treasury futures is more effective way to this position using currency forwards. AIM V.I. Diversified employ the Fund's cash for duration Despite being the worst performing Income Fund. Mr. Gau joined AIM in 1996. management purposes versus buying actual currency against many major currencies in He graduated magna cum laude with a B.A. bonds. U.S. Treasury futures offer a 2006, the Japanese yen did not lose much in economics, mathematics and physics variety of standardized contracts, are of its value against the U.S. dollar. As a from Rice University. exchange traded and provide a high level result, our position in Japan had no of liquidity. significant impact on performance. Carolyn L. Gibbs [GIBBS Chartered Financial During the fiscal year, the Fund In closing PHOTO] Analyst, is manager of invested primarily in U.S. corporate bonds AIM V.I. Diversified of various credit ratings. We kept smaller Thank you for investing in AIM V.I. Income Fund. She began her investment weightings in international bonds, Diversified Income Fund and for sharing career 1983 and joined AIM in 1992. Ms. mortgage-backed securities and U.S. our long-term investment horizon. Gibbs is a Phi Beta Kappa graduate of Treasuries and other government-related Texas Christian University, where she securities. The views and opinions expressed in earned a B.A. in English. She also earned management's discussion of Fund an M.B.A. in finance from The Wharton Investment grade corporate bonds performance are those of A I M Advisors, School of the University of Pennsylvania. posted solid returns, as they benefited Inc. These views and opinions are subject from strong demand later in the year, to change at any time based on factors Darren Hughes reflecting a strong company earnings such as market and economic conditions. [HUGHES Chartered Financial season, stable credit fundamentals and a These views and opinions may not be relied PHOTO] Analyst, portfolio low interest rate environment. Investment upon as investment advice or manager, is manager of strategies that overweighted lower rated AIM V.I. investment grade corporate bonds recommendations, or as an offer for a Diversified Income Fund. He joined AIM in (BBB-rated) generally outperformed particular security. The information is 1992. Mr. Hughes earned a B.B.A. in strategies of higher quality segments (A- not a complete analysis of every aspect of finance and economics from Baylor and above) in the fourth quarter. The any market, country, industry, security or University. Fund's underweight position in investment the Fund. Statements of fact are from grade securities, which performed well sources considered reliable, but A I M Scot W. Johnson during the year, detracted from Advisors, Inc. makes no representation or Chartered Financial performance. warranty as to their completeness or [JOHNSON Analyst, senior accuracy. Although historical performance PHOTO] portfolio manager, is The U.S. high yield market continued is no guarantee of future results, these manager of AIM V.I. to perform well due to solid corporate insights may help you understand our Diversified Income Fund. He joined AIM in profitability, low default rates and investment management philosophy. 1994. Mr. Johnson earned both his demand for higher yield from investors. On bachelor's degree in economics and an a quality basis, CCC-rated bonds continued FOR A DISCUSSION OF THE RISKS OF INVESTING M.B.A. in finance from Vanderbilt to outperform higher quality debt IN YOUR FUND, INDEXES USED IN THIS REPORT University. instruments. Moody's Investors Service global speculative grade corporate bond Assisted by the Taxable issuer default rate finished the year at AND YOUR FUND'S LONG-TERM PERFORMANCE, Investment Grade Bond Team and the Taxable 1.7%, the lowest PLEASE SEE PAGES 4-5. High Yield Team
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. DIVERSIFIED INCOME FUND ========================================== AVERAGE ANNUAL TOTAL RETURNS RESTATED HISTORICAL PERFORMANCE OF SERIES THROUGH INSURANCE COMPANIES ISSUING I SHARES (FOR PERIODS PRIOR TO INCEPTION VARIABLE PRODUCTS. YOU CANNOT PURCHASE OF SERIES II SHARES) ADJUSTED TO REFLECT SHARES OF THE FUND DIRECTLY. PERFORMANCE As of 12/31/06 THE RULE 12B-1 FEES APPLICABLE TO SERIES FIGURES GIVEN REPRESENT THE FUND AND ARE SERIES I SHARES II SHARES. THE INCEPTION DATE OF SERIES I NOT INTENDED TO REFLECT ACTUAL VARIABLE Inception (5/5/93) 4.94% SHARES IS MAY 5, 1993. THE PERFORMANCE OF PRODUCT VALUES. THEY DO NOT REFLECT SALES 10 Years 3.88 THE FUND'S SERIES I AND SERIES II SHARE CHARGES, EXPENSES AND FEES ASSESSED IN 5 Years 4.76 CLASSES WILL DIFFER PRIMARILY DUE TO CONNECTION WITH A VARIABLE PRODUCT. SALES 1 Year 4.48 DIFFERENT CLASS EXPENSES. CHARGES, EXPENSES AND FEES, WHICH ARE DETERMINED BY THE VARIABLE PRODUCT SERIES II SHARES THE PERFORMANCE DATA QUOTED ISSUERS, WILL VARY AND WILL LOWER THE 10 Years 3.61 REPRESENT PAST PERFORMANCE AND CANNOT TOTAL RETURN. PER NASD REQUIREMENTS, THE 5 Years 4.49 GUARANTEE COMPARABLE FUTURE RESULTS; MOST RECENT MONTH-END PERFORMANCE DATA AT 1 Year 4.17 CURRENT PERFORMANCE MAY BE LOWER OR THE FUND LEVEL, EXCLUDING VARIABLE PRODUCT HIGHER. PLEASE CONTACT YOUR VARIABLE CHARGES, IS AVAILABLE ON THIS AIM ========================================== PRODUCT ISSUER OR FINANCIAL ADVISOR FOR AUTOMATED INFORMATION LINE, 866-702-4402. THE MOST RECENT MONTH-END VARIABLE AS MENTIONED ABOVE, FOR THE MOST RECENT ========================================== PRODUCT PERFORMANCE. PERFORMANCE FIGURES MONTH-END PERFORMANCE INCLUDING VARIABLE REFLECT FUND EXPENSES, REINVESTED PRODUCT CHARGES, PLEASE CONTACT YOUR CUMULATIVE TOTAL RETURNS DISTRIBUTIONS AND CHANGES IN NET ASSET VARIABLE PRODUCT ISSUER OR FINANCIAL VALUE. INVESTMENT RETURN AND PRINCIPAL ADVISOR. 6 months ended 12/31/06 VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE Series I Shares 5.23% A GAIN OR LOSS WHEN YOU SELL SHARES. HAD THE ADVISOR NOT WAIVED FEES Series II Shares 5.05 AIM V.I. DIVERSIFIED INCOME FUND, A SERIES AND/OR REIMBURSED EXPENSES, PERFORMANCE ========================================== PORTFOLIO OF AIM VARIABLE INSURANCE FUNDS, WOULD HAVE BEEN LOWER.E IS CURRENTLY OFFERED SERIES II SHARES' INCEPTION DATE IS MARCH 14, 2002. RETURNS SINCE THAT DATE ARE HISTORICAL. ALL OTHER RETURNS ARE THE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE ==================================================================================================================================== Principal risks of investing in the Fund tion or declares bankruptcy, the Fund may which means that a faster-than-expected experience delays in selling the principal prepayment rate will reduce both Prices of equity securities change in securities underlying the repurchase the market value of and income from such response to many factors including the agreement. securities. historical and prospective earnings of the issuer, the value of its assets, general There is no guarantee that the About indexes used in this report economic conditions, interest rates, investment techniques and risk analyses investor perceptions and market liquidity. used by the Fund's portfolio managers will The unmanaged LEHMAN BROTHERS U.S. produce the desired results. AGGREGATE BOND INDEX (the Lehman Foreign securities have additional Aggregate), which represents the U.S. risks, including exchange rate changes, Debt securities are particularly investment-grade fixed-rate bond market political and economic upheaval, the vulnerable to credit risk and interest (including government and corporate relative lack of information about these rate fluctuations. securities, mortgage pass-through companies, relatively low market liquidity securities and asset-backed securities), and the potential lack of strict financial The Fund may invest in lower-quality is compiled by Lehman Brothers, a global and accounting controls and standards. debt securities, commonly known as "junk investment bank. bonds". Compared to higher quality debt Investing in emerging markets securities, junk bonds involve greater The LEHMAN BROTHERS U.S. CREDIT involves greater risk than investing in risk of default or price changes due to INDEX consists of publicly issued U.S. more established markets. The risks changes in credit quality of the issuer corporate and specified foreign debentures include the relatively smaller size and because they are generally unsecured and and secured notes that meet the specified lesser liquidity of these markets, high may be subordinated to other creditors' maturity, liquidity, and quality inflation rates, adverse political claims. Credit ratings on junk bonds do requirements. It is compiled by Lehman developments and lack of timely not necessarily reflect their actual Brothers, a global investment bank. To information. market risk. qualify, bonds must be SEC-registered. To the extent the Fund holds cash or Some securities purchased by the The unmanaged LIPPER BBB-RATED FUNDS cash equivalents rather than equity Fund are not guaranteed by the U.S. INDEX represents an average of the 30 securities for risk management purposes, government. The agencies or largest BBB-rated bond funds tracked by the Fund may not achieve its investment instrumentalities issuing such securities Lipper Inc., an independent mutual fund objective. may default or otherwise be unable to performance monitor. honor a financial obligation. If the seller of a repurchase agreement in which the Fund invests The Fund can invest in U.S. defaults on its obliga- government agency mortgage-backed securities. The Fund may purchase such securities at a premium, Continued on page 5
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AIM V.I. DIVERSIFIED INCOME FUND Past performance cannot guarantee comparable future results. This chart, which is a logarithmic value of an investment, is constructed chart, presents the fluctuations in the with each segment representing a percent value of the Fund and its indexes. We change in the value of the investment. In believe that a logarithmic chart is more this chart, each segment represents a effective than other types of charts in doubling, or 100% change, in the value of illustrating changes in value during the the investment. In other words, the space early years shown in the chart. The between $5,000 and $10,000 is the same vertical axis, the one that indicates the size as the space between $10,000 and dollar $20,000, and so on. ==================================================================================================================================== Continued from page 4 In conjunction with the annual A direct investment cannot be made ally, the returns and net asset values prospectus update on or about May 1, 2007, in an index. Unless otherwise indicated, shown throughout this report are at the the AIM V.I Diversified Income Fund index results include reinvested Fund level only and do not include prospectus will be amended to reflect that dividends, and they do not reflect sales variable product issuer charges. If such the Fund has elected to use the Lipper charges. Performance of an index of funds charges were included, the total returns Variable Underlying Funds (VUF) Corporate reflects fund expenses; performance of a would be lower. Debt BBB-Rated Funds Index as its peer market index does not. group rather than the Lipper BBB-Rated Industry classifications used in Funds Index. The Lipper VUF Corporate Debt Other information this report are generally according to the BBB-Rated Funds Index, recently published Global Industry Classification Standard, by Lipper Inc., comprises the largest The returns shown in the management's which was developed by and is the underlying funds in each variable discussion of Fund performance are based exclusive property and a service mark of insurance category and does not include on net asset values calculated for Morgan Stanley Capital International Inc. mortality and expense fees. shareholder transactions. Generally and Standard & Poor's. accepted accounting principles require The Fund is not managed to track the adjustments to be made to the net assets The Chartered Financial Analyst performance of any particular index, of the Fund at period end for financial --Registered Trademark-- (CFA--Registered including the indexes defined here, and reporting purposes, and as such, the net Trademark--) designation is a globally consequently, the performance of the Fund asset values for shareholder transactions recognized standard for measuring the may deviate significantly from the and the returns based on those net asset competence and integrity of investment performance of the indexes. values may differ from the net asset professionals. values and returns reported in the Financial Highlights. Addition-
5
==================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/93, Fund data from 5/5/93 AIM V.I. DIVERSIFIED INCOME FUND LEHMAN BROTHERS DATE -SERIES I SHARES U.S. AGGREGATE BOND INDEX LEHMAN BROTHERS U.S. CREDIT INDEX LIPPER BBB RATED FUNDS INDEX 4/30/93 $10000 $10000 $10000 5/93 $9980 10013 10012 10024 6/93 10160 10194 10255 10249 7/93 10240 10252 10329 10345 8/93 10480 10432 10586 10586 9/93 10510 10460 10611 10616 10/93 10622 10499 10665 10690 11/93 10500 10410 10534 10567 12/93 10605 10466 10596 10638 1/94 10833 10608 10801 10823 2/94 10574 10423 10546 10587 3/94 10271 10166 10223 10285 4/94 10166 10085 10124 10161 5/94 10093 10084 10087 10135 6/94 10124 10062 10062 10093 7/94 10178 10261 10316 10266 8/94 10188 10274 10328 10306 9/94 10177 10123 10135 10164 10/94 10231 10114 10112 10131 11/94 10090 10091 10095 10104 12/94 10068 10161 10179 10155 1/95 10146 10362 10395 10319 2/95 10446 10609 10694 10554 3/95 10603 10674 10782 10637 4/95 10795 10823 10964 10829 5/95 11123 11242 11480 11296 6/95 11191 11324 11584 11381 7/95 11281 11299 11533 11354 8/95 11372 11435 11718 11521 9/95 11564 11546 11857 11656 10/95 11734 11696 12012 11812 11/95 11812 11872 12242 12005 12/95 11984 12038 12443 12203 1/96 12056 12118 12524 12302 2/96 11971 11908 12226 12043 3/96 11983 11825 12122 11955 4/96 12007 11758 12021 11878 5/96 12043 11734 12000 11870 6/96 12235 11892 12176 12006 7/96 12259 11925 12200 12036 8/96 12343 11905 12162 12030 9/96 12582 12112 12420 12271 10/96 12881 12380 12759 12565 11/96 13182 12592 13032 12845 12/96 13205 12475 12852 12721 1/97 13129 12514 12870 12761 2/97 13244 12545 12924 12834 3/97 12989 12406 12723 12636 4/97 13168 12591 12916 12823 5/97 13372 12710 13062 12970 6/97 13577 12861 13247 13163 7/97 13947 13208 13731 13618 8/97 13806 13095 13529 13438 9/97 14178 13289 13765 13674 10/97 14242 13481 13940 13813 11/97 14293 13543 14019 13880 12/97 14446 13680 14167 14029 1/98 14688 13855 14335 14208 2/98 14740 13845 14331 14203 3/98 14931 13893 14384 14275 4/98 14945 13965 14474 14336 5/98 15047 14098 14646 14459 6/98 15047 14217 14754 14565 7/98 15072 14247 14741 14554 8/98 14739 14479 14810 14448 9/98 14881 14818 15289 14746 10/98 14625 14740 15054 14564 11/98 14983 14824 15337 14833 12/98 14963 14868 15382 14870 1/99 15168 14974 15534 15000 2/99 14841 14713 15165 14675 3/99 14977 14794 15272 14839 4/99 15100 14841 15317 14945 5/99 14759 14711 15112 14743 6/99 14663 14664 15033 14666 7/99 14622 14602 14950 14592 8/99 14525 14595 14914 14538 9/99 14634 14764 15076 14663 ==================================================================================================================================== SOURCE: LIPPER INC.
==================================================================================================================================== [MOUNTAIN CHART] 10/99 14580 14818 15145 14692 11/99 14621 14817 15161 14727 12/99 14677 14746 15081 14703 1/00 14618 14698 15028 14660 2/00 14779 14875 15167 14841 3/00 14793 15071 15296 14977 4/00 14487 15028 15162 14796 5/00 14225 15021 15106 14683 6/00 14531 15334 15485 15055 7/00 14574 15473 15673 15119 8/00 14764 15697 15877 15395 9/00 14764 15796 15960 15439 10/00 14603 15900 15976 15389 11/00 14530 16160 16183 15532 12/00 14777 16460 16497 15857 1/01 15291 16729 16948 16240 2/01 15400 16875 17096 16401 3/01 15150 16960 17202 16391 4/01 14932 16890 17140 16301 5/01 15072 16991 17297 16448 6/01 14979 17056 17385 16467 7/01 15337 17437 17839 16840 8/01 15493 17637 18078 17042 9/01 15198 17842 18051 16897 10/01 15571 18215 18499 17255 11/01 15478 17964 18338 17143 12/01 15308 17850 18213 17039 1/02 15341 17995 18367 17132 2/02 15257 18169 18505 17214 3/02 15056 17867 18164 16988 4/02 15223 18213 18417 17248 5/02 15273 18368 18660 17384 6/02 15071 18527 18691 17303 7/02 14702 18750 18681 17216 8/02 15021 19067 19165 17564 9/02 15255 19376 19529 17722 10/02 15021 19288 19303 17596 11/02 15238 19282 19553 17849 12/02 15657 19681 20130 18265 1/03 15767 19698 20195 18386 2/03 16040 19970 20599 18695 3/03 16094 19955 20614 18727 4/03 16423 20119 20995 19105 5/03 16878 20495 21657 19605 6/03 16950 20454 21604 19631 7/03 16294 19766 20683 18962 8/03 16403 19897 20845 19112 9/03 16913 20424 21573 19700 10/03 16822 20234 21343 19622 11/03 16894 20282 21441 19757 12/03 17104 20488 21680 20045 1/04 17297 20653 21899 20227 2/04 17434 20877 22174 20406 3/04 17570 21033 22389 20546 4/04 17143 20486 21683 20023 5/04 17066 20404 21531 19871 6/04 17143 20519 21622 19988 7/04 17297 20723 21889 20197 8/04 17646 21118 22405 20607 9/04 17743 21175 22531 20735 10/04 17898 21353 22749 20940 11/04 17801 21183 22521 20870 12/04 17963 21377 22815 21108 1/05 18087 21512 22996 21220 2/05 18025 21385 22861 21185 3/05 17861 21275 22576 20947 4/05 18108 21563 22879 21118 5/05 18334 21796 23199 21338 6/05 18479 21915 23383 21519 7/05 18355 21715 23149 21419 8/05 18623 21994 23501 21685 9/05 18398 21767 23149 21469 10/05 18212 21595 22896 21283 11/05 18314 21690 23035 21370 12/05 18486 21897 23262 21580 1/06 18508 21898 23215 21659 2/06 18595 21971 23318 21758 3/06 18398 21755 22990 21520 4/06 18288 21716 22906 21506 5/06 18310 21692 22866 21454 6/06 18354 21738 22901 21457 7/06 18616 22032 23238 21754 8/06 18901 22370 23668 22151 9/06 19120 22566 23932 22370 10/06 19229 22715 24123 22565 11/06 19449 22979 24464 22878 12/06 19315 22846 24253 22719
CALCULATING YOUR ONGOING FUND EXPENSES
AIM V.I. DIVERSIFIED INCOME FUND Example You may use the information in this table, The hypothetical account values and together with the amount you invested, to expenses may not be used to estimate the As a shareholder of the Fund, you incur estimate the expenses that you paid over actual ending account balance or expenses ongoing costs, including management fees; the period. Simply divide your account you paid for the period. You may use this distribution and/or service (12b-1) fees; value by $1,000 (for example, an $8,600 information to compare the ongoing costs and other Fund expenses. This example is account value divided by $1,000 = 8.6), of investing in the Fund and other funds. intended to help you understand your then multiply the result by the number in To do so, compare this 5% hypothetical ongoing costs (in dollars) of investing in the table under the heading entitled example with the 5% hypothetical examples the Fund and to compare these costs with "Actual Expenses Paid During Period" to that appear in the shareholder reports of ongoing costs of investing in other mutual estimate the expenses you paid on your the other funds. funds. The example is based on an account during this period. investment of $1,000 invested at the Please note that the expenses shown beginning of the period and held for the Hypothetical example for comparison in the table are meant to highlight your entire period July 1, 2006, through purposes ongoing costs. Therefore, the hypothetical December 31, 2006. information is useful in comparing ongoing The table below also provides information costs, and will not help you determine the The actual and hypothetical expenses about hypothetical account values and relative total costs of owning different in the examples below do not represent the hypothetical expenses based on the Fund's funds. effect of any fees or other expenses actual expense ratio and an assumed rate assessed in connection with a variable of return of 5% per year before expenses, product; if they did, the expenses shown which is not the Fund's actual return. The would be higher while the ending account Fund's actual cumulative total returns at values shown would be lower. net asset value after expenses for the six months ended December 31, 2006, appear in Actual expenses the table "Cumulative Total Returns" on page 4. The table below provides information about actual account values and actual expenses. ====================================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $ 1,052.30 $ 3.93 $ 1,021.37 $ 3.87 0.76% Series II 1,000.00 1,050.50 5.22 1,020.11 5.14 1.01 --------- (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ====================================================================================================================================
6
Approval of Investment Advisory Agreement AIM V.I. DIVERSIFIED INCOME FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory concluded that no changes should be made Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board to the Fund and that it was not management of AIM V.I. Diversified Income reviewed the services to be provided by necessary to change the Fund's portfolio Fund (the "Fund") and, as required by law, AIM under the Advisory Agreement. Based on management team at this time. Although determines annually whether to approve the such review, the Board concluded that the the independent written evaluation of continuance of the Fund's advisory range of services to be provided by AIM the Fund's Senior Officer (discussed agreement with A I M Advisors, Inc. under the Advisory Agreement was below) only considered Fund performance ("AIM"). Based upon the recommendation of appropriate and that AIM currently is through the most recent calendar year, the Investments Committee of the Board, at providing services in accordance with the the Board also reviewed more recent Fund a meeting held on June 27, 2006, the terms of the Advisory Agreement. performance, which did not change their Board, including all of the independent conclusions. trustees, approved the continuance of the - The quality of services to be provided advisory agreement (the "Advisory by AIM. The Board reviewed the credentials - Meetings with the Fund's portfolio Agreement") between the Fund and AIM for and experience of the officers and managers and investment personnel. With another year, effective July 1, 2006. employees of AIM who will provide respect to the Fund, the Board is meeting investment advisory services to the Fund. periodically with such Fund's portfolio The Board considered the factors In reviewing the qualifications of AIM to managers and/or other investment personnel discussed below in evaluating the fairness provide investment advisory services, the and believes that such individuals are and reasonableness of the Advisory Board considered such issues as AIM's competent and able to continue to carry Agreement at the meeting on June 27, 2006 portfolio and product review process, out their responsibilities under the and as part of the Board's ongoing various back office support functions Advisory Agreement. oversight of the Fund. In their provided by AIM and AIM's equity and fixed deliberations, the Board and the income trading operations. Based on the - Overall performance of AIM. The Board independent trustees did not identify any review of these and other factors, the considered the overall performance of AIM particular factor that was controlling, Board concluded that the quality of in providing investment advisory and and each trustee attributed different services to be provided by AIM was portfolio administrative services to the weights to the various factors. appropriate and that AIM currently is Fund and concluded that such performance providing satisfactory services in was satisfactory. One responsibility of the accordance with the terms of the Advisory independent Senior Officer of the Fund is Agreement. - Fees relative to those of clients of AIM to manage the process by which the Fund's with comparable investment strategies. The proposed management fees are negotiated to - The performance of the Fund relative to Board reviewed the effective advisory fee ensure that they are negotiated in a comparable funds. The Board reviewed the rate (before waivers) for the Fund under manner which is at arms' length and performance of the Fund during the past the Advisory Agreement. The Board noted reasonable. To that end, the Senior one, three and five calendar years against that this rate was (i) above the effective Officer must either supervise a the performance of funds advised by other advisory fee rate (before waivers) for a competitive bidding process or prepare an advisors with investment strategies mutual fund advised by AIM with investment independent written evaluation. The Senior comparable to those of the Fund. The Board strategies comparable to those of the Officer has recommended an independent noted that the Fund's performance was Fund; and (ii) above the effective written evaluation in lieu of a above the median performance of such advisory fee rate (before waivers) for a competitive bidding process and, upon the comparable funds for the one and three mutual fund advised by AIM and used direction of the Board, has prepared such year periods and below such median exclusively for separately managed an independent written evaluation. Such performance for the five year period. accounts/wrap accounts managed by AIM written evaluation also considered certain Based on this review and after taking affiliates with investment strategies of the factors discussed below. In account of all of the other factors that comparable to those of the Fund. The Board addition, as discussed below, the Senior the Board considered in determining noted that AIM has agreed to limit the Officer made a recommendation to the Board whether to continue the Advisory Agreement Fund's total operating expenses, as in connection with such written for the Fund, the Board concluded that no discussed below. Based on this review, the evaluation. changes should be made to the Fund and Board concluded that the advisory fee rate that it was not necessary to change the for the Fund under the Advisory Agreement The discussion below serves as a Fund's portfolio management team at this was fair and reasonable. summary of the Senior Officer's time. Although the independent written independent written evaluation and evaluation of the Fund's Senior Officer - Fees relative to those of comparable recommendation to the Board in connection (discussed below) only considered Fund funds with other advisors. The Board therewith, as well as a discussion of the performance through the most recent reviewed the advisory fee rate for the material factors and the conclusions with calendar year, the Board also reviewed Fund under the Advisory Agreement. The respect thereto that formed the basis for more recent Fund performance, which did Board compared effective contractual the Board's approval of the Advisory not change their conclusions. advisory fee rates at a common asset level Agreement. After consideration of all of at the end of the past calendar year and the factors below and based on its - The performance of the Fund relative noted that the Fund's rate was comparable informed business judgment, the Board to indices. The Board reviewed the to the median rate of the funds advised by determined that the Advisory Agreement is performance of the Fund during the past other advisors with investment strategies in the best interests of the Fund and its one, three and five calendar years comparable to those of the Fund that the shareholders and that the compensation to against the performance of the Lipper Board reviewed. The Board noted that AIM AIM under the Advisory Agreement is fair Variable Underlying Fund Corporate has agreed to limit the Fund's total and reasonable and would have been - BBB Index. The Board noted that the operating expenses, as discussed below. obtained through arm's length Fund's performance was above the Based on this review, the Board concluded negotiations. performance of such Index for the one that the advisory fee rate for the Fund and three year periods and below such under the Advisory Agreement was fair and Unless otherwise stated, information Index for the five year period. Based on reasonable. presented below is as of June 27, 2006 and this review and after taking account of does not reflect any changes that may have all of the other factors that the Board occurred since June 27, 2006, including considered in determining whether to but not limited to changes to the Fund's continue the Advisory Agreement for the performance, advisory fees, expense Fund, the Board limitations and/or fee waivers.
7
AIM V.I. DIVERSIFIED INCOME FUND - Expense limitations and fee waivers. The - Independent written evaluation and trustees also considered the Board noted that AIM has contractually recommendations of the Fund's Senior organizational structure employed by AIM agreed to waive fees and/or limit expenses Officer. The Board noted that, upon their and its affiliates to provide those of the Fund through April 30, 2008 so that direction, the Senior Officer of the Fund, services. Based on the review of these and total annual operating expenses are who is independent of AIM and AIM's other factors, the Board concluded that limited to a specified percentage of affiliates, had prepared an independent AIM and its affiliates were qualified to average daily net assets for each class of written evaluation in order to assist the continue to provide non-investment the Fund. The Board considered the Board in determining the reasonableness of advisory services to the Fund, including contractual nature of this fee waiver and the proposed management fees of the AIM administrative, transfer agency and noted that it remains in effect until Funds, including the Fund. The Board noted distribution services, and that AIM and April 30, 2008. The Board considered the that the Senior Officer's written its affiliates currently are providing effect this fee waiver/expense limitation evaluation had been relied upon by the satisfactory non-investment advisory would have on the Fund's estimated Board in this regard in lieu of a services. expenses and concluded that the levels of competitive bidding process. In fee waivers/expense limitations for the determining whether to continue the - Other factors and current trends. The Fund were fair and reasonable. Advisory Agreement for the Fund, the Board Board considered the steps that AIM and considered the Senior Officer's written its affiliates have taken over the last - Breakpoints and economies of scale. The evaluation. several years, and continue to take, in Board reviewed the structure of the Fund's order to improve the quality and advisory fee under the Advisory Agreement, - Profitability of AIM and its affiliates. efficiency of the services they provide to noting that it includes one breakpoint. The Board reviewed information concerning the Funds in the areas of investment The Board reviewed the level of the Fund's the profitability of AIM's (and its performance, product line diversification, advisory fees, and noted that such fees, affiliates') investment advisory and other distribution, fund operations, shareholder as a percentage of the Fund's net assets, activities and its financial condition. services and compliance. The Board would decrease as net assets increase The Board considered the overall concluded that these steps taken by AIM because the Advisory Agreement includes a profitability of AIM, as well as the have improved, and are likely to continue breakpoint. The Board noted that, due to profitability of AIM in connection with to improve, the quality and efficiency of the Fund's asset levels at the end of the managing the Fund. The Board noted that the services AIM and its affiliates past calendar year and the way in which AIM's operations remain profitable, provide to the Fund in each of these the advisory fee breakpoint has been although increased expenses in recent areas, and support the Board's approval of structured, the Fund has yet to benefit years have reduced AIM's profitability. the continuance of the Advisory Agreement from the breakpoint. The Board concluded Based on the review of the profitability for the Fund. that the Fund's fee levels under the of AIM's and its affiliates' investment Advisory Agreement therefore would reflect advisory and other activities and its economies of scale at higher asset levels financial condition, the Board concluded and that it was not necessary to change that the compensation to be paid by the the advisory fee breakpoints in the Fund's Fund to AIM under its Advisory Agreement advisory fee schedule. was not excessive. - Investments in affiliated money market - Benefits of soft dollars to AIM. The funds. The Board also took into account Board considered the benefits realized by the fact that uninvested cash and cash AIM as a result of brokerage transactions collateral from securities lending executed through "soft dollar" arrangements, if any (collectively, "cash arrangements. Under these arrangements, balances") of the Fund may be invested in brokerage commissions paid by the Fund money market funds advised by AIM pursuant and/or other funds advised by AIM are used to the terms of an SEC exemptive order. to pay for research and execution The Board found that the Fund may realize services. This research may be used by AIM certain benefits upon investing cash in making investment decisions for the balances in AIM advised money market Fund. The Board concluded that such funds, including a higher net return, arrangements were appropriate. increased liquidity, increased diversification or decreased transaction - AIM's financial soundness in light of costs. The Board also found that the Fund the Fund's needs. The Board considered will not receive reduced services if it whether AIM is financially sound and has invests its cash balances in such money the resources necessary to perform its market funds. The Board noted that, to the obligations under the Advisory Agreement, extent the Fund invests uninvested cash in and concluded that AIM has the financial affiliated money market funds, AIM has resources necessary to fulfill its voluntarily agreed to waive a portion of obligations under the Advisory Agreement. the advisory fees it receives from the Fund attributable to such investment. The - Historical relationship between the Fund Board further determined that the proposed and AIM. In determining whether to securities lending program and related continue the Advisory Agreement for the procedures with respect to the lending Fund, the Board also considered the prior Fund is in the best interests of the relationship between AIM and the Fund, as lending Fund and its respective well as the Board's knowledge of AIM's shareholders. The Board therefore operations, and concluded that it was concluded that the investment of cash beneficial to maintain the current collateral received in connection with the relationship, in part, because of such securities lending program in the money knowledge. The Board also reviewed the market funds according to the procedures general nature of the non-investment is in the best interests of the lending advisory services currently performed by Fund and its respective shareholders. AIM and its affiliates, such as administrative, transfer agency and distribution services, and the fees received by AIM and its affiliates for performing such services. In addition to reviewing such services, the
8 AIM V.I. Diversified Income Fund SCHEDULE OF INVESTMENTS December 31, 2006
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- U.S. DOLLAR DENOMINATED BONDS & NOTES-82.56% AEROSPACE & DEFENSE-0.73% Systems 2001 Asset Trust LLC (United Kingdom)- Series 2001, Class G, Pass Through Ctfs., (INS-MBIA Insurance Corp.) 6.66%, 09/15/13 (Acquired 02/09/05-10/27/05; Cost $365,115)(a)(b)(c) $ 332,451 $ 348,294 ============================================================================ AGRICULTURAL PRODUCTS-0.41% Corn Products International Inc., Sr. Unsec. Notes, 8.25%, 07/15/07(b) 190,000 192,692 ============================================================================ APPAREL RETAIL-0.28% Gap Inc. (The), Unsec. Notes, 6.90%, 09/15/07(b) 130,000 131,348 ============================================================================ ASSET MANAGEMENT & CUSTODY BANKS-1.52% Bank of New York Institutional Capital Trust- Series A, Trust Pfd. Bonds, 7.78%, 12/01/26 (Acquired 06/12/03; Cost $298,178)(a)(b) 250,000 259,082 ---------------------------------------------------------------------------- GAMCO Investors, Inc., Sr. Unsec. Unsub. Notes, 5.22%, 02/17/07(b) 155,000 154,907 ---------------------------------------------------------------------------- Mellon Capital II-Series B, Jr. Unsec. Gtd. Sub. Trust Pfd. Bonds, 8.00%, 01/15/27(b) 180,000 187,969 ---------------------------------------------------------------------------- Nuveen Investments, Inc., Sr. Unsec. Sub. Notes, 5.50%, 09/15/15(b) 125,000 120,941 ============================================================================ 722,899 ============================================================================ AUTOMOBILE MANUFACTURERS-1.07% DaimlerChrysler North America Holding Corp., Gtd. Floating Rate Global Notes, 5.60%, 03/07/07(b)(d) 205,000 205,040 ---------------------------------------------------------------------------- Notes, 4.13%, 03/07/07(b) 305,000 304,292 ============================================================================ 509,332 ============================================================================ BROADCASTING & CABLE TV-6.52% Adelphia Communications Corp., Sr. Unsec. Unsub. Notes, 10.88%, 10/01/10(b)(e) 90,000 82,800 ---------------------------------------------------------------------------- CBS Corp., Sr. Unsec. Gtd. Global Notes, 5.63%, 05/01/07(b) 530,000 530,064 ---------------------------------------------------------------------------- Unsec. Gtd. Deb., 7.88%, 09/01/23(b) 80,000 84,488 ---------------------------------------------------------------------------- Clear Channel Communications, Inc., Sr. Unsec. Notes, 3.13%, 02/01/07(b) 180,000 179,672 ---------------------------------------------------------------------------- Comcast Cable Communications Holdings Inc., Unsec. Gtd. Global Notes, 9.46%, 11/15/22(b) 440,000 572,590 ---------------------------------------------------------------------------- Comcast Corp., Sr. Sub. Deb., 10.63%, 07/15/12(b) 485,000 587,025 ---------------------------------------------------------------------------- Cox Enterprises, Inc., Notes, 8.00%, 02/15/07 (Acquired 01/27/06-02/24/06; Cost $533,412)(a)(b) 520,000 521,253 ---------------------------------------------------------------------------- CSC Holdings Inc., Sr. Unsec. Notes, 7.88%, 12/15/07(b) 155,000 157,712 ----------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------
BROADCASTING & CABLE TV-(CONTINUED) Series B, Sr. Unsec. Unsub. Notes, 7.63%, 04/01/11(b) $ 55,000 $ 56,306 ---------------------------------------------------------------------------- Hearst-Argyle Television Inc.,, Sr. Unsec. Unsub. Notes, 7.00%, 11/15/07(b) 145,000 146,504 ---------------------------------------------------------------------------- Time Warner Entertainment Co. L.P., Sr. Unsec. Deb., 8.38%, 03/15/23(b) 150,000 175,909 ============================================================================ 3,094,323 ============================================================================ BUILDING PRODUCTS-0.24% Masco Corp., Unsec. Notes, 4.63%, 08/15/07(b) 115,000 114,420 ============================================================================ CASINOS & GAMING-0.76% Harrah's Operating Co., Inc., Sr. Unsec. Gtd. Global Notes, 7.13%, 06/01/07(b) 360,000 360,990 ============================================================================ COMPUTER & ELECTRONICS RETAIL-0.42% RadioShack Corp., Unsec. Notes, 6.95%, 09/01/07(b) 200,000 201,056 ============================================================================ CONSUMER FINANCE-8.17% Capital One Capital I, Sub. Floating Rate Trust Pfd. Bonds, 6.92%, 02/01/27 (Acquired 09/15/04-04/12/06; Cost $486,249)(a)(b)(d) 480,000 484,013 ---------------------------------------------------------------------------- Ford Motor Credit Co., Floating Rate Medium Term Notes, 6.19%, 09/28/07(b)(d) 240,000 240,087 ---------------------------------------------------------------------------- Medium Term Notes, 7.75%, 02/15/07(b) 50,000 50,102 ---------------------------------------------------------------------------- Notes, 6.63%, 06/16/08(b) 240,000 241,061 ---------------------------------------------------------------------------- Sr. Unsec. Notes, 4.95%, 01/15/08(b) 1,000,000 987,450 ---------------------------------------------------------------------------- Unsec. Floating Rate Euro Medium Term Notes, 5.56%, 03/13/07(b)(d) 310,000 308,062 ---------------------------------------------------------------------------- General Motors Acceptance Corp., Floating Rate Medium Term Notes, 6.27%, 01/16/07(b)(d) 720,000 720,807 ---------------------------------------------------------------------------- 6.23%, 03/20/07(b)(d) 130,000 130,168 ---------------------------------------------------------------------------- Global Notes, 6.15%, 04/05/07(b) 230,000 230,504 ---------------------------------------------------------------------------- Series GM, Sr. Medium Term Notes, 6.31%, 11/30/07(b) 482,000 482,709 ============================================================================ 3,874,963 ============================================================================ DEPARTMENT STORES-0.34% JC Penney Corp. Inc., Unsec. Deb., 8.13%, 04/01/27(b) 160,000 163,272 ============================================================================
AIM V.I. Diversified Income Fund
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- DIVERSIFIED BANKS-7.76% Bangkok Bank PCL (Hong Kong), Unsec. Sub. Notes, 9.03%, 03/15/29 (Acquired 04/21/05-05/11/06; Cost $493,483)(a)(b) $ 400,000 $ 498,260 ---------------------------------------------------------------------------- BankAmerica Institutional-Series A, Gtd. Trust Pfd. Bonds, 8.07%, 12/31/26 (Acquired 02/15/06-09/26/06; Cost $209,596)(a)(b) 200,000 207,602 ---------------------------------------------------------------------------- BankBoston Capital Trust II-Series B, Gtd. Trust Pfd. Bonds, 7.75%, 12/15/26(b) 310,000 321,197 ---------------------------------------------------------------------------- Barclays Bank PLC (United Kingdom), Floating Rate Global Notes, 4.47%, 08/08/07 (Acquired 04/06/06; Cost $99,481)(a)(b)(d) 100,000 100,035 ---------------------------------------------------------------------------- Centura Capital Trust I, Gtd. Trust Pfd. Notes, 8.85%, 06/01/27 (Acquired 05/22/03; Cost $632,715)(a)(b) 500,000 528,550 ---------------------------------------------------------------------------- First Empire Capital Trust I, Gtd. Trust Pfd. Notes, 8.23%, 02/01/27(b) 260,000 271,843 ---------------------------------------------------------------------------- Lloyds Bank PLC (United Kingdom)-Series 1, Unsec. Sub. Floating Rate Euro Notes, 5.63%(b)(d)(f) 180,000 158,373 ---------------------------------------------------------------------------- Mizuho Financial Group Cayman Ltd. (Cayman Islands), Gtd. Sub. Second Tier Euro Bonds, 8.38%(b)(f) 100,000 105,705 ---------------------------------------------------------------------------- National Bank of Canada (Canada), Floating Rate Euro Deb., 5.63%, 08/29/87,(b)(d) 200,000 163,527 ---------------------------------------------------------------------------- National Westminster Bank PLC (United Kingdom)- Series B, Unsec. Sub. Floating Rate Euro Notes, 5.69%(b)(d)(f) 280,000 241,995 ---------------------------------------------------------------------------- NBD Bank N.A. Michigan, Unsec. Sub. Deb., 8.25%, 11/01/24(b) 140,000 174,509 ---------------------------------------------------------------------------- RBS Capital Trust III, Sub. Trust Pfd. Global Notes, 5.51%(b)(f) 120,000 119,352 ---------------------------------------------------------------------------- Sumitomo Mitsui Banking Corp. (Japan), Sub. Second Tier Euro Notes, 8.15%(b)(f) 280,000 290,459 ---------------------------------------------------------------------------- US Trust Capital Trust A, Trust Pfd. Bonds, 8.41%, 02/01/27 (Acquired 02/15/06; Cost $277,014)(a)(b) 260,000 271,349 ---------------------------------------------------------------------------- VTB Capital S.A. (Russia), Sr. Floating Rate Notes, 6.12%, 09/21/07 (Acquired 12/14/05; Cost $230,000)(a)(b)(d) 230,000 230,661 ============================================================================ 3,683,417 ============================================================================ DIVERSIFIED CHEMICALS-0.42% Hercules Inc., Unsec. Putable Deb., 6.60%, 08/01/07(b) 200,000 200,090 ============================================================================ DIVERSIFIED METALS & MINING-0.30% Reynolds Metals Co., Medium Term Notes, 7.00%, 05/15/09(b) 141,000 143,663 ============================================================================ DRUG RETAIL-0.17% Rite Aid Corp., Sr. Unsec. Unsub. Notes, 7.13%, 01/15/07(b) 80,000 80,300 ============================================================================ ELECTRIC UTILITIES-2.19% Commonwealth Edison Co., Unsec. Notes, 7.63%, 01/15/07(b) 430,000 430,219 ---------------------------------------------------------------------------- Mission Energy Holding Co., Sr. Sec. Global Notes, 13.50%, 07/15/08(b) 160,000 177,400 ----------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------
ELECTRIC UTILITIES-(CONTINUED) Potomac Electric Power Co.-Series A, Medium Term Notes, 7.64%, 01/17/07(b) $ 100,000 $ 100,062 ---------------------------------------------------------------------------- Southern Co. Capital Trust I, Gtd. Trust Pfd. Notes, 8.19%, 02/01/37(b) 320,000 333,363 ============================================================================ 1,041,044 ============================================================================ FOOD RETAIL-1.25% Kroger Co. (The), Notes, 7.80%, 08/15/07(b) 240,000 243,190 ---------------------------------------------------------------------------- Sr. Unsec. Notes, 7.65%, 04/15/07(b) 260,000 261,425 ---------------------------------------------------------------------------- Safeway Inc., Sr. Unsec. Notes, 7.00%, 09/15/07(b) 88,000 88,847 ============================================================================ 593,462 ============================================================================ FOREST PRODUCTS-0.11% Weyerhaeuser Co., Unsec. Unsub. Global Notes, 6.13%, 03/15/07(b) 50,000 50,060 ============================================================================ GENERAL MERCHANDISE STORES-0.17% Pantry, Inc. (The), Sr. Sub. Global Notes, 7.75%, 02/15/14(b) 80,000 80,900 ============================================================================ HEALTH CARE SERVICES-0.33% Orlando Lutheran Towers Inc., Bonds, 7.75%, 07/01/11(b) 155,000 154,248 ============================================================================ HOME IMPROVEMENT RETAIL-0.17% Sherwin-Williams Co. (The), Sr. Notes, 6.85%, 02/01/07(b) 80,000 80,078 ============================================================================ HOMEBUILDING-0.89% D.R. Horton, Inc., Sr. Unsec. Gtd. Notes, 8.00%, 02/01/09(b) 200,000 209,644 ---------------------------------------------------------------------------- Sr. Unsec. Notes, 7.88%, 08/15/11(b) 200,000 214,814 ============================================================================ 424,458 ============================================================================ HOTELS, RESORTS & CRUISE LINES-0.35% Starwood Hotels & Resorts Worldwide, Inc., Sr. Gtd. Global Notes, 7.38%, 05/01/07(b) 164,000 164,615 ============================================================================ HOUSEWARES & SPECIALTIES-0.05% Newell Rubbermaid Inc., Unsec. Notes, 6.00%, 03/15/07(b) 25,000 25,017 ============================================================================ INSURANCE BROKERS-0.87% Aon Corp., Unsec. Notes, 6.95%, 01/15/07(b) 20,000 20,008 ---------------------------------------------------------------------------- Marsh & McLennan Cos., Inc., Sr. Unsec. Global Notes, 5.38%, 03/15/07(b) 395,000 394,913 ============================================================================ 414,921 ============================================================================ INTEGRATED OIL & GAS-1.85% ConocoPhillips, Unsec. Deb., 7.13%, 03/15/28(b) 300,000 311,352 ---------------------------------------------------------------------------- Husky Oil Ltd. (Canada), Yankee Bonds, 8.90%, 08/15/28(b) 540,000 567,000 ============================================================================ 878,352 ============================================================================
AIM V.I. Diversified Income Fund
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- INTEGRATED TELECOMMUNICATION SERVICES-5.46% Embarq Corp., Sr. Unsec. Notes, 7.08%, 06/01/16(b) $ 230,000 $ 235,048 ---------------------------------------------------------------------------- TCI Communications Financing III, Gtd. Trust Pfd. Bonds, 9.65%, 03/31/27(b) 450,000 476,505 ---------------------------------------------------------------------------- TELUS Corp. (Canada), Yankee Notes, 7.50%, 06/01/07(b) 250,000 251,985 ---------------------------------------------------------------------------- Verizon California Inc.-Series G, Unsec. Deb., 5.50%, 01/15/09(b) 160,000 160,402 ---------------------------------------------------------------------------- Verizon Communications Inc., Unsec. Deb., 8.75%, 11/01/21(b) 460,000 548,320 ---------------------------------------------------------------------------- Verizon Florida Inc.-Series F, Sr. Unsec. Deb., 6.13%, 01/15/13(b) 120,000 122,681 ---------------------------------------------------------------------------- Verizon New York Inc., Unsec. Deb., 7.00%, 12/01/33(b) 180,000 184,360 ---------------------------------------------------------------------------- Verizon Virginia Inc.-Series A, Unsec. Global Deb., 4.63%, 03/15/13(b) 648,000 611,323 ============================================================================ 2,590,624 ============================================================================ INTERNET RETAIL-0.30% Expedia, Inc., Putable Bonds, 7.46%, 08/15/13 (Acquired 08/16/06; Cost $135,000)(a)(b) 135,000 140,991 ============================================================================ INVESTMENT BANKING & BROKERAGE-0.17% Dryden Investor Trust, Bonds, 7.16%, 07/23/08 (Acquired 04/10/06; Cost $31,022)(a)(b) 30,475 30,876 ---------------------------------------------------------------------------- Jefferies Group, Inc.-Series B, Sr. Unsec. Notes, 7.50%, 08/15/07(b) 50,000 50,586 ============================================================================ 81,462 ============================================================================ LIFE & HEALTH INSURANCE-2.69% Americo Life Inc., Notes, 7.88%, 05/01/13 (Acquired 04/25/03; Cost $93,875)(a)(b) 95,000 95,564 ---------------------------------------------------------------------------- Prudential Holdings, LLC Series B, Bonds, (INS-Financial Security Assurance Inc.) 7.25%, 12/18/23 (Acquired 01/22/04-01/29/04; Cost $588,417)(a)(b)(c) 500,000 578,890 ---------------------------------------------------------------------------- Sun Life Canada (U.S.) Capital Trust, Gtd. Trust Pfd. Notes, 8.53% (Acquired 02/13/06-11/15/06; Cost $607,333)(a)(b)(f) 570,000 600,262 ============================================================================ 1,274,716 ============================================================================ MANAGED HEALTH CARE-0.28% Cigna Corp., Unsec. Notes, 7.40%, 05/15/07(b) 130,000 130,930 ============================================================================ METAL & GLASS CONTAINERS-0.31% Owens-Brockway Glass Container Inc., Sr. Unsec. Gtd. Global Notes, 8.25%, 05/15/13(b) 140,000 145,075 ============================================================================ MOVIES & ENTERTAINMENT-2.26% News America Holdings Inc., Sr. Unsec. Gtd. Deb., 7.75%, 12/01/45(b) 205,000 233,427 ---------------------------------------------------------------------------- Time Warner Cos., Inc., Unsec. Deb., 9.15%, 02/01/23(b) 480,000 597,365 ---------------------------------------------------------------------------- Time Warner Inc., Sr. Unsec. Gtd. Deb., 6.50%, 11/15/36(b) 240,000 240,163 ============================================================================ 1,070,955 ============================================================================
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------
MULTI-UTILITIES-1.58% Ameren Corp., Bonds, 4.26%, 05/15/07(b) $ 195,000 $ 194,165 ---------------------------------------------------------------------------- Dominion Capital Trust I, Jr. Unsec. Gtd. Trust Pfd. Bonds, 7.83%, 12/01/27(b) 400,000 417,784 ---------------------------------------------------------------------------- Duke Energy Indiana, Inc., Unsec. Deb., 7.85%, 10/15/07(b) 65,000 66,165 ---------------------------------------------------------------------------- Sempra Energy, Sr. Notes, 4.62%, 05/17/07(b) 70,000 69,787 ============================================================================ 747,901 ============================================================================ OFFICE REIT'S-0.32% EOP Operating L.P., Sr. Unsec. Notes, 7.75%, 11/15/07(b) 150,000 153,111 ============================================================================ OIL & GAS EXPLORATION & PRODUCTION-2.66% Pemex Project Funding Master Trust, Unsec. Gtd. Unsub. Global Notes, 5.75%, 12/15/15(b) 325,000 324,447 ---------------------------------------------------------------------------- 8.63%, 02/01/22(b) 675,000 836,359 ---------------------------------------------------------------------------- Talisman Energy Inc. (Canada), Unsec. Unsub. Yankee Deb., 7.13%, 06/01/07(b) 100,000 100,504 ============================================================================ 1,261,310 ============================================================================ OIL & GAS REFINING & MARKETING-0.18% Premcor Refining Group Inc. (The), Sr. Unsec. Global Notes,, 9.50%, 02/01/13(b) 80,000 86,504 ============================================================================ OTHER DIVERSIFIED FINANCIAL SERVICES-9.55% BankAmerica Capital II-Series 2, Jr. Unsec. Gtd. Sub. Trust Pfd. Notes, 8.00%, 12/15/26(b) 130,000 134,840 ---------------------------------------------------------------------------- General Electric Capital Corp., Unsec. Floating Rate Putable Deb., 5.11%, 09/01/07(b)(d) 50,000 49,755 ---------------------------------------------------------------------------- JPM Capital Trust I, Gtd. Trust Pfd. Notes, 7.54%, 01/15/27(b) 300,000 312,477 ---------------------------------------------------------------------------- Mizuho JGB Investment LLC-Series A, Sub. Bonds, 9.87% (Acquired 06/16/04-03/03/06; Cost $787,636)(a)(b)(f) 700,000 743,316 ---------------------------------------------------------------------------- NB Capital Trust IV, Gtd. Trust Pfd. Bonds, 8.25%, 04/15/27(b) 280,000 293,199 ---------------------------------------------------------------------------- Pemex Finance Ltd. (Mexico), Sr. Unsec. Global Notes, 8.02%, 05/15/07(b) 85,000 85,513 ---------------------------------------------------------------------------- Series 1999-2, Class A1, Global Bonds, 9.69%, 08/15/09(b) 368,500 388,358 ---------------------------------------------------------------------------- Regional Diversified Funding (Cayman Islands), Sr. Notes, 9.25%, 03/15/30 (Acquired 01/10/03-09/22/04; Cost $525,327)(a)(b) 453,889 515,600 ---------------------------------------------------------------------------- Class A-1a, Sr. Floating Rate Notes, 5.71%, 01/25/36 (Acquired 03/21/05; Cost $493,302)(a)(b)(d)(g) 493,302 480,610 ---------------------------------------------------------------------------- Residential Capital LLC, Sr. Unsec. Floating Rate Global Notes, 6.74%, 06/29/07(b)(d) 250,000 251,211 ---------------------------------------------------------------------------- Sr. Unsec. Gtd. Floating Rate Notes, 5.85%, 06/09/08(b)(d) 395,000 394,627 ----------------------------------------------------------------------------
AIM V.I. Diversified Income Fund
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- OTHER DIVERSIFIED FINANCIAL SERVICES-(CONTINUED) Twin Reefs Pass-Through Trust, Floating Rate Pass Through Ctfs., 6.35% (Acquired 12/07/04-04/03/06; Cost $300,332)(a)(b)(d)(f) $ 300,000 $ 300,571 ---------------------------------------------------------------------------- Two-Rock Pass-Through Trust (Bermuda), Floating Rate Pass Through Ctfs., 6.32% (Acquired 11/10/06; Cost $220,260)(a)(b)(d)(f) 220,000 216,748 ---------------------------------------------------------------------------- UFJ Finance Aruba AEC (Aruba), Gtd. Sub. Second Tier Euro Bonds, 8.75%(b)(f) 250,000 263,979 ---------------------------------------------------------------------------- Windsor Financing LLC, Sr. Gtd. Notes, 5.88%, 07/15/17 (Acquired 02/07/06; Cost $102,859)(a)(b) 102,859 102,391 ============================================================================ 4,533,195 ============================================================================ PAPER PRODUCTS-0.19% International Paper Co., Unsec. Notes, 7.63%, 01/15/07(b) 91,000 91,055 ============================================================================ PROPERTY & CASUALTY INSURANCE-5.68% Executive Risk Capital Trust-Series B, Gtd. Trust Pfd. Bonds, 8.68%, 02/01/27(b) 260,000 272,363 ---------------------------------------------------------------------------- First American Capital Trust I, Gtd. Trust Pfd. Notes, 8.50%, 04/15/12(b) 790,000 838,277 ---------------------------------------------------------------------------- North Front Pass-Through Trust, Bonds, 5.81%, 12/15/24 (Acquired 12/08/04; Cost $351,994)(a)(b) 350,000 345,674 ---------------------------------------------------------------------------- Oil Casualty Insurance Ltd. (Bermuda), Unsec. Sub. Deb., 8.00%, 09/15/34 (Acquired 04/29/05-06/09/05; Cost $352,536)(a)(b) 330,000 328,848 ---------------------------------------------------------------------------- Oil Insurance Ltd., Notes, 7.56% (Acquired 06/15/06; Cost $870,000)(a)(b)(f) 870,000 908,445 ============================================================================ 2,693,607 ============================================================================ PUBLISHING-0.23% Belo Corp., Sr. Unsec. Unsub. Notes, 7.13%, 06/01/07(b) 110,000 110,785 ============================================================================ REAL ESTATE MANAGEMENT & DEVELOPMENT-1.40% Realogy Corp., Sr. Floating Rate Notes, 6.07%, 10/20/09 (Acquired 10/13/06; Cost $45,000)(a)(b)(d) 45,000 45,028 ---------------------------------------------------------------------------- Sr. Notes, 6.50%, 10/15/16 (Acquired 10/13/06-10/16/06; Cost $340,659)(a)(b) 340,000 342,836 ---------------------------------------------------------------------------- Southern Investments UK PLC (United Kingdom), Gtd. Trust Pfd. Yankee Notes, 8.23%, 02/01/27(b) 270,000 274,050 ============================================================================ 661,914 ============================================================================ REGIONAL BANKS-3.20% Cullen/Frost Capital Trust I, Unsec. Sub. Floating Rate Notes, 6.92%, 03/01/34(b)(d) 600,000 613,344 ---------------------------------------------------------------------------- PNC Capital Trust C, Gtd. Floating Rate Trust Pfd. Bonds, 5.94%, 06/01/28(b)(d) 100,000 96,628 ---------------------------------------------------------------------------- Popular North America Inc.-Series F, Medium Term Notes, 5.20%, 12/12/07(b) 140,000 139,080 ----------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------
REGIONAL BANKS-(CONTINUED) TCF National Bank, Sub. Notes, 5.00%, 06/15/14(b) $ 175,000 $ 171,973 ---------------------------------------------------------------------------- Western Financial Bank, Unsec. Sub. Deb., 9.63%, 05/15/12(b) 450,000 499,185 ============================================================================ 1,520,210 ============================================================================ REINSURANCE-1.33% Reinsurance Group of America, Inc., Jr. Unsec. Sub. Deb., 6.75%, 12/15/65(b) 165,000 165,827 ---------------------------------------------------------------------------- Stingray Pass-Through Trust, Pass Through Ctfs., 5.90%, 01/12/15 (Acquired 01/07/05-11/03/05; Cost $493,840)(a)(b) 500,000 467,570 ============================================================================ 633,397 ============================================================================ SOVEREIGN DEBT-0.70% Russian Federation (Russia)-REGS, Unsec. Unsub. Euro Bonds, 10.00%, 06/26/07 (Acquired 05/14/04; Cost $364,406)(a)(b) 325,000 332,703 ============================================================================ SPECIALIZED REIT'S-1.24% Health Care Property Investors, Inc., Floating Rate Medium Term Notes, 5.81%, 09/15/08(b)(d) 240,000 240,698 ---------------------------------------------------------------------------- Notes, 5.63%, 05/01/17(b) 180,000 172,550 ---------------------------------------------------------------------------- Health Care REIT, Inc., Sr. Notes, 5.88%, 05/15/15(b) 175,000 173,084 ============================================================================ 586,332 ============================================================================ STEEL-0.31% Commercial Metals Co., Unsec. Unsub. Notes, 6.80%, 08/01/07(b) 145,000 145,986 ============================================================================ THRIFTS & MORTGAGE FINANCE-1.63% Dime Capital Trust I-Series A, Gtd. Trust Pfd. Notes, 9.33%, 05/06/27(b) 110,000 116,384 ---------------------------------------------------------------------------- Greenpoint Capital Trust I, Gtd. Sub. Trust Pfd. Notes, 9.10%, 06/01/27(b) 275,000 291,236 ---------------------------------------------------------------------------- Telebanc Capital Trust I, Gtd. Trust Pfd. Notes, 11.00%, 06/01/27(b) 240,000 260,362 ---------------------------------------------------------------------------- Washington Mutual Capital I, Gtd. Sub. Trust Pfd. Notes, 8.38%, 06/01/27(b) 100,000 105,200 ============================================================================ 773,182 ============================================================================ TOBACCO-0.23% Altria Group, Inc., Unsec. Notes, 7.20%, 02/01/07(b) 110,000 110,131 ============================================================================ TRADING COMPANIES & DISTRIBUTORS-0.87% Western Power Distribution Holdings Ltd. (United Kingdom), Unsec. Unsub. Notes, 7.38%, 12/15/28 (Acquired 01/25/05-03/03/05; Cost $428,237)(a)(b) 375,000 414,079 ============================================================================ TRUCKING-1.43% Roadway Corp., Sr. Sec. Gtd. Global Notes, 8.25%, 12/01/08(b) 650,000 678,165 ============================================================================
AIM V.I. Diversified Income Fund
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES-1.02% Alamosa Delaware Inc., Sr. Gtd. Global Notes, 8.50%, 01/31/12(b) $ 190,000 $ 202,096 ---------------------------------------------------------------------------- Sprint Nextel Corp., Deb., 9.25%, 04/15/22(b) 235,000 282,639 ============================================================================ 484,735 ============================================================================ Total U.S. Dollar Denominated Bonds & Notes (Cost $39,672,015) 39,181,269 ============================================================================ ASSET-BACKED SECURITIES-4.97% COLLATERALIZED MORTGAGE OBLIGATIONS-0.25% Federal Home Loan Bank (FHLB)-Series TQ-2015, Class A, Pass Through Ctfs., 5.07%, 10/20/15(b) 122,792 121,379 ============================================================================ OTHER DIVERSIFIED FINANCIAL SERVICES-4.72% Citicorp Lease Pass-Through Trust-Series 1999-1, Class A2, Pass Through Ctfs., 8.04%, 12/15/19 (Acquired 07/14/00-07/27/05; Cost $781,505)(a)(b) 675,000 795,479 ---------------------------------------------------------------------------- Patrons' Legacy 2003-III LILACS-III-A, Ctfs., 5.65%, 01/17/17 (Acquired 11/04/04; Cost $487,214)(a)(g) 475,141 470,897 ---------------------------------------------------------------------------- Patrons' Legacy 2004-1 LILACS-I-Series A, Ctfs., 6.67%, 05/04/18 (Acquired 04/30/04; Cost $972,222)(a)(g) 972,222 972,582 ============================================================================ 2,238,958 ============================================================================ Total Asset-Backed Securities (Cost $2,352,737) 2,360,337 ============================================================================ MUNICIPAL OBLIGATIONS-3.56% Detroit (City of), Michigan; Series 2005 A-1, Taxable Capital Improvement Limited Tax GO, (INS-Ambac Assurance Corp.) 4.96%, 04/01/20(b)(c) 130,000 122,126 ---------------------------------------------------------------------------- Florida (State of) Development Finance Corp. (Palm Bay Academy Inc.) Series 2006 B, Taxable RB, 7.50%, 05/15/17(b) 65,000 64,074 ---------------------------------------------------------------------------- Indianapolis (City of), Indiana Local Public Improvement Bond Bank; Series 2005 A, Taxable RB, 4.87%, 07/15/16(b) 100,000 96,162 ---------------------------------------------------------------------------- 5.22%, 07/15/20(b) 125,000 121,920 ---------------------------------------------------------------------------- 5.28%, 01/15/22(b) 100,000 97,369 ---------------------------------------------------------------------------- Industry (City of), California Urban Development Agency (Project 3); Series 2003, Taxable Allocation RB, (INS-MBIA Insurance Corp.) 6.10%, 05/01/24(b)(c) 650,000 666,705 ---------------------------------------------------------------------------- Phoenix (City of), Arizona Civic Improvement Corp.; Series 2004, Taxable Rental Car Facility Charge RB (INS-Financial Guaranty Insurance Co.), 3.69%, 07/01/07(b)(c) 225,000 223,220 ---------------------------------------------------------------------------- 4.21%, 07/01/08(b)(c) 300,000 295,578 ============================================================================ Total Municipal Obligations (Cost $1,592,747) 1,687,154 ============================================================================
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------
U.S. MORTGAGE-BACKED SECURITIES-2.38% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)-0.87% Pass Through Ctfs., 8.50%, 03/01/10(b) $ 327 $ 330 ---------------------------------------------------------------------------- 6.50%, 05/01/16 to 08/01/32(b) 30,397 31,109 ---------------------------------------------------------------------------- 6.00%, 05/01/17 to 11/01/33(b) 277,707 280,622 ---------------------------------------------------------------------------- 5.50%, 09/01/17(b) 102,376 102,582 ============================================================================ 414,643 ============================================================================ FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-0.93% Pass Through Ctfs., 7.00%, 02/01/16 to 09/01/32(b) 47,862 49,249 ---------------------------------------------------------------------------- 6.50%, 05/01/16 to 10/01/35(b) 73,588 75,410 ---------------------------------------------------------------------------- 5.00%, 11/01/18(b) 97,122 95,723 ---------------------------------------------------------------------------- 7.50%, 04/01/29 to 10/01/29(b) 105,277 109,937 ---------------------------------------------------------------------------- 6.50%, 05/01/31(b) 100,752(h) 103,176 ---------------------------------------------------------------------------- 8.00%, 04/01/32(b) 6,282 6,632 ============================================================================ 440,127 ============================================================================ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)-0.58% Pass Through Ctfs., 7.50%, 06/15/23(b) 20,621 21,528 ---------------------------------------------------------------------------- 8.50%, 11/15/24(b) 19,988 21,596 ---------------------------------------------------------------------------- 7.00%, 07/15/31 to 08/15/31(b) 5,188 5,363 ---------------------------------------------------------------------------- 6.50%, 11/15/31 to 09/15/32(b) 42,034 43,208 ---------------------------------------------------------------------------- 6.00%, 12/15/31 to 11/15/32(b) 60,504 61,452 ---------------------------------------------------------------------------- 5.50%, 02/15/34(b) 122,213(h) 121,739 ============================================================================ 274,886 ============================================================================ Total U.S. Mortgage-Backed Securities (Cost $1,143,983) 1,129,656 ============================================================================ SHARES PREFERRED STOCKS-2.21% LIFE & HEALTH INSURANCE-0.41% Aegon N.V., 6.38% Pfd. (Netherlands) 7,500 194,775 ============================================================================ THRIFTS & MORTGAGE FINANCE-1.16% Fannie Mae, Series J, 6.45% Floating Rate Pfd.(d) 5,550 278,610 ---------------------------------------------------------------------------- Series K, 5.40% Floating Rate Pfd.(d) 5,450 272,773 ============================================================================ 551,383 ============================================================================ WIRELESS TELECOMMUNICATION SERVICES-0.64% Telephone & Data Systems, Inc.-Series A, 7.60% Pfd 12,000 300,840 ============================================================================ Total Preferred Stocks (Cost $1,048,587) 1,046,998 ============================================================================
AIM V.I. Diversified Income Fund
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------- NON-U.S. DOLLAR DENOMINATED BONDS & NOTES-0.97% CONSUMER FINANCE-0.97% Takefuji Corp. (Japan), Sr. Unsec. Medium Term Euro Notes, 1.01%, 03/01/34 (Cost $527,645)(g)(i) JPY 100,000,000 $ 459,793 ============================================================================ COMMERCIAL PAPER-0.84% BROADCASTING & CABLE TV-0.84% Cox Communications Inc., Floating Rate, 5.38%, 08/15/07 (Acquired 08/15/07; Cost $400,000)(a)(b)(d) 400,000 400,068 ============================================================================ U.S. GOVERNMENT AGENCY SECURITIES-0.62% FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-0.62% Unsec. Floating Rate Global Notes, 3.20%, 02/17/09 (Cost $300,000)(b)(d) 300,000 293,469 ============================================================================
SHARES VALUE ---------------------------------------------------------------------------- WARRANTS-0.00% INTEGRATED TELECOMMUNICATION SERVICES-0.00% NTELOS Inc.-Wts., expiring 08/15/10 (Acquired 11/15/00; Cost $0)(a)(g)(j)(k) 275 $ 0 ============================================================================ MONEY MARKET FUNDS-0.50% Liquid Assets Portfolio-Institutional Class(l) 119,019 119,019 ---------------------------------------------------------------------------- Premier Portfolio-Institutional Class(l) 119,019 119,019 ============================================================================ Total Money Market Funds (Cost $238,038) 238,038 ============================================================================ TOTAL INVESTMENTS-98.61% (Cost $47,275,752) 46,796,782 ============================================================================ OTHER ASSETS LESS LIABILITIES-1.39% 659,191 ============================================================================ NET ASSETS-100.00% $47,455,973 ____________________________________________________________________________ ============================================================================
Investment Abbreviations: Ctfs. - Certificates Deb. - Debentures GO - General Obligation Bonds Gtd. - Guaranteed INS - Insurer JPY - Japanese Yen Jr. - Junior LILACS - Life Insurance and Life Annuities Based Certificates Pfd. - Preferred RB - Revenue Bonds REGS - Regulation S REIT - Real Estate Investment Trust Sec. - Secured Sr. - Senior Sub. - Subordinated Unsec. - Unsecure Unsub. - Unsubordinated Wts. - Warrants
Notes to Schedule of Investments: (a) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $13,079,127, which represented 27.56% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (b) In accordance with the procedures established by the Board of Trustees, security fair valued based on an evaluated quote provided by an independent pricing service. The aggregate value of these securities at December 31, 2006 was $43,608,474, which represented 91.89% of the Fund's Net Assets. See Note 1A. (c) Principal and/or interest payments are secured by the bond insurance company listed. (d) Interest or dividend rate is redetermined periodically. Rate shown is the rate in effect on December 31, 2006. (e) Defaulted security. Currently, the issuer is in default with respect to interest payments. The value of this security at December 31, 2006 represented 0.17% of the Fund's Net Assets. (f) Perpetual bond with no specified maturity date. (g) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The aggregate value of these securities considered illiquid at December 31, 2006 was $2,383,882, which represented 5.02% of the Fund's Net Assets. (h) All or a portion of the principal balance was pledged as collateral to cover margin requirements for open futures contracts. See Note 1N and Note 10. (i) Foreign denominated security. Principal amount is denominated in currency indicated. (j) Non-income producing security acquired as part of a unit with or in exchange for other securities. (k) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The value of this security at December 31, 2006 represented 0.00% of the Fund's Net Assets. See Note 1A. (l) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Diversified Income Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $47,037,714) $46,558,744 ---------------------------------------------------------------- Investments in affiliated money market funds (cost $238,038) 238,038 ================================================================ Total investments (cost $47,275,752) 46,796,782 ================================================================ Cash 58,718 ---------------------------------------------------------------- Receivables for: Fund shares sold 8,912 ---------------------------------------------------------------- Dividends and interest 686,292 ---------------------------------------------------------------- Foreign currency contracts outstanding 3,937 ---------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 52,359 ---------------------------------------------------------------- Other assets 370 ================================================================ Total assets 47,607,370 ________________________________________________________________ ================================================================ LIABILITIES: Payables for: Fund shares reacquired 6,185 ---------------------------------------------------------------- Dividends 133 ---------------------------------------------------------------- Trustee deferred compensation and retirement plans 58,633 ---------------------------------------------------------------- Unrealized depreciation on credit default swap transactions 2,743 ---------------------------------------------------------------- Variation margin 14,804 ---------------------------------------------------------------- Accrued administrative services fees 25,958 ---------------------------------------------------------------- Accrued distribution fees -- Series II 472 ---------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,388 ---------------------------------------------------------------- Accrued transfer agent fees 649 ---------------------------------------------------------------- Accrued operating expenses 38,432 ================================================================ Total liabilities 151,397 ================================================================ Net assets applicable to shares outstanding $47,455,973 ________________________________________________________________ ================================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $65,668,692 ---------------------------------------------------------------- Undistributed net investment income 2,853,143 ---------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities, foreign currencies, foreign currency contracts, futures contracts, option contracts and credit default swap agreements (20,297,524) ---------------------------------------------------------------- Unrealized appreciation (depreciation) of investment securities, foreign currencies, foreign currency contracts, futures contracts and credit default swap agreements (768,338) ================================================================ $47,455,973 ________________________________________________________________ ================================================================ NET ASSETS: Series I $46,743,414 ________________________________________________________________ ================================================================ Series II $ 712,559 ________________________________________________________________ ================================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 5,647,186 ________________________________________________________________ ================================================================ Series II 86,794 ________________________________________________________________ ================================================================ Series I: Net asset value per share $ 8.28 ________________________________________________________________ ================================================================ Series II: Net asset value per share $ 8.21 ________________________________________________________________ ================================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Interest $3,058,694 ---------------------------------------------------------------- Dividends 125,239 ---------------------------------------------------------------- Dividends from affiliated money market funds 18,000 ================================================================ Total investment income 3,201,933 ================================================================ EXPENSES: Advisory fees 308,867 ---------------------------------------------------------------- Administrative services fees 141,102 ---------------------------------------------------------------- Custodian fees 17,734 ---------------------------------------------------------------- Distribution fees -- Series II 2,084 ---------------------------------------------------------------- Transfer agent fees 7,834 ---------------------------------------------------------------- Trustees' and officer's fees and benefits 16,433 ---------------------------------------------------------------- Professional services fees 51,491 ---------------------------------------------------------------- Other 23,744 ================================================================ Total expenses 569,289 ================================================================ Less: Fees waived and expense offset arrangements (181,000) ================================================================ Net expenses 388,289 ================================================================ Net investment income 2,813,644 ================================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES, FOREIGN CURRENCY CONTRACTS, FUTURES CONTRACTS, OPTION CONTRACTS AND CREDIT DEFAULT SWAP AGREEMENTS: Net realized gain (loss) from: Investment securities (includes net gains (losses) from securities sold to affiliates of $(3,070)) (75,028) ---------------------------------------------------------------- Foreign currencies 1,721 ---------------------------------------------------------------- Foreign currency contracts 12,686 ---------------------------------------------------------------- Futures contracts (101,592) ---------------------------------------------------------------- Option contracts written 9,915 ---------------------------------------------------------------- Credit default swap agreements (804) ================================================================ (153,102) ================================================================ Change in net unrealized appreciation (depreciation) of: Investment securities (173,006) ---------------------------------------------------------------- Foreign currencies 785 ---------------------------------------------------------------- Foreign currency contracts (21,788) ---------------------------------------------------------------- Futures contracts (315,352) ---------------------------------------------------------------- Credit default swap agreements (1,771) ================================================================ (511,132) ================================================================ Net gain (loss) from investment securities, foreign currencies, foreign currency contracts, futures contracts, option contracts and credit default swap agreements (664,234) ================================================================ Net increase in net assets resulting from operations $2,149,410 ________________________________________________________________ ================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Diversified Income Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ----------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 2,813,644 $ 2,765,023 ----------------------------------------------------------------------------------------- Net realized gain (loss) from investment securities, foreign currencies, foreign currency contracts, futures contracts, option contracts and credit default swap agreements (153,102) 529,078 ----------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investment securities, foreign currencies, foreign currency contracts, futures contracts and credit default swap agreements (511,132) (1,562,880) ========================================================================================= Net increase in net assets resulting from operations 2,149,410 1,731,221 ========================================================================================= Distributions to shareholders from net investment income: Series I (2,878,667) (3,444,080) ----------------------------------------------------------------------------------------- Series II (41,567) (56,114) ========================================================================================= Decrease in net assets resulting from distributions (2,920,234) (3,500,194) ========================================================================================= Share transactions-net: Series I (7,560,790) (8,266,475) ----------------------------------------------------------------------------------------- Series II (179,546) (46,419) ========================================================================================= Net increase (decrease) in net assets resulting from share transactions (7,740,336) (8,312,894) ========================================================================================= Net increase (decrease) in net assets (8,511,160) (10,081,867) ========================================================================================= NET ASSETS: Beginning of year 55,967,133 66,049,000 ========================================================================================= End of year (including undistributed net investment income of $2,853,143 and $2,867,820, respectively) $47,455,973 $ 55,967,133 _________________________________________________________________________________________ =========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Diversified Income Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Diversified Income Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to achieve a high level of current income. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Swap agreements are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service are valued based on a model which may include end of day net present values, spreads, ratings, industry, and company performance. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Paydown gains and losses on mortgage and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains AIM V.I. Diversified Income Fund (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. DOLLAR ROLL TRANSACTIONS -- The Fund may engage in dollar roll transactions with respect to mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a mortgage-backed security held in the Fund to a financial institution such as a bank or broker-dealer, and simultaneously agrees to purchase a substantially similar security (same type, coupon and maturity) from the institution at an agreed upon price and future date. The mortgage-backed securities to be purchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. Based on the typical structure of dollar roll transactions by the Fund, the dollar roll transactions are accounted for as financing transactions in which the Fund receives compensation as either a "fee" or a "drop". "Fee" income which is agreed upon amongst the parties at the commencement of the dollar roll and the "drop" which is the difference between the selling price and the repurchase price of the mortgage-backed securities are amortized to income. During the period between the sale and purchase settlement dates, the Fund will not be entitled to receive interest and principal payments on securities purchased and not yet settled. Proceeds of the sale may be invested in short-term instruments, and the income from these investments, together with any additional fee income received on the sale, could generate income for the Fund exceeding the yield on the security sold. Dollar roll transactions are considered borrowings under the 1940 Act. At the time the Fund enters into the dollar roll, it will segregate liquid assets having a dollar value equal to the purchase price. Dollar roll transactions involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities that the Fund has sold but is obligated to purchase under the agreement. In the event that the buyer of securities in a dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale of the securities may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to purchase the securities. The return earned by the Fund with the proceeds of the dollar roll transaction may not exceed the return on the securities sold. J. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. AIM V.I. Diversified Income Fund K. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. L. COVERED CALL OPTIONS -- The Fund may write call options, including options on futures. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. An option on a futures contract gives the holder the right to receive a cash "exercise settlement amount" equal to the difference between the exercise price of the option and the value of the underlying futures contract on the exercise date. The value of a futures contract fluctuates with changes in the market values of the securities underlying the futures contract. In writing futures contract options, the principal risk is that the Fund could bear a loss on the options that would be only partially offset (or not offset at all) by the increased value or reduced cost of underlying portfolio securities. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. M. PUT OPTIONS PURCHASED AND WRITTEN -- The Fund may purchase and write put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the underlying portfolio securities. The Fund may write put options to earn additional income in the form of option premiums if it expects the price of the underlying instrument to remain stable or rise during the option period so that the option will not be exercised. The risk in this strategy is that the price of the underlying securities may decline by an amount greater than the premium received. Put options written are reported as a liability in the Statement of Assets and Liabilities. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. N. FUTURES CONTRACTS -- The Fund may purchase or sell futures contracts. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities as collateral for the account of the broker (the Fund's agent in acquiring the futures position). During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contracts at the end of each day's trading. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contracts are closed, the Fund recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Fund's basis in the contract. If the Fund were unable to liquidate a futures contract and/or enter into an offsetting closing transaction, the Fund would continue to be subject to market risk with respect to the value of the contracts and continue to be required to maintain the margin deposits on the futures contracts. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. O. SWAP AGREEMENTS -- The Fund may enter into various swap transactions, including interest rate, index, currency exchange rate and credit default swap contracts ("CDS") for investment purposes or to manage interest rate, currency or credit risk. Interest rate, index, and currency exchange rate swap agreements are two-party contracts entered into primarily to exchange the returns (or differentials in rates of returns) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. A CDS is an agreement between two parties ("Counterparties") to exchange the credit risk of an issuer. A buyer of a CDS is said to buy protection by paying a fixed payment over the life of the agreement to the seller of the CDS. If a defined credit event occurs (such as payment default or bankruptcy), the Fund as a protection buyer would cease paying its fixed payment, the Fund would deliver the corresponding bonds, or other similar bonds issued by the same reference entity to the seller, and the seller would pay the full notional value, or the "par value", of the referenced obligation to the Fund. A seller of a CDS is said to sell protection and thus would receive the fixed payment stream. If a credit event occurs, the Fund as a protection seller would cease to receive the fixed payment stream, the Fund would pay the buyer the full notional value of the referenced obligation, and the Fund would receive the corresponding bonds or similar bonds issued by the same reference entity. If no credit event occurs, the Fund receives the fixed payment over the life of the agreement. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the CDS. Because the CDS is a bilateral agreement between Counterparties, the transaction can alternatively be settled by a cash payment in the case of a credit event. AIM V.I. Diversified Income Fund Changes in the value of swap agreements are recognized as unrealized gains (losses) in the Statement of Operations by "marking to market" on a daily basis to reflect the value of the swap agreement at the end of each trading day. The Fund accrues for the fixed payments on swap agreements on a daily basis with the net amount recorded as a component of realized gain (loss) on the Statement of Operations. A liquidation payment received or made at the termination of a swap agreement is recorded as realized gain (loss) on the Statement of Operations. The Fund segregates liquid securities having a value at least equal to the amount of the potential obligation of a Fund under any swap transaction. Entering into these agreements involves, to varying degrees, lack of liquidity and elements of credit, market, and counterparty risk in excess of amounts recognized on the Statement of Assets and Liabilities. P. LOWER-RATED SECURITIES -- The Fund may invest in lower-quality debt securities, i.e., "junk bonds". Investments in lower-rated securities or unrated securities of comparable quality tend to be more sensitive to economic conditions than higher rated securities. Junk bonds involve a greater risk of default by the issuer because such securities are generally unsecured and are often subordinated to other creditors' claims. Q. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE --------------------------------------------------------------------- First $250 million 0.60% --------------------------------------------------------------------- Over $250 million 0.55% ____________________________________________________________________ =====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 0.75% and Series II shares to 1.00% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $179,148. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $91,102 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Diversified Income Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED REALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND GAIN FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME (LOSS) ------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $124,432 $12,320,493 $(12,325,906) $ -- $119,019 $ 8,998 $ -- ------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 5,465,614 (5,346,595) -- 119,019 4,644 -- ------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 124,432 6,863,019 (6,987,451) -- -- 4,358 -- =============================================================================================================================== Total Investments in Affiliates $248,864 $24,649,126 $(24,659,952) $ -- $238,038 $18,000 $ -- _______________________________________________________________________________________________________________________________ ===============================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $84,322, which resulted in net realized gains (losses) of $(3,070), and securities purchases of $1,084,564. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $1,852. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,963 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. AIM V.I. Diversified Income Fund NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--FOREIGN CURRENCY CONTRACTS
OPEN FOREIGN CURRENCY CONTRACTS AT PERIOD END ----------------------------------------------------------------------------------------------------------------------------- CONTRACT TO ---------------------------- VALUE UNREALIZED SETTLEMENT DATE DELIVER RECEIVE 12/31/06 APPRECIATION ----------------------------------------------------------------------------------------------------------------------------- 01/11/07 JPY 50,000,000 USD 424,827 $420,890 $3,937 _____________________________________________________________________________________________________________________________ =============================================================================================================================
Currency Abbreviations: JPY - Japanese Yen USD - United States Dollar
NOTE 9--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ------------------------------------------------------------------------------------------------------------ CALL OPTION CONTRACTS PUT OPTION CONTRACTS --------------------- --------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED ------------------------------------------------------------------------------------------------------------ Beginning of period -- $ -- -- $ -- ------------------------------------------------------------------------------------------------------------ Written 20 3,400 42 6,790 ------------------------------------------------------------------------------------------------------------ Closed -- -- (26) (3,995) ------------------------------------------------------------------------------------------------------------ Exercised -- -- -- -- ------------------------------------------------------------------------------------------------------------ Expired (20) (3,400) (16) (2,795) ============================================================================================================ End of period -- $ -- -- $ -- ____________________________________________________________________________________________________________ ============================================================================================================
AIM V.I. Diversified Income Fund NOTE 10--FUTURES CONTRACTS On December 31, 2006, $222,965 principal amount of U.S. Mortgage-Backed obligations were pledged as collateral to cover margin requirements for open futures contracts.
OPEN FUTURES CONTRACTS AT PERIOD END -------------------------------------------------------------------------------------------------------------------------- UNREALIZED NUMBER OF MONTH/ VALUE APPRECIATION CONTRACT CONTRACTS COMMITMENT 12/31/06 (DEPRECIATION) -------------------------------------------------------------------------------------------------------------------------- Long Gilt 10 Mar-07/Long $ 2,117,780 $ (32,915) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 2 Year Notes 65 Mar-07/Long 13,262,031 (50,741) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 10 Year Notes 139 Mar-07/Long 14,938,156 (186,316) -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 30 Year Bonds 15 Mar-07/Long 1,671,563 (34,233) ========================================================================================================================== Subtotal 31,989,530 (304,205) ========================================================================================================================== Japan 10 Year Bond 1 Mar-07/Short (1,126,376) 5,462 -------------------------------------------------------------------------------------------------------------------------- Eurodollar GLOBEX2 E-Trade 30 Dec-07/Short (7,128,750) 7,279 ========================================================================================================================== Subtotal (8,255,126) 12,741 ========================================================================================================================== $23,734,404 $(291,464) __________________________________________________________________________________________________________________________ ==========================================================================================================================
NOTE 11--CREDIT DEFAULT SWAPS
OPEN CREDIT DEFAULT SWAP AGREEMENTS AT PERIOD END --------------------------------------------------------------------------------------------------------------------------------- NOTIONAL UNREALIZED BUY/SELL PAY/RECEIVE EXPIRATION AMOUNT APPRECIATION COUNTERPARTY REFERENCE ENTITY PROTECTION FIXED RATE DATE (000) (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------------------- Lehman Brothers, Inc. Dow Jones CDX.NA.IG Index Buy 0.40% 12/20/11 $1,000 $(1,771) _________________________________________________________________________________________________________________________________ =================================================================================================================================
AIM V.I. Diversified Income Fund NOTE 12--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from ordinary income $2,920,234 $3,500,194 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 2,922,920 ---------------------------------------------------------------------------- Net unrealized appreciation (depreciation) -- investments (502,876) ---------------------------------------------------------------------------- Temporary book/tax differences (53,141) ---------------------------------------------------------------------------- Capital loss carryforward (20,346,428) ---------------------------------------------------------------------------- Post-October capital loss deferral (211,171) ---------------------------------------------------------------------------- Post-October currency loss deferral (22,023) ---------------------------------------------------------------------------- Shares of beneficial interest 65,668,692 ============================================================================ Total net assets $ 47,455,973 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to the treatment of partnership and defaulted bonds and the realization for tax purposes of unrealized gains on certain foreign currency contracts, futures contracts and credit default swaps. The tax-basis net unrealized appreciation (depreciation) on investments amount includes appreciation (depreciation) on foreign currencies, futures contracts and credit default swaps of $(25,213). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2007 $ 2,582,661 ----------------------------------------------------------------------------- December 31, 2008 4,437,761 ----------------------------------------------------------------------------- December 31, 2009 6,105,069 ----------------------------------------------------------------------------- December 31, 2010 6,879,053 ----------------------------------------------------------------------------- December 31, 2014 341,884 ============================================================================= Total capital loss carryforward $20,346,428 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. NOTE 13--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $36,291,607 and $43,400,649, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 284,455 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (762,118) =============================================================================== Net unrealized appreciation (depreciation) of investment securities $(477,663) _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $47,274,445.
AIM V.I. Diversified Income Fund NOTE 14--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions and paydowns, dollar roll transactions, credit default swaps and capital loss carryforwards, on December 31, 2006, undistributed net investment income was increased by $91,913, undistributed net realized gain (loss) was increased by $24,546 and shares of beneficial interest decreased by $116,459. This reclassification had no effect on the net assets of the Fund. NOTE 15--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(A) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 305,992 $ 2,591,467 4,117,347 $ 35,952,572 ---------------------------------------------------------------------------------------------------------------------- Series II 12,578 106,190 91,797 794,699 ====================================================================================================================== Issued as reinvestment of dividends: Series I 345,164 2,878,667 411,971 3,444,080 ---------------------------------------------------------------------------------------------------------------------- Series II 5,026 41,567 6,769 56,114 ====================================================================================================================== Reacquired: Series I (1,533,737) (13,030,924) (5,441,529) (47,663,127) ---------------------------------------------------------------------------------------------------------------------- Series II (38,705) (327,303) (103,637) (897,232) ====================================================================================================================== (903,682) $ (7,740,336) (917,282) $ (8,312,894) ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 74% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 16--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Diversified Income Fund NOTE 17--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
{SERIES I ---------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 8.43 $ 8.74 $ 8.82 $ 8.60 $ 9.13 ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income(a) 0.46 0.40 0.36 0.42 0.55 ------------------------------------------------------------------------------------------------------------------------ Net gains (losses) on securities (both realized and unrealized) (0.08) (0.15) 0.08 0.37 (0.35) ======================================================================================================================== Total from investment operations 0.38 0.25 0.44 0.79 0.20 ======================================================================================================================== Less dividends from net investment income (0.53) (0.56) (0.52) (0.57) (0.73) ======================================================================================================================== Net asset value, end of period $ 8.28 $ 8.43 $ 8.74 $ 8.82 $ 8.60 ________________________________________________________________________________________________________________________ ======================================================================================================================== Total return(b) 4.48% 2.90% 5.03% 9.24% 2.30% ________________________________________________________________________________________________________________________ ======================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $46,743 $55,065 $65,069 $71,860 $70,642 ________________________________________________________________________________________________________________________ ======================================================================================================================== Ratio of expenses to average net assets 0.75%(c)(d) 0.89%(d) 1.01% 0.95% 0.94% ======================================================================================================================== Ratio of net investment income to average net assets 5.47%(c) 4.54% 4.01% 4.71% 6.15% ________________________________________________________________________________________________________________________ ======================================================================================================================== Portfolio turnover rate 78% 92% 113% 153% 86% ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $50,644,181. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.10% and 1.08% for the years ended December 31, 2006 and 2005, respectively.
{SERIES II ------------------------------------------------------------------ MARCH 14, 2002 YEAR ENDED DECEMBER 31, (DATE SALES COMMENCED) ---------------------------------------- TO DECEMBER 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.36 $8.67 $8.78 $8.58 $ 8.97 -------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.44 0.38 0.33 0.40 0.42 -------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) (0.09) (0.15) 0.08 0.37 (0.08) ================================================================================================================================ Total from investment operations 0.35 0.23 0.41 0.77 0.34 ================================================================================================================================ Less dividends from net investment income (0.50) (0.54) (0.52) (0.57) (0.73) ================================================================================================================================ Net asset value, end of period $8.21 $8.36 $8.67 $8.78 $ 8.58 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Total return(b) 4.17% 2.67% 4.69% 9.02% 3.90% ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratios/supplemental data: Net assets, end of period (000s omitted) $ 713 $ 902 $ 980 $ 762 $ 124 ________________________________________________________________________________________________________________________________ ================================================================================================================================ Ratio of expenses to average net assets 1.00%(c)(d) 1.14%(d) 1.26% 1.20% 1.19%(e) ================================================================================================================================ Ratio of net investment income to average net assets 5.22%(c) 4.29% 3.76% 4.46% 5.90%(e) ________________________________________________________________________________________________________________________________ ================================================================================================================================ Portfolio turnover rate(f) 78% 92% 113% 153% 86% ________________________________________________________________________________________________________________________________ ================================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $833,576. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.35% and 1.33% for the years ended December 31, 2006 and 2005, respectively. (e) Annualized. (f) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Diversified Income Fund NOTE 18--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor--Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Diversified Income Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Diversified Income Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Diversified Income Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, and the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Diversified Income Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 1.41%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Diversified Income Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Diversified Income Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. DYNAMICS FUND MID-CAP GROWTH Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the [COVER GLOBE IMAGE] operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio AIM V.I. DYNAMICS FUND SEEKS securities is available without charge, LONG-TERM CAPITAL GROWTH. upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. ====================================================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS [AIM INVESTMENTS LOGO] AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING --Registered Trademark-- SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE INVESTING. ====================================================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. DYNAMICS FUND Management's discussion of Fund performance industries and companies with strong drivers of ================================================================================ growth. PERFORMANCE SUMMARY Risk management plays an important role in portfolio construction, as our target portfolio For the year ended December 31, 2006, AIM V.I. Dynamics Fund, excluding variable attempts to limit volatility and downside risk. product issuer charges, had double-digit returns and outperformed the broad We seek to accomplish this goal by investing in market, as measured by the S&P 500 --REGISTERED TRADEMARK-- Index, and the Fund's sectors, industries and companies with attractive style-specific index, the Russell Midcap --REGISTERED TRADEMARK-- Growth Index. fundamental prospects. We limit the Fund's sector exposure and also seek to minimize stock-specific Solid stock selection and strong performance by mid-cap stocks enabled the risk by building a diversified portfolio. Fund to outperform the large-cap oriented S&P 500 Index. Stock selection across sectors also enabled the Fund to outperform the Russell Midcap Growth Index. We consider selling a stock for any of the following reasons: Your Fund's long-term performance appears on pages 4-5. - The stock is overvalued based on our analysis. FUND VS. INDEXES - A change in fundamental metrics indicates Total returns, 12/31/05-12/31/06, excluding variable product issuer charges. potential problems. If variable product issuer charges were included, returns would be lower. - A change in market capitalization--if a stock Series I Shares 16.11% grows and moves into the large-cap range. Series II Shares 15.84 S&P 500 Index (Broad Market Index) 15.78 - A better stock candidate with higher potential Russell Midcap Growth Index (Style-Specific Index) 10.66 return is found. Lipper Mid-Cap Growth Funds Index (Peer Group Index) 11.02 SOURCE: LIPPER INC. MARKET CONDITIONS AND YOUR FUND ================================================================================ Domestic equities posted solid returns in 2006, HOW WE INVEST - Earnings-focus on companies leaving several major market indexes near exhibiting strong growth in earnings, multi-year highs. Strong economic growth, We believe a growth investment strategy revenue and cash flows favorable corporate earnings results and is an essential component of a diversi- continued benign inflation benefited equities, fied portfolio. offsetting high energy prices, a slowing housing market and the U.S. Federal Reserve Board's Our investment process combines - Quality-focus on companies with (the Fed) tightening campaign. quantitative and fundamental analysis sustain-able earnings growth and to uncover companies exhibiting long- management teams that profitably While small-cap stocks continued to lead the term, sustainable earnings and cash reinvest shareholder cash flow market higher, large- and mid-cap stocks also had flow growth that is not yet reflected double-digit returns. Additionally, value stocks by the stock's market price. outperformed growth stocks. Positive performance was broad among Russell Midcap Our quantitative model ranks - Valuation-focus on companies that companies based on factors we have are attractively valued given their found to be highly correlated with growth potential outperformance in the mid-cap growth universe, including: Stocks that are ranked highest by our quantitative model are the focus of our fundamental research efforts. Our fundamental analysis focuses on identifying both
==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector 1. Application Software 4.3% 1. Precision Castparts Corp. 1.5% Information Technology 18.7% 2. Aerospace & Defense 4.3 2. NII Holdings Inc. 1.5 Industrials 16.5 3. Wireless Telecommunication 3. CB Richard Ellis Group, Inc.-Class A 1.4 Consumer Discretionary 16.2 Services 4.3 4. Burger King Holdings Inc. 1.3 Health Care 15.5 4. Pharmaceuticals 4.0 5. Polo Ralph Lauren Corp. 1.3 Financials 9.9 5. Computer Storage & Peripherals 3.5 6. Hilton Hotels Corp. 1.3 Energy 7.6 Total Net Assets $120.81 million 7. Corrections Corp. of America 1.3 Telecommunication Services 5.2 Total Number of Holdings* 105 8. Aveta, Inc. 1.3 Consumer Staples 3.6 9. Cooper Industries, Ltd.-Class A 1.3 Materials 2.1 10.Foster Wheeler Ltd. 1.3 Money Market Funds Plus Other Assets Less Liabilities 4.7 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
2 AIM V.I. DYNAMICS FUND Growth Index sectors with the best returns The energy sector experienced wide IN CLOSING found in telecommunication services, swings but finished positive for the year. materials and utilities. In this volatile environment, the Fund Although we are pleased to have provided benefited from strong stock selection and strong absolute and relative performance The Fund benefited from positive an overweight position relative to the for the year, we are always striving to absolute performance in nine out of 10 style-specific index. Within this sector, improve performance and help you meetyour economic sectors, with the highest one of the top contributors to Fund financial goals. positive impact on performance coming from performance for the year was AVENTINE holdings in the industrials, information RENEWABLE ENERGY HOLDINGS, one of the WE THANK YOU FOR YOUR COMMITMENT TO technology and consumer discretionary leading producers and marketers of AIM V.I. DYNAMICS FUND. sectors. On a relative basis, the Fund ethanol. Aventine's stock price was up outperformed the Russell Midcap Growth close to 75% for the year due to strong Index in seven out of 10 sectors, with the demand and rising prices for ethanol. This widest margin of outperformance in the stock was also sold before the end of the The views and opinions expressed in industrials, consumer discretionary, fiscal year. management's discussion of Fund consumer staples and energy sectors. performance are those of A I M Advisors, Our investment process led us to Inc. These views and opinions are subject The industrials sector rallied during increase the Fund's exposure in the to change at any time based on factors much of the year, and the Fund benefited telecommunication services sectors as we such as market and economic conditions. from solid performance from holdings in a identified a number of attractive These views and opinions may not be number of different industries including investment opportunities. Within this relied upon as investment advice or aerospace and defense and commercial sector, the Fund's overweight position and recommendations, or as an offer for a services and supplies. One holding that stock selection drove outperformance particular security. The information is made a significant contribution to versus the Russell Midcap Growth Index. not a complete analysis of every aspect performance was CORRECTIONS CORP. OF of any market, country, industry, AMERICA, the nation's largest owner and The Fund underperformed relative to security or the Fund. Statements of fact operator of privatized detention and the Russell Midcap Growth Index in three are from sources considered reliable, but juvenile facilities. The stock price of sectors--financials, materials and A I M Advisors, Inc. makes no represent this holding rose after the company was utilities. The widest margin of ation or warranty as to their able to secure a number of new contracts underperformance was in the financials completeness or accuracy. Although with government agencies. sector, where stock selection and an historical performance is no guarantee of underweight position in real estate future results, these insights may help Despite facing a number of headwinds, investment trust (REIT) holdings were the you understand our investment management consumer spending remained resilient key detractors from performance. However, philosophy. throughout much of 2006, and the Fund one holding that offset some of this benefited from solid stock selection in a underperformance in the financials sector PAUL J. RASPLICKA variety of different areas, including the was commercial real estate services Chartered Financial textiles, apparel and luxury goods holding CB RICHARD ELLIS, which was up [RASPLICKA Analyst, senior portfolio industry. Holdings in this industry that more than 60% in 2006. PHOTO] manager, is lead manager made key contributions included POLO RALPH of AIM V.I. Dynamics LAUREN AND COACH. The Fund also benefited An underweight position and stock Fund. Mr. Rasplicka by not owning many of the home builder selection in the materials sector also began his investment career in 1982. A stocks that performed poorly during the contributed to underperformance. In this native of Denver, Mr. Rasplicka is a year. sector, SMURFIT STONE CONTAINER detracted magna cum laude graduate of the from Fund returns. We subsequently sold University of Colorado at Boulder with a The Fund also benefited from strong this holding due to deteriorating business administration. He earned an stock selection within the more defensive fundamentals. B.S. in M.B.A. from the University of consumer staples sector. Within this Chicago. sector, one holding that made a Underperformance in the utilities KARL F. FARMER significant contribution to Fund sector was largely due to the fact that Chartered Financial performance was ARCHER-DANIELS MIDLAND, the Fund had no exposure in the utilities [FARMER Analyst, portfolio one of the world's largest processors of sector, as many utilities stocks performed PHOTO] manager, is a manager of corn, wheat and oilseeds. One of the well during the year. AIM V.I. Dynamics Fund. products the company produces with corn is He spent six years as a ethanol, so the company benefited from During the year, the most significant pension actuary, focusing on retirement high demand and rising prices of ethanol. changes to portfolio positioning included plans and other benefit programs prior to Ethanol was in strong demand after many additions to the industrials, materials joining AIM in 1998. He earned a B.S. in refiners phased out the use of MTBE, a and financials sectors and reductions in economics from Texas A&M University, fuel additive, due to legal concerns. This the energy, consumer discretionary and graduating magna cum laude. He subse- stock was sold before the end of the year information technology sectors. All quently earned his M.B.A. in finance from due to concerns about valuation. changes to the Fund were based on our The Wharton School at the University of bottom-up stock selection process of Pennsylvania. identifying high quality growth companies trading at what we believe are attractive Assisted by the Mid-Cap Growth/GARP valuations. (growth at a reasonable price) Team FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG- TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
3 AIM V.I. DYNAMICS FUND YOUR FUND'S LONG-TERM PERFORMANCE =========================================== RESTATED HISTORICAL PERFORMANCE OF SERIES I FUNDS, IS CURRENTLY OFFERED THROUGH AVERAGE ANNUAL TOTAL RETURNS SHARES (FOR PERIODS PRIOR TO INCEPTION OF INSURANCE COMPANIES ISSUING VARIABLE SERIES II SHARES) ADJUSTED TO REFLECT THE PRODUCTS. YOU CANNOT PURCHASE SHARES OF As of 12/31/06 RULE 12b-1 FEES APPLICABLE TO SERIES II THE FUND DIRECTLY. PERFORMANCE FIGURES SERIES I SHARES SHARES. THE INCEPTION DATE OF SERIES I GIVEN REPRESENT THE FUND AND ARE NOT Inception (8/22/97) 6.12% SHARES IS AUGUST 22, 1997. THE PERFORMANCE INTENDED TO REFLECT ACTUAL VARIABLE 5 Years 6.46 OF THE FUND'S SERIES I AND SERIES II SHARE PRODUCT VALUES. THEY DO NOT REFLECT SALES 1 Year 16.11 CLASSES WILL DIFFER PRIMARILY DUE TO CHARGES, EXPENSES AND FEES ASSESSED IN DIFFERENT CLASS EXPENSES. CONNECTION WITH A VARIABLE PRODUCT. SALES SERIES II SHARES CHARGES, EXPENSES AND FEES, WHICH ARE Inception 5.86% THE PERFORMANCE DATA QUOTED REPRESENT DETERMINED BY THE VARIABLE PRODUCT 5 Years 6.20 PAST PERFORMANCE AND CANNOT GUARANTEE ISSUERS, WILL VARY AND WILL LOWER THE 1 Year 15.84 COMPARABLE FUTURE RESULTS; CURRENT TOTAL RETURN. =========================================== PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE =========================================== CONTACT YOUR VARIABLE PRODUCT ISSUER OR PER NASD REQUIREMENTS, THE MOST RECENT CUMULATIVE TOTAL RETURNS FINANCIAL ADVISOR FOR THE MOST RECENT MONTH-END PERFORMANCE DATA AT THE FUND MONTH END VARIABLE PRODUCT PERFORMANCE. LEVEL, EXCLUDING VARIABLE PRODUCT CHARGES, 6 months ended 12/31/06 PERFORMANCE FIGURES REFLECT FUND EXPENSES, IS AVAILABLE ON THIS AIM AUTOMATED REINVESTED DISTRIBUTIONS AND CHANGES IN NET INFORMATION LINE, 866-702-4402. AS Series I Shares 8.13% ASSET VALUE. INVESTMENT RETURN AND MENTIONED ABOVE, FOR THE MOST RECENT Series II Shares 8.05 PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MONTH-END PERFORMANCE INCLUDING VARIABLE =========================================== MAY HAVE A GAIN OR LOSS WHEN YOU SELL PRODUCT CHARGES, PLEASE CONTACT YOUR SERIES II SHARES' INCEPTION DATE IS APRIL SHARES. VARIABLE PRODUCT ISSUER OR FINANCIAL 30, 2004. RETURNS SINCE THAT DATE ARE ADVISOR. HISTORICAL. ALL OTHER RETURNS ARE THE AIM V.I. DYNAMICS FUND, A SERIES BLENDED RETURNS OF THE HISTORICAL PORTFOLIO OF AIM VARIABLE INSURANCE PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND The prices of securities held by the If the seller of a repurchase Fund may decline in response to market agreement in which the Fund invests Prices of equity securities change in risks. defaults on its obligation or declares response to many factors including the bankruptcy, the Fund may experience delays historical and prospective earnings of the The Fund may use enhanced investment in selling the securities underlying the issuer, the value of its assets, general techniques such as derivatives. The repurchase agreement. economic conditions, interest rates, principal risk of investments in investor perceptions and market liquidity. derivatives is that the fluctuations in There is no guarantee that the their values may not correlate perfectly investment techniques and risk analyses Growth investing may be more volatile with the overall securities markets. used by the Fund's portfolio managers will than other investment styles because Derivatives are subject to counter party produce the desired results. growth stocks are more sensitive to risk--the risk that the other party will investor perceptions of an issuing not complete the transaction with the ABOUT INDEXES USED IN THIS REPORT company's growth potential. Fund. The unmanaged STANDARD & POOR'S COMPOSITE At any given time, the Fund may be Foreign securities have additional INDEX OF 500 STOCKS (the S&P 500 Index) is subject to sector risk, which means a risks, including exchange rate changes, an index of common stocks fre-quently certain sector may under perform other political and economic upheaval, the used as a general measure of U.S. stock sectors or the market as a whole. The Fund relative lack of information about these market performance. is not limited with respect to the sectors companies, relatively low market liquidity in which it can invest. and the potential lack of strict financial The unmanaged LIPPER MID-CAP GROWTH and accounting controls and standards. FUNDS INDEX represents an average of the Investing in a fund that invests in performance of the 30 largest smaller companies involves risks not Investing in emerging markets mid-capitalization growth funds tracked by associated with investing in more involves greater risk than investing in Lipper Inc., an independent mutual fund established companies, such as business more established markets. The risks performance monitor. risk, stock price fluctuations and include the relatively smaller size and illiquidity. lesser liquidity of these markets, high The unmanaged RUSSELL MIDCAP GROWTH inflation rates, adverse political INDEX is a subset of the Russell Midcap Investments in mid-size companies developments and lack of timely Index, which represents the performance of carry greater risk than investments in information. the stocks of domestic mid-capitalization larger, more established companies. companies; the Growth subset measures the To the extent the Fund holds cash or performance of cash equivalents rather than equity securities for risk management purposes, the Fund may not achieve its investment objective.
Continued on page 5 4 AIM V.I. DYNAMICS FUND Past performance cannot guarantee compara- value of an investment, is constructed ble future results. with each segment representing a percent change in the value of the investment. In This chart, which is a logarithmic this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value of value of the Fund and its indexes. We the investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same effective than other types of charts in size as the space between $10,000 and illustrating changes in value during the $20,000 and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ==================================================================================================================================== CONTINUED FROM PAGE 4 Russell Midcap companies with higher The Fund is not managed to track the asset value for shareholder transactions price/book ratios and higher forecasted performance of any particular index, and the returns based on those net asset growth values. including the indexes defined here, and values may differ from the net asset consequently, the performance of the Fund values and returns reported in the The Russell Midcap Growth Index is a may deviate significantly from the Financial Highlights. Additionally, the trademark/service mark of the Frank performance of the indexes. returns and net asset values shown Russell Company. Russell--REGISTERED throughout this report are at the fund TRADEMARK-- is a trademark of the Frank A direct investment cannot be made in level only and do not include variable Russell Company. an index. Unless otherwise indicated, product issuer charges. If such charges index results include reinvested were included, the total returns would be In conjunction with the annual dividends, and they do not reflect sales lower. prospectus update on or about May 1, 2007, charges. Performance of an index of funds the AIM V.I Dynamics Fund prospectus will reflects fund expenses; performance of a Industry classifications used in this be amended to reflect that the Fund has market index does not. report are generally according to the elected to use the Lipper Variable Global Industry Classification Standard, Underlying Funds (VUF) Mid-Cap Growth OTHER INFORMATION which was developed by and is the Funds Index as its peer group rather than exclusive property and a service mark of the Lipper Mid-Cap Growth Funds Index. The The returns shown in the Management's Morgan Stanley Capital International Inc. Lipper VUF Mid-Cap Growth Funds Index, Discussion of Fund Performance are based and Standard & Poor's. recently published by Lipper Inc., on net asset values calculated for comprises the largest underlying funds in shareholder transactions. Generally The Chartered Financial Analyst each variable insurance category and does accepted accounting principles require --REGISTERED TRADEMARK--(CFA--REGISTERED not include mortality and expense fees. adjustments to be made to the net assets TRADEMARK--) designation is a globally of the fund at period end for financial recognized standard for measuring the reporting purposes, and as such, the net competence and integrity of investment professionals.
5
================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund data from 8/22/97, Index data from 8/31/97 AIM V.I. DYNAMICS FUND DATE -SERIES I SHARES S&P 500 INDEX RUSSELL MIDCAP GROWTH INDEX LIPPER MID-CAP GROWTH FUNDS INDEX 8/22/97 $ 10000 8/97 9930 $ 10000 $ 10000 $ 10000 9/97 10610 10547 10506 10716 10/97 10240 10196 9980 10116 11/97 10190 10667 10085 9954 12/97 10340 10850 10217 10187 1/98 10290 10970 10033 9995 2/98 11240 11761 10977 10843 3/98 11889 12363 11437 11405 4/98 12069 12489 11592 11455 5/98 11609 12275 11115 10787 6/98 12179 12773 11430 11283 7/98 11619 12638 10940 10532 8/98 8959 10812 8852 8261 9/98 9749 11505 9522 9123 10/98 10550 12440 10223 9458 11/98 10980 13193 10912 10177 12/98 12341 13953 12043 11490 1/99 13184 14536 12404 12060 2/99 12462 14085 11797 11124 3/99 13549 14648 12454 11917 4/99 14148 15215 13022 12405 5/99 14077 14856 12854 12354 6/99 14849 15679 13751 13350 7/99 14524 15191 13314 13167 8/99 14229 15116 13175 13100 9/99 14412 14702 13063 13483 10/99 15682 15632 14073 14675 11/99 16855 15950 15530 16515 12/99 19201 16888 18220 19960 1/00 18917 16040 18216 19618 2/00 23001 15736 22046 24534 3/00 21985 17275 22068 22807 4/00 20085 16755 19926 19798 5/00 18926 16412 18473 18019 6/00 21822 16816 20434 20819 7/00 21141 16553 19140 19955 8/00 24158 17581 22026 22565 9/00 24047 16653 20949 21480 10/00 22056 16582 19516 19743 11/00 17298 15276 15275 15615 12/00 18518 15351 16079 16740 1/01 19147 15895 16998 16968 2/01 15527 14447 14057 14422 3/01 13240 13532 12046 12892 4/01 15416 14583 14053 14592 5/01 15162 14681 13987 14712 6/01 14989 14323 13995 14655 7/01 13881 14182 13051 13884 8/01 12518 13295 12105 12954 9/01 9864 12222 10104 11086 10/01 10912 12455 11167 11703 11/01 12366 13410 12369 12664 12/01 12754 13528 12839 13213 1/02 12570 13330 12422 12708 2/02 11401 13073 11718 12076 3/02 12316 13565 12612 12837 4/02 11502 12743 11944 12410 5/02 11024 12649 11588 11996 6/02 9773 11749 10309 10919 7/02 8827 10833 9308 9741 8/02 8633 10904 9275 9625 9/02 7942 9720 8538 9027 10/02 8765 10575 9200 9482 11/02 9345 11197 9920 10045 12/02 8684 10539 9320 9451 1/03 8684 10264 9229 9311 2/03 8542 10109 9149 9167 3/03 8633 10207 9319 9299 4/03 9233 11048 9953 9951 5/03 9925 11629 10911 10774 6/03 10066 11778 11067 10942 7/03 10412 11985 11462 11374 8/03 10920 12219 12094 11933 ==================================================================================================================
SOURCE: LIPPER INC. ================================================================================ [MOUNTAIN CHART] 9/03 10554 12089 11859 11533 10/03 11480 12773 12815 12438 11/03 11836 12885 13158 12733 12/03 11968 13560 13301 12799 1/04 12253 13809 13741 13122 2/04 12375 14001 13971 13303 3/04 12294 13790 13944 13300 4/04 12141 13574 13551 12878 5/04 12344 13760 13870 13158 6/04 12517 14027 14091 13475 7/04 11663 13563 13158 12517 8/04 11491 13617 12996 12301 9/04 11969 13765 13481 12827 10/04 12253 13975 13938 13206 11/04 13006 14540 14658 13940 12/04 13565 15035 15360 14595 1/05 13311 14669 14949 14123 2/05 13546 14977 15328 14305 3/05 13363 14712 15104 14020 4/05 12621 14433 14506 13345 5/05 13313 14892 15337 14137 6/05 13730 14913 15622 14460 7/05 14594 15468 16534 15292 8/05 14615 15327 16433 15245 9/05 14646 15451 16645 15511 10/05 14117 15193 16155 15080 11/05 14850 15767 17032 15895 12/05 15022 15773 17219 15992 1/06 16079 16190 18250 17091 2/06 16070 16234 18025 16943 3/06 16589 16436 18529 17508 4/06 17005 16657 18607 17672 5/06 16192 16178 17732 16688 6/06 16131 16199 17659 16696 7/06 15510 16299 17026 15990 8/06 15784 16686 17419 16251 9/06 16120 17116 17816 16484 10/06 16791 17674 18500 17061 11/06 17503 18009 19226 17771 12/06 17443 18262 19054 17755 ================================================================================
AIM V.I. DYNAMICS FUND CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE ACTUAL EXPENSES 5% per year before expenses, which is not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information about actual cumulative total returns at net ongoing costs, including management fees; actual account values and actual expenses. asset value after expenses for the six distribution and/or service (12b-1) fees; You may use the information in this table, months ended December 31, 2006, appear in and other Fund expenses. This example is together with the amount you invested, to the table "Cumulative Total Returns" on intended to help you understand your estimate the expenses that you paid over page 4. ongoing costs (in dollars) of investing in the period. Simply divide your account the Fund and to compare these costs with value by $1,000 (for example, an $8,600 The hypothetical account values and ongoing costs of investing in other mutual account value divided by $1,000 = 8.6), expenses may not be used to estimate the funds. The example is based on an then multiply the result by the number in actual ending account balance or expenses investment of $1,000 invested at the the table under the heading entitled you paid for the period. You may use this beginning of the period and held for the "Actual Expenses Paid During Period" to information to compare the ongoing costs entire period July 1, 2006, through estimate the expenses you paid on your of investing in the Fund and other funds. December 31, 2006. account during this period. To do so, compare this 5% hypothetical example with the 5% hypothetical examples The actual and hypothetical expenses HYPOTHETICAL EXAMPLE FOR COMPARISON that appear in the shareholder reports of in the examples below do not represent the PURPOSES the other funds. effect of any fees or other expenses assessed in connection with a variable The table below also provides information Please note that the expenses shown product; if they did, the expenses shown about hypothetical account values and in the table are meant to highlight your would be higher while the ending account hypothetical expenses based on the Fund's ongoing costs. Therefore, the hypothetical values shown would be lower. actual expense ratio and an assumed rate information is useful in comparing ongoing of return of costs, and will not help you determine the relative total costs of owning different funds. ====================================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ Series I $ 1,000.00 $ 1,081.30 $ 5.82 $ 1,019.61 $ 5.65 1.11% Series II 1,000.00 1,080.50 7.13 1,018.35 6.92 1.36 ====================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. AIM V.I. DYNAMICS FUND APPROVAL OF INVESTMENT ADVISORY AGREEMENT The Board of Trustees of AIM Variable - The nature and extent of the advisory review and after taking account of all of Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board the other factors that the Board management of AIM V.I. Dynamics Fund (the reviewed the services to be provided by considered in determining whether to "Fund") and, as required by law, AIM under the Advisory Agreement. Based on continue the Advisory Agreement for the determines annually whether to approve the such review, the Board concluded that the Fund, the Board concluded that no changes continuance of the Fund's advisory range of services to be provided by AIM should be made to the Fund and that it was agreement with A I M Advisors, Inc. under the Advisory Agreement was not necessary to change the Fund's ("AIM"). Based upon the recommendation of appropriate and that AIM currently is portfolio management team at this time. the Investments Committee of the Board, at providing services in accordance with the Although the independent written a meeting held on June 27, 2006, the terms of the Advisory Agreement. evaluation of the Fund's Senior Officer Board, including all of the independent (discussed below) only considered Fund trustees, approved the continuance of the - The quality of services to be provided performance through the most recent advisory agreement (the "Advisory by AIM. The Board reviewed the credentials calendar year, the Board also reviewed Agreement") between the Fund and AIM for and experience of the officers and more recent Fund performance, which did another year, effective July 1, 2006. employees of AIM who will provide not change their conclusions. investment advisory services to the Fund. The Board considered the factors In reviewing the qualifications of AIM to - Meetings with the Fund's portfolio discussed below in evaluating the fairness provide investment advisory services, the managers and investment personnel. With and reasonableness of the Advisory Board considered such issues as AIM's respect to the Fund, the Board is meeting Agreement at the meeting on June 27, 2006 portfolio and product review process, periodically with such Fund's portfolio and as part of the Board's ongoing various back office support functions managers and/or other investment personnel oversight of the Fund. In their provided by AIM and AIM's equity and fixed and believes that such individuals are deliberations, the Board and the income trading operations. Based on the competent and able to continue to carry independent trustees did not identify any review of these and other factors, the out their responsibilities under the particular factor that was controlling, Board concluded that the quality of Advisory Agreement. and each trustee attributed different services to be provided by AIM was weights to the various factors. appropriate and that AIM currently is - Overall performance of AIM. The Board providing satisfactory services in considered the overall performance of AIM One responsibility of the independent accordance with the terms of the Advisory in providing investment advisory and Senior Officer of the Fund is to manage Agreement. portfolio administrative services to the the process by which the Fund's proposed Fund and concluded that such performance management fees are negotiated to ensure - The performance of the Fund relative to was satisfactory. that they are negotiated in a manner which comparable funds. The Board reviewed the is at arms' length and reasonable. To that performance of the Fund during the past - Fees relative to those of clients of AIM end, the Senior Officer must either one, three and five calendar years against with comparable investment strategies. The supervise a competitive bidding process or the performance of funds advised by other Board reviewed the effective advisory fee prepare an independent written evaluation. advisors with investment strategies rate (before waivers) for the Fund under The Senior Officer has recommended an comparable to those of the Fund. The Board the Advisory Agreement. The Board noted independent written evaluation in lieu of noted that the Fund's performance was that this rate was (i) above the effective a competitive bidding process and, upon below the median performance of such advisory fee rates (before waivers) for the direction of the Board, has prepared comparable funds for the one and five year two mutual funds advised by AIM with such an independent written evaluation. periods and above such median performance investment strategies comparable to those Such written evaluation also considered for the three year period. The Board also of the Fund; (ii) the same as the certain of the factors discussed below. In noted that AIM began serving as investment effective advisory fee rate (before addition, as discussed below, the Senior advisor to the Fund in April 2004. Based waivers) for a variable insurance fund Officer made a recommendation to the Board on this review and after taking account of advised by AIM and offered to insurance in connection with such written evaluation. all of the other factors that the Board company separate accounts with investment considered in determining whether to strategies comparable to those of the The discussion below serves as a continue the Advisory Agreement for the Fund; (iii) above the effective summary of the Senior Officer's Fund, the Board concluded that no changes sub-advisory fee rate for one offshore independent written evaluation and should be made to the Fund and that it was fund advised and sub-advised by AIM recommendation to the Board in connection not necessary to change the Fund's affiliates with investment strategies therewith, as well as a discussion of the portfolio management team at this time. comparable to those of the Fund, although material factors and the conclusions with Although the independent written the total advisory fees for such offshore respect thereto that formed the basis for evaluation of the Fund's Senior Officer fund were above those for the Fund; and the Board's approval of the Advisory (discussed below) only considered Fund (iv) above the effective sub-advisory fee Agreement. After consideration of all of performance through the most recent rates for two variable insurance funds the factors below and based on its calendar year, the Board also reviewed sub-advised by an AIM affiliate and informed business judgment, the Board more recent Fund performance, which did offered to insurance company separate determined that the Advisory Agreement is not change their conclusions. accounts with investment strategies in the best interests of the Fund and its comparable to those of the Fund, although shareholders and that the compensation to - The performance of the Fund relative to the total advisory fees for such variable AIM under the Advisory Agreement is fair indices. The Board reviewed the insurance funds were the same as or above and reasonable and would have been performance of the Fund during the past those for the Fund. The Board noted that obtained through arm's length one, three and five calendar years against AIM has agreed to waive advisory fees of negotiations. the performance of the Lipper Variable the Fund and to limit the Fund's total Underlying Fund Mid-Cap Growth Index. The operating expenses, as discussed below. Unless otherwise stated, information Board noted that the Fund's performance Based on this review, the Board concluded presented below is as of June 27, 2006 and was above the performance of such Index that the advisory fee rate for the Fund does not reflect any changes that may have for the one and five year periods and under the Advisory Agreement was fair and occurred since June 27, 2006, including comparable to such Index for the three reasonable. but not limited to changes to the Fund's year period. The Board also noted that AIM performance, advisory fees, expense began serving as investment advisor to the - Fees relative to those of comparable limitations and/or fee waivers. Fund in April 2004. Based on this funds with other advisors. The Board reviewed the advisory fee rate for the Fund under the Advisory Agreement. The Board compared effective contractual advisory fee rates
7 AIM V.I. DYNAMICS FUND at a common asset level at the end of the - Investments in affiliated money market - ates' investment advisory and other past calendar year and noted that the funds. The Board also took into account activities and its financial condition, Fund's rate was comparable to the median the fact that uninvested cash and cash the Board concluded that the compensation rate of the funds advised by other collateral from securities lending to be paid by the Fund to AIM under its advisors with investment strategies arrangements, if any (collectively, "cash Advisory Agreement was not excessive. comparable to those of the Fund that the balances") of the Fund may be invested in Board reviewed. The Board noted that AIM money market funds advised by AIM pursuant - Benefits of soft dollars to AIM. The has agreed to waive advisory fees of the to the terms of an SEC exemptive order. Board considered the benefits realized by Fund and to limit the Fund's total The Board found that the Fund may realize AIM as a result of brokerage transactions operating expenses, as discussed below. certain benefits upon investing cash executed through "soft dollar" Based on this review, the Board concluded balances in AIM advised money market arrangements. Under these arrangements, that the advisory fee rate for the Fund funds, including a higher net return, brokerage commissions paid by the Fund under the Advisory Agreement was fair and increased liquidity, increased and/or other funds advised by AIM are used reasonable. diversification or decreased transaction to pay for research and execution costs. The Board also found that the Fund services. This research may be used by AIM - Expense limitations and fee waivers. The will not receive reduced services if it in making investment decisions for the Board noted that AIM has contractually invests its cash balances in such money Fund. The Board concluded that such agreed to waive advisory fees of the Fund market funds. The Board noted that, to the arrangements were appropriate. through April 30, 2008 to the extent extent the Fund invests uninvested cash in necessary so that the advisory fees affiliated money market funds, AIM has - AIM's financial soundness in light of payable by the Fund do not exceed a voluntarily agreed to waive a portion of the Fund's needs. The Board considered specified maximum advisory fee rate, which the advisory fees it receives from the whether AIM is financially sound and has maximum rate includes breakpoints and is Fund attributable to such investment. The the resources necessary to perform its based on net asset levels. The Board Board further determined that the proposed obligations under the Advisory Agreement, considered the contractual nature of this securities lending program and related and concluded that AIM has the financial fee waiver and noted that it remains in procedures with respect to the lending resources necessary to fulfill its effect until April 30, 2008. The Board Fund is in the best interests of the obligations under the Advisory Agreement. noted that AIM has contractually agreed to lending Fund and its respective waive fees and/or limit expenses of the shareholders. The Board therefore - Historical relationship between the Fund Fund through April 30, 2008 in an amount concluded that the investment of cash and AIM. In determining whether to necessary to limit total annual operating collateral received in connection with the continue the Advisory Agreement for the expenses to a specified percentage of securities lending program in the money Fund, the Board also considered the prior average daily net assets for each class of market funds according to the procedures relationship between AIM and the Fund, as the Fund. The Board considered the is in the best interests of the lending well as the Board's knowledge of AIM's contractual nature of this fee Fund and its respective shareholders. operations, and concluded that it was waiver/expense limitation and noted that beneficial to maintain the current it remains in effect until April 30, 2008. - Independent written evaluation and relationship, in part, because of such The Board considered the effect these fee recommendations of the Fund's Senior knowledge. The Board also reviewed the waivers/expense limitations would have on Officer. The Board noted that, upon their general nature of the non-investment the Fund's estimated expenses and direction, the Senior Officer of the Fund, advisory services currently performed by concluded that the levels of fee who is independent of AIM and AIM's AIM and its affiliates, such as waivers/expense limitations for the Fund affiliates, had prepared an independent administrative, transfer agency and were fair and reasonable. written evaluation in order to assist the distribution services, and the fees Board in determining the reasonableness of received by AIM and its affiliates for - Breakpoints and economies of scale. The the proposed management fees of the AIM performing such services. In addition to Board reviewed the structure of the Fund's Funds, including the Fund. The Board noted reviewing such services, the trustees also advisory fee under the Advisory Agreement, that the Senior Officer's written considered the organizational structure noting that it does not include any evaluation had been relied upon by the employed by AIM and its affiliates to breakpoints. The Board considered whether Board in this regard in lieu of a provide those services. Based on the it would be appropriate to add advisory competitive bidding process. In review of these and other factors, the fee breakpoints for the Fund or whether, determining whether to continue the Board concluded that AIM and its due to the nature of the Fund and the Advisory Agreement for the Fund, the Board affiliates were qualified to continue to advisory fee structures of comparable considered the Senior Officer's written provide non-investment advisory services funds, it was reasonable to structure the evaluation and the recommendation made by to the Fund, including administrative, advisory fee without breakpoints. Based on the Senior Officer to the Board that the transfer agency and distribution services, this review, the Board concluded that it Board consider whether the advisory fee and that AIM and its affiliates currently was not necessary to add advisory fee waivers for certain equity AIM Funds, are providing satisfactory non-investment breakpoints to the Fund's advisory fee including the Fund, should be simplified. advisory services. schedule. The Board reviewed the level of The Board concluded that it would be the Fund's advisory fees, and noted that advisable to consider this issue and reach - Other factors and current trends. The such fees, as a percentage of the Fund's a decision prior to the expiration date of Board considered the steps that AIM and net assets, would remain constant under such advisory fee waivers. its affiliates have taken over the last the Advisory Agreement because the several years, and continue to take, in Advisory Agreement does not include any - Profitability of AIM and its affiliates. order to improve the quality and breakpoints. The Board noted that AIM has The Board reviewed information concerning efficiency of the services they provide to contractually agreed to waive advisory the profitability of AIM's (and its the Funds in the areas of investment fees of the Fund through April 30, 2008 to affiliates') investment advisory and other performance, product line diversification, the extent necessary so that the advisory activities and its financial condition. distribution, fund operations, shareholder fees payable by the Fund do not exceed a The Board considered the overall services and compliance. The Board specified maximum advisory fee rate, which profitability of AIM, as well as the concluded that these steps taken by AIM maximum rate includes breakpoints and is profitability of AIM in connection with have improved, and are likely to continue based on net asset levels. The Board managing the Fund. The Board noted that to improve, the quality and efficiency of concluded that the Fund's fee levels under AIM's operations remain profitable, the services AIM and its affiliates the Advisory Agreement therefore would not although increased expenses in recent provide to the Fund in each of these reflect economies of scale, although the years have reduced AIM's profitability. areas, and support the Board's approval of advisory fee waiver reflects economies of Based on the review of the profitability the continuance of the Advisory Agreement scale. of AIM's and its affili for the Fund.
8 AIM V.I. Dynamics Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ------------------------------------------------------------------------ COMMON STOCKS & OTHER EQUITY INTERESTS-95.25% ADVERTISING-1.03% Clear Channel Outdoor Holdings, Inc.-Class A(a) 44,754 $ 1,249,084 ======================================================================== AEROSPACE & DEFENSE-4.26% Armor Holdings, Inc.(a) 22,361 1,226,501 ------------------------------------------------------------------------ KBR, Inc.(a) 24,794 648,611 ------------------------------------------------------------------------ Precision Castparts Corp. 23,126 1,810,303 ------------------------------------------------------------------------ Spirit Aerosystems Holdings Inc.-Class A(a) 43,509 1,456,246 ======================================================================== 5,141,661 ======================================================================== AGRICULTURAL PRODUCTS-1.51% Bunge Ltd. 16,160 1,171,762 ------------------------------------------------------------------------ Corn Products International, Inc. 18,722 646,658 ======================================================================== 1,818,420 ======================================================================== AIR FREIGHT & LOGISTICS-1.25% UTI Worldwide, Inc.(b) 50,566 1,511,923 ======================================================================== ALTERNATIVE CARRIERS-0.99% Level 3 Communications, Inc.(a) 213,109 1,193,410 ======================================================================== APPAREL RETAIL-1.06% Abercrombie & Fitch Co.-Class A 18,359 1,278,337 ======================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-3.42% Carter's, Inc.(a) 51,395 1,310,572 ------------------------------------------------------------------------ Coach, Inc.(a) 28,521 1,225,262 ------------------------------------------------------------------------ Polo Ralph Lauren Corp. 20,536 1,594,826 ======================================================================== 4,130,660 ======================================================================== APPLICATION SOFTWARE-4.33% Amdocs Ltd.(a) 32,363 1,254,066 ------------------------------------------------------------------------ BEA Systems, Inc.(a) 51,188 643,945 ------------------------------------------------------------------------ Cadence Design Systems, Inc.(a) 67,144 1,202,549 ------------------------------------------------------------------------ Citrix Systems, Inc.(a) 39,558 1,070,044 ------------------------------------------------------------------------ TIBCO Software Inc.(a) 112,711 1,063,992 ======================================================================== 5,234,596 ======================================================================== ASSET MANAGEMENT & CUSTODY BANKS-0.65% AllianceBernstein Holding L.P. 9,806 788,402 ======================================================================== BIOTECHNOLOGY-2.51% Celgene Corp.(a)(c) 21,000 1,208,130 ------------------------------------------------------------------------ Cephalon, Inc.(a)(b) 12,069 849,778 ------------------------------------------------------------------------ Human Genome Sciences, Inc.(a) 53,000 659,320 ------------------------------------------------------------------------ Vertex Pharmaceuticals Inc.(a) 8,500 318,070 ======================================================================== 3,035,298 ========================================================================
SHARES VALUE ------------------------------------------------------------------------ BUILDING PRODUCTS-0.50% NCI Building Systems, Inc.(a) 11,715 $ 606,251 ======================================================================== CASINOS & GAMING-1.18% Scientific Games Corp.-Class A(a) 47,281 1,429,305 ======================================================================== COMMUNICATIONS EQUIPMENT-0.54% Comverse Technology, Inc.(a) 30,711 648,309 ======================================================================== COMPUTER STORAGE & PERIPHERALS-3.47% Logitech International S.A. (Switzerland)(a)(d) 43,797 1,257,213 ------------------------------------------------------------------------ Network Appliance, Inc.(a) 19,469 764,742 ------------------------------------------------------------------------ QLogic Corp.(a) 55,851 1,224,254 ------------------------------------------------------------------------ Seagate Technology 35,471 939,981 ======================================================================== 4,186,190 ======================================================================== CONSTRUCTION & ENGINEERING-1.26% Foster Wheeler Ltd.(a) 27,692 1,526,937 ======================================================================== CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS-0.70% Joy Global Inc. 17,448 843,436 ======================================================================== CONSUMER ELECTRONICS-0.96% Harman International Industries, Inc. 11,644 1,163,352 ======================================================================== DATA PROCESSING & OUTSOURCED SERVICES-2.10% Alliance Data Systems Corp.(a) 19,127 1,194,864 ------------------------------------------------------------------------ Fidelity National Information Services, Inc. 33,329 1,336,159 ======================================================================== 2,531,023 ======================================================================== DEPARTMENT STORES-1.08% Nordstrom, Inc. 26,540 1,309,484 ======================================================================== DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES-2.33% Corrections Corp. of America(a) 34,267 1,549,896 ------------------------------------------------------------------------ IHS Inc.-Class A(a) 31,878 1,258,544 ======================================================================== 2,808,440 ======================================================================== DIVERSIFIED METALS & MINING-0.51% Freeport-McMoRan Copper & Gold, Inc.-Class B 10,955 610,522 ======================================================================== DRUG RETAIL-0.97% Shoppers Drug Mart Corp. (Canada) 27,336 1,173,972 ======================================================================== ELECTRICAL COMPONENTS & EQUIPMENT-2.41% Acuity Brands, Inc. 26,602 1,384,368 ------------------------------------------------------------------------ Cooper Industries, Ltd.-Class A 16,886 1,527,001 ======================================================================== 2,911,369 ========================================================================
AIM V.I. Dynamics Fund
SHARES VALUE ------------------------------------------------------------------------ ELECTRONIC EQUIPMENT MANUFACTURERS-1.37% Agilent Technologies, Inc.(a) 14,179 $ 494,138 ------------------------------------------------------------------------ Amphenol Corp.-Class A 18,682 1,159,779 ======================================================================== 1,653,917 ======================================================================== ELECTRONIC MANUFACTURING SERVICES-0.81% Molex Inc.-Class A 35,173 974,292 ======================================================================== FERTILIZERS & AGRICULTURAL CHEMICALS-0.61% Potash Corp. of Saskatchewan Inc. (Canada) 5,146 738,348 ======================================================================== HEALTH CARE DISTRIBUTORS-1.00% Schein (Henry), Inc.(a) 24,755 1,212,500 ======================================================================== HEALTH CARE EQUIPMENT-0.99% Hologic, Inc.(a) 25,182 1,190,605 ======================================================================== HEALTH CARE FACILITIES-1.01% Psychiatric Solutions, Inc.(a)(b) 32,372 1,214,598 ======================================================================== HEALTH CARE SERVICES-1.64% HealthExtras, Inc.(a) 38,000 915,800 ------------------------------------------------------------------------ Healthways, Inc.(a) 22,300 1,063,933 ======================================================================== 1,979,733 ======================================================================== HEALTH CARE TECHNOLOGY-0.98% Cerner Corp.(a) 25,974 1,181,817 ======================================================================== HOTELS, RESORTS & CRUISE LINES-2.51% Hilton Hotels Corp. 45,657 1,593,429 ------------------------------------------------------------------------ Starwood Hotels & Resorts Worldwide, Inc. 23,088 1,443,000 ======================================================================== 3,036,429 ======================================================================== HOUSEWARES & SPECIALTIES-1.05% Jarden Corp.(a)(b) 36,286 1,262,390 ======================================================================== INDUSTRIAL CONGLOMERATES-1.21% McDermott International, Inc.(a) 28,700 1,459,682 ======================================================================== INDUSTRIAL MACHINERY-1.03% Kaydon Corp. 31,298 1,243,783 ======================================================================== INTERNET SOFTWARE & SERVICES-1.12% aQuantive, Inc.(a)(b) 28,923 713,241 ------------------------------------------------------------------------ WebEx Communications, Inc.(a) 18,485 644,942 ======================================================================== 1,358,183 ======================================================================== INVESTMENT BANKING & BROKERAGE-2.83% E*TRADE Financial Corp.(a) 27,678 620,541 ------------------------------------------------------------------------ FBR Capital Markets Corp. (Acquired 07/14/06; Cost $690,000)(a)(e)(f) 46,000 690,000 ------------------------------------------------------------------------ Lazard Ltd.-Class A (Bermuda) 18,058 854,866 ------------------------------------------------------------------------ Schwab (Charles) Corp. (The) 64,972 1,256,558 ======================================================================== 3,421,965 ======================================================================== IT CONSULTING & OTHER SERVICES-1.04% Cognizant Technology Solutions Corp.-Class A(a) 16,302 1,257,862 ========================================================================
SHARES VALUE ------------------------------------------------------------------------ LIFE SCIENCES TOOLS & SERVICES-1.00% Pharmaceutical Product Development, Inc. 37,646 $ 1,212,954 ======================================================================== MANAGED HEALTH CARE-2.28% Aveta, Inc. (Acquired 12/21/05-05/22/06; Cost $1,300,095)(a)(e)(f) 90,000 1,530,000 ------------------------------------------------------------------------ Humana Inc.(a) 22,127 1,223,844 ======================================================================== 2,753,844 ======================================================================== MARINE-0.52% American Commercial Lines Inc.(a) 9,649 632,106 ======================================================================== OFFICE REIT'S-0.41% Douglas Emmett, Inc. 18,698 497,180 ======================================================================== OIL & GAS DRILLING-1.88% ENSCO International Inc.(b) 22,436 1,123,146 ------------------------------------------------------------------------ GlobalSantaFe Corp. 19,555 1,149,443 ======================================================================== 2,272,589 ======================================================================== OIL & GAS EQUIPMENT & SERVICES-2.74% Cameron International Corp.(a) 21,442 1,137,498 ------------------------------------------------------------------------ National-Oilwell Varco Inc.(a) 18,037 1,103,504 ------------------------------------------------------------------------ Weatherford International Ltd.(a) 25,651 1,071,955 ======================================================================== 3,312,957 ======================================================================== OIL & GAS EXPLORATION & PRODUCTION-2.00% Rosetta Resources, Inc.(a)(g) 68,200 1,273,294 ------------------------------------------------------------------------ Southwestern Energy Co.(a) 32,577 1,141,824 ======================================================================== 2,415,118 ======================================================================== OIL & GAS STORAGE & TRANSPORTATION-0.96% Williams Cos., Inc. (The) 44,563 1,163,986 ======================================================================== PERSONAL PRODUCTS-1.13% Bare Escentuals, Inc.(a) 43,800 1,360,866 ======================================================================== PHARMACEUTICALS-4.03% Adams Respiratory Therapeutics, Inc.(a) 22,366 912,756 ------------------------------------------------------------------------ Allergan, Inc. 7,582 907,869 ------------------------------------------------------------------------ Barr Pharmaceuticals Inc.(a) 19,118 958,194 ------------------------------------------------------------------------ New River Pharmaceuticals Inc.(a)(b) 15,300 837,063 ------------------------------------------------------------------------ Warner Chilcott Ltd.-Class A(a) 90,634 1,252,562 ======================================================================== 4,868,444 ======================================================================== PROPERTY & CASUALTY INSURANCE-1.87% First American Corp. 29,982 1,219,668 ------------------------------------------------------------------------ OneBeacon Insurance Group Ltd.(a) 37,212 1,041,936 ======================================================================== 2,261,604 ======================================================================== REAL ESTATE MANAGEMENT & DEVELOPMENT-1.45% CB Richard Ellis Group, Inc.-Class A(a) 52,591 1,746,021 ========================================================================
AIM V.I. Dynamics Fund
SHARES VALUE ------------------------------------------------------------------------ REGIONAL BANKS-1.26% Centennial Bank Holdings Inc.(a)(g) 63,979 $ 605,241 ------------------------------------------------------------------------ Signature Bank(a) 29,606 917,194 ======================================================================== 1,522,435 ======================================================================== RESTAURANTS-1.35% Burger King Holdings Inc.(a) 77,065 1,626,072 ======================================================================== SEMICONDUCTOR EQUIPMENT-1.76% Lam Research Corp.(a) 19,522 988,204 ------------------------------------------------------------------------ MEMC Electronic Materials, Inc.(a) 29,114 1,139,522 ======================================================================== 2,127,726 ======================================================================== SEMICONDUCTORS-1.60% Advanced Micro Devices, Inc.(a) 30,404 618,721 ------------------------------------------------------------------------ Intersil Corp.-Class A 54,679 1,307,922 ======================================================================== 1,926,643 ======================================================================== SPECIALIZED FINANCE-1.16% Chicago Mercantile Exchange Holdings Inc.-Class A 2,749 1,401,303 ======================================================================== SPECIALTY STORES-2.52% Office Depot, Inc.(a) 30,726 1,172,811 ------------------------------------------------------------------------ PetSmart, Inc. 22,861 659,769 ------------------------------------------------------------------------ Staples, Inc. 45,384 1,211,753 ======================================================================== 3,044,333 ======================================================================== STEEL-0.99% Allegheny Technologies, Inc.(b) 13,183 1,195,434 ======================================================================== TECHNOLOGY DISTRIBUTORS-0.57% Arrow Electronics, Inc.(a)(b) 21,911 691,292 ======================================================================== THRIFTS & MORTGAGE FINANCE-0.24% People's Choice Financial Corp. (Acquired 12/21/04-06/09/06; Cost $1,188,822)(e)(f) 146,576 293,152 ======================================================================== TRADING COMPANIES & DISTRIBUTORS-1.07% WESCO International, Inc.(a) 21,948 1,290,762 ========================================================================
SHARES VALUE ------------------------------------------------------------------------ WIRELESS TELECOMMUNICATION SERVICES-4.24% American Tower Corp.-Class A(a) 31,251 $ 1,165,037 ------------------------------------------------------------------------ Crown Castle International Corp.(a) 35,559 1,148,556 ------------------------------------------------------------------------ Leap Wireless International, Inc.(a) 17,242 1,025,382 ------------------------------------------------------------------------ NII Holdings Inc.(a) 27,736 1,787,308 ======================================================================== 5,126,283 ======================================================================== Total Common Stocks & Other Equity Interests (Cost $101,908,130) 115,059,589 ________________________________________________________________________ ========================================================================
NUMBER OF EXERCISE EXPIRATION CONTRACTS PRICE DATE PUT OPTIONS PURCHASED-0.04% CASINOS & GAMING-0.04% Harrah's Entertainment, Inc.(f)(Cost $33,969) 169 $ 80 Jan-07 50,793 =======================================================================
SHARES MONEY MARKET FUNDS-4.91% Liquid Assets Portfolio-Institutional Class(h) 2,966,101 2,966,101 ======================================================================= Premier Portfolio-Institutional Class(h) 2,966,101 2,966,101 ======================================================================= Total Money Market Funds (Cost $5,932,202) 5,932,202 ======================================================================= Total Investments (excluding investments purchased with cash collateral from securities loaned)-100.20% (Cost $107,874,301) 121,042,584 _______________________________________________________________________ ======================================================================= INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-2.09% Premier Portfolio-Institutional Class (Cost $2,528,752)(h)(i) 2,528,752 2,528,752 ======================================================================= TOTAL INVESTMENTS-102.29% (Cost $110,403,053) 123,571,336 ======================================================================= OTHER ASSETS LESS LIABILITIES-(2.29)% (2,765,350) ======================================================================= NET ASSETS-100.00% $120,805,986 _______________________________________________________________________ =======================================================================
Investment Abbreviations: REIT - Real Estate Investment Trust
Notes to Schedule of Investments: (a) Non-income producing security. (b) All or a portion of this security was out on loan at December 31, 2006. (c) A portion of this security is subject to call options written. See Note 1K and Note 9. (d) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The value of this security at December 31, 2006 represented 1.04% of the Fund's Net Assets. See Note 1A. (e) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $2,513,152, which represented 2.08% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (f) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The aggregate value of these securities considered illiquid at December 31, 2006 was $2,563,945, which represented 2.12% of the Fund's Net Assets. (g) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The aggregate value of these securities at December 31, 2006 was $1,878,535, which represented 1.56% of the Fund's Net Assets. See Note 1A. (h) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (i) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. AIM V.I. Dynamics Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $101,942,099)* $115,110,382 ------------------------------------------------------------- Investments in affiliated money market funds (cost $8,460,954) 8,460,954 ============================================================= Total investments (cost $110,403,053) 123,571,336 ============================================================= Receivables for: Investments sold 111,090 ------------------------------------------------------------- Fund shares sold 27,896 ------------------------------------------------------------- Dividends 62,686 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 14,524 ============================================================= Total assets 123,787,532 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Fund shares reacquired 265,277 ------------------------------------------------------------- Options written, at value (premiums received $36,370) 38,388 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 20,765 ------------------------------------------------------------- Collateral upon return of securities loaned 2,528,752 ------------------------------------------------------------- Accrued administrative services fees 81,166 ------------------------------------------------------------- Accrued distribution fees -- Series II 9 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,617 ------------------------------------------------------------- Accrued transfer agent fees 2,403 ------------------------------------------------------------- Accrued operating expenses 41,169 ============================================================= Total liabilities 2,981,546 ============================================================= Net assets applicable to shares outstanding $120,805,986 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $180,211,885 ------------------------------------------------------------- Undistributed net investment income (loss) (15,897) ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities, foreign currencies and option contracts (72,556,257) ------------------------------------------------------------- Unrealized appreciation of investment securities, foreign currencies and option contracts 13,166,255 _____________________________________________________________ ============================================================= $120,805,986 _____________________________________________________________ ============================================================= NET ASSETS: Series I $120,791,716 _____________________________________________________________ ============================================================= Series II $ 14,270 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 7,042,385 _____________________________________________________________ ============================================================= Series II 837.5 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 17.15 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 17.04 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $2,458,519 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $2,829) $ 559,499 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $10,707) 237,245 ============================================================ Total investment income 796,744 ============================================================ EXPENSES: Advisory fees 981,967 ------------------------------------------------------------ Administrative services fees 376,725 ------------------------------------------------------------ Custodian fees 27,294 ------------------------------------------------------------ Distribution fees-Series II 33 ------------------------------------------------------------ Transfer agent fees 13,759 ------------------------------------------------------------ Trustees' and officer's fees and benefits 18,319 ------------------------------------------------------------ Other 55,453 ============================================================ Total expenses 1,473,550 ============================================================ Less: Fees waived and expense offset arrangements (10,549) ============================================================ Net expenses 1,463,001 ============================================================ Net investment income (loss) (666,257) ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES AND OPTION CONTRACTS: Net realized gain from: Investment securities (includes net gains from securities sold to affiliates of $219,553) 20,057,531 ------------------------------------------------------------ Foreign currencies 9,089 ------------------------------------------------------------ Option contracts written 24,085 ============================================================ 20,090,705 ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities (3,352,641) ------------------------------------------------------------ Foreign currencies (35) ------------------------------------------------------------ Option contracts written (2,018) ============================================================ (3,354,694) ============================================================ Net gain from investment securities, foreign currencies and option contracts 16,736,011 ============================================================ Net increase in net assets resulting from operations $16,069,754 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Dynamics Fund STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) $ (666,257) $ (336,942) ------------------------------------------------------------------------------------------ Net realized gain from investment securities, foreign currencies and option contracts 20,090,705 13,541,961 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities, foreign currencies and option contracts (3,354,694) (2,315,631) ========================================================================================== Net increase in net assets resulting from operations 16,069,754 10,889,388 ========================================================================================== Share transactions-net: Series I (6,931,540) (22,841,394) ------------------------------------------------------------------------------------------ Series II -- -- ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (6,931,540) (22,841,394) ========================================================================================== Net increase (decrease) in net assets 9,138,214 (11,952,006) ========================================================================================== NET ASSETS: Beginning of year 111,667,772 123,619,778 ========================================================================================== End of year (including undistributed net investment income (loss) of $(15,897) and $(12,078), respectively) $120,805,986 $111,667,772 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Dynamics Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Dynamics Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Dynamics Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. AIM V.I. Dynamics Fund L. PUT OPTIONS PURCHASED -- The Fund may purchase put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the securities hedged. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.745% -------------------------------------------------------------------- Next $250 million 0.73% -------------------------------------------------------------------- Next $500 million 0.715% -------------------------------------------------------------------- Next $1.5 billion 0.70% -------------------------------------------------------------------- Next $2.5 billion 0.685% -------------------------------------------------------------------- Next $2.5 billion 0.67% -------------------------------------------------------------------- Next $2.5 billion 0.655% -------------------------------------------------------------------- Over $10 billion 0.64% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $7,647. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant AIM V.I. Dynamics Fund to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $326,725 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $ 24,157,223 $ (21,191,122) $ -- $2,966,101 $ 48,517 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 958,574 90,810,772 (88,803,245) -- 2,966,101 178,021 -- ================================================================================================================================== Subtotal $ 958,574 $114,967,995 $(109,994,367) $ -- $5,932,202 $226,538 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class $ 307,262 $ 63,257,577 $ (61,036,087) $ -- $2,528,752 $ 10,707 $ -- ================================================================================================================================== Total $1,265,836 $178,225,572 $(171,030,454) $ -- $8,460,954 $237,245 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $4,342,727, which resulted in net realized gains of $219,553, and securities purchases of $6,485,763. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $2,902. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides AIM V.I. Dynamics Fund for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,233 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $2,458,519 were on loan to brokers. The loans were secured by cash collateral of $2,528,752 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $10,707 for securities lending transactions, which are net of compensation to counterparties. AIM V.I. Dynamics Fund NOTE 9--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ----------------------------------------------------------------------------------- CALL OPTION CONTRACTS --------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ----------------------------------------------------------------------------------- Beginning of period -- $ -- ----------------------------------------------------------------------------------- Written 662 83,137 ----------------------------------------------------------------------------------- Exercised (134) (22,682) ----------------------------------------------------------------------------------- Expired (318) (24,085) =================================================================================== End of period 210 $ 36,370 ___________________________________________________________________________________ ===================================================================================
OPEN OPTIONS WRITTEN AT PERIOD END ------------------------------------------------------------------------------------------------------------------------------- UNREALIZED CONTRACT STRIKE NUMBER OF PREMIUMS VALUE APPRECIATION MONTH PRICE CONTRACTS RECEIVED 12/31/06 (DEPRECIATION) ------------------------------------------------------------------------------------------------------------------------------- CALLS Celgene Corp. Jan-07 $58 210 $36,370 $38,388 $(2,018) _______________________________________________________________________________________________________________________________ ===============================================================================================================================
NOTE 10--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: There were no ordinary income or long-term capital gain distributions paid during the years ended December 31, 2006 and 2005. TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 -------------------------------------------------------------------------- Unrealized appreciation -- investments $ 13,119,480 -------------------------------------------------------------------------- Temporary book/tax differences (15,897) -------------------------------------------------------------------------- Capital loss carryover (72,509,482) -------------------------------------------------------------------------- Shares of beneficial interest 180,211,885 ========================================================================== Total net assets $120,805,986 __________________________________________________________________________ ==========================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and the deferral of losses on certain straddles. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $(10) and option contracts written of $(2,018). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund utilized $19,836,540 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2009 $ 1,883,553 ----------------------------------------------------------------------------- December 31, 2010 70,625,929 ============================================================================= Total capital loss carryforward $72,509,482 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. AIM V.I. Dynamics Fund NOTE 11--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $178,324,981 and $189,525,161, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 15,417,244 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (2,295,736) =============================================================================== Net unrealized appreciation of investment securities $ 13,121,508 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $110,449,828.
NOTE 12--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions and net operating losses, on December 31, 2006, undistributed net investment income (loss) was increased by $662,438, undistributed net realized gain (loss) was decreased by $9,088 and shares of beneficial interest decreased by $653,350. This reclassification had no effect on the net assets of the Fund. NOTE 13--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006(a) 2005 --------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------------------------------------------------- Sold: Series I 4,310,698 $ 69,372,528 1,388,856 $ 19,000,517 ----------------------------------------------------------------------------------------------------------------------- Series II -- -- -- -- ======================================================================================================================= Reacquired: Series I (4,826,869) (76,304,068) (3,095,326) (41,841,911) ----------------------------------------------------------------------------------------------------------------------- Series II -- -- -- -- ======================================================================================================================= (516,171) $ (6,931,540) (1,706,470) $(22,841,394) _______________________________________________________________________________________________________________________ =======================================================================================================================
(a) There are three entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 75% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 14--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Dynamics Fund NOTE 15--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 14.77 $ 13.34 $ 11.77 $ 8.54 $ 12.54 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.09) (0.04) (0.09) (0.07) (0.00)(a) ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.47 1.47 1.66 3.30 (4.00) ========================================================================================================================= Total from investment operations 2.38 1.43 1.57 3.23 (4.00) ========================================================================================================================= Net asset value, end of period $ 17.15 $ 14.77 $ 13.34 $ 11.77 $ 8.54 ========================================================================================================================= Total return(b) 16.11% 10.72% 13.34% 37.82% (31.90)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $120,792 $111,655 $123,609 $169,269 $116,135 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.12%(c) 1.16% 1.14% 1.14% 1.12% ------------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.13%(c) 1.17% 1.14% 1.15% 1.12% ========================================================================================================================= Ratio of net investment income (loss) to average net assets (0.51)%(c) (0.29)% (0.62)% (0.70)% (0.75)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 142% 110% 64% 129% 110% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) The net investment income (loss) per share was calculated after permanent book tax differences, such as net operating losses, which were reclassified from accumulated net investment income (loss) to paid in capital. Had net investment income (loss) per share been calculated using the current method, which is before reclassification of net operating losses, net investment income (loss) per share would have been (b)$(0.08) for the year ended December 31, 2002. Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce (c)total returns. Ratios are based on average daily net assets of $130,915,612.
SERIES II ---------------------------------------------- APRIL 30, 2004 (DATE SALES YEAR ENDED DECEMBER 31, COMMENCED) TO ----------------------------- DECEMBER 31, 2006 2005 2004 ------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $14.71 $13.32 $11.94 ------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) (0.12) (0.07) (0.07) ------------------------------------------------------------------------------------------------------------ Net gains on securities (both realized and unrealized) 2.45 1.46 1.45 ============================================================================================================ Total from investment operations 2.33 1.39 1.38 ============================================================================================================ Net asset value, end of period $17.04 $14.71 $13.32 ============================================================================================================ Total return(a) 15.84% 10.44% 11.56% ____________________________________________________________________________________________________________ ============================================================================================================ Ratios/supplemental data: Net assets, end of period (000s omitted) $ 14 $ 12 $ 11 ____________________________________________________________________________________________________________ ============================================================================================================ Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.37%(b) 1.41% 1.40%(c) ------------------------------------------------------------------------------------------------------------ Without fee waivers and/or expense reimbursements 1.38%(b) 1.42% 1.40%(c) ============================================================================================================ Ratio of net investment income (loss) to average net assets (0.76)%(b) (0.54)% (0.88)%(c) ____________________________________________________________________________________________________________ ============================================================================================================ Portfolio turnover rate(d) 142% 110% 64% ____________________________________________________________________________________________________________ ============================================================================================================
(a) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection (b)with a variable product, which if included would reduce total returns. (c)Ratios are based on average daily net assets of $13,333. (d)Annualized. Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Dynamics Fund NOTE 16--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Dynamics Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Dynamics Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Dynamics Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Dynamics Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Dynamics Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. FINANCIAL SERVICES FUND Sectors The Fund provides a complete list of its Annual Report to Shareholders - December 31, 2006 holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in [COVER GLOBE IMAGE] Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our AIM V.I. FINANCIAL SERVICES FUND Client Services department at seeks capital growth. 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT the About Us tab, click on Required IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ==================================================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING [AIM INVESTMENTS LOGO] SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE INVESTING. --Registered Trademark-- ==================================================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. FINANCIAL SERVICES FUND ========================================================================================== returning excess capital to shareholders PERFORMANCE SUMMARY in the form of dividends and share repurchases. For the year ended December 31, 2006, AIM V.I. Financial Services Fund, excluding variable product issuer charges, produced positive returns and slightly outperformed the We maintain a proprietary database of S&P 500 --REGISTERED TRADEMARK-- Index, its broad market index, and the Lipper Financial intrinsic value estimates and screen Services Funds Index, its peer group index. The Fund underperformed its style-specific financial companies for those of index, the S&P 500 Financials Index. acceptable quality. Purchase candidates are subject to exhaustive fundamental Given the mandate of the Fund--to invest in the financials sector--the Fund's analysis. We focus on the drivers of performance relative to its broad market index was heavily influenced by the performance estimated intrinsic value such as of the financials sector versus the overall market. For the year, the financials sector normalized earnings power, marginal was strong relative to the broad market. The Fund underperformed its style-specific index returns on economic equity (which primarily because it did not own any real estate investment trusts (REITs), which were adjusts for distortions present in strong performers during the year. accounting numbers) and sustainable growth. Additionally, we strive to Your Fund's long-term performance appears on pages 4-5. understand a company's ability and willingness to grow capital returned to FUND VS. INDEXES shareholders in the future. Finally, we focus on quality, including competitive TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF VARIABLE position, management and financial PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. strength. Series I Shares 16.44% The result is normally a 35- to 50- Series II Shares 16.22 stock portfolio, with investments that S&P 500 Index (Broad Market Index) 15.78 we believe are attractive from both a S&P 500 Financials Index (Style-Specific Index) 19.19 valuation and capital discipline Lipper Financial Services Funds Index (Peer Group Index) 15.90 perspective representing top holdings. In constructing a portfolio, we attempt SOURCE: LIPPER INC. to mitigate risk in multiple ways, ========================================================================================== including by diversifying holdings across industries and businesses that HOW WE INVEST react in different ways to changes in interest rates and economic cycles. Our goal is to create wealth for discount to our estimate of intrinsic value shareholders. We maintain a long-term because of excessive short-term investor We believe a portfolio of undervalued investment horizon and invest in two primary pessimism. Estimated intrinsic value is a and capital-disciplined quality opportunities we believe have historically measure based primarily on the estimated financial companies that profitably grow resulted in superior investment returns future cash flows generated by the cash flows over time provides the best within the financials sector: businesses. opportunity for superior long-term investment results. - Financial companies trading at a - Reasonably valued financial companies that significant demonstrate superior capital discipline by MARKET CONDITIONS AND YOUR FUND ========================================================================================== The investment backdrop for the PORTFOLIO COMPOSITION TOP 10 EQUITY HOLDINGS* financials sector is heavily affected by ------------------------------------------------------------------------------------------ several factors, including U.S. Federal 1. JPMorgan Chase & Co. 7.0% Reserve Board (the Fed) policy, capital By industry 2. Merrill Lynch & Co., Inc. 6.7 markets activity and the health of the Other Diversified Financial Services 16.8% 3. Citigroup Inc. 6.4 economy--which drives credit losses. Investment Banking & Brokerage 11.3 4. Fannie Mae 5.9 For the year as a whole, the economy Thrifts & Mortgage Finance 10.6 5. Capital One Financial Corp. 5.1 grew at a moderate pace. The Fed, having Property & Casualty Insurance 9.3 6. Bank of New York Co., Inc. (The) 4.6 methodically raised interest rates since Asset Management & Custody Banks 8.7 7. Morgan Stanley 4.6 June 2004, decided to hold rates steady Diversified Banks 7.8 8. Hartford Financial Services beginning mid year. Investor Insurance Brokers 7.0 Group, Inc. (The) 4.2 expectations regarding the end of Multi-Line Insurance 6.5 9. ACE Ltd. 4.0 interest rate increases by the Fed was Regional Banks 6.3 10. Marsh & McLennan Cos., Inc. 4.0 an important consideration for the Consumer Finance 5.1 performance of financial stocks. The Three Other Industries, Each With Total Net Assets $ 147.76 million Fed's pause in interest rate hikes, Less Than 3% of Total Net Assets 4.0 coupled with minimal credit losses and Money Market Funds Total Number of Holdings* 32 robust capital markets activity, allowed Plus Other Assets Less Liabilities 6.6 financial stocks to post strong gains, especially during the second half of the *Excluding money market fund holdings. year. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ========================================================================================
2 AIM V.I. Financial Services Fund The largest contributors to Fund We initiated positions in SECURITY Michael J. Simon Chartered performance during the year were MERRILL CAPITAL ASSURANCE and NATIONAL FINANCIAL [SIMON Financial Analyst, senior LYNCH, MORGAN STANLEY and JP MORGAN. All PARTNERS (NFP) during the year. The PHOTO] portfolio manager, is lead benefited from robust capital markets opportunity for us to buy established manager of AIM V.I. and a rotation to large-cap financials bond insurer Security Capital at an Financial Services Fund. He as investors anticipated an end to Fed attractive price arose from the need of began his investment career tightening. More important, Morgan former parent, XL Capital (not a Fund in 1989 and joined AIM in Stanley and JP Morgan, under the holding), to sell part of the company in 2001. Mr. Simon earned his B.B.A. in leadership of new CEOs, showed signs of an initial public offering as part of a finance from Texas Christian University improved operating and financial plan to fortify its balance sheet after and his M.B.A. from the University of performance. THE BANK OF NEW YORK was last year's devastating hurricanes. NFP Chicago. also a strong contributor as a result of was down about 40% from its high when we announcing a favorable merger with purchased the stock amid what we Meggan M. Walsh Chartered Mellon Financial, creating a global considered to be investor overreaction [WALSH Financial Analyst, senior giant in trust banking. FANNIE MAE also to margin pressure that we believed PHOTO] portfolio manager, is contributed to Fund performance as could prove transitory. At the close of manager of AIM V.I. concerns over past accounting issues the year, we believed NFP, a distributor Financial Services Fund. dissipated and investors focused on the of insurance products to high net worth She began her investment company's compelling valuation. individuals, was trading at a career in 1987 and joined substantial discount to its estimated AIM in 1991. Ms. Walsh earned her The Fund did not have any intrinsic value. bachelor's degree in finance from the investments in REITs during the year. University of Maryland and her M.B.A. REITs performed strongly for a fourth At the close of the year, the from Loyola College. straight year, so the absence of REIT portfolio continued to have significant investments hurt the Fund's performance holdings in the largest diversified U.S. Assisted by the Basic Value Team and the relative to the S&P 500 Financials financial companies which we believed to Diversified Dividend Team Index. We did not believe REITs, with be among the most attractive investment dividend yields at historic lows opportunities in the sector. Given relative to interest rates, represented recent strong performance by financial attractive values. stocks and rising risks in the financials sector (an inverted yield In this strong year for financial curve, the sharp slowdown in residential stocks, CAPITAL ONE FINANCIAL and housing activity and, more recently, a FEDERATED INVESTORS were the only Fund step up in corporate leveraging) we holdings that declined more than 5% believe valuation levels demand during the year. We believe that Capital heightened selectivity when investing One, a well-run credit card company that within the sector. has expanded further into regional banking with its recent acquisition of IN CLOSING North Fork Bancorporation, is attractively valued. Federated has an Regardless of the macro economic enviable position in the money market environment, we remain focused on fund business, which has been under identifying financial companies that we pressure as the interest rate cycle has believe are undervalued and that exhibit negatively affected money market fund capital discipline. Thank you for your assets under management. During the investment in AIM V.I. Financial year, the company raised its dividend Services Fund. 20% and continued to aggressively repurchase shares. We continued to hold THE VIEWS AND OPINIONS EXPRESSED IN both stocks at the end of the year. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ARE THOSE OF A I M ADVISORS, Consistent with our relatively low INC. THESE VIEWS AND OPINIONS ARE turnover approach, the composition of SUBJECT TO CHANGE AT ANY TIME BASED ON the portfolio changed only modestly FACTORS SUCH AS MARKET AND ECONOMIC during the year. Based mostly on CONDITIONS. THESE VIEWS AND OPINIONS MAY valuation and other portfolio NOT BE RELIED UPON AS INVESTMENT ADVICE considerations, we eliminated our or recommendations, or as an offer for a positions in LEHMAN BROTHERS, PARTICULAR SECURITY. THE INFORMATION IS CULLEN/FROST BANKERS and PMI GROUP, and NOT A COMPLETE ANALYSIS OF EVERY ASPECT we meaningfully reduced our holdings in OF ANY MARKET, COUNTRY, INDUSTRY, PRUDENTIAL, WELLS FARGO and BANK OF SECURITY OR THE FUND. STATEMENTS OF FACT AMERICA. ARE FROM SOURCES CONSIDERED RELIABLE, BUT A I M ADVISORS, INC. MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE FOR A DISCUSSION OF THE RISKS OF OF FUTURE RESULTS, THESE INSIGHTS MAY INVESTING IN YOUR FUND, INDEXES USED IN HELP YOU UNDERSTAND OUR INVESTMENT THIS REPORT AND YOUR FUND'S LONG-TERM MANAGEMENT PHILOSOPHY. PERFORMANCE, PLEASE SEE PAGES 4-5.
3 YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. FINANCIAL SERVICES FUND ======================================== AVERAGE ANNUAL TOTAL RETURNS RESTATED HISTORICAL PERFORMANCE OF SERIES PORTFOLIO OF AIM VARIABLE ---------------------------------------- SERIES I SHARES (FOR PERIODS PRIOR TO INSURANCE FUNDS, IS CURRENTLY OFFERED As of 12/31/06 INCEPTION OF SERIES II SHARES) ADJUSTED THROUGH INSURANCE COMPANIES ISSUING TO REFLECT THE RULE 12b-1 FEES VARIABLE PRODUCTS. YOU CANNOT PURCHASE SERIES I SHARES APPLICABLE TO SERIES II SHARES. THE SHARES OF THE FUND DIRECTLY. PERFORMANCE Inception (9/20/99) 8.78% INCEPTION DATE OF SERIES I SHARES IS FIGURES GIVEN REPRESENT THE FUND AND ARE 5 Years 8.13 SEPTEMBER 20, 1999. THE PERFORMANCE OF NOT INTENDED TO REFLECT ACTUAL VARIABLE 1 Year 16.44 THE FUND'S SERIES I AND SERIES II SHARE PRODUCT VALUES. THEY DO NOT REFLECT CLASSES WILL DIFFER PRIMARILY DUE TO SALES CHARGES, EXPENSES AND FEES SERIES II SHARES DIFFERENT CLASS EXPENSES. ASSESSED IN CONNECTION WITH A VARIABLE Inception 8.52% PRODUCT. SALES CHARGES, EXPENSES AND 5 Years 7.87 THE PERFORMANCE DATA QUOTED FEES, WHICH ARE DETERMINED BY THE 1 Year 16.22 REPRESENT PAST PERFORMANCE AND CANNOT VARIABLE PRODUCT ISSUERS, WILL VARY AND ======================================== GUARANTEE COMPARABLE FUTURE RESULTS; WILL LOWER THE TOTAL RETURN. CURRENT PERFORMANCE MAY BE LOWER OR ======================================== HIGHER. PLEASE CONTACT YOUR VARIABLE PER NASD REQUIREMENTS, THE MOST PRODUCT ISSUER OR FINANCIAL ADVISOR FOR RECENT MONTH-END PERFORMANCE DATA AT THE CUMULATIVE TOTAL RETURNS THE MOST RECENT MONTH-END VARIABLE FUND LEVEL, EXCLUDING VARIABLE PRODUCT PRODUCT PERFORMANCE. PERFORMANCE FIGURES CHARGES, IS AVAILABLE ON THIS AIM 6 months ended 12/31/06 REFLECT FUND EXPENSES, REINVESTED AUTOMATED INFORMATION LINE, DISTRIBUTIONS AND CHANGES IN NET ASSET 866-702-4402. AS MENTIONED ABOVE, FOR Series I Shares 15.16% VALUE. INVESTMENT RETURN AND PRINCIPAL THE MOST RECENT MONTH-END PERFORMANCE Series II Shares 15.01 VALUE WILL FLUCTUATE SO THAT YOU MAY INCLUDING VARIABLE PRODUCT CHARGES, ======================================== HAVE A GAIN OR LOSS WHEN YOU SELL PLEASE CONTACT YOUR VARIABLE PRODUCT SHARES. ISSUER OR FINANCIAL ADVISOR. SERIES II SHARES' INCEPTION DATE IS APRIL 30, 2004. RETURNS SINCE THAT DATE AIM V.I. FINANCIAL SERVICES FUND, ARE HISTORICAL. ALL OTHER RETURNS ARE A THE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE ================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND investing in more established companies, The S&P 500 FINANCIALS INDEX is a such as business risk, stock price market capitalization weighted index of Foreign securities have additional fluctuations and illiquidity. companies involved in activities such as risks, including exchange rate changes, banking, consumer finance, investment political and economic upheaval, the The Fund may use enhanced banking and brokerage, asset management, relative lack of information about these investment techniques such as insurance and investment and real companies, relatively low market derivatives. The principal risk of estate, including real estate investment liquidity and the potential lack of investments in derivatives is that the trusts (REITs). strict financial and accounting controls fluctuations in their values may not and standards. correlate perfectly with the overall In conjunction with the annual securities markets. Derivatives are prospectus update on or about May 1, Investing in emerging markets subject to counter party risk--the 2007, the AIM V.I. Financial Services involves greater risk than investing in risk that the other party will not Fund prospectus will be amended to more established markets. The risks complete the transaction with the Fund. reflect that the Fund has elected to use include the relatively smaller size and the Lipper Variable Underlying Funds lesser liquidity of these markets, high The prices of securities held by (VUF) Financial Services Funds Category inflation rates, adverse political the Fund may decline in response to Average as its peer group index rather developments and lack of timely market risks. than the Lipper Financial Services Funds information. Index. The Lipper VUF Financial Services ABOUT INDEXES USED IN THIS REPORT Funds Category Average, recently If the seller of a repurchase published by Lipper Inc., comprises the agreement in which the Fund invests The unmanaged LIPPER FINANCIAL SERVICES largest underlying funds in each defaults on its obligation or declares FUNDS INDEX represents an average of the variable insurance category and does not bankruptcy, the Fund may experience 10 largest financial services funds include mortality and expense fees. delays in selling the securities tracked by Lipper Inc., an independent underlying the repurchase agreement. mutual fund performance monitor. The Fund is not managed to track the performance of any particular index, There is no guarantee that the The unmanaged STANDARD & POOR'S including the indexes defined here, and investment techniques and risk analyses COMPOSITE INDEX OF 500 STOCKS (the S&P consequently, the performance of the used by the Fund's portfolio managers 500 Index) is an index of common stocks Fund may deviate significantly from the will produce the desired results. frequently used as a general measure of performance of the indexes. U.S. stock market performance. Investing in a fund that invests in smaller companies involves risks not associated with
Continued on page 5 4 AIM V.I. FINANCIAL SERVICES FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. This chart, which is a logarithmic In this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value value of the Fund and its indexes. We of the investment. In other words, the believe that a logarithmic chart is more space between $5,000 and $10,000 is the effective than other types of charts in same size as the space between $10,000 illustrating changes in value during the and $20,000. early years shown in the chart. The vertical axis, the one that indicates the dollar ================================================================================================================================= Continued from page 4 A direct investment cannot be made reported in the Financial Highlights. in an index. Unless otherwise indicated, Additionally, the returns and net asset index results include reinvested values shown throughout this report are dividends, and they do not reflect sales at the Fund level only and do not charges. Performance of an index of include variable product issuer charges. funds reflects fund expenses; If such charges were included, the total performance of a market index does not. returns would be lower. OTHER INFORMATION Industry classifications used in this report are generally according to The returns shown in the management's the Global Industry Classification discussion of Fund performance Standard, which was developed by and is are based on net asset values the exclusive property and a service calculated for shareholder transactions. mark of Morgan Stanley Capital Generally accepted accounting International Inc. and Standard & principles require adjustments Poor's. to be made to the net assets of the Fund at period end for financial The Chartered Financial Analyst reporting purposes, and as such, the net --Registered Trademark-- (CFA ) asset values for shareholder designation is a globally recognized transactions and the returns based on standard for measuring the competence those net asset values may differ from and integrity of investment the net asset values and returns professionals.
5 RESULTS OF A $10,000 INVESTMENT Fund data from 9/20/99, Index data from 9/30/99
============================================================================================================================== [MOUNTAIN CHART] AIM V.I. FINANCIAL SERVICES FUND DATE -SERIES I SHARES S&P 500 INDEX S&P 500 FINANCIALS INDEX LIPPER FINANCIAL SERVICES FUNDS INDEX ------------------------------------------------------------------------------------------------------------------------------ 9/20/99 $ 10000 9/99 9950 $ 10000 $ 10000 $ 10000 10/99 11150 10633 11669 11240 11/99 11009 10849 11097 10763 12/99 11100 11487 10877 10478 1/00 10640 10910 10533 9999 2/00 9560 10703 9392 9030 3/00 10990 11750 11135 10498 4/00 10781 11396 10785 10113 5/00 11391 11163 11508 10709 6/00 11081 11438 10810 10317 7/00 12062 11259 11927 11118 8/00 13012 11958 13073 12135 9/00 13532 11327 13383 12526 10/00 13523 11279 13325 12596 11/00 12583 10390 12539 12070 12/00 13855 10441 13672 13279 1/01 13505 10811 13635 13138 2/01 12815 9826 12739 12529 3/01 12414 9204 12355 12104 4/01 12764 9919 12815 12490 5/01 13365 9985 13332 12989 6/01 13275 9742 13327 12985 7/01 13015 9646 13111 12832 8/01 12275 9043 12312 12204 9/01 11603 8313 11585 11571 10/01 11333 8472 11370 11248 11/01 12235 9121 12182 12022 12/01 12487 9201 12449 12378 1/02 12356 9067 12254 12351 2/02 12205 8892 12076 12307 3/02 12950 9227 12879 12959 4/02 12538 8667 12535 12841 5/02 12558 8604 12514 12873 6/02 12015 7991 11920 12268 7/02 11100 7368 10975 11388 8/02 11271 7417 11199 11684 9/02 10145 6611 9890 10431 10/02 10869 7193 10784 10983 11/02 11151 7616 11228 11390 12/02 10628 7168 10626 10892 1/03 10455 6981 10449 10692 2/03 10122 6876 10122 10412 3/03 10122 6943 10083 10350 4/03 11164 7514 11318 11344 5/03 11772 7910 11916 12070 6/03 11812 8011 11946 12163 7/03 12399 8152 12494 12659 8/03 12267 8311 12368 12725 9/03 12318 8223 12451 12788 10/03 13168 8688 13308 13730 11/03 13107 8764 13271 13861 12/03 13770 9223 13923 14376 1/04 14269 9393 14367 14826 2/04 14646 9523 14748 15239 3/04 14442 9380 14602 15084 4/04 13730 9233 13928 14280 5/04 13893 9359 14184 14550 6/04 13985 9541 14255 14669 7/04 13588 9225 13963 14343 8/04 13974 9262 14432 14713 9/04 13933 9362 14309 14872 10/04 13883 9506 14381 15093 11/04 14330 9890 14807 15736 12/04 14965 10226 15440 16383 1/05 14544 9977 15106 15963 2/05 14524 10187 15026 15947 3/05 13991 10007 14455 15469 4/05 13908 9817 14471 15226 5/05 14329 10129 14867 15706 6/05 14533 10144 15080 16095 7/05 14799 10521 15318 16582 8/05 14462 10425 15050 16257 9/05 14502 10509 15190 16310 ==============================================================================================================================
Source: Lipper Inc. ============================================================================================================================== [MOUNTAIN CHART] 10/05 15107 10334 15669 16518 11/05 15804 10724 16404 17282 12/05 15848 10728 16439 17354 1/06 16190 11012 16587 17772 2/06 16388 11042 16923 17981 3/06 16357 11179 16973 18186 4/06 16958 11329 17708 18722 5/06 16222 11004 17056 17999 6/06 16026 11018 16951 17903 7/06 16337 11086 17371 18065 8/06 16607 11350 17573 18237 9/06 17178 11642 18305 18856 10/06 17645 12021 18750 19276 11/06 17696 12249 18866 19512 12/06 18449 12421 19595 20113 ==============================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. FINANCIAL SERVICES FUND EXAMPLE You may use the information in this The hypothetical account values table, together with the amount you and expenses may not be used to estimate As a shareholder of the Fund, you incur invested, to estimate the expenses that the actual ending account balance or ongoing costs, including management you paid over the period. Simply divide expenses you paid for the period. You fees; distribution and/or service your account value by $1,000 (for may use this information to compare the (12b-1) fees; and other Fund expenses. example, an $8,600 account value divided ongoing costs of investing in the Fund This example is intended to help you by $1,000 = 8.6), then multiply the and other funds. To do so, compare this understand your ongoing costs (in result by the number in the table under 5% hypothetical example with the 5% dollars) of investing in the Fund and to the heading entitled "Actual Expenses hypothetical examples that appear in the compare these costs with ongoing costs Paid During Period" to estimate the shareholder reports of the other funds. of investing in other mutual funds. The expenses you paid on your account during example is based on an investment of this period. Please note that the expenses $1,000 invested at the beginning of the shown in the table are meant to period and held for the entire period HYPOTHETICAL EXAMPLE FOR COMPARISON highlight your ongoing costs. Therefore, July 1, 2006, through December 31, 2006. PURPOSES the hypothetical information is useful in comparing ongoing costs, and will not The actual and hypothetical The table below also provides help you determine the relative total expenses in the examples below do not information about hypothetical account costs of owning different funds. represent the effect of any fees or values and hypothetical expenses based other expenses assessed in connection on the Fund's actual expense ratio and with a variable product; if they did, an assumed rate of return of 5% per year the expenses shown would be higher while before expenses, which is not the Fund's the ending account values shown would be actual return. The Fund's actual lower. cumulative total returns at net asset value after expenses for the six months ACTUAL EXPENSES ended December 31, 2006, appear in the table "Cumulative Total Returns" on page The table below provides information 4. about actual account values and actual expenses. ====================================================================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ SERIES I $ 1,000.00 $ 1,151.60 $ 6.13 $ 1,019.51 $ 5.75 1.13% SERIES II 1,000.00 1,150.10 7.48 1,018.25 7.02 1.38 ====================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6 AIM V.I. FINANCIAL SERVICES FUND APPROVAL OF INVESTMENT ADVISORY AGREEMENT The Board of Trustees of AIM Variable services to be provided by AIM under the team, which need more time to be Insurance Funds (the "Board") oversees Advisory Agreement was appropriate and evaluated before a conclusion can be the management of AIM V.I. Financial that AIM currently is providing services made that the changes have addressed the Services Fund (the "Fund") and, as in accordance with the terms of the Fund's under-performance. Based on this required by law, determines annually Advisory Agreement. review and after taking account of all whether to approve the continuance of of the other factors that the Board the Fund's advisory agreement with A I M - The quality of services to be provided considered in determining whether to Advisors, Inc. ("AIM"). Based upon the by AIM. The Board reviewed the continue the Advisory Agreement for the recommendation of the Investments credentials and experience of the Fund, the Board concluded that no Committee of the Board, at a meeting officers and employees of AIM who will changes should be made to the Fund and held on June 27, 2006, the Board, provide investment advisory services to that it was not necessary to change the including all of the independent the Fund. In reviewing the Fund's portfolio management team at this trustees, approved the continuance of qualifications of AIM to provide time. However, due to the Fund's the advisory agreement (the "Advisory investment advisory services, the Board under-performance, the Board also Agreement") between the Fund and AIM for considered such issues as AIM's concluded that it would be appropriate another year, effective July 1, 2006. portfolio and product review process, for the Board to continue to closely various back office support functions monitor and review the performance of The Board considered the factors provided by AIM and AIM's equity and the Fund. Although the independent discussed below in evaluating the fixed income trading operations. Based written evaluation of the Fund's Senior fairness and reasonableness of the on the review of these and other Officer (discussed below) only Advisory Agreement at the meeting on factors, the Board concluded that the considered Fund performance through the June 27, 2006 and as part of the Board's quality of services to be provided by most recent calendar year, the Board ongoing oversight of the Fund. In their AIM was appropriate and that AIM also reviewed more recent Fund deliberations, the Board and the currently is providing satisfactory performance, which did not change their independent trustees did not identify services in accordance with the terms of conclusions. any particular factor that was the Advisory Agreement. controlling, and each trustee attributed - Meetings with the Fund's portfolio different weights to the various - The performance of the Fund relative managers and investment personnel. With factors. to comparable funds. The Board reviewed respect to the Fund, the Board is the performance of the Fund during the meeting periodically with such Fund's One responsibility of the past one, three and five calendar years portfolio managers and/or other independent Senior Officer of the Fund against the performance of funds advised investment personnel and believes that is to manage the process by which the by other advisors with investment such individuals are competent and able Fund's proposed management fees are strategies comparable to those of the to continue to carry out their negotiated to ensure that they are Fund. The Board noted that the Fund's responsibilities under the Advisory negotiated in a manner which is at arms' performance in such periods was below Agreement. length and reasonable. To that end, the the median performance of such Senior Officer must either supervise a comparable funds. The Board also noted - Overall performance of AIM. The Board competitive bidding process or prepare that AIM began serving as investment considered the overall performance of an independent written evaluation. The advisor to the Fund in April 2004. The AIM in providing investment advisory and Senior Officer has recommended an Board noted that AIM has recently made portfolio administrative services to the independent written evaluation in lieu changes to the Fund's portfolio Fund and concluded that such performance of a competitive bidding process and, management team, which need more time to was satisfactory. upon the direction of the Board, has be evaluated before a conclusion can be prepared such an independent written made that the changes have addressed the - Fees relative to those of clients of evaluation. Such written evaluation also Fund's under-performance. Based on this AIM with comparable investment considered certain of the factors review and after taking account of all strategies. The Board reviewed the discussed below. In addition, as of the other factors that the Board effective advisory fee rate (before discussed below, the Senior Officer made considered in determining whether to waivers) for the Fund under the Advisory a recommendation to the Board in continue the Advisory Agreement for the Agreement. The Board noted that this connection with such written evaluation. Fund, the Board concluded that no rate was (i) above the effective changes should be made to the Fund and advisory fee rate (before waivers) for The discussion below serves as a that it was not necessary to change the one mutual fund advised by AIM with summary of the Senior Officer's Fund's portfolio management team at this investment strategies comparable to independent written evaluation and time. However, due to the Fund's those of the Fund; (ii) the same as the recommendation to the Board in under-performance, the Board also effective advisory fee rates (before connection therewith, as well as a concluded that it would be appropriate waivers) for three variable insurance discussion of the material factors and for the Board to continue to closely funds advised by AIM and offered to the conclusions with respect thereto monitor and review the performance of insurance company separate accounts with that formed the basis for the Board's the Fund. Although the independent investment strategies comparable to approval of the Advisory Agreement. written evaluation of the Fund's Senior those of the Fund; and (iii) above the After consideration of all of the Officer (discussed below) only effective sub-advisory fee rate for two factors below and based on its informed considered Fund performance through the offshore funds advised and sub-advised business judgment, the Board determined most recent calendar year, the Board by AIM affiliates with investment that the Advisory Agreement is in the also reviewed more recent Fund strategies comparable to those of the best interests of the Fund and its performance, which did not change their Fund, although the total advisory fees shareholders and that the compensation conclusions. for one such offshore fund were above to AIM under the Advisory Agreement is those for the Fund and the total fair and reasonable and would have been - The performance of the Fund relative advisory fees for the other offshore obtained through arm's length to indices. The Board reviewed the fund were comparable to those for the negotiations. performance of the Fund during the past Fund. The Board noted that AIM has one, three and five calendar years agreed to waive advisory fees of the Unless otherwise stated, against the performance of the Lipper Fund and to limit the Fund's total information presented below is as of Financial Services Fund Index. The Board operating expenses, as discussed below. June 27, 2006 and does not reflect any noted that the Fund's performance was Based on this review, the Board changes that may have occurred since comparable to the performance of such concluded that the advisory fee rate for June 27, 2006, including but not limited Index for the one year period and below the Fund under the Advisory Agreement to changes to the Fund's performance, such Index for the three and five year was fair and reasonable. advisory fees, expense limitations periods. The Board also noted that AIM and/or fee waivers. began serving as investment advisor to the Fund in April 2004. The Board noted - The nature and extent of the advisory that AIM has recently made changes to services to be provided by AIM. The the Fund's portfolio management Board reviewed the services to be provided by AIM under the Advisory Agreement. Based on such review, the Board concluded that the range of
(continued) 7 AIM V.I. FINANCIAL SERVICES FUND - Fees relative to those of comparable The Board concluded that the Fund's fee remain profitable, although increased funds with other advisors. The Board levels under the Advisory Agreement expenses in recent years have reduced reviewed the advisory fee rate for the therefore would not reflect economies of AIM's profitability. Based on the review Fund under the Advisory Agreement. The scale, although the advisory fee waiver of the profitability of AIM's and its Board compared effective contractual reflects economies of scale. affiliates' investment advisory and advisory fee rates at a common asset other activities and its financial level at the end of the past calendar - Investments in affiliated money market condition, the Board concluded that the year and noted that the Fund's rate was funds. The Board also took into account compensation to be paid by the Fund to comparable to above the median rate of the fact that uninvested cash and cash AIM under its Advisory Agreement was not the funds advised by other advisors with collateral from securities lending excessive. investment strategies comparable to arrangements, if any (collectively, those of the Fund that the Board "cash balances") of the Fund may be - Benefits of soft dollars to AIM. The reviewed. The Board noted that AIM has invested in money market funds advised Board considered the benefits realized agreed to waive advisory fees of the by AIM pursuant to the terms of an SEC by AIM as a result of brokerage Fund and to limit the Fund's total exemptive order. The Board found that transactions executed through "soft operating expenses, as discussed below. the Fund may realize certain benefits dollar" arrangements. Under these Based on this review, the Board upon investing cash balances in AIM arrangements, brokerage commissions paid concluded that the advisory fee rate for advised money market funds, including a by the Fund and/or other funds advised the Fund under the Advisory Agreement higher net return, increased liquidity, by AIM are used to pay for research and was fair and reasonable. increased diversification or decreased execution services. This research may be transaction costs. The Board also found used by AIM in making investment - Expense limitations and fee waivers. that the Fund will not receive reduced decisions for the Fund. The Board The Board noted that AIM has services if it invests its cash balances concluded that such arrangements were contractually agreed to waive advisory in such money market funds. The Board appropriate. fees of the Fund through April 30, 2008 noted that, to the extent the Fund to the extent necessary so that the invests uninvested cash in affiliated - AIM's financial soundness in light of advisory fees payable by the Fund do not money market funds, AIM has voluntarily the Fund's needs. The Board considered exceed a specified maximum advisory fee agreed to waive a portion of the whether AIM is financially sound and has rate, which maximum rate includes advisory fees it receives from the Fund the resources necessary to perform its breakpoints and is based on net asset attributable to such investment. The obligations under the Advisory levels. The Board considered the Board further determined that the Agreement, and concluded that AIM has contractual nature of this fee waiver proposed securities lending program and the financial resources necessary to and noted that it remains in effect related procedures with respect to the fulfill its obligations under the until April 30, 2008. The Board noted lending Fund is in the best interests of Advisory Agreement. that AIM has contractually agreed to the lending Fund and its respective waive fees and/or limit expenses of the shareholders. The Board therefore - Historical relationship between the Fund through April 30, 2008 in an amount concluded that the investment of cash Fund and AIM. In determining whether to necessary to limit total annual collateral received in connection with continue the Advisory Agreement for the operating expenses to a specified the securities lending program in the Fund, the Board also considered the percentage of average daily net assets money market funds according to the prior relationship between AIM and the for each class of the Fund. The Board procedures is in the best interests of Fund, as well as the Board's knowledge considered the contractual nature of the lending Fund and its respective of AIM's operations, and concluded that this fee waiver/expense limitation and shareholders. it was beneficial to maintain the noted that it remains in effect until current relationship, in part, because April 30, 2008. The Board considered the - Independent written evaluation and of such knowledge. The Board also effect these fee waivers/expense recommendations of the Fund's Senior reviewed the general nature of the limitations would have on the Fund's Officer. The Board noted that, upon non-investment advisory services estimated expenses and concluded that their direction, the Senior Officer of currently performed by AIM and its the levels of fee waivers/expense the Fund, who is independent of AIM and affiliates, such as administrative, limitations for the Fund were fair and AIM's affiliates, had prepared an transfer agency and distribution reasonable. independent written evaluation in order services, and the fees received by AIM to assist the Board in determining the and its affiliates for performing such - Breakpoints and economies of scale. reasonableness of the proposed services. In addition to reviewing such The Board reviewed the structure of the management fees of the AIM Funds, services, the trustees also considered Fund's advisory fee under the Advisory including the Fund. The Board noted that the organizational structure employed by Agreement, noting that it does not the Senior Officer's written evaluation AIM and its affiliates to provide those include any breakpoints. The Board had been relied upon by the Board in services. Based on the review of these considered whether it would be this regard in lieu of a competitive and other factors, the Board concluded appropriate to add advisory fee bidding process. In determining whether that AIM and its affiliates were breakpoints for the Fund or whether, due to continue the Advisory Agreement for qualified to continue to provide to the nature of the Fund and the the Fund, the Board considered the non-investment advisory services to the advisory fee structures of comparable Senior Officer's written evaluation and Fund, including administrative, transfer funds, it was reasonable to structure the recommendation made by the Senior agency and distribution services, and the advisory fee without breakpoints. Officer to the Board that the Board that AIM and its affiliates currently Based on this review, the Board consider whether the advisory fee are providing satisfactory concluded that it was not necessary to waivers for certain equity AIM Funds, non-investment advisory services. add advisory fee breakpoints to the including the Fund, should be Fund's advisory fee schedule. The Board simplified. The Board concluded that it - Other factors and current trends. The reviewed the level of the Fund's would be advisable to consider this Board considered the steps that AIM and advisory fees, and noted that such fees, issue and reach a decision prior to the its affiliates have taken over the last as a percentage of the Fund's net expiration date of such advisory fee several years, and continue to take, in assets, would remain constant under the waivers. order to improve the quality and Advisory Agreement because the Advisory efficiency of the services they provide Agreement does not include any - Profitability of AIM and its to the Funds in the areas of investment breakpoints. The Board noted that AIM affiliates. The Board reviewed performance, product line has contractually agreed to waive information concerning the profitability diversification, distribution, fund advisory fees of the Fund through April of AIM's (and its affiliates') operations, shareholder services and 30, 2008 to the extent necessary so that investment advisory and other activities compliance. The Board concluded that the advisory fees payable by the Fund do and its financial condition. The Board these steps taken by AIM have improved, not exceed a specified maximum advisory considered the overall profitability of and are likely to continue to improve, fee rate, which maximum rate includes AIM, as well as the profitability of AIM the quality and efficiency of the breakpoints and is based on net asset in connection with managing the Fund. services AIM and its affiliates provide levels. The Board noted that AIM's operations to the Fund in each of these areas, and support the Board's approval of the continuance of the Advisory Agreement for the Fund.
8 AIM V.I. Financial Services Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ----------------------------------------------------------------------- COMMON STOCKS-93.41% ASSET MANAGEMENT & CUSTODY BANKS-8.67% Bank of New York Co., Inc. (The) 174,088 $ 6,853,845 ----------------------------------------------------------------------- Federated Investors, Inc.-Class B 109,411 3,695,904 ----------------------------------------------------------------------- State Street Corp. 33,512 2,260,049 ======================================================================= 12,809,798 ======================================================================= CONSUMER FINANCE-5.09% Capital One Financial Corp. 97,897 7,520,448 ======================================================================= DIVERSIFIED BANKS-7.82% Anglo Irish Bank Corp. PLC (Ireland)(a) 95,513 1,980,663 ----------------------------------------------------------------------- U.S. Bancorp 107,657 3,896,107 ----------------------------------------------------------------------- Wachovia Corp. 83,999 4,783,743 ----------------------------------------------------------------------- Wells Fargo & Co. 25,000 889,000 ======================================================================= 11,549,513 ======================================================================= DIVERSIFIED CAPITAL MARKETS-2.03% UBS A.G.-Reg (Switzerland) 49,734 3,000,452 ======================================================================= INSURANCE BROKERS-7.03% Aon Corp. 76,915 2,718,176 ----------------------------------------------------------------------- Marsh & McLennan Cos., Inc. 193,722 5,939,517 ----------------------------------------------------------------------- National Financial Partners Corp. 39,300 1,728,021 ======================================================================= 10,385,714 ======================================================================= INVESTMENT BANKING & BROKERAGE-11.26% Merrill Lynch & Co., Inc. 106,257 9,892,527 ----------------------------------------------------------------------- Morgan Stanley 82,810 6,743,218 ======================================================================= 16,635,745 ======================================================================= LIFE & HEALTH INSURANCE-0.59% Prudential Financial, Inc. 10,120 868,903 ======================================================================= MULTI-LINE INSURANCE-6.50% American International Group, Inc. 23,147 1,658,714 ----------------------------------------------------------------------- Genworth Financial Inc.-Class A 50,277 1,719,976 ----------------------------------------------------------------------- Hartford Financial Services Group, Inc. (The) 66,674 6,221,351 ======================================================================= 9,600,041 =======================================================================
SHARES VALUE -----------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES-16.74% Bank of America Corp. 93,466 $ 4,990,150 ----------------------------------------------------------------------- Citigroup Inc. 169,249 9,427,169 ----------------------------------------------------------------------- JPMorgan Chase & Co. 213,761 10,324,656 ======================================================================= 24,741,975 ======================================================================= PROPERTY & CASUALTY INSURANCE-9.34% ACE Ltd. 98,527 5,967,780 ----------------------------------------------------------------------- MBIA Inc. 54,293 3,966,647 ----------------------------------------------------------------------- Security Capital Assurance Ltd. 79,087 2,200,991 ----------------------------------------------------------------------- St. Paul Travelers Cos., Inc. (The) 30,974 1,662,994 ======================================================================= 13,798,412 ======================================================================= REGIONAL BANKS-6.28% Fifth Third Bancorp 141,625 5,796,711 ----------------------------------------------------------------------- SunTrust Banks, Inc. 25,399 2,144,945 ----------------------------------------------------------------------- Zions Bancorp 16,249 1,339,568 ======================================================================= 9,281,224 ======================================================================= SPECIALIZED CONSUMER SERVICES-1.42% H&R Block, Inc. 91,420 2,106,317 ======================================================================= THRIFTS & MORTGAGE FINANCE-10.64% Fannie Mae 145,728 8,654,786 ----------------------------------------------------------------------- Freddie Mac 76,093 5,166,715 ----------------------------------------------------------------------- Hudson City Bancorp, Inc. 136,946 1,900,810 ======================================================================= 15,722,311 ======================================================================= Total Common Stocks (Cost $106,866,515) 138,020,853 ======================================================================= MONEY MARKET FUNDS-7.89% Liquid Assets Portfolio-Institutional Class(b) 5,826,336 5,826,336 ----------------------------------------------------------------------- Premier Portfolio-Institutional Class(b) 5,826,337 5,826,337 ======================================================================= Total Money Market Funds (Cost $11,652,673) 11,652,673 ======================================================================= TOTAL INVESTMENTS-101.30% (Cost $118,519,188) 149,673,526 ======================================================================= OTHER ASSETS LESS LIABILITIES-(1.30)% (1,917,347) ======================================================================= NET ASSETS-100.00% $147,756,179 _______________________________________________________________________ =======================================================================
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The value of this security at December 31, 2006 represented 1.34% of the Fund's Net Assets. See Note 1A. (b) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Financial Services Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $106,866,515) $138,020,853 ------------------------------------------------------------- Investments in affiliated money market funds (cost $11,652,673) 11,652,673 ============================================================= Total investments (cost $118,519,188) 149,673,526 ============================================================= Receivables for: Fund shares sold 103,673 ------------------------------------------------------------- Dividends 261,953 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 15,712 ============================================================= Total assets 150,054,864 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 1,919,559 ------------------------------------------------------------- Fund shares reacquired 216,227 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 24,360 ------------------------------------------------------------- Accrued administrative services fees 89,125 ------------------------------------------------------------- Accrued distribution fees-Series II 672 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,513 ------------------------------------------------------------- Accrued transfer agent fees 4,209 ------------------------------------------------------------- Accrued operating expenses 41,020 ============================================================= Total liabilities 2,298,685 ============================================================= Net assets applicable to shares outstanding $147,756,179 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $108,481,993 ------------------------------------------------------------- Undistributed net investment income 1,895,827 ------------------------------------------------------------- Undistributed net realized gain from investment securities and foreign currencies 6,224,104 ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 31,154,255 ============================================================= $147,756,179 _____________________________________________________________ ============================================================= NET ASSETS: Series I $146,091,680 _____________________________________________________________ ============================================================= Series II $ 1,664,499 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 8,389,542 _____________________________________________________________ ============================================================= Series II 96,069 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 17.41 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 17.33 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $8,520) $ 3,144,682 ------------------------------------------------------------ Dividends from affiliated money market funds 273,398 ============================================================ Total investment income 3,418,080 ============================================================ EXPENSES: Advisory fees 1,003,239 ------------------------------------------------------------ Administrative services fees 384,973 ------------------------------------------------------------ Custodian fees 17,309 ------------------------------------------------------------ Distribution fees-Series II 831 ------------------------------------------------------------ Transfer agent fees 17,064 ------------------------------------------------------------ Trustees' and officer's fees and benefits 18,237 ------------------------------------------------------------ Other 60,367 ============================================================ Total expenses 1,502,020 ============================================================ Less: Fees waived and expense offset arrangements (3,204) ============================================================ Net expenses 1,498,816 ============================================================ Net investment income 1,919,264 ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain from investment securities 7,599,322 ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities 10,902,715 ------------------------------------------------------------ Foreign currencies (118) ============================================================ 10,902,597 ============================================================ Net gain from investment securities and foreign currencies 18,501,919 ============================================================ Net increase in net assets resulting from operations $20,421,183 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Financial Services Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 1,919,264 $ 2,173,979 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 7,599,322 12,719,470 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities and foreign currencies 10,902,597 (10,553,270) ========================================================================================== Net increase in net assets resulting from operations 20,421,183 4,340,179 ========================================================================================== Distributions to shareholders from net investment income: Series I (2,166,144) (1,893,397) ------------------------------------------------------------------------------------------ Series II (20,378) (135) ========================================================================================== Total distributions from net investment income (2,186,522) (1,893,532) ========================================================================================== Distributions to shareholders from net realized gains: Series I (834,392) -- ------------------------------------------------------------------------------------------ Series II (7,888) -- ========================================================================================== Total distributions from net realized gains (842,280) -- ========================================================================================== Decrease in net assets resulting from distributions (3,028,802) (1,893,532) ========================================================================================== Share transactions-net: Series I (12,475,511) (65,084,200) ------------------------------------------------------------------------------------------ Series II 1,586,646 135 ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (10,888,865) (65,084,065) ========================================================================================== Net increase (decrease) in net assets 6,503,516 (62,637,418) ========================================================================================== NET ASSETS: Beginning of year 141,252,663 203,890,081 ========================================================================================== End of year (including undistributed net investment income of $1,895,827 and $2,163,085, respectively) $147,756,179 $141,252,663 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Financial Services Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Financial Services Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to seek capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Financial Services Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment agreement with A I M Advisors, Inc. ("AIM). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. AIM V.I. Financial Services Fund Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.75% ------------------------------------------------------------------- Next $250 million 0.74% ------------------------------------------------------------------- Next $500 million 0.73% ------------------------------------------------------------------- Next $1.5 billion 0.72% ------------------------------------------------------------------- Next $2.5 billion 0.71% ------------------------------------------------------------------- Next $2.5 billion 0.70% ------------------------------------------------------------------- Next $2.5 billion 0.69% ------------------------------------------------------------------- Over $10 billion 0.68% __________________________________________________________________ ===================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $1,374. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $334,973 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Financial Services Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in an affiliated money market fund. The Fund and the money market fund below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in an affiliated money market fund for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $13,335,822 $ (7,509,486) $ -- $ 5,826,336 $103,450 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 5,064,797 31,630,823 (30,869,283) -- 5,826,337 169,948 -- ================================================================================================================================== Total Investments in Affiliates $5,064,797 $44,966,645 $(38,378,769) $ -- $11,652,673 $273,398 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities purchases of $193,600. NOTE 5-- EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fee. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $1,830. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,248 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. Financial Services Fund NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $2,186,522 $1,893,532 -------------------------------------------------------------------------------------- Long-term capital gain 842,280 -- ====================================================================================== Total distributions $3,028,802 $1,893,532 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 2,157,654 ---------------------------------------------------------------------------- Undistributed long-term gain 6,993,719 ---------------------------------------------------------------------------- Unrealized appreciation -- investments 30,141,984 ---------------------------------------------------------------------------- Temporary book/tax differences (19,027) ---------------------------------------------------------------------------- Post October Currency loss deferral (144) ---------------------------------------------------------------------------- Shares of beneficial interest 108,481,993 ============================================================================ Total net assets $147,756,179 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $(83). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the currency losses deferred, trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $17,747,719 and $34,789,845, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $32,670,067 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (2,528,000) =============================================================================== Net unrealized appreciation of investment securities $30,142,067 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $119,531,459.
AIM V.I. Financial Services Fund NOTE 10--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(A) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 1,717,516 $ 28,153,085 1,679,434 $ 24,855,189 ---------------------------------------------------------------------------------------------------------------------- Series II 94,755 1,577,115 -- -- ====================================================================================================================== Issued as reinvestment of dividends: Series I 175,406 3,000,536 123,028 1,893,397 ---------------------------------------------------------------------------------------------------------------------- Series II 1,660 28,266 9 135 ====================================================================================================================== Reacquired: Series I (2,756,103) (43,629,132) (6,506,406) (91,832,786) ---------------------------------------------------------------------------------------------------------------------- Series II (1,101) (18,735) -- -- ====================================================================================================================== (767,867) $(10,888,865) (4,703,935) $(65,084,065) ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are three entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 79% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, distribution, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 11--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Financial Services Fund NOTE 12--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.26 $ 14.61 $ 13.54 $ 10.50 $ 12.42 ------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.23(a) 0.19(a) 0.15 0.08 0.08 ------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.28 0.66 1.02 3.02 (1.93) =============================================================================================================================== Total from investment operations 2.51 0.85 1.17 3.10 (1.85) =============================================================================================================================== Less distributions: Dividends from net investment income (0.26) (0.20) (0.10) (0.06) (0.07) ------------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.10) -- -- -- -- =============================================================================================================================== Total distributions (0.36) (0.20) (0.10) (0.06) (0.07) =============================================================================================================================== Net asset value, end of period $ 17.41 $ 15.26 $ 14.61 $ 13.54 $ 10.50 _______________________________________________________________________________________________________________________________ =============================================================================================================================== Total return(b) 16.52% 5.84% 8.68% 29.58% (14.90)% _______________________________________________________________________________________________________________________________ =============================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $146,092 $141,241 $203,879 $210,352 $142,403 _______________________________________________________________________________________________________________________________ =============================================================================================================================== Ratio of expenses to average net assets 1.12%(c) 1.12% 1.12% 1.09% 1.09% =============================================================================================================================== Ratio of net investment income to average net assets 1.44%(c) 1.30% 0.89% 0.87% 0.57% _______________________________________________________________________________________________________________________________ =============================================================================================================================== Portfolio turnover rate 14% 22% 67% 65% 72% _______________________________________________________________________________________________________________________________ ===============================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $133,432,989.
SERIES II ------------------------------------------- APRIL 30, 2004 YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO --------------------- DECEMBER 31, 2006 2005 2004 --------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.23 $14.59 $13.50 --------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.20(a) 0.15(a) 0.12 --------------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 2.26 0.67 1.07 ========================================================================================================= Total from investment operations 2.46 0.82 1.19 ========================================================================================================= Less distributions: Dividends from net investment income (0.26) (0.18) (0.10) --------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.10) -- -- ========================================================================================================= Total distributions (0.36) (0.18) (0.10) ========================================================================================================= Net asset value, end of period $17.33 $15.23 $14.59 _________________________________________________________________________________________________________ ========================================================================================================= Total return(b) 16.22% 5.61% 8.85% _________________________________________________________________________________________________________ ========================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $1,664 $ 11 $ 11 _________________________________________________________________________________________________________ ========================================================================================================= Ratio of expenses to average net assets 1.37%(c) 1.37% 1.38%(d) ========================================================================================================= Ratio of net investment income to average net assets 1.19%(c) 1.05% 0.63%(d) _________________________________________________________________________________________________________ ========================================================================================================= Portfolio turnover rate(e) 14% 22% 67% _________________________________________________________________________________________________________ =========================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $332,268. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Financial Services Fund NOTE 13--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -- Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Financial Services Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Financial Services Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Financial Services Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Financial Services Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $842,280 Corporate Dividends Received Deduction* 100%
* The above percentages are based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Financial Services Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Financial Services Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. GLOBAL HEALTH CARE FUND Sectors Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in [COVER GLOBE IMAGE] Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available AIM V.I. GLOBAL HEALTH CARE FUND without charge, upon request, from our seeks capital growth. Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT site. Go to AIMinvestments.com, access IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. GLOBAL HEALTH CARE FUND PERFORMANCE SUMMARY term commercial potential of each company's current and prospective The year ended December 31, 2006, was a difficult one for the health care sector. For products, especially products that fill the year, AIM V.I. Global Health Care Fund fared better than its peer group index but otherwise unfilled market segments. trailed its broad market and style-specific indexes. The Fund underperformed the MSCI World Index --SERVICE MARK-- because the health care sector was one of the weakest We seek to manage risk by generally: performing sectors of the market. The Fund underperformed the MSCI World Health Care Index due primarily to an overweight position in biotechnology stocks and an - Limiting investments in a single stock. underweight position in pharmaceutical stocks relative to the index. - Diversifying across industries. Your Fund's long-term performance appears on pages 4-5. - Monitoring political trends that could FUND VS. INDEXES negatively affect a specific industry. TOTAL RETURNS, 12/31/05 - 12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF We may sell a holding when: VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. - We identify a more attractive investment Series I Shares 5.24% opportunity. Series II Shares 4.96 MSCI World Index (Broad Market Index)(1) 20.07 - We see a deterioration of a company's S&P 500 --REGISTERED TRADEMARK-- Index (Former Broad Market Index) 15.78 fundamentals. MSCI World Health Care Index (Style-Specific Index)(2) 10.47 Goldman Sachs Health Care Index (Former Style-Specific Index) 5.42 - A company fails to capitalize on a Lipper Health/Biotechnology Funds Index (Peer Group Index) 4.80 market opportunity. SOURCE: A I M MANAGEMENT GROUP, INC., LIPPER INC., FACTSET RESEARCH SYSTEMS INC. - A change in management occurs. (1) The Fund has elected to use the MSCI World Index as its broad-based index instead - A stock's price target has been met. of the S&P 500 Index as it better represents the global investments of the Fund. MARKET CONDITIONS AND YOUR FUND (2) The Fund has elected to use the MSCI World Health Care Index as its style-specific index instead of the Goldman Sachs Health Care Index as it better The year started off on a positive note represents the global investments of the Fund. the markets were encouraged by strong economic data. Ben Bernanke took the helm ======================================================================================= as the new chairman of the U.S. Federal Reserve Board (the Fed). However, tensions HOW WE INVEST in the Middle East escalated with the Israel-Lebanon conflict, residential We seek health care stocks of all market We typically invest in four broad segments housing markets showed signs of cooling capitalizations from around the world that of the health care sector: and rising energy prices heightened we believe are attractively priced and pharmaceuticals, biotechnology, medical inflation concerns. These factors led to a have the potential to benefit from technology and health services. We look slight sell-off in the markets mid way long-term earnings and cash flow growth. for companies that are financially healthy through the year, as investors became and, in our opinion, likely to sustain concerned about an economic downturn. This their profitability. We assess the long- affected small-cap stocks more than large-cap stocks, as they are generally more sensitive to signs of economic weakness. However, the markets staged a rally
==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By country 1. Pharmaceuticals 34.4% 1. Roche Holding A.G. (Switzerland) 5.5% United States 72.7% 2. Biotechnology 21.5 2. Novartis A.G.-ADR (Switzerland) 3.7 Switzerland 9.2 3. Health Care Equipment 12.1 3. Johnson & Johnson 3.7 France 3.6 4. Managed Health Care 6.8 4. Pfizer Inc. 3.2 Countries Each With Less 5. Life Sciences Tools & Services 6.2 5. Amgen Inc. 2.8 Than 2.0% of Portfolio 6.5 6. Gilead Sciences, Inc. 2.7 Money Market Funds Plus Total Net Assets $333.16 million 7. Genzyme Corp. 2.6 Other Assets Less Liabilities 8.0 8. Wyeth 2.4 Total Number of Holdings* 95 9. UnitedHealth Group Inc. 2.1 10.Cytyc Corp. 1.8 * Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ===================================================================================================================================
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AIM V.I. GLOBAL HEALTH CARE FUND beginning in August after the Fed held software maker dropped throughout the year Derek M. Taner Chartered interest rates steady after 17 consecutive due to accounting restatements, Securities [TANER Financial Analyst, portfolio increases. Also contributing to the rally Exchange Commission audits, management PHOTO] manager, is manager of AIM was a series of solid economic reports turnover and possible delisting of the V.I. Global Health Care Fund. that indicated the economy, while slowing, security. We sold the position due to Mr. Taner began his investment career in continued to expand, and inflation these developments. 1993 and joined AIM in 2005. He earned a remained within manageable levels. B.S. in accounting and an M.B.A. from the MEDIMMUNE, a biotech firm focused on Haas School of Business at the University Against this backdrop, utilities and treatments related to infectious and of California at Berkeley. telecommunication services were the inflammatory diseases and cancer, also best-performing sectors of the MSCI World detracted from performance over the year. Assisted by the Global Health Care Team Index. The health care sector was one of Shares declined during the third quarter the weakest sectors of the broad market, of 2006 after the company reported a as managed health care and health care decrease in year-over-year revenues, which information technology stocks struggled. were mostly due to increased competition. Pharmaceutical stocks, which comprise We continued to own the stock as the long approximately 60% of the MSCI World Health term fundamentals had not changed. Care Index, were one of the best performing industries in the sector for We maintained our foreign exposure the year, significantly outperforming with moderate weight in Japan, France and biotechnology stocks. Switzerland. During the year, we reduced our Japanese holdings to take profits, and Relative to the style-specific index, we increased our position in the United our overweight position in biotechnology States as we identified attractive buying stocks and underweight position in opportunities domestically. pharmaceutical stocks detracted from performance. On the other hand, the Fund's During the year, we positioned the stock selection in pharmaceuticals and an Fund in anticipation of the impact of the overweight position in life science tools Medicare Modernization Act, as we believed and services stocks were positive this law could have a positive influence contributors to absolute performance. on a number of health care industries. Stocks that enhanced Fund performance IN CLOSING included Shire, a specialty pharmaceutical company focusing on central nervous As always, we thank you for your continued system, gastrointestinal and human genetic investment and welcome any new therapies. In an effort to expand its investors to AIM V.I. Global Health Care product pipeline through in-licensing, Fund. Shire is actively seeking collaborative partnerships for products in its strategic THE VIEWS AND OPINIONS EXPRESSED IN areas of focus in various phases of the MANAGEMENT'S DISCUSSION OF FUND development process. Shire's stock rose in PERFORMANCE ARE THOSE OF A I M ADVISORS, anticipation of a patent settlement for INC. THESE VIEWS AND OPINIONS ARE SUBJECT the company's largest product, attention TO CHANGE AT ANY TIME BASED ON FACTORS deficit hyperactivity disorder (ADHD) SUCH AS MARKET AND ECONOMIC CONDITIONS. medication Adderall XR --REGISTERED THESE VIEWS AND OPINIONS MAY NOT BE RELIED TRADEMARK--, and after the release of UPON AS INVESTMENT ADVICE OR favorable clinical data regarding a new RECOMMENDATIONS, OR AS AN OFFER FOR A ADHD drug. PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF IPSEN, a manufacturer of medical ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR drugs for targeted disease areas of THE FUND. STATEMENTS OF FACT ARE FROM oncology, endocrinology and neuromuscular SOURCES CONSIDERED RELIABLE, BUT A I M disorders, was another strong contributor ADVISORS, INC. MAKES NO REPRESENTATION OR to performance for the year. Shares of the WARRANTY AS TO THEIR COMPLETENESS OR stock appreciated following its initial ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE public offering in December 2005. The IS NO GUARANTEE OF FUTURE RESULTS, THESE stock also benefited from recent favorable INSIGHTS MAY HELP YOU UNDERSTAND OUR clinical data released by the company. INVESTMENT MANAGEMENT PHILOSOPHY. On the other hand, health care FOR A DISCUSSION OF THE RISKS OF INVESTING technology stock MERGE TECHNOLOGIES IN YOUR FUND, INDEXES USED IN THIS REPORT detracted from performance. Shares of the AND YOUR FUND'S LONG-TERM PERFORMANCE, medical imaging PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. GLOBAL HEALTH CARE FUND ========================================== RESTATED HISTORICAL PERFORMANCE OF SERIES INSURANCE FUNDS, IS CURRENTLY OFFERED AVERAGE ANNUAL TOTAL RETURNS I SHARES (FOR PERIODS PRIOR TO INCEPTION THROUGH INSURANCE COMPANIES ISSUING ------------------------------------------ OF SERIES II SHARES) ADJUSTED TO REFLECT VARIABLE PRODUCTS. YOU CANNOT PURCHASE As of 12/31/06 THE RULE 12b-1 FEES APPLICABLE TO SERIES SHARES OF THE FUND DIRECTLY. PERFORMANCE SERIES I SHARES II SHARES. THE INCEPTION DATE OF SERIES I FIGURES GIVEN REPRESENT THE FUND AND ARE Inception (5/21/97) 8.70% SHARES IS MAY 21, 1997. THE PERFORMANCE OF NOT INTENDED TO REFLECT ACTUAL VARIABLE 5 Years 3.40 THE FUND'S SERIES I AND SERIES II SHARE PRODUCT VALUES. THEY DO NOT REFLECT SALES 1 Year 5.24 CLASSES WILL DIFFER PRIMARILY DUE TO CHARGES, EXPENSES AND FEES ASSESSED IN DIFFERENT CLASS EXPENSES. CONNECTION WITH A VARIABLE PRODUCT. SALES SERIES II SHARES CHARGES, EXPENSES AND FEES, WHICH ARE Inception 8.43% THE PERFORMANCE DATA QUOTED REPRESENT DETERMINED BY THE VARIABLE PRODUCT 5 Years 3.13 PAST PERFORMANCE AND CANNOT GUARANTEE ISSUERS, WILL VARY AND WILL LOWER THE 1 Year 4.96 COMPARABLE FUTURE RESULTS; CURRENT TOTAL RETURN. ========================================== PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE CONTACT YOUR VARIABLE PRODUCT ISSUER OR PER NASD REQUIREMENTS, THE MOST ========================================== FINANCIAL ADVISOR FOR THE MOST RECENT RECENT MONTH-END PERFORMANCE DATA AT THE CUMULATIVE TOTAL RETURNS MONTH-END VARIABLE PRODUCT PERFORMANCE. FUND LEVEL,EXCLUDING VARIABLE PRODUCT ------------------------------------------ PERFORMANCE FIGURES REFLECT FUND EXPENSES, CHARGES, IS AVAILABLE ON THIS AIM 6 months ended 12/31/06 REINVESTED DISTRIBUTIONS AND CHANGES IN AUTOMATED INFORMATION LINE, 866-702-4402. Series I Shares 7.12% NET ASSET VALUE. INVESTMENT RETURN AND AS MENTIONED ABOVE, FOR THE MOST RECENT Series II Shares 6.96 PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MONTH-END PERFORMANCE INCLUDING VARIABLE ========================================== MAY HAVE A GAIN OR LOSS WHEN YOU SELL PRODUCT CHARGES, PLEASE CONTACT YOUR SHARES. VARIABLE PRODUCT ISSUER OR FINANCIAL SERIES II SHARES' INCEPTION DATE IS APRIL ADVISOR. 30, 2004. RETURNS SINCE THAT DATE ARE AIM V.I. GLOBAL HEALTH CARE FUND, A HISTORICAL. ALL OTHER RETURNS ARE THE SERIES PORTFOLIO OF AIM VARIABLE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND or declares bankruptcy, the Fund may fall more than the value of shares of a experience delays in selling the fund that invests more broadly. Prices of equity securities change in securities underlying the repurchase response to many factors including the agreement. ABOUT INDEXES USED IN THIS REPORT historical and prospective earnings of the issuer, the value of its assets, general There is no guarantee that the The unmanaged MSCI WORLD INDEX is a economic conditions, interest rates, investment techniques and risk analyses group of global securities tracked by investor perceptions and market liquidity. used by the Fund's portfolio managers will Morgan Stanley Capital International. produce the desired results. The value of convertible securities The unmanaged STANDARD & POOR'S in which the Fund invests may be affected The Fund invests in synthetic COMPOSITE INDEX OF 500 STOCKS (the S&P 500 by market interest rates, the risk that instruments, the value of which may not Index) is an index of common stocks the issuer may default on interest or correlate perfectly with the overall frequently used as a general measure of principal payments and the value of the securities markets. Rising interest rates U.S. stock market performance. underlying common stock into which these and market price fluctuations will affect securities may be converted. the performance of the Fund's investments The unmanaged MSCI WORLD HEALTH CARE in synthetic instruments. Also, synthetic INDEX, a subset of the MSCI World Index, Foreign securities have additional instruments are subject to counter party includes health care securities from risks, including exchange rate changes, risk--the risk that the other party in developed countries. The unmanaged MSCI political and economic upheaval, the the transaction will not fulfill its World Index tracks the performance of relative lack of information about these contractual obligation to complete the approximately 50 countries covered by companies, relatively low market liquidity transaction with the Fund. Morgan Stanley Capital International that and the potential lack of strict financial are considered developed markets. and accounting controls and standards. The value of the Fund's shares is particularly vulnerable to factors The unmanaged GOLDMAN SACHS HEALTH Investing in emerging markets affecting the health care industry, such CARE INDEX is a modified involves greater risk than investing in as substantial government regulation. capitalization-weighted index designed as more established markets. The risks Government regulation may impact the a benchmark for U.S. traded securities in include the relatively smaller size and demand for products and services offered the health care sector. The index includes lesser liquidity of these markets, high by health care companies. Also, the companies in the following categories: inflation rates, adverse political products and services offered by health providers of health care related services, developments and lack of timely care companies may be subject to rapid researchers, manufacturers, and information. obsolescence caused by scientific advances distributors and technological innovations. These If the seller of a repurchase factors can cause the Fund's shares to agreement in which the Fund invests rise and defaults on its obligation Continued on page 5
4
AIM V.I. GLOBAL HEALTH CARE FUND Past performance cannot guarantee of charts in illustrating changes in value each segment represents a doubling, or comparable future results. during the early years shown in the chart. 100% change, in the value of the The vertical axis, the one that indicates investment. In other words, the space This chart, which is a logarithmic the dollar value of an investment, is between $5,000 and $10,000 is the same chart, presents the fluctuations in the constructed with each segment representing size as the space between $10,000 and value of the Fund and its indexes. We a percent change in the value of the $20,000, and so on. believe that a logarithmic chart is more investment. In this chart, effective than other types ==================================================================================================================================== Continued from page 4 of pharmaceuticals, drugs and related performance of the Fund may deviate product issuer charges. If such charges sciences, and medical supplies, significantly from the performance of the were included, the total returns would be instruments and products. indexes. lower. The unmanaged LIPPER HEALTH/ A direct investment cannot be made in Industry classifications used in this BIOTECHNOLOGY FUNDS INDEX represents an an index. Unless otherwise indicated, report are generally according to the average of the 30 largest health and index results include reinvested Global Industry Classification Standard, biotechnology funds tracked by Lipper dividends, and they do not reflect sales which was developed by and is the Inc., an independent mutual fund charges. Performance of an index of funds exclusive property and a service mark of performance monitor. reflects fund expenses; performance of a Morgan Stanley Capital International Inc. market index does not. and Standard & Poor's. In conjunction with the annual prospectus update on or about May 1, 2007, OTHER INFORMATION The Chartered Financial Analyst the AIM V.I. Global Health Care Fund --Registered Trademark-- (CFA --Registered prospectus will be amended to reflect that The returns shown in management's Trademark--) designation is a globally the Fund has elected to use the Lipper discussion of Fund performance are based recognized standard for measuring the Variable Underlying Funds (VUF) on net asset values calculated for competence and integrity of investment Health/Biotechnology Funds Category shareholder transactions. Generally professionals. Average as its peer group index rather accepted accounting principles require than the Lipper Health/Biotechnology Funds adjustments to be made to the net assets Index. The Lipper VUF of the Fund at period end for financial Health/Bio-technology Funds Category reporting purposes, and as such, the net Average, recently published by Lipper asset values for shareholder transactions Inc., comprises the largest underlying and the returns based on those net asset funds in each variable insurance category values may differ from the net asset and does not include mortality and expense values and returns reported in the fees. Financial Highlights. Additionally, the returns and net asset values shown The Fund is not managed to track the throughout this report are at the Fund performance of any particular index, level only and do not include variable including the indexes defined here, and consequently, the
5
==================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund data from 5/21/97, index data from 5/31/97 AIM V.I. LIPPER GLOBAL HEALTH CARE FUND GOLDMAN SACHS HEALTH/BIOTECHNOLOGY FUNDS DATE -SERIES I SHARES S&P 500 INDEX MSCI WORLD INDEX HEALTH CARE INDEX INDEX -------------------------------------------------------------------------------------------------------------------------- 5/21/97 $ 10000 5/97 10000 $ 10000 $ 10000 $ 10000 $ 10000 6/97 10000 10445 10497 10781 10505 7/97 9930 11275 10979 11118 10848 8/97 10250 10644 10243 10491 10556 9/97 10610 11227 10797 11066 11402 10/97 10610 10852 10227 10932 11117 11/97 10910 11354 10407 11344 11199 12/97 11040 11549 10532 11676 11252 1/98 11589 11677 10823 12216 11486 2/98 12049 12518 11554 13007 12130 3/98 12699 13159 12040 13598 12586 4/98 12999 13294 12156 13955 12678 5/98 12909 13066 12002 13730 12309 6/98 13629 13596 12285 14519 12666 7/98 13639 13452 12263 14527 12524 8/98 12289 11509 10626 12614 10696 9/98 13618 12247 10812 14036 12007 10/98 14068 13241 11788 14664 12466 11/98 14798 14043 12487 15447 13110 12/98 15768 14852 13095 16376 14177 1/99 15871 15473 13380 16316 14409 2/99 15623 14992 13022 16114 14036 3/99 15984 15592 13562 16606 14396 4/99 15108 16196 14095 15833 13698 5/99 14531 15813 13578 15567 13625 6/99 15108 16689 14209 16225 14286 7/99 14830 16170 14165 15719 14303 8/99 15367 16090 14138 16024 14695 9/99 14428 15649 13999 14595 13634 10/99 15171 16639 14724 15660 14280 11/99 15514 16977 15137 16123 14881 12/99 16536 17976 16360 15713 15644 1/00 17507 17073 15421 16735 16761 2/00 21068 16750 15461 16680 19085 3/00 17187 18388 16528 16567 17120 4/00 16309 17835 15827 17307 16945 5/00 16433 17469 15424 17984 17252 6/00 19664 17899 15942 19941 20199 7/00 18435 17620 15491 19267 19575 8/00 21056 18713 15993 19964 21330 9/00 22180 17726 15141 20844 22265 10/00 21892 17650 14885 21347 21988 11/00 20386 16260 13980 21648 21314 12/00 21587 16340 14204 22431 22477 1/01 19385 16919 14478 20360 20619 2/01 19301 15377 13252 20264 20411 3/01 16956 14404 12380 18457 18090 4/01 18279 15522 13292 19056 19494 5/01 18941 15626 13119 19687 20230 6/01 18961 15246 12706 19188 20485 7/01 18620 15096 12536 19717 19855 8/01 18454 14152 11933 19212 19585 9/01 17803 13009 10880 19063 18528 10/01 18547 13257 11088 19091 19148 11/01 19415 14274 11742 20111 20111 12/01 18868 14399 11814 19731 20125 1/02 17934 14189 11455 18991 18927 2/02 17571 13916 11355 19106 18315 3/02 17821 14439 11877 19344 18824 4/02 17229 13564 11452 18135 17871 5/02 17064 13464 11471 17781 17350 6/02 16059 12506 10773 16089 15944 7/02 15156 11531 9864 15737 15361 8/02 15062 11607 9881 15850 15164 9/02 15031 10346 8793 15003 14654 10/02 15092 11256 9441 15699 15197 11/02 14553 11918 9948 16137 15459 12/02 14252 11218 9465 15579 14851 1/03 14160 10925 9177 15589 14794 2/03 13932 10761 9016 15320 14469 3/03 14553 10865 8986 15786 14985 4/03 15227 11759 9783 16513 15731 5/03 15807 12378 10339 17282 17074 ==================================================================================================================================== SOURCES: A I M MANAGEMENT GROUP INC., LIPPER INC., FACTSET RESEARCH SYSTEMS INC.
==================================================================================================================================== [MOUNTAIN CHART] 6/03 16532 12536 10517 18024 17474 7/03 16605 12758 10729 18094 18068 8/03 16212 13006 10960 17699 17836 9/03 16346 12868 11026 17725 17911 10/03 16855 13596 11679 17900 18151 11/03 17497 13715 11856 18224 18640 12/03 18212 14434 12598 19196 19385 1/04 18886 14699 12801 19760 20219 2/04 19156 14903 13015 20032 20475 3/04 18938 14678 12929 19453 20396 4/04 18855 14448 12664 20147 20726 5/04 18834 14646 12770 20120 20641 6/04 18949 14931 13042 20116 20702 7/04 17715 14437 12616 18857 19225 8/04 17882 14495 12671 19090 19369 9/04 18078 14652 12911 19037 19886 10/04 17975 14875 13227 18593 19533 11/04 18182 15477 13922 19069 20303 12/04 19591 16004 14453 20399 21660 1/05 18896 15614 14128 19780 20923 2/05 18875 15942 14575 20306 20827 3/05 18397 15660 14294 20324 20442 4/05 18728 15363 13981 21129 20995 5/05 19215 15851 14229 21517 21588 6/05 19360 15874 14352 21613 21920 7/05 20345 16464 14854 22361 23162 8/05 20717 16314 14966 22459 23416 9/05 20883 16446 15354 22313 23630 10/05 20376 16172 14982 21862 23080 11/05 20812 16783 15481 22332 23710 12/05 21184 16789 15824 22870 24146 1/06 22065 17233 16531 23145 24914 2/06 22365 17280 16506 23323 25220 3/06 22263 17495 16869 23060 25057 4/06 21619 17730 17381 22333 24193 5/06 20914 17220 16787 21937 23362 6/06 20810 17243 16783 21947 23408 7/06 21049 17349 16887 22865 23704 8/06 21765 17761 17326 23466 24410 9/06 21795 18219 17532 23699 24443 10/06 22107 18812 18176 23849 25091 11/06 22242 19169 18621 23814 25179 12/06 22304 19438 18999 24111 25304 ====================================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. GLOBAL HEALTH CARE FUND EXAMPLE ACTUAL EXPENSES 5% per year before expenses, which is not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information about actual cumulative total returns at net ongoing costs, including management fees; actual account values and actual expenses. asset value after expenses for the six distribution and/or service (12b-1) fees; You may use the information in this table, months ended December 31, 2006, appear in and other Fund expenses. This example is together with the amount you invested, to the table "Cumulative Total Returns" on intended to help you understand your estimate the expenses that you paid over page 4. ongoing costs (in dollars) of investing in the period. Simply divide your account the Fund and to compare these costs with value by $1,000 (for example, an $8,600 The hypothetical account values and ongoing costs of investing in other mutual account value divided by $1,000 = 8.6), expenses may not be used to estimate the funds. The example is based on an then multiply the result by the number in actual ending account balance or expenses investment of $1,000 invested at the the table under the heading entitled you paid for the period. You may use this beginning of the period and held for the "Actual Expenses Paid During Period" to information to compare the ongoing costs entire period July 1, 2006, through estimate the expenses you paid on your of investing in the Fund and other funds. December 31, 2006. account during this period. To do so, compare this 5% hypothetical example with the 5% hypothetical examples The actual and hypothetical expenses HYPOTHETICAL EXAMPLE FOR COMPARISON that appear in the shareholder reports of in the examples below do not represent the PURPOSES the other funds. effect of any fees or other expenses assessed in connection with a variable The table below also provides information Please note that the expenses shown product; if they did, the expenses shown about hypothetical account values and in the table are meant to highlight your would be higher while the ending account hypothetical expenses based on the Fund's ongoing costs. Therefore, the hypothetical values shown would be lower. actual expense ratio and an assumed rate information is useful in comparing ongoing of return of costs, and will not help you determine the relative total costs of owning different funds.
==================================================================================================================================== HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD (2) (12/31/06) PERIOD (2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ Series I $ 1,000.00 $ 1,071.20 $ 5.69 $ 1,019.71 $ 5.55 1.09% Series II 1,000.00 1,069.60 6.99 1,018.45 6.82 1.34 ===================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. GLOBAL HEALTH CARE FUND The Board of Trustees of AIM Variable on such review, the Board concluded that under-performance. Based on this review Insurance Funds (the "Board") oversees the the range of services to be provided by and after taking account of all of the management of AIM V.I. Global Health Care AIM under the Advisory Agreement was other factors that the Board considered in Fund (the "Fund") and, as required by law, appropriate and that AIM currently is determining whether to continue the determines annually whether to approve the providing services in accordance with the Advisory Agreement for the Fund, the Board continuance of the Fund's advisory terms of the Advisory Agreement. concluded that no changes should be made agreement with A I M Advisors, Inc. to the Fund and that it was not necessary ("AIM"). Based upon the recommendation of - The quality of services to be provided to change the Fund's portfolio management the Investments Committee of the Board, at by AIM. The Board reviewed the credentials team at this time. Although the a meeting held on June 27, 2006, the and experience of the officers and independent written evaluation of the Board, including all of the independent employees of AIM who will provide Fund's Senior Officer (discussed below) trustees, approved the continuance of the investment advisory services to the Fund. only considered Fund performance through advisory agreement (the "Advisory In reviewing the qualifications of AIM to the most recent calendar year, the Board Agreement") between the Fund and AIM for provide investment advisory services, the also reviewed more recent Fund another year, effective July 1, 2006. Board considered such issues as AIM's performance, which did not change their portfolio and product review process, conclusions. The Board considered the factors various back office support functions discussed below in evaluating the fairness provided by AIM and AIM's equity and fixed - Meetings with the Fund's portfolio and reasonableness of the Advisory income trading operations. Based on the managers and investment personnel. With Agreement at the meeting on June 27, 2006 review of these and other factors, the respect to the Fund, the Board is meeting and as part of the Board's ongoing Board concluded that the quality of periodically with such Fund's portfolio oversight of the Fund. In their services to be provided by AIM was managers and/or other investment personnel deliberations, the Board and the appropriate and that AIM currently is and believes that such individuals are independent trustees did not identify any providing satisfactory services in competent and able to continue to carry particular factor that was controlling, accordance with the terms of the Advisory out their responsibilities under the and each trustee attributed different Agreement. Advisory Agreement. weights to the various factors. - The performance of the Fund relative to - Overall performance of AIM. The Board One responsibility of the independent comparable funds. The Board reviewed the considered the overall performance of AIM Senior Officer of the Fund is to manage performance of the Fund during the past in providing investment advisory and the process by which the Fund's proposed one and three calendar years against the portfolio administrative services to the management fees are negotiated to ensure performance of funds advised by other Fund and concluded that such performance that they are negotiated in a manner which advisors with investment strategies was satisfactory. is at arms' length and reasonable. To that comparable to those of the Fund. The Board end, the Senior Officer must either noted that the Fund's performance in such - Fees relative to those of clients of AIM supervise a competitive bidding process or periods was below the median performance with comparable investment strategies. The prepare an independent written evaluation. of such comparable funds. The Board also Board reviewed the effective advisory fee The Senior Officer has recommended an noted that AIM began serving as investment rate (before waivers) for the Fund under independent written evaluation in lieu of advisor to the Fund in April 2004. The the Advisory Agreement. The Board noted a competitive bidding process and, upon Board noted that AIM has recently made that this rate was (i) above the effective the direction of the Board, has prepared changes to the Fund's portfolio management advisory fee rate (before waivers) for one such an independent written evaluation. team, which need more time to be evaluated mutual fund advised by AIM with investment Such written evaluation also considered before a conclusion can be made that the strategies comparable to those of the certain of the factors discussed below. In changes have addressed the Fund's Fund; (ii) the same as the effective addition, as discussed below, the Senior under-performance. Based on this review advisory fee rates (before waivers) for Officer made a recommendation to the Board and after taking account of all of the three variable insurance funds advised by in connection with such written other factors that the Board considered in AIM and offered to insurance company evaluation. determining whether to continue the separate accounts with investment Advisory Agreement for the Fund, the Board strategies comparable to those of the The discussion below serves as a concluded that no changes should be made Fund; and (iii) above the effective summary of the Senior Officer's to the Fund and that it was not necessary sub-advisory fee rates for two offshore independent written evaluation and to change the Fund's portfolio management funds advised and sub-advised by AIM recommendation to the Board in connection team at this time. Although the affiliates with investment strategies therewith, as well as a discussion of the independent written evaluation of the comparable to those of the Fund, although material factors and the conclusions with Fund's Senior Officer (discussed below) the total advisory fees for one such respect thereto that formed the basis for only considered Fund performance through offshore fund were above those for the the Board's approval of the Advisory the most recent calendar year, the Board Fund and the total advisory fees for the Agreement. After consideration of all of also reviewed more recent Fund other offshore fund were comparable to the factors below and based on its performance, which did not change their those for the Fund. The Board noted that informed business judgment, the Board conclusions. AIM has agreed to waive advisory fees of determined that the Advisory Agreement is the Fund and to limit the Fund's total in the best interests of the Fund and its - The performance of the Fund relative to operating expenses, as discussed below. shareholders and that the compensation to indices. The Board reviewed the Based on this review, the Board concluded AIM under the Advisory Agreement is fair performance of the Fund during the past that the advisory fee rate for the Fund and reasonable and would have been one, three and five calendar years against under the Advisory Agreement was fair and obtained through arm's length the performance of the Lipper reasonable. negotiations. Health/Biotech Fund Index. The Board noted that the Fund's performance in such - Fees relative to those of comparable Unless otherwise stated, information periods was below the performance of such funds with other advisors. The Board presented below is as of June 27, 2006 and Index. The Board also noted that AIM began reviewed the advisory fee rate for the does not reflect any changes that may have serving as investment advisor to the Fund Fund under the Advisory Agreement. The occurred since June 27, 2006, including in April 2004. The Board noted that AIM Board compared effective contractual but not limited to changes to the Fund's has recently made changes to the Fund's advisory fee rates at a common asset level performance, advisory fees, expense portfolio management team, which need more at the end of the past calendar year and limitations and/or fee waivers. time to be evaluated before a conclusion noted that the Fund's rate was comparable can be made that the changes have to the median rate of the funds advised by - The nature and extent of the advisory addressed the Fund's other advisors with investment strategies services to be provided by AIM. The Board comparable to those of the reviewed the services to be provided by AIM under the Advisory Agreement. Based (continued)
7
AIM V.I. GLOBAL HEALTH CARE FUND Fund that the Board reviewed. The Board the Fund may be invested in money market - Benefits of soft dollars to AIM. The noted that AIM has agreed to waive funds advised by AIM pursuant to the terms Board considered the benefits realized by advisory fees of the Fund and to limit the of an SEC exemptive order. The Board found AIM as a result of brokerage transactions Fund's total operating expenses, as that the Fund may realize certain benefits executed through "soft dollar" discussed below. Based on this review, the upon investing cash balances in AIM arrangements. Under these arrangements, Board concluded that the advisory fee rate advised money market funds, including a brokerage commissions paid by the Fund for the Fund under the Advisory Agreement higher net return, increased liquidity, and/or other funds advised by AIM are used was fair and reasonable. increased diversification or decreased to pay for research and execution transaction costs. The Board also found services. This research may be used by AIM - Expense limitations and fee waivers. The that the Fund will not receive reduced in making investment decisions for the Board noted that AIM has contractually services if it invests its cash balances Fund. The Board concluded that such agreed to waive advisory fees of the Fund in such money market funds. The Board arrangements were appropriate. through April 30, 2008 to the extent noted that, to the extent the Fund invests necessary so that the advisory fees uninvested cash in affiliated money market - AIM's financial soundness in light of payable by the Fund do not exceed a funds, AIM has voluntarily agreed to waive the Fund's needs. The Board considered specified maximum advisory fee rate, which a portion of the advisory fees it receives whether AIM is financially sound and has maximum rate includes breakpoints and is from the Fund attributable to such the resources necessary to perform its based on net asset levels. The Board investment. The Board further determined obligations under the Advisory Agreement, considered the contractual nature of this that the proposed securities lending and concluded that AIM has the financial fee waiver and noted that it remains in program and related procedures with resources necessary to fulfill its effect until April 30, 2008. The Board respect to the lending Fund is in the best obligations under the Advisory Agreement. also noted that AIM has contractually interests of the lending Fund and its agreed to waive fees and/or limit expenses respective shareholders. The Board - Historical relationship between the Fund of the Fund through April 30, 2008 so that therefore concluded that the investment of and AIM. In determining whether to total annual operating expenses are cash collateral received in connection continue the Advisory Agreement for the limited to a specified percentage of with the securities lending program in the Fund, the Board also considered the prior average daily net assets for each class of money market funds according to the relationship between AIM and the Fund, as the Fund. The Board considered the procedures is in the best interests of the well as the Board's knowledge of AIM's contractual nature of this fee lending Fund and its respective operations, and concluded that it was waiver/expense limitation and noted that shareholders. beneficial to maintain the current it remains in effect until April 30, 2008. relationship, in part, because of such The Board considered the effect these fee - Independent written evaluation and knowledge. The Board also reviewed the waivers/expense limitations would have on recommendations of the Fund's Senior general nature of the non-investment the Fund's estimated expenses and Officer. The Board noted that, upon their advisory services currently performed by concluded that the levels of fee direction, the independent Senior Vice AIM and its affiliates, such as waivers/expense limitations for the Fund President of the Fund had prepared an administrative, transfer agency and were fair and reasonable. independent written evaluation in order to distribution services, and the fees assist the Board in determining the received by AIM and its affiliates for - Breakpoints and economies of scale. The reasonableness of the proposed management performing such services. In addition to Board reviewed the structure of the Fund's fees of the AIM Funds, including the Fund. reviewing such services, the trustees also advisory fee under the Advisory Agreement, The Board noted that the Senior Vice considered the organizational structure noting that it does not include any President's written evaluation had been employed by AIM and its affiliates to breakpoints. The Board considered whether relied upon by the Board in this regard in provide those services. Based on the it would be appropriate to add advisory lieu of a competitive bidding process. In review of these and other factors, the fee breakpoints for the Fund or whether, determining whether to continue the Board concluded that AIM and its due to the nature of the Fund and the Advisory Agreement for the Fund, the Board affiliates were qualified to continue to advisory fee structures of comparable considered the Senior Vice President's provide non-investment advisory services funds, it was reasonable to structure the written evaluation and the recommendation to the Fund, including administrative, advisory fee without breakpoints. Based on made by the Senior Vice President to the transfer agency and distribution services, this review, the Board concluded that it Board that the Board consider whether the and that AIM and its affiliates currently was not necessary to add advisory fee advisory fee waivers for certain equity are providing satisfactory non-investment breakpoints to the Fund's advisory fee AIM Funds, including the Fund, should be advisory services. schedule. The Board reviewed the level of simplified. The Board concluded that it the Fund's advisory fees, and noted that would be advisable to consider this issue - Other factors and current trends. The such fees, as a percentage of the Fund's and reach a decision prior to the Board considered the steps that AIM and net assets, would remain constant under expiration date of such advisory fee its affiliates have taken over the last the Advisory Agreement because the waivers. several years, and continue to take, in Advisory Agreement does not include any order to improve the quality and breakpoints. The Board noted that AIM has - Profitability of AIM and its affiliates. efficiency of the services they provide to contractually agreed to waive advisory The Board reviewed information concerning the Funds in the areas of investment fees of the Fund through April 30, 2008 to the profitability of AIM's (and its performance, product line diversification, the extent necessary so that the advisory affiliates') investment advisory and other distribution, fund operations, shareholder fees payable by the Fund do not exceed a activities and its financial condition. services and compliance. The Board specified maximum advisory fee rate, which The Board considered the overall concluded that these steps taken by AIM maximum rate includes breakpoints and is profitability of AIM, as well as the have improved, and are likely to continue based on net asset levels. The Board profitability of AIM in connection with to improve, the quality and efficiency of concluded that the Fund's fee levels under managing the Fund. The Board noted that the services AIM and its affiliates the Advisory Agreement therefore would not AIM's operations remain profitable, provide to the Fund in each of these reflect economies of scale, although the although increased expenses in recent areas, and support the Board's approval of advisory fee waiver reflects economies of years have reduced AIM's profitability. the continuance of the Advisory Agreement scale. Based on the review of the profitability for the Fund. of AIM's and its affiliates' investment - Investments in affiliated money market advisory and other activities and its funds. The Board also took into account financial condition, the Board concluded the fact that uninvested cash and cash that the compensation to be paid by the collateral from securities lending Fund to AIM under its Advisory Agreement arrangements, if any (collectively, "cash was not excessive. balances") of
8 AIM V.I. Global Health Care Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ------------------------------------------------------------------------ DOMESTIC COMMON STOCKS-72.70% BIOTECHNOLOGY-21.24% Affymax Inc.(a)(b) 14,782 $ 503,179 ------------------------------------------------------------------------ Altus Pharmaceuticals Inc.(b) 33,800 637,130 ------------------------------------------------------------------------ Amgen Inc.(b) 138,050 9,430,196 ------------------------------------------------------------------------ Arena Pharmaceuticals, Inc.(a)(b) 52,812 681,803 ------------------------------------------------------------------------ Array BioPharma Inc.(b) 62,960 813,443 ------------------------------------------------------------------------ Biogen Idec Inc.(b) 81,693 4,018,479 ------------------------------------------------------------------------ BioMarin Pharmaceutical Inc.(b) 142,796 2,340,426 ------------------------------------------------------------------------ Celgene Corp.(b) 34,423 1,980,355 ------------------------------------------------------------------------ Cubist Pharmaceuticals, Inc.(b) 91,410 1,655,435 ------------------------------------------------------------------------ Genentech, Inc.(b) 38,820 3,149,467 ------------------------------------------------------------------------ Genzyme Corp.(b) 142,398 8,768,869 ------------------------------------------------------------------------ Gilead Sciences, Inc.(b) 136,179 8,842,103 ------------------------------------------------------------------------ Human Genome Sciences, Inc.(a)(b) 134,542 1,673,703 ------------------------------------------------------------------------ Incyte Corp.(b) 141,823 828,246 ------------------------------------------------------------------------ InterMune, Inc.(a)(b) 38,641 1,188,211 ------------------------------------------------------------------------ Keryx Biopharmaceuticals, Inc.(b) 54,984 731,287 ------------------------------------------------------------------------ Mannkind Corp.(a)(b) 85,505 1,409,977 ------------------------------------------------------------------------ Medarex, Inc.(b) 88,233 1,304,966 ------------------------------------------------------------------------ MedImmune, Inc.(b) 148,066 4,792,896 ------------------------------------------------------------------------ Myriad Genetics, Inc.(b) 33,198 1,039,097 ------------------------------------------------------------------------ Nuvelo, Inc.(b) 44,477 177,908 ------------------------------------------------------------------------ Onyx Pharmaceuticals, Inc.(a)(b) 68,070 720,181 ------------------------------------------------------------------------ OSI Pharmaceuticals, Inc.(b) 20,342 711,563 ------------------------------------------------------------------------ Panacos Pharmaceuticals Inc.(b) 127,437 511,022 ------------------------------------------------------------------------ PDL BioPharma Inc.(b) 131,991 2,658,299 ------------------------------------------------------------------------ Theravance, Inc.(b) 28,491 880,087 ------------------------------------------------------------------------ United Therapeutics Corp.(b) 61,733 3,356,423 ------------------------------------------------------------------------ Vanda Pharmaceuticals Inc.(b) 32,492 800,928 ------------------------------------------------------------------------ Vertex Pharmaceuticals Inc.(b) 61,133 2,287,597 ------------------------------------------------------------------------ ZymoGenetics, Inc.(b) 184,386 2,870,890 ======================================================================== 70,764,166 ======================================================================== DRUG RETAIL-0.77% CVS Corp. 82,593 2,552,950 ======================================================================== HEALTH CARE DISTRIBUTORS-0.68% PSS World Medical, Inc.(b) 116,840 2,281,885 ========================================================================
SHARES VALUE ------------------------------------------------------------------------
HEALTH CARE EQUIPMENT-12.12% Baxter International Inc. 74,939 $ 3,476,420 ------------------------------------------------------------------------ Cytyc Corp.(b) 216,743 6,133,827 ------------------------------------------------------------------------ Dexcom Inc.(a)(b) 172,706 1,702,881 ------------------------------------------------------------------------ Hospira, Inc.(b) 121,433 4,077,720 ------------------------------------------------------------------------ Mentor Corp.(a) 101,450 4,957,862 ------------------------------------------------------------------------ NxStage Medical, Inc.(a)(b) 170,216 1,426,410 ------------------------------------------------------------------------ Respironics, Inc.(b) 138,674 5,234,943 ------------------------------------------------------------------------ St. Jude Medical, Inc.(b) 122,115 4,464,524 ------------------------------------------------------------------------ Thoratec Corp.(b) 166,997 2,935,807 ------------------------------------------------------------------------ Varian Medical Systems, Inc.(b) 50,922 2,422,360 ------------------------------------------------------------------------ Zimmer Holdings, Inc.(b) 45,033 3,529,687 ======================================================================== 40,362,441 ======================================================================== HEALTH CARE FACILITIES-0.46% Assisted Living Concepts Inc. - Class A(b) 153,586 1,518,966 ======================================================================== HEALTH CARE SERVICES-5.67% Caremark Rx, Inc. 50,333 2,874,518 ------------------------------------------------------------------------ DaVita, Inc.(b) 96,752 5,503,254 ------------------------------------------------------------------------ Express Scripts, Inc.(b) 59,605 4,267,718 ------------------------------------------------------------------------ HMS Holdings Corp.(b) 149,084 2,258,622 ------------------------------------------------------------------------ Omnicare, Inc. 35,971 1,389,560 ------------------------------------------------------------------------ Quest Diagnostics Inc. 49,061 2,600,233 ======================================================================== 18,893,905 ======================================================================== HEALTH CARE SUPPLIES-0.45% Cooper Cos., Inc. (The) 33,664 1,498,048 ======================================================================== HEALTH CARE TECHNOLOGY-1.54% Eclipsys Corp.(b) 108,137 2,223,297 ------------------------------------------------------------------------ TriZetto Group, Inc. (The)(b) 65,202 1,197,761 ------------------------------------------------------------------------ Vital Images, Inc.(b) 49,327 1,716,579 ======================================================================== 5,137,637 ======================================================================== INDUSTRIAL CONGLOMERATES-1.53% Tyco International Ltd. 167,926 5,104,950 ======================================================================== LIFE SCIENCES TOOLS & SERVICES-5.44% Charles River Laboratories International, Inc.(b) 73,508 3,179,221 ------------------------------------------------------------------------ Dionex Corp.(b) 9,199 521,675 ------------------------------------------------------------------------ Invitrogen Corp.(b) 72,651 4,111,320 ------------------------------------------------------------------------ Millipore Corp.(b) 3,436 228,838 ------------------------------------------------------------------------
AIM V.I. Global Health Care Fund
SHARES VALUE ------------------------------------------------------------------------ LIFE SCIENCES TOOLS & SERVICES-(CONTINUED) Pharmaceutical Product Development, Inc. 157,002 $ 5,058,604 ------------------------------------------------------------------------ Thermo Fisher Scientific, Inc.(b) 87,364 3,956,716 ------------------------------------------------------------------------ Varian Inc.(b) 24,138 1,081,141 ======================================================================== 18,137,515 ======================================================================== MANAGED HEALTH CARE-6.78% Aetna Inc. 60,650 2,618,867 ------------------------------------------------------------------------ Aveta, Inc. (Acquired 12/21/05; Cost $1,655,802)(b)(c)(d) 122,652 2,085,084 ------------------------------------------------------------------------ Coventry Health Care, Inc.(b) 60,466 3,026,323 ------------------------------------------------------------------------ Health Net Inc.(b) 108,340 5,271,824 ------------------------------------------------------------------------ UnitedHealth Group Inc. 128,368 6,897,213 ------------------------------------------------------------------------ WellPoint Inc.(b) 34,069 2,680,890 ======================================================================== 22,580,201 ======================================================================== PHARMACEUTICALS-16.02% Adolor Corp.(b) 103,443 777,891 ------------------------------------------------------------------------ Allergan, Inc. 44,771 5,360,880 ------------------------------------------------------------------------ Cadence Pharmaceuticals, Inc.(a)(b) 81,101 999,164 ------------------------------------------------------------------------ Cypress Bioscience, Inc.(b) 101,378 785,680 ------------------------------------------------------------------------ Endo Pharmaceuticals Holdings Inc.(b) 50,185 1,384,102 ------------------------------------------------------------------------ Forest Laboratories, Inc.(b) 65,462 3,312,377 ------------------------------------------------------------------------ Johnson & Johnson 184,261 12,164,911 ------------------------------------------------------------------------ Lilly (Eli) and Co. 53,720 2,798,812 ------------------------------------------------------------------------ Medicines Co. (The)(b) 45,241 1,435,045 ------------------------------------------------------------------------ Pfizer Inc. 416,956 10,799,160 ------------------------------------------------------------------------ POZEN Inc.(b) 48,279 820,260 ------------------------------------------------------------------------ Sepracor Inc.(b) 31,866 1,962,308 ------------------------------------------------------------------------ Warner Chilcott Ltd.-Class A(b) 152,941 2,113,645 ------------------------------------------------------------------------ Wyeth 154,645 7,874,523 ------------------------------------------------------------------------ Xenoport Inc.(b) 32,143 789,111 ======================================================================== 53,377,869 ======================================================================== Total Domestic Common Stocks (Cost $226,287,353) 242,210,533 ========================================================================
SHARES VALUE ------------------------------------------------------------------------
FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-19.39% AUSTRALIA-0.27% CSL Ltd. (Biotechnology)(e) 17,434 $ 896,527 ======================================================================== CANADA-1.15% Cardiome Pharma Corp. (Pharmaceuticals)(b) 113,015 1,260,117 ------------------------------------------------------------------------ MDS Inc. (Life Sciences Tools & Services) 140,980 2,572,509 ======================================================================== 3,832,626 ======================================================================== FRANCE-3.62% Ipsen S.A. (Pharmaceuticals)(e) 31,770 1,476,457 ------------------------------------------------------------------------ Ipsen S.A. (Pharmaceuticals) (Acquired 12/06/05; Cost $2,556,926)(c)(e) 97,682 4,539,605 ------------------------------------------------------------------------ Sanofi-Aventis-ADR (Pharmaceuticals) 130,629 6,031,141 ======================================================================== 12,047,203 ======================================================================== GERMANY-1.16% Merck KGaA (Pharmaceuticals)(e) 37,463 3,883,173 ======================================================================== JAPAN-1.96% Eisai Co., Ltd. (Pharmaceuticals)(a)(e) 70,178 3,859,043 ------------------------------------------------------------------------ Shionogi & Co., Ltd. (Pharmaceuticals)(a)(e) 136,507 2,674,445 ======================================================================== 6,533,488 ======================================================================== SWITZERLAND-9.24% Novartis A.G.-ADR (Pharmaceuticals) 214,499 12,320,823 ------------------------------------------------------------------------ Roche Holding A.G. (Pharmaceuticals)(e) 103,174 18,460,006 ======================================================================== 30,780,829 ======================================================================== UNITED KINGDOM-1.99% AstraZeneca PLC-ADR (Pharmaceuticals) 44,390 2,377,085 ------------------------------------------------------------------------ Shire PLC-ADR (Pharmaceuticals) 68,907 4,255,696 ======================================================================== 6,632,781 ======================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $50,004,218) 64,606,627 ========================================================================
AIM V.I. Global Health Care Fund
SHARES VALUE ------------------------------------------------------------------------ MONEY MARKET FUNDS-7.10% Liquid Assets Portfolio-Institutional Class(f) 11,818,248 $ 11,818,248 ------------------------------------------------------------------------ Premier Portfolio-Institutional Class(f) 11,818,249 11,818,249 ======================================================================== Total Money Market Funds (Cost $23,636,497) 23,636,497 ======================================================================== TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-99.19% (Cost $299,928,068) 330,453,657 ========================================================================
SHARES VALUE ------------------------------------------------------------------------
INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-3.01% Premier Portfolio-Institutional Class(f)(g) 10,037,792 $ 10,037,792 ======================================================================== Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $10,037,792) 10,037,792 ======================================================================== TOTAL INVESTMENTS-102.20% (Cost $309,965,860) 340,491,449 ======================================================================== OTHER ASSETS LESS LIABILITIES-(2.20)% (7,335,990) ======================================================================== NET ASSETS-100.00% $333,155,459 ________________________________________________________________________ ========================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) All or a portion of this security was out on loan at December 31, 2006. (b) Non-income producing security. (c) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $6,624,689, which represented 1.99% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (d) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The value of this security considered illiquid at December 31, 2006 represented 0.63% of the Fund's Net Assets. (e) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $35,789,256, which represented 10.74% of the Fund's Net Assets. See Note 1A. (f) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (g) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Health Care Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $276,291,571)* $306,817,160 ---------------------------------------------------------------- Investments in affiliated money market funds (cost $33,674,289) 33,674,289 ---------------------------------------------------------------- Total investments (cost $309,965,860) 340,491,449 ================================================================ Foreign currencies, at value (cost $132) 134 ---------------------------------------------------------------- Receivables for: Investments sold 2,808,983 ---------------------------------------------------------------- Fund shares sold 345,461 ---------------------------------------------------------------- Dividends 196,408 ---------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 22,253 ================================================================ Total assets 343,864,688 ________________________________________________________________ ================================================================ LIABILITIES: Payables for: Fund shares reacquired 304,298 ---------------------------------------------------------------- Trustee deferred compensation and retirement plans 37,850 ---------------------------------------------------------------- Collateral upon return of securities loaned 10,037,792 ---------------------------------------------------------------- Accrued administrative services fees 208,841 ---------------------------------------------------------------- Accrued distribution fees -- Series II 53,186 ---------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,683 ---------------------------------------------------------------- Accrued transfer agent fees 9,480 ---------------------------------------------------------------- Accrued operating expenses 54,099 ================================================================ Total liabilities 10,709,229 ================================================================ Net assets applicable to shares outstanding $333,155,459 ________________________________________________________________ ================================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $313,506,295 ---------------------------------------------------------------- Undistributed net investment income (loss) (34,023) ---------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (10,842,863) ---------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 30,526,050 ================================================================ $333,155,459 ________________________________________________________________ ================================================================ NET ASSETS: Series I $235,509,298 ________________________________________________________________ ================================================================ Series II $ 97,646,161 ________________________________________________________________ ================================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 10,949,979 ________________________________________________________________ ================================================================ Series II 4,572,167 ________________________________________________________________ ================================================================ Series I: Net asset value per share $ 21.51 ________________________________________________________________ ================================================================ Series II: Net asset value per share $ 21.36 ________________________________________________________________ ================================================================
* At December 31, 2006, securities with an aggregate value of $9,605,328 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $114,582) $ 1,754,371 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $43,282) 828,708 ============================================================ Total investment income 2,583,079 ============================================================ EXPENSES: Advisory fees 2,129,997 ------------------------------------------------------------ Administrative services fees 781,280 ------------------------------------------------------------ Custodian fees 60,120 ------------------------------------------------------------ Distribution fees -- Series II 84,977 ------------------------------------------------------------ Transfer agent fees 42,665 ------------------------------------------------------------ Trustees' and officer's fees and benefits 21,666 ------------------------------------------------------------ Other 90,449 ============================================================ Total expenses 3,211,154 ============================================================ Less: Fees waived and expense offset arrangements (13,295) ============================================================ Net expenses 3,197,859 ============================================================ Net investment income (loss) (614,780) ============================================================ REALIZED AND UNREALIZED GAIN FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain from: Investment securities (includes net gains from securities sold to affiliates of $606,231) 9,833,287 ------------------------------------------------------------ Foreign currencies 50,848 ============================================================ 9,884,135 ============================================================ Change in net unrealized appreciation of: Investment securities 7,631,766 ------------------------------------------------------------ Foreign currencies 641 ============================================================ 7,632,407 ============================================================ Net gain from investment securities and foreign currencies 17,516,542 ============================================================ Net increase in net assets resulting from operations $16,901,762 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Health Care Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) $ (614,780) $ (747,529) ------------------------------------------------------------------------------------------- Net realized gain from investment securities, foreign currencies, foreign currency contracts and option contracts 9,884,135 29,418,586 ------------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investment securities and foreign currencies 7,632,407 (5,403,259) =========================================================================================== Net increase in net assets resulting from operations 16,901,762 23,267,798 =========================================================================================== Share transactions-net: Series l (34,311,775) (120,420,216) ------------------------------------------------------------------------------------------- Series ll 92,818,635 -- =========================================================================================== Net increase (decrease) in net assets resulting from share transactions 58,506,860 (120,420,216) =========================================================================================== Net increase (decrease) in net assets 75,408,622 (97,152,418) =========================================================================================== NET ASSETS: Beginning of year 257,746,837 354,899,255 =========================================================================================== End of year (including undistributed net investment income (loss) of $(34,023) and $(82,929), respectively) $333,155,459 $ 257,746,837 ___________________________________________________________________________________________ ===========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Health Care Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Global Health Care Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Global Health Care Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. AIM V.I. Global Health Care Fund L. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.75% ------------------------------------------------------------------- Next $250 million 0.74% ------------------------------------------------------------------- Next $500 million 0.73% ------------------------------------------------------------------- Next $1.5 billion 0.72% ------------------------------------------------------------------- Next $2.5 billion 0.71% ------------------------------------------------------------------- Next $2.5 billion 0.70% ------------------------------------------------------------------- Next $2.5 billion 0.69% ------------------------------------------------------------------- Over $10 billion 0.68% __________________________________________________________________ ===================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $7,362. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $75,320 for accounting and fund administrative services and reimbursed $705,960 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Global Health Care Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $ 59,664,465 $ (47,846,217) $ -- $11,818,248 $284,404 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 5,568,522 120,245,471 (113,995,744) -- 11,818,249 501,022 -- ================================================================================================================================== Subtotal $ 5,568,522 $179,909,936 $(161,841,961) $ -- $23,636,497 $785,426 $ -- ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class $ 5,595,032 $259,080,340 $(254,637,580) $ -- $10,037,792 $ 43,282 $ -- ================================================================================================================================== Total Investments in Affiliates $11,163,554 $438,990,276 $(416,479,541) $ -- $33,674,289 $828,708 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $2,173,321, which resulted in net realized gains of $606,231, and securities purchases of $2,587,056. NOTE 5-- EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $5,933. NOTE 6--TRUSTEES' AND OFFICERS FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,728 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. AIM V.I. Global Health Care Fund The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $9,605,328 were on loan to brokers. The loans were secured by cash collateral of $10,037,792 received by the Fund and subsequently invested in an affiliated money market fund. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $43,282 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: There were no ordinary income or long-term capital gain distributions during the years ended December 31, 2006 and 2005. TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Net unrealized appreciation -- investments $ 30,381,219 ---------------------------------------------------------------------------- Temporary book/tax differences (29,523) ---------------------------------------------------------------------------- Capital loss carryforward (10,698,032) ---------------------------------------------------------------------------- Post-October currency loss deferral (4,500) ---------------------------------------------------------------------------- Shares of beneficial interest 313,506,295 ============================================================================ Total net assets $333,155,459 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis net unrealized appreciation on investments amount includes appreciation on foreign currencies of $461. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund utilized $12,497,582 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2010 $10,698,032 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. AIM V.I. Global Health Care Fund NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $253,653,379 and $214,645,041, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $38,543,041 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (8,162,283) =============================================================================== Net unrealized appreciation of investment securities $30,380,758 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $310,110,691.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions and net operating losses, on December 31, 2006, undistributed net investment income (loss) was increased by $663,686, undistributed net realized gain (loss) was decreased by $50,848 and shares of beneficial interest decreased by $612,838. This reclassification had no effect on the net assets of the Fund. NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(A) 2005 -------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 2,987,617 $ 61,430,551 1,865,466 $ 35,904,906 ------------------------------------------------------------------------------------------------------------------------ Series II 4,597,663 93,373,802 -- -- ======================================================================================================================== Reacquired: Series I (4,650,072) (95,742,326) (8,032,556) (156,325,122) ------------------------------------------------------------------------------------------------------------------------ Series II (26,046) (555,167) -- -- ======================================================================================================================== 2,909,162 $ 58,506,860 (6,167,090) $(120,420,216) ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 75% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Global Health Care Fund NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 20.44 $ 18.90 $ 17.57 $ 13.75 $ 18.20 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.04)(a) (0.06) (0.03) (0.03) (0.00)(b) ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.11 1.60 1.36 3.85 (4.45) ========================================================================================================================= Total from investment operations 1.07 1.54 1.33 3.82 (4.45) ========================================================================================================================= Net asset value, end of period $ 21.51 $ 20.44 $ 18.90 $ 17.57 $ 13.75 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(c) 5.24% 8.15% 7.57% 27.78% (24.45)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $235,509 $257,736 $354,889 $340,711 $232,681 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets 1.10%(d) 1.08%(e) 1.11% 1.07% 1.07% ========================================================================================================================= Ratio of net investment income (loss) to average net assets (0.19)%(d) (0.24)% (0.17)% (0.20)% (0.43)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 79% 82% 175% 114% 130% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Calculated using average shares outstanding. (b) The net investment income (loss) per share was calculated after permanent book tax differences, such as net operating losses, which were reclassified from accumulated net investment income (loss) to paid in capital. Had net investment income (loss) per share been calculated using the current method, which is before reclassification of net operating losses, net investment income (loss) per share would have been $(0.07) for the year ended December, 31 2002. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $250,008,583. (e) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.09% for the year ended December 31, 2005. AIM V.I. Global Health Care Fund NOTE 14--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ---------------------------------------- APRIL 30, 2004, YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO --------------------- DECEMBER 31, 2006 2005 2004 ------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 20.34 $ 18.86 $ 18.19 ------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) (0.09)(a) (0.09) (0.05) ------------------------------------------------------------------------------------------------------ Net gains on securities (both realized and unrealized) 1.11 1.57 0.72 ====================================================================================================== Total from investment operations 1.02 1.48 0.67 ====================================================================================================== Net asset value, end of period $ 21.36 $ 20.34 $ 18.86 ______________________________________________________________________________________________________ ====================================================================================================== Total return(b) 5.01% 7.85% 3.68% ______________________________________________________________________________________________________ ====================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $97,646 $ 11 $ 10 ______________________________________________________________________________________________________ ====================================================================================================== Ratio of expenses to average net assets 1.35%(c) 1.33%(d) 1.36%(e) ====================================================================================================== Ratio of net investment income (loss) to average net assets (0.44)%(c) (0.49)% (0.42)%(e) ______________________________________________________________________________________________________ ====================================================================================================== Portfolio turnover rate(f) 79% 82% 175% ______________________________________________________________________________________________________ ======================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $33,990,959. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.34% for the year ended December 31, 2005. (e) Annualized. (f) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Global Health Care Fund NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Global Health Care Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Global Health Care Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Global Health Care Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Global Health Care Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Global Health Care Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. GLOBAL REAL ESTATE FUND REAL ESTATE Formerly AIM V.I. Real Estate Fund Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with [COVER GLOBE IMAGE] the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine AIM V.I. GLOBAL REAL ESTATE FUND seeks to achieve how to vote proxies relating to portfolio high total return through growth of capital securities is available without charge, and current income. upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT tab, click on Required Notices and then IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ==================================================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING [AIM INVESTMENTS LOGO] SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE INVESTING. --Registered Trademark-- ==================================================================================== ==================================================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE ====================================================================================
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. GLOBAL REAL ESTATE FUND HOW WE INVEST PERFORMANCE SUMMARY On July 3, 2006, AIM V.I. Real Estate Fund's name changed to AIM V.I. Global We are pleased to report that AIM V.I. Global Real Estate Fund once again provided Real Estate Fund. This change, along with shareholders with positive returns during the reporting period. On July 3, 2006, the the corresponding investment philosophy Fund changed its investment strategy and name to reflect its new global mandate. The change, allows for a more flexible Fund outperformed the broad market, represented by the MSCI World Index(SM), and investment universe. Your Fund holds performed inline with its new style-specific index, the FTSE EPRA/NAREIT Global Real primarily real estate-oriented securities Estate Index. from the U.S. and abroad whose value is driven by tangible assets. Our goal is to Favorable security selection within the office, diversified and residential property create a global Fund focused on total types, as well as an overweight position in the real estate management & development return that will perform at or above index property type, contributed most to the Fund's performance during the first half of the levels with a comparable level of risk. reporting period. Additionally, overweight positions and strong stock selection in Our investment strategy focuses on Australia, the United Kingdom and Singapore contributed to strong second half identifying U.S. and non-U.S. property performance. types we believe will benefit from long-term sector trends. We use a Your Fund's long-term performance appears on pages 4-5. fundamentals-driven investment process, including property market cycle analysis, FUND VS. INDEXES property evaluation, and management and structure review to identify securities TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF with: VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. - Quality underlying properties. Series I Shares 42.60% Series II Shares 42.24 - Solid management teams. MSCI World Index (Broad Market Index) (1) 20.07 S&P 500 --REGISTERED TRADEMARK-- Index (Former Broad Market Index) 15.78 - Attractive valuations relative to peer FTSE NAREIT/EPRA Global Real Estate Index (Style Specific Index) (2) 42.35 MSCI U.S. REIT Index (Former Style Specific Index) 35.92 investment alternatives. Lipper Real Estate Funds Index (Peer Group Index) 31.46 We attempt to control risk by SOURCES: A I M MANAGEMENT GROUP INC., LIPPER INC., BLOOMBERG L.P. diversifying property types and geographic locations as well as limiting the size of (1) The Fund has elected to use the MSCI World Index as its broad-based index instead any one holding. We will consider selling of the S&P 500 Index because it better represents the global investments of the a holding when: Fund. - Relative valuation falls below desired (2) The Fund has elected to use the FTSE NAREIT/EPRA Global Real Estate Index as its levels. style-specific index instead of the MSCI U.S. REIT Index because it better represents the global investments of the Fund. - Risk/return relationships change ====================================================================================== significantly. ====================================================================================== - Company fundamentals change (property type, geography or management changes). PORTFOLIO COMPOSITION TOP 10 EQUITY HOLDINGS* -------------------------------------------------------------------------------------- - A more attractive investment opportunity By property type 1. Sun Hung Kai Properties Ltd. is identified. Retail 26.1% (Hong Kong) 3.9% Diversified 25.2 2. Westfield Group (Australia) 3.4 MARKET CONDITIONS AND YOUR FUND Office 22.6 3. Land Securities Group PLC Residential 15.1 (United Kingdom) 3.1 The year started off on a positive note as Industrial 4.8 4. Simon Property Group, Inc. 2.9 domestic markets were encouraged by strong Hotels 3.8 5. ProLogis 2.9 economic data with small caps leading the Money Market Funds 6. Mitsubishi Estate Co. Ltd. way. There was a slight sell-off mid-way Plus Other Assets Less (Japan) 2.8 through the year as investors became Liabilities 2.4 7. Mitsui Fudosan Co. Ltd. (Japan) 2.8 fearful of an economic downturn. However, 8. British Land Co. PLC markets staged a rally as the U.S. Federal (United Kingdom) 2.7 Reserve Board (the Fed) held interest 9. Host Hotels & Resorts Inc. 2.3 rates steady after 17 consecutive 10. Stockland (Australia) 2.2 increases and a series of solid economic reports, which indicated the economy's Total Net Assets $192.93 strength was slowing yet intact and million inflation was within manageable levels. Total Number of Holdings* 93 This set the stage for small-cap stocks to rally along with additional speculation The Fund's holdings are subject to change, and there is no assurance that the Fund will that the Fed may lower interest rates in continue to hold any particular security. 2007. *Excluding money market fund holdings. ====================================================================================================================================
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AIM V.I. GLOBAL REAL ESTATE FUND The REIT market, both globally and Joe V. Rodriguez, Jr. Mark D. Blackburn domestically, was among the top performing Director of Securities Chartered Financial markets for the reporting period, easily [RODRIGUEZ Management, INVESCO Real [BLACKBURN Analyst, Director of outpacing the broad domestic and global PHOTO] Estate, is lead manager PHOTO] Investments, INVESCO markets as measured by the S&P 500 Index of AIM V.I. Global Real Real Estate, is manager and the MSCI World Index, respectively. Estate Fund. He oversees all phases of of AIM V.I. Global Real REIT performance was positive during the the unit including securities research and Estate Fund. He joined INVESCO in 1998 and first quarter of 2006 but retreated in administration. Mr. Rodriguez began his has approximately 20 years of experience April and May. The sector rebounded in investment career in 1983 and joined in institutional investing and risk June and continued to perform well for the INVESCO in 1990. He has served on the management. Mr. Blackburn earned a B.S. remainder of the year ending the reporting editorial boards of the National in accounting from Louisiana State period with solid performance. The group's Association of Real Estate Investment University and an M.B.A. from Southern favorable relative performance was driven Trusts (NAREIT) as well as the Methodist University. He is a certified by a number of recurring themes, including Institutional Real Estate Securities public accountant. ongoing REIT privatization activity, Newsletter. Mr. Rodriguez earned his improving real estate operating B.B.A. in economics and finance as well as James Cowen Portfolio fundamentals, growing demand for stable, his M.B.A. in finance from Baylor manager, INVESCO Real income-producing assets and real estate University. [COWEN Estate, is manager of and a movement toward the globalization of PHOTO] AIM V.I. Global Real real estate mandates. of self-storage facilities in the U.S., Estate Fund. He joined detracted the most from performance on INVESCO in 2001. He has eight years of During the first half of the year, the news of a surprise fourth-quarter 2005 real estate experience. Mr. Cowen earned Fund's stock selection within the office loss. We sold the position. The largest a B.A. in town and country planning from property type contributed the most to Fund detractor from relative performance was University of Manchester and a master of performance. Our top contributor was SL not owning Centro Properties, a retail philosophy degree from the University of GREEN REALTY, which owns and operates a investment organization specializing in Cambridge. portfolio of commercial office properties the ownership, management and development in Midtown Manhattan. SL Green Realty of retail shopping centers. Despite the James W. Trowbridge shares increased after the REIT announced stock's strong performance, we still Portfolio manager, plans to sell properties in New York City. believe it to be relatively unattractive [TROWBRIDGE INVESCO Real Estate, Shares of another office REIT, on a valuation basis. PHOTO] is manager of AIM V.I. Chicago-based TRIZEC PROPERTIES, rose on Global Real Estate news of its potential acquisition by IN CLOSING Fund. Mr. Trowbridge joined INVESCO Real Brookfield Properties Corp. Once complete, Estate in 1989. With 32 years of real the commercial property deal could create Over the past 12 months, the Fund and real estate investment experience for major one of North America's largest landlords. estate markets in general have experienced institutional investors, Mr. Trowbridge is We sold our position during the reporting strong double-digit returns. It would be responsible for integrating his knowledge period. imprudent for us to suggest such a level into INVESCO's publicly traded REIT of performance is sustainable over the investments. Mr. Trowbridge earned his Positive returns during the second half long term. B.S. in finance from Indiana University. of the year -- and outperformance versus the style-specific index -- resulted from We'd like to thank you for Ping Ying Wang overweight positions and strong stock continuing to invest in the AIM V.I. Chartered Financial selection in Australia, the U.K. and Global Real Estate Fund, and we'd like to [WANG Analyst, portfolio Singapore. Our overweight positions in CFS welcome any new shareholders who invested PHOTO] manager, INVESCO Real RETAIL PROPERTY TRUST, which invests in with us during the reporting period. Estate, is manager of high quality regional and sub-regional AIM V.I. Global Real Estate Fund. She has shopping centers across Australia, THE VIEWS AND OPINIONS EXPRESSED IN 10 years of real estate experience. She Stockland Trust, a leading Australian MANAGEMENT'S DISCUSSION OF FUND earned a B.S. in international finance diversified property group, and CAPITAL & PERFORMANCE ARE THOSE OF A I M ADVISORS, from the People's University of China and REGIONAL, a co-investing real estate asset INC. THESE VIEWS AND OPINIONS ARE SUBJECT a Ph.D. in finance from the University of manager in the U.K., contributed the most TO CHANGE AT ANY TIME BASED ON FACTORS Texas at Dallas. to the Fund's relative outperformance for SUCH AS MARKET AND ECONOMIC CONDITIONS. the period. THESE VIEWS AND OPINIONS MAY NOT BE RELIED Assisted by the Real Estate Team UPON AS INVESTMENT ADVICE OR Conversely, despite positive RECOMMENDATIONS, OR AS AN OFFER FOR A Effective January 25, 2007, after the performance by the REIT market during the PARTICULAR SECURITY. THE INFORMATION IS close of the reporting period, Paul S. first half of the year, a few holdings NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF Curbo was added to the portfolio team and detracted from our performance. U-STORE IT ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR James Cowen left the portfolio team. TRUST, a REIT that engages in the THE FUND. STATEMENTS OF FACT ARE FROM development and operation SOURCES CONSIDERED RELIABLE, BUT A I M FOR A DISCUSSION OF THE RISKS OF INVESTING ADVISORS, INC. MAKES NO REPRESENTATION OR IN YOUR FUND, INDEXES USED IN THIS REPORT WARRANTY AS TO THEIR COMPLETENESS OR AND YOUR FUND'S LONG-TERM PERFORMANCE, ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE PLEASE SEE PAGES 4-5. IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
3
YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. GLOBAL REAL ESTATE FUND ========================================== AVERAGE ANNUAL TOTAL RETURNS INCEPTION OF SERIES II SHARES) ADJUSTED TO PURCHASE SHARES OF THE FUND DIRECTLY. REFLECT THE RULE 12B-1 FEES APPLICABLE TO PERFORMANCE FIGURES GIVEN REPRESENT THE As of 12/31/06 SERIES II SHARES. THE INCEPTION DATE OF FUND AND ARE NOT INTENDED TO REFLECT SERIES I SHARES SERIES I SHARES IS MARCH 31, 1998. THE ACTUAL VARIABLE PRODUCT VALUES. THEY DO Inception (3/31/98) 15.54% PERFORMANCE OF THE FUND'S SERIES I AND NOT REFLECT SALES CHARGES, EXPENSES AND 5 Years 26.86 SERIES II SHARE CLASSES WILL DIFFER FEES ASSESSED IN CONNECTION WITH A 1 Year 42.60 PRIMARILY DUE TO DIFFERENT CLASS EXPENSES. VARIABLE PRODUCT. SALES CHARGES, EXPENSES SERIES II SHARES AND FEES, WHICH ARE DETERMINED BY THE Inception 15.26% THE PERFORMANCE DATA QUOTED REPRESENT VARIABLE PRODUCT ISSUERS, WILL VARY AND 5 Years 26.56 PAST PERFORMANCE AND CANNOT GUARANTEE WILL LOWER THE TOTAL RETURN. 1 Year 42.24 COMPARABLE FUTURE RESULTS; CURRENT ========================================== PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE PER NASD REQUIREMENTS, THE MOST RECENT ========================================== CONTACT YOUR VARIABLE PRODUCT ISSUER OR MONTH-END PERFORMANCE DATA AT THE FUND CUMULATIVE TOTAL RETURNS FINANCIAL ADVISOR FOR THE MOST RECENT LEVEL, EXCLUDING VARIABLE PRODUCT CHARGES, MONTH-END VARIABLE PRODUCT PERFORMANCE. IS AVAILABLE ON THIS AIM AUTOMATED 6 months ended 12/31/06 PERFORMANCE FIGURES REFLECT FUND EXPENSES, INFORMATION LINE, 866-702-4402. AS REINVESTED DISTRIBUTIONS AND CHANGES IN MENTIONED ABOVE, FOR THE MOST RECENT Series I Shares 25.18% NET ASSET VALUE. INVESTMENT RETURN AND MONTH-END PERFORMANCE INCLUDING VARIABLE Series II Shares 24.97 PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU PRODUCT CHARGES, PLEASE CONTACT YOUR MAY HAVE A GAIN OR LOSS WHEN YOU SELL VARIABLE PRODUCT ISSUER OR FINANCIAL SHARES. ADVISOR. SERIES II SHARES' INCEPTION DATE IS APRIL 30, 2004. RETURNS SINCE THAT DATE ARE AIM V.I. GLOBAL REAL ESTATE FUND, A HAD THE ADVISOR NOT WAIVED FEES HISTORICAL. ALL OTHER RETURNS ARE THE SERIES PORTFOLIO OF AIM VARIABLE INSURANCE AND/OR REIMBURSED EXPENSES IN THE PAST, BLENDED RETURNS OF THE HISTORICAL FUNDS, IS CURRENTLY OFFERED THROUGH PERFORMANCE WOULD HAVE BEEN LOWER. PERFORMANCE OF SERIES II SHARES SINCE INSURANCE COMPANIES ISSUING VARIABLE THEIR INCEPTION AND THE RESTATED PRODUCTS. YOU CANNOT HISTORICAL PERFORMANCE OF SERIES I SHARES (FOR PERIODS PRIOR TO ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND ments and lack of timely information. the Fund may have additional risks relating to direct ownership in real Prices of equity securities change in If the seller of a repurchase agreement estate, including difficulties in response to many factors including the in which the Fund invests defaults on its valuating and trading real estate, historical and prospective earnings of the obligation or declares bankruptcy, the declines in the value of the properties, issuer, the value of its assets, general Fund may experience delays in selling the risk relating to general and local economic conditions, interest rates, securities underlying the repurchase economic conditions, changes in the investor perceptions and market liquidity. agreement. climate for real estate, increases in taxes, expenses and costs, changes in The value of convertible securities in There is no guarantee that the laws, casualty and condemnation losses, which the Fund invests may be affected by investment techniques and risk analyses rent control limitations and increases in market interest rates, the risk that the used by the Fund's portfolio managers will interest rates. issuer may default on interest or produce the desired results. principal payments and the value of the Because the Fund focuses its underlying common stock into which these The Fund invests in synthetic investments in real estate investment securities may be converted. instruments, the value of which may not trusts (REITs) -- real estate operating correlate perfectly with the overall companies and other companies related to Foreign securities have additional securities markets. Rising interest rates the real estate industry -- the value of risks, including exchange rate changes, and market price fluctuations will affect your shares may rise and fall more than political and economic upheaval, the the performance of the Fund's investments the value of shares of a fund that invests relative lack of information about these in synthetic instruments. Also, synthetic in a broader range of companies. companies, relatively low market liquidity instruments are subject to counter party and the potential lack of strict financial risk -- the risk that the other party in About indexes used in this report and accounting controls and standards. the transaction will not fulfill its contractual obligation to complete the The unmanaged MSCI WORLD INDEX is a group Investing in emerging markets involves transaction with the Fund. of global securities tracked by Morgan greater risk than investing in more Stanley Capital International. established markets. The risks include the Debt securities are particularly relatively smaller size and lesser vulnerable to credit risk and interest The FTSE EPRA/NAREIT GLOBAL REAL ESTATE liquidity of these markets, high inflation rate fluctuations. INDEX is designed to track the performance rates, adverse political develop- of listed real estate companies and REITs The Fund could conceivably hold real worldwide. It is compiled by FTSE Group estate directly if a company defaults on (an independent company, originally a debt securities the Fund owns. In that joint venture of the Financial Times and event, an investment in the London Stock Exchange, whose sole business is the creation and management of indexes and associated data services); NAREIT (National Association of
Continued on page 5 4
AIM V.I. GLOBAL REAL ESTATE FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. In This chart, which is a logarithmic this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value of value of the Fund and its indexes. We the investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same effective than other types of charts in size as the space between $10,000 and illustrating changes in value during the $20,000, and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ==================================================================================================================================== Continued from page 4 Real Estate Investment Trusts) and EPRA In conjunction with the annual ples require adjustments to be made to the (European Public Real Estate Association). prospectus update on or about May 1, 2007, net assets of the Fund at period end for the AIM V.I. Global Real Estate Fund financial reporting purposes, and as such, FTSE (TM) is a trademark of London prospectus will be amended to reflect that the net asset values for shareholder Stock Exchange Plc and The Financial Times the Fund has elected to use the Lipper transactions and the returns based on Limited, NAREIT --Registered Trademark-- Variable Underlying Funds (VUF) Real those net asset values may differ from the is a trademark of the National Association Estate Funds Category Average as its peer net asset values and returns reported in of Real Estate Investment Trusts group rather than the Lipper Real Estate the Financial Highlights. Additionally, --Registered Trademark--("NAREIT") and Funds Index. The Lipper VUF Real Estate the returns and net asset values shown both are used by FTSE under license. The Funds Category Average, recently published throughout this report are at the Fund FTSE EPRA/NAREIT Global Real Estate Index by Lipper Inc., comprises the underlying level only and do not include variable is calculated by FTSE. All rights in the funds in each variable insurance category product issuer charges. If such charges Indices vest in FTSE and NAREIT. Neither and does not include mortality and expense were included, the total returns would be FTSE nor NAREIT accept any liability for fees. lower. any errors or omissions in the FTSE Indices or underlying data. The Fund is not managed to track the Property type classifications used in performance of any particular index, this report are generally according to the The unmanaged LIPPER REAL ESTATE FUNDS including the indexes defined here, and FTSE EPRA/NAREIT Global Real Estate Index, INDEX represents an average of the consequently, the performance of the Fund which is exclusively owned by the FTSE performance of the 30 largest real estate may deviate significantly from the Group, the European Public Real Estate funds tracked by Lipper Inc., an performance of the indexes. Association (EPRA), the National independent mutual fund performance Association of Real Estate Investment monitor. A direct investment cannot be made in Trusts (NAREIT) and Euronext Indices BV. an index. Unless otherwise indicated, The unmanaged STANDARD & POOR'S index results include reinvested The Chartered Financial Analyst COMPOSITE INDEX of 500 Stocks (the S&P 500 dividends, and they do not reflect sales --Registered Trademark-- (CFA --Registered Index) is an index of common stocks charges. Performance of an index of funds Trademark--) designation is a globally frequently used as a general measure of reflects fund expenses; performance of a recognized standard for measuring the U.S. stock market performance. market index does not. competence and integrity of investment professionals. The MSCI US REIT Index is a Other information total-return index composed of the most actively traded real estate investment The returns shown in management's trusts and is designed to be a measure of discussion of Fund performance are based real estate equity performance. The index on net asset values calculated for was developed with a base value of 200 as shareholder transactions. Generally of December 31, 1994. It is compiled by accepted accounting princi- Morgan Stanley Capital International.
5 RESULTS OF A $10,000 INVESTMENT Fund and index data from 3/31/98
==================================================================================================================================== [MOUNTAIN CHART] AIM V.I. GLOBAL REAL ESTATE FUND DATE -SERIES I SHARES S&P 500 INDEX MSCI WORLD INDEX MSCI U.S.REIT INDEX LIPPER REAL ESTATE FUNDS INDEX 3/31/1998 $10000 $10000 $10000 $10000 $10000 4/30/1998 9710 10102 10096 9646 9689 5/31/98 9610 9929 9968 9562 9563 6/30/98 9500 10332 10203 9561 9462 7/31/98 8920 10223 10185 8890 8859 8/31/98 7830 8746 8826 8053 7946 9/30/98 8180 9307 8980 8551 8315 10/31/98 8090 10062 9790 8390 8218 11/30/98 8400 10672 10371 8522 8398 12/31/98 8412 11287 10876 8370 8294 1/31/99 8207 11758 11113 8145 8109 2/28/99 8074 11393 10816 8011 7969 3/31/1999 7972 11849 11264 7967 7898 4/30/1999 8892 12308 11707 8738 8745 5/31/99 9087 12017 11277 8923 8923 6/30/99 8974 12682 11802 8757 8845 7/31/99 8565 12288 11765 8481 8501 8/31/99 8565 12227 11742 8400 8360 9/30/99 8228 11892 11627 8048 8026 10/31/99 8043 12645 12230 7865 7816 11/30/99 7972 12902 12572 7748 7696 12/31/99 8441 13661 13588 7989 8001 1/31/00 8473 12974 12808 8039 7930 2/29/00 8538 12729 12841 7911 7794 3/31/00 9029 13973 13727 8201 8132 4/30/00 9423 13553 13145 8752 8537 5/31/00 9135 13275 12811 8833 8635 6/30/00 9764 13602 13241 9052 9004 7/31/00 10587 13390 12867 9873 9664 8/31/00 10448 14221 13284 9468 9393 9/30/00 10587 13470 12576 9759 9705 10/31/00 10245 13413 12363 9296 9292 11/30/00 10213 12357 11611 9459 9435 12/31/00 10859 12417 11797 10131 10046 1/31/01 10934 12858 12025 10174 10101 2/28/01 10538 11686 11007 10000 9954 3/31/01 10077 10946 10282 10082 9909 4/30/01 10559 11796 11040 10316 10132 5/31/01 10527 11875 10896 10547 10354 6/30/01 10891 11586 10553 11183 10917 7/31/01 10570 11472 10412 10941 10722 8/31/01 10591 10755 9911 11346 11055 9/30/01 10163 9886 9036 10893 10528 10/31/01 9960 10075 9209 10528 10184 11/30/01 10452 10847 9752 11142 10723 12/31/01 10775 10943 9813 11431 11062 1/31/02 10732 10783 9514 11405 11108 2/28/02 10970 10575 9431 11630 11334 3/31/02 11619 10973 9865 12380 11980 4/30/02 11813 10308 9511 12459 12103 5/31/02 12018 10232 9527 12617 12247 6/30/02 12256 9504 8948 12979 12516 7/31/02 11759 8763 8193 12251 11800 8/31/02 11867 8820 8207 12272 11825 9/30/02 11380 7863 7303 11826 11404 10/31/02 11121 8554 7841 11232 10902 11/30/02 11446 9057 8263 11750 11343 12/31/02 11463 8525 7861 11847 11464 1/31/03 11135 8302 7622 11521 11164 2/28/03 11299 8177 7488 11728 11336 3/31/03 11582 8257 7464 11974 11598 4/30/03 12008 8936 8125 12479 12102 5/31/03 12752 9407 8588 13184 12816 6/30/03 13221 9527 8735 13487 13120 7/31/03 13833 9695 8912 14203 13721 8/31/03 13964 9884 9103 14289 13869 9/30/03 14413 9779 9158 14795 14312 10/31/03 14620 10332 9700 15044 14631 11/30/03 15419 10423 9847 15707 15272 12/31/03 15913 10969 10464 16201 15730 1/31/04 16513 11170 10632 16911 16292 2/29/04 16868 11325 10810 17194 16649 3/31/04 17889 11155 10738 18153 17558 4/30/04 15492 10980 10518 15462 15249 ====================================================================================================================================
==================================================================================================================================== [MOUNTAIN CHART] 5/31/04 16513 11130 10606 16572 16147 6/30/04 17101 11347 10832 17042 16644 7/31/04 17278 10971 10478 17132 16713 8/31/04 18466 11015 10524 18508 17876 9/30/04 18554 11134 10723 18471 17976 10/31/04 19686 11304 10986 19482 18803 11/30/04 20595 11762 11563 20308 19640 12/31/04 21734 12162 12004 21302 20783 1/31/05 20020 11865 11734 19469 19407 2/28/05 20554 12115 12106 20048 19976 3/31/05 20145 11901 11872 19717 19608 4/30/05 21362 11675 11612 20889 20398 5/31/05 21986 12046 11818 21571 21084 6/30/05 22918 12063 11921 22654 22064 7/31/05 24600 12512 12337 24277 23485 8/31/05 23702 12398 12430 23344 22673 9/30/05 23873 12498 12753 23477 22740 10/31/05 23362 12290 12444 22918 22211 11/30/05 24476 12754 12858 23911 23172 12/31/05 24831 12758 13143 23886 23334 1/31/06 26445 13096 13730 25721 24797 2/28/06 26916 13132 13709 26205 25170 3/31/06 28402 13295 14011 27506 26331 4/30/06 27706 13474 14436 26484 25645 5/31/06 26974 13086 13943 25720 24933 6/30/06 28283 13104 13939 27105 26014 7/31/06 29120 13184 14026 28077 26619 8/31/06 30191 13498 14390 29144 27530 9/30/06 30886 13845 14562 29713 28055 10/31/06 32594 14296 15096 31573 29655 11/30/06 34373 14567 15466 33068 31003 12/31/06 35400 14772 15780 32466 30674 ====================================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. GLOBAL REAL ESTATE FUND EXAMPLE ACTUAL EXPENSES Fund's actual return. The Fund's actual cumulative total returns at As a shareholder of the Fund, you The table below provides information net asset value after expenses for incur ongoing costs, including about actual account values and the six months ended December 31, management fees; distribution and/or actual expenses. You may use the 2006, appear in the table service (12b-1) fees; and other Fund information in this table, together "Cumulative Total Returns" on page expenses. This example is intended with the amount you invested, to 4. to help you understand your ongoing estimate the expenses that you paid The hypothetical account costs (in dollars) of investing in over the period. Simply divide your values and expenses may not be used the Fund and to compare these costs account value by $1,000 (for to estimate the actual ending with ongoing costs of investing in example, an $8,600 account value account balance or expenses you paid other mutual funds. The example is divided by $1,000 = 8.6), then for the period. You may use this based on an investment of $1,000 multiply the result by the number in information to compare the ongoing invested at the beginning of the the table under the heading entitled costs of investing in the Fund and period and held for the entire "Actual Expenses Paid During Period" other funds. To do so, compare this period July 1, 2006, through to estimate the expenses you paid on 5% hypothetical example with the 5% December 31, 2006. your account during this period. hypothetical examples that appear in the shareholder reports of the other The actual and hypothetical HYPOTHETICAL EXAMPLE FOR funds. expenses in the examples below do COMPARISON PURPOSES Please note that the expenses not represent the effect of any fees shown in the table are meant to or other expenses assessed in The table below also provides highlight your ongoing costs. connection with a variable product; information about hypothetical Therefore, the hypothetical if they did, the expenses shown account values and hypothetical information is useful in comparing would be higher while the ending expenses based on the Fund's actual ongoing costs, and will not help you account values shown would be lower. expense ratio and an assumed rate of determine the relative total costs return of 5% per year before of owning different funds. expenses, which is not the
==================================================================================================================================== ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)1 PERIOD2 (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $ 1,251.80 $ 6.47 $ 1,019.46 $5.80 1.14% Series II 1,000.00 1,249.70 7.88 1,018.20 7.07 1.39 ====================================================================================================================================
------- (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year.
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. GLOBAL REAL ESTATE FUND The Board of Trustees of AIM terms of the Advisory Agreement. advisors. The Board reviewed the Variable Insurance Funds (the advisory fee rate for the Fund under "Board") oversees the management of - The performance of the Fund the Advisory Agreement. The Board AIM V.I. Global Real Estate Fund relative to comparable funds. The compared effective contractual (formerly named "AIM V.I. Real Board reviewed the performance of advisory fee rates at a common asset Estate Fund") (the "Fund") and, as the Fund during the past one, three level at the end of the past required by law, determines annually and five calendar years against the calendar year and noted that the whether to approve the continuance performance of funds advised by Fund's rate was above the median of the Fund's advisory agreement other advisors with investment rate of the funds advised by other with A I M Advisors, Inc. ("AIM"). strategies comparable to those of advisors with investment strategies Based upon the recommendation of the the Fund. The Board noted that the comparable to those of the Fund that Investments Committee of the Board, Fund's performance was below the the Board reviewed. The Board noted at a meeting held on June 27, 2006, median performance of such that AIM has agreed to waive the Board, including all of the comparable funds for the one and advisory fees of the Fund and to independent trustees, approved the five year periods and above such limit the Fund's total operating continuance of the advisory median performance for the three expenses, as discussed below. Based agreement (the "Advisory Agreement") year period. The Board also noted on this review, the Board concluded between the Fund and AIM for another that AIM began serving as investment that the advisory fee rate for the year, effective July 1, 2006. advisor to the Fund in April 2004. Fund under the Advisory Agreement Based on this review and after was fair and reasonable. The Board considered the taking account of all of the other factors discussed below in factors that the Board considered in - Expense limitations and fee evaluating the fairness and determining whether to continue the waivers. The Board noted that AIM reasonableness of the Advisory Advisory Agreement for the Fund, the has contractually agreed to waive Agreement at the meeting on June 27, Board concluded that no changes advisory fees of the Fund through 2006 and as part of the Board's should be made to the Fund and that April 30, 2008 to the extent ongoing oversight of the Fund. In it was not necessary to change the necessary so that the advisory fees their deliberations, the Board and Fund's portfolio management team at payable by the Fund do not exceed a the independent trustees did not this time. Although the independent specified maximum advisory fee rate, identify any particular factor that written evaluation of the Fund's which maximum rate includes was controlling, and each trustee Senior Officer (discussed below) breakpoints and is based on net attributed different weights to the only considered Fund performance asset levels. The Board considered various factors. through the most recent calendar the contractual nature of this fee year, the Board also reviewed more waiver and noted that it remains in One responsibility of the recent Fund performance, which did effect until April 30, 2008. The independent Senior Officer of the not change their conclusions. Board also noted that AIM has Fund is to manage the process by contractually agreed to waive fees which the Fund's proposed management - The performance of the Fund and/or limit expenses of the Fund fees are negotiated to ensure that relative to indices. The Board through April 30, 2008 so that total they are negotiated in a manner reviewed the performance of the Fund annual operating expenses are which is at arms' length and during the past one, three and five limited to a specified percentage of reasonable. To that end, the Senior calendar years against the average daily net assets for each Officer must either supervise a performance of the Lipper Variable class of the Fund. The Board competitive bidding process or Underlying Fund Real Estate Index. considered the contractual nature of prepare an independent written The Board noted that the Fund's this fee waiver/expense limitation evaluation. The Senior Officer has performance in such periods was and noted it remains in effect until recommended an independent written comparable to the performance of April 30, 2008. The Board considered evaluation in lieu of a competitive such Index. The Board also noted the effect these fee waivers/expense bidding process and, upon the that AIM began serving as investment reimbursements would have on the direction of the Board, has prepared advisor to the Fund in April 2004. Fund's estimated expenses and such an independent written Based on this review and after concluded that the levels of fee evaluation. Such written evaluation taking account of all of the other waivers/expense reimbursements for also considered certain of the factors that the Board considered in the Fund were fair and reasonable. factors discussed below. In determining whether to continue the addition, as discussed below, the Advisory Agreement for the Fund, the - Breakpoints and economies of Senior Officer made a recommendation Board concluded that no changes scale. The Board reviewed the to the Board in connection with such should be made to the Fund and that structure of the Fund's advisory fee written evaluation. it was not necessary to change the under the Advisory Agreement, noting Fund's portfolio management team at that it does not include any The discussion below serves as this time. Although the independent breakpoints. The Board considered a summary of the Senior Officer's written evaluation of the Fund's whether it would be appropriate to independent written evaluation and Senior Officer (discussed below) add advisory fee breakpoints for the recommendation to the Board in only considered Fund performance Fund or whether, due to the nature connection therewith, as well as a through the most recent calendar of the Fund and the advisory fee discussion of the material factors year, the Board also reviewed more structures of comparable funds, it and the conclusions with respect recent Fund performance, which did was reasonable to structure the thereto that formed the basis for not change their conclusions. advisory fee without breakpoints. the Board's approval of the Advisory Based on this review, the Board Agreement. After consideration of - Meetings with the Fund's concluded that it was not necessary all of the factors below and based portfolio managers and investment , to add advisory fee breakpoints to on its informed business judgment, personnel. With respect to the Fund the Fund's advisory fee schedule. the Board determined that the the Board is meeting periodically The Board reviewed the level of the Advisory Agreement is in the best with such Fund's portfolio managers Fund's advisory fees, and noted that interests of the Fund and its and/or other investment personnel such fees, as a percentage of the shareholders and that the and believes that such individuals Fund's net assets, would remain compensation to AIM under the are competent and able to continue constant under the Advisory Advisory Agreement is fair and to carry out their responsibilities Agreement because the Advisory reasonable and would have been under the Advisory Agreement. Agreement does not include any obtained through arm's length breakpoints. The Board noted that negotiations. - Overall performance of AIM. The AIM has contractually agreed to Board considered the overall waive advisory fees of the Fund Unless otherwise stated, performance of AIM in providing through April 30, 2008 to the extent information presented below is as of investment advisory and portfolio necessary so that the advisory fees June 27, 2006 and does not reflect administrative services to the Fund payable by the Fund do not exceed a any changes that may have occurred and concluded that such performance specified maximum advisory fee rate, since June 27, 2006, including but was satisfactory. which maximum rate includes not limited to changes to the Fund's breakpoints and is based on net performance, advisory fees, expense - Fees relative to those of client asset levels. The Board concluded limitations and/or fee waivers. of AIM with comparable investment that the Fund's fee levels under the strategies. The Board reviewed the Advisory Agreement therefore would - The nature and extent of the effective advisory fee rate (before not reflect economies of scale, advisory services to be provided by waivers) for the Fund under the although the advisory fee waiver AIM. The Board reviewed the services Advisory Agreement. The Board noted reflects economies of scale. to be provided by AIM under the that this rate was (i) the same as Advisory Agreement. Based on such the effective advisory fee rate - Investments in affiliated money review, the Board concluded that the (before waivers) for one mutual fund market funds. The Board also took range of services to be provided by advised by AIM with investment into account the fact that AIM under the Advisory Agreement was strategies comparable to those of uninvested cash and cash collateral appropriate and that AIM currently the Fund and above the effective from securities lending is providing services in accordance advisory fee rate (before waivers) arrangements, if any (collectively, with the terms of the Advisory for a second mutual fund advised by "cash balances") of the Fund may be Agreement. AIM with investment strategies invested in money market funds comparable to those of the Fund; and advised by AIM pursuant to the terms - The quality of services to be (ii) above the effective of an SEC exemptive order. The Board provided by AIM. The Board reviewed sub-advisory fee rate for one found that the Fund may realize the credentials and experience of variable insurance fund sub-advised certain benefits upon investing cash the officers and employees of AIM by an AIM affiliate and offered to balances in AIM advised money market who will provide investment advisory insurance company separate accounts funds, including a higher net services to the Fund. In reviewing with investment strategies return, increased liquidity, the qualifications of AIM to provide comparable to those of the Fund. The increased diversification or investment advisory services, the Board noted that AIM has agreed to decreased transaction costs. The Board considered such issues as waive advisory fees of the Fund and Board also found that the Fund will AIM's portfolio and product review to limit the Fund's total operating not receive reduced services if it process, various back office support expenses, as discussed below. Based invests its cash balances in such functions provided by AIM and AIM's on this review, the Board concluded money market funds. The Board noted equity and fixed income trading that the advisory fee rate for the that, to the extent the Fund invests operations. Based on the review of Fund under the Advisory Agreement uninvested cash in affiliated money these and other factors, the Board was fair and reasonable. market funds, AIM has voluntarily concluded that the quality of agreed to waive a portion of the services to be provided by AIM was - Fees relative to those of advisory fees it receives from the appropriate and that AIM currently comparable funds with other Fund attributable to such is providing satisfactory services investment. The Board further in accordance with the
(continued) 7
AIM V.I. GLOBAL REAL ESTATE FUND determined that the proposed Funds in the areas of investment the Board also reviewed more recent securities lending program and performance, product line Fund performance, which did not related procedures with respect to diversification, distribution, fund change their conclusions. the lending Fund is in the best operations, shareholder services and interests of the lending Fund and compliance. The Board concluded that - The performance of the Fund its respective shareholders. The these steps taken by AIM have relative to indices. The Board Board therefore concluded that the improved, and are likely to continue reviewed the performance of the Fund investment of cash collateral to improve, the quality and during the past one, three and five received in connection with the efficiency of the services AIM and calendar years against the securities lending program in the its affiliates provide to the Fund performance of the Lipper Variable money market funds according to the in each of these areas, and support Underlying Fund Real Estate Index. procedures is in the best interests the Board's approval of the The Board noted that the Fund's of the lending Fund and its continuance of the Advisory performance in such periods was respective shareholders. Agreement for the Fund. comparable to the performance of such Index. The Board also noted - Independent written evaluation APPROVAL OF SUB-ADVISORY AGREEMENT that AIM began serving as investment and recommendations of the Fund's advisor to the Fund in April 2004. Senior Officer. The Board noted The Board oversees the management of Based on this review and after that, upon their direction, the the Fund and, as required by law, taking account of all of the other Senior Officer of the Fund, who is determines annually whether to factors that the Board considered in independent of AIM and AIM's approve the continuance of the determining whether to continue the affiliates, had prepared an Fund's sub-advisory agreement. Based Advisory Agreement for the Fund, the independent written evaluation in upon the recommendation of the Board concluded that no changes order to assist the Board in Investments Committee of the Board, should be made to the Fund and that determining the reasonableness of at a meeting held on June 27, 2006, it was not necessary to change the the proposed management fees of the the Board, including all of the Fund's portfolio management team at AIM Funds, including the Fund. The independent trustees, approved the this time. Although the independent Board noted that the Senior continuance of the sub-advisory written evaluation of the Fund's Officer's written evaluation had agreement (the "Sub-Advisory Senior Officer (discussed below) been relied upon by the Board in Agreement") between INVESCO only considered Fund performance this regard in lieu of a competitive Institutional (N.A.), Inc. (the through the most recent calendar bidding process. In determining "Sub-Advisor") and AIM with respect year, the Board also reviewed more whether to continue the Advisory to the Fund for another year, recent Fund performance, which did Agreement for the Fund, the Board effective July 1, 2006. not change their conclusions. considered the Senior Officer's written evaluation and the The Board considered the - Meetings with the Fund's recommendation made by the Senior factors discussed below in portfolio managers and investment Officer to the Board that the Board evaluating the fairness and personnel. The Board is meeting consider whether the advisory fee reasonableness of the Sub-Advisory periodically with the Fund's waivers for certain equity AIM Agreement at the meeting on June 27, portfolio managers and/or other Funds, including the Fund, should be 2006 and as part of the Board's investment personnel and believes simplified. The Board concluded that ongoing oversight of the Fund. In that such individuals are competent it would be advisable to consider their deliberations, the Board and and able to continue to carry out this issue and reach a decision the independent trustees did not their responsibilities under the prior to the expiration date of such identify any particular factor that Sub-Advisory Agreement. advisory fee waivers. was controlling, and each trustee attributed different weights to the - Overall performance of the - Profitability of AIM and its various factors. Sub-Advisor. The Board considered affiliates. The Board reviewed the overall performance of the information concerning the The discussion below serves as Sub-Advisor in providing investment profitability of AIM's (and its a discussion of the material factors advisory services to the Fund and affiliates') investment advisory and and the conclusions with respect concluded that such performance was other activities and its financial thereto that formed the basis for satisfactory. condition. The Board considered the the Board's approval of the overall profitability of AIM, as Sub-Advisory Agreement. After - Fees relative to those of well as the profitability of AIM in consideration of all of the factors clients of the Sub-Advisor with connection with managing the Fund. below and based on its informed comparable investment strategies. The Board noted that AIM's business judgment, the Board The Board reviewed the sub-advisory operations remain profitable, determined that the Sub-Advisory fee rate for the Fund under the although increased expenses in Agreement is in the best interests Sub-Advisory Agreement and the recent years have reduced AIM's of the Fund and its shareholders and sub-advisory fees paid thereunder. profitability. Based on the review that the compensation to the The Board noted that this rate was of the profitability of AIM's and Sub-Advisor under the Sub-Advisory (i) the same as the sub-advisory fee its affiliates' investment advisory Agreement is fair and reasonable. rate for one mutual fund sub-advised and other activities and its by the Sub-Advisor with investment financial condition, the Board Unless otherwise stated, strategies comparable to those of concluded that the compensation to information presented below is as of the Fund and comparable to the be paid by the Fund to AIM under its June 27, 2006 and does not reflect sub-advisory fee rate for a second Advisory Agreement was not any changes that may have occurred mutual fund sub-advised by the excessive. since June 27, 2006, including but Sub-Advisor with investment not limited to changes to the Fund's strategies comparable to those of - Benefits of soft dollars to AIM. performance. the Fund; and (ii) below the The Board considered the benefits sub-advisory fee rate for one realized by AIM as a result of - The nature and extent of the variable insurance fund sub-advised brokerage transactions executed advisory services to be provided by by the Sub-Advisor and offered to through "soft dollar" arrangements. the Sub-Advisor. The Board reviewed insurance company separate accounts Under these arrangements, brokerage the services to be provided by the with investment strategies commissions paid by the Fund and/or Sub-Advisor under the Sub-Advisory comparable to those of the Fund. The other funds advised by AIM are used Agreement. Based on such review, the Board noted that AIM has agreed to to pay for research and execution Board concluded that the range of waive advisory fees of the Fund. The services. This research may be used services to be provided by the Board also considered the services by AIM in making investment Sub-Advisor under the Sub-Advisory to be provided by the Sub-Advisor decisions for the Fund. The Board Agreement was appropriate and that pursuant to the Sub-Advisory concluded that such arrangements the Sub-Advisor currently is Agreement and the services to be were appropriate. providing services in accordance provided by AIM pursuant to the with the terms of the Sub-Advisory Advisory Agreement, as well as the - AIM's financial soundness in Agreement. allocation of fees between AIM and light of the Fund's needs. The Board the Sub-Advisor pursuant to the considered whether AIM is - The quality of services to be Sub-Advisory Agreement. The Board financially sound and has the provided by the Sub-Advisor. The noted that the sub-advisory fees resources necessary to perform its Board reviewed the credentials and have no direct effect on the Fund or obligations under the Advisory experience of the officers and its shareholders, as they are paid Agreement, and concluded that AIM employees of the Sub-Advisor who by AIM to the Sub-Advisor, and that has the financial resources will provide investment advisory AIM and the Sub-Advisor are necessary to fulfill its obligations services to the Fund. Based on the affiliates. Based on this review, under the Advisory Agreement. review of these and other factors, the Board concluded that the the Board concluded that the quality sub-advisory fee rate under the - Historical relationship between of services to be provided by the Sub-Advisory Agreement was fair and the Fund and AIM. In determining Sub-Advisor was appropriate, and reasonable. whether to continue the Advisory that the Sub-Advisor currently is Agreement for the Fund, the Board providing satisfactory services in - Profitability of AIM and its also considered the prior accordance with the terms of the affiliates. The Board reviewed relationship between AIM and the Sub-Advisory Agreement. information concerning the Fund, as well as the Board's profitability of AIM's (and its knowledge of AIM's operations, and - The performance of the Fund affiliates') investment advisory and concluded that it was beneficial to relative to comparable funds. The other activities and its financial maintain the current relationship, Board reviewed the performance of condition. The Board considered the in part, because of such knowledge. the Fund during the past one, three overall profitability of AIM, as The Board also reviewed the general and five calendar years against the well as the profitability of AIM in nature of the non-investment performance of funds advised by connection with managing the Fund. advisory services currently other advisors with investment The Board noted that AIM's performed by AIM and its affiliates, strategies comparable to those of operations remain profitable, such as administrative, transfer the Fund. The Board noted that the although increased expenses in agency and distribution services, Fund's performance was below the recent years have reduced AIM's and the fees received by AIM and its median performance of such profitability. Based on the review affiliates for performing such comparable funds for the one and of the profitability of AIM's and services. In addition to reviewing five year periods and above such its affiliates' investment advisory such services, the trustees also median performance for the three and other activities and its considered the organizational year period. The Board also noted financial condition, the Board structure employed by AIM and its that AIM began serving as investment concluded that the compensation to affiliates to provide those advisor to the Fund in April 2004. be paid by the Fund to AIM under its services. Based on the review of Based on this review and after Advisory Agreement was not these and other factors, the Board taking account of all of the other excessive. concluded that AIM and its factors that the Board considered in affiliates were qualified to determining whether to continue the - The Sub-Advisor's financial continue to provide non-investment Advisory Agreement for the Fund, the soundness in light of the Fund's advisory services to the Fund, Board concluded that no changes needs. The Board considered whether including administrative, transfer should be made to the Fund and that the Sub-Advisor is financially sound agency and distribution services, it was not necessary to change the and has the resources necessary to and that AIM and its affiliates Fund's portfolio management team at perform its obligations under the currently are providing satisfactory this time. Although the independent Sub-Advisory Agreement, and non-investment advisory services. written evaluation of the Fund's concluded that the Sub-Advisor has Senior Officer (discussed below) the financial resources necessary to - Other factors and current only considered Fund performance fulfill its obligations under the trends. The Board considered the through the most recent calendar Sub-Advisory Agreement. steps that AIM and its affiliates year, have taken over the last several years, and continue to take, in order to improve the quality and efficiency of the services they provide to the
8 AIM V.I. Global Real Estate Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ------------------------------------------------------------------------- FOREIGN REAL ESTATE INVESTMENT TRUSTS, COMMON STOCKS & OTHER EQUITY INTERESTS-56.16% AUSTRALIA-10.14% CFS Retail Property Trust (Retail)(a) 1,679,000 $ 3,086,085 ------------------------------------------------------------------------- GPT Group (Diversified)(a) 719,700 3,174,866 ------------------------------------------------------------------------- Mirvac Group (Diversified)(a) 229,200 1,007,604 ------------------------------------------------------------------------- Stockland (Diversified)(a) 664,600 4,332,064 ------------------------------------------------------------------------- Tishman Speyer Office Fund (Office)(a) 236,400 464,149 ------------------------------------------------------------------------- Valad Property Group (Diversified)(a) 752,200 941,558 ------------------------------------------------------------------------- Westfield Group (Retail)(a) 396,900 6,552,979 ========================================================================= 19,559,305 ========================================================================= CANADA-2.83% Boardwalk Real Estate Investment Trust (Residential) 48,900 1,732,150 ------------------------------------------------------------------------- Cominar Real Estate Investment Trust (Diversified) 36,800 710,333 ------------------------------------------------------------------------- Dundee Real Estate Investment Trust (Office) 30,500 1,011,303 ------------------------------------------------------------------------- Primaris Retail Real Estate Investment Trust (Retail) 43,800 709,427 ------------------------------------------------------------------------- RioCan Real Estate Investment Trust (Retail) 60,500 1,305,345 ========================================================================= 5,468,558 ========================================================================= CHINA-0.31% Guangzhou R&F Properties Co. Ltd. (Residential) 277,200 598,727 ========================================================================= FINLAND-0.65% Citycon Oyj (Retail)(a) 114,300 762,092 ------------------------------------------------------------------------- Sponda Oyj (Office)(a) 30,600 484,025 ========================================================================= 1,246,117 ========================================================================= FRANCE-2.85% Klepierre (Retail)(a) 8,500 1,604,260 ------------------------------------------------------------------------- Societe Immobiliere de Location pour I'Industrie et le Commerce (Office)(a) 5,500 827,699 ------------------------------------------------------------------------- Unibail (Diversified)(a) 12,600 3,072,167 ========================================================================= 5,504,126 ========================================================================= HONG KONG-9.64% China Overseas Land & Investment Ltd. (Office)(a) 760,000 1,021,058 ------------------------------------------------------------------------- China Resources Land Ltd. (Residential)(a) 521,800 620,235 ------------------------------------------------------------------------- Great Eagle Holdings Ltd. (Office)(a) 197,000 564,355 ------------------------------------------------------------------------- Hang Lung Properties Ltd. (Retail)(a) 1,103,000 2,768,881 ------------------------------------------------------------------------- Henderson Land Development Co. Ltd. (Residential)(a) 135,000 750,971 ------------------------------------------------------------------------- Hongkong Land Holdings Ltd. (Office)(a) 1,066,000 4,231,030 ------------------------------------------------------------------------- Hysan Development Co. Ltd. (Diversified)(a) 179,000 466,956 -------------------------------------------------------------------------
SHARES VALUE -------------------------------------------------------------------------
HONG KONG-(CONTINUED) Kerry Properties Ltd. (Diversified) 137,400 $ 642,122 ------------------------------------------------------------------------- Sun Hung Kai Properties Ltd. (Residential)(a) 658,000 7,528,273 ========================================================================= 18,593,881 ========================================================================= ITALY-0.97% Beni Stabili S.p.A. (Office)(a) 503,300 802,879 ------------------------------------------------------------------------- Risanamento S.p.A (Diversified)(a) 99,200 1,074,076 ========================================================================= 1,876,955 ========================================================================= JAPAN-11.57% AEON Mall Co., Ltd. (Retail)(a) 19,300 1,082,028 ------------------------------------------------------------------------- GOLDCREST Co., Ltd. (Residential) 15,010 774,400 ------------------------------------------------------------------------- Japan Prime Realty Investment Corp. (Office)(a) 134 486,378 ------------------------------------------------------------------------- Japan Retail Fund Investment Corp. (Retail) 93 758,004 ------------------------------------------------------------------------- JOINT Corp. (Residential)(a) 9,800 378,171 ------------------------------------------------------------------------- Mitsubishi Estate Co. Ltd. (Office) 209,000 5,408,957 ------------------------------------------------------------------------- Mitsui Fudosan Co., Ltd. (Diversified) 218,000 5,321,318 ------------------------------------------------------------------------- Nippon Building Fund Inc. (Office)(a) 148 1,965,453 ------------------------------------------------------------------------- NTT Urban Development Corp. (Office)(a) 445 860,541 ------------------------------------------------------------------------- Sumitomo Realty & Development Co., Ltd. (Diversified) 102,000 3,274,011 ------------------------------------------------------------------------- Tokyo Tatemono Co., Ltd. (Diversified)(a) 130,000 1,440,017 ------------------------------------------------------------------------- TOKYU REIT, Inc. (Diversified)(a) 65 567,689 ========================================================================= 22,316,967 ========================================================================= NETHERLANDS-1.28% Rodamco Europe N.V. (Retail)(a) 18,600 2,469,177 ========================================================================= NEW ZEALAND-0.23% Macquire Goodman Property Trust (Diversified) 428,300 434,687 ========================================================================= SINGAPORE-3.11% Ascendas Real Estate Investment Trust (Industrial)(a) 450,000 783,390 ------------------------------------------------------------------------- Capitacommercial Trust (Office)(a) 419,690 714,730 ------------------------------------------------------------------------- Capitaland Ltd. (Residential)(a) 489,000 1,963,501 ------------------------------------------------------------------------- CapitaMall Trust (Retail) 566,000 1,074,053 ------------------------------------------------------------------------- Keppel Land Ltd. (Office)(a) 194,000 872,557 ------------------------------------------------------------------------- Suntec Real Estate Investment Trust (Retail)(a) 493,000 583,792 ========================================================================= 5,992,023 ========================================================================= SWEDEN-0.34% Fabege A.B. (Diversified)(a) 24,700 662,016 ========================================================================= UNITED KINGDOM-12.24% Big Yellow Group PLC (Industrial)(a) 48,500 668,145 ------------------------------------------------------------------------- British Land Co. PLC (Diversified)(a) 153,300 5,133,969 ------------------------------------------------------------------------- Brixton PLC (Industrial)(a) 67,200 756,123 ------------------------------------------------------------------------- Capital & Regional PLC (Retail) 87,600 2,645,594 -------------------------------------------------------------------------
AIM V.I. Global Real Estate Fund
SHARES VALUE ------------------------------------------------------------------------- UNITED KINGDOM-(CONTINUED) Derwent Valley Holdings PLC (Office)(a) 45,900 $ 1,884,852 ------------------------------------------------------------------------- Hammerson PLC (Retail)(a) 46,700 1,438,484 ------------------------------------------------------------------------- Land Securities Group PLC (Diversified)(a) 134,000 6,079,263 ------------------------------------------------------------------------- Liberty International PLC (Retail)(a) 24,800 677,728 ------------------------------------------------------------------------- Quintain Estates & Development PLC (Diversified)(a) 50,200 838,217 ------------------------------------------------------------------------- Shaftesbury PLC (Retail) 109,000 1,673,698 ------------------------------------------------------------------------- Unite Group PLC (Residential)(a) 119,900 1,282,499 ------------------------------------------------------------------------- Workspace Group PLC (Office)(a) 55,400 537,321 ========================================================================= 23,615,893 ========================================================================= Total Foreign Real Estate Investment Trusts, Common Stocks & Other Equity Interests (Cost $86,769,084) 108,338,432 ========================================================================= DOMESTIC REAL ESTATE INVESTMENT TRUSTS, COMMON STOCKS AND OTHER EQUITY INTERESTS-41.48% DIVERSIFIED-4.92% Colonial Properties Trust 26,100 1,223,568 ------------------------------------------------------------------------- Digital Realty Trust, Inc. 10,900 373,107 ------------------------------------------------------------------------- Health Care Property Investors, Inc. 69,700 2,566,354 ------------------------------------------------------------------------- Public Storage, Inc. 29,900 2,915,250 ------------------------------------------------------------------------- Ventas, Inc. 57,100 2,416,472 ========================================================================= 9,494,751 ========================================================================= HOTELS-3.79% Hilton Hotels Corp. 56,200 1,961,380 ------------------------------------------------------------------------- Host Hotels & Resorts Inc. 178,989 4,394,180 ------------------------------------------------------------------------- Starwood Hotels & Resorts Worldwide, Inc. 15,200 950,000 ========================================================================= 7,305,560 ========================================================================= INDUSTRIAL-3.66% AMB Property Corp. 25,600 1,500,416 ------------------------------------------------------------------------- ProLogis 91,414 5,555,229 ========================================================================= 7,055,645 ========================================================================= OFFICE-11.08% Alexandria Real Estate Equities, Inc. 10,700 1,074,280 ------------------------------------------------------------------------- Boston Properties, Inc. 30,500 3,412,340 ------------------------------------------------------------------------- Brandywine Realty Trust 51,721 1,719,723 -------------------------------------------------------------------------
SHARES VALUE -------------------------------------------------------------------------
OFFICE-(CONTINUED) Brookfield Properties Corp. 56,600 $ 2,231,176 ------------------------------------------------------------------------- Douglas Emmett, Inc. 17,400 462,666 ------------------------------------------------------------------------- Equity Office Properties Trust 84,000 4,046,280 ------------------------------------------------------------------------- Liberty Property Trust 9,200 452,088 ------------------------------------------------------------------------- SL Green Realty Corp. 30,000 3,983,400 ------------------------------------------------------------------------- Vornado Realty Trust 32,900 3,997,350 ========================================================================= 21,379,303 ========================================================================= RESIDENTIAL-7.03% Archstone-Smith Trust 63,800 3,713,798 ------------------------------------------------------------------------- AvalonBay Communities, Inc. 12,800 1,664,640 ------------------------------------------------------------------------- Camden Property Trust 26,600 1,964,410 ------------------------------------------------------------------------- Equity Residential 78,400 3,978,800 ------------------------------------------------------------------------- Essex Property Trust, Inc. 17,400 2,248,950 ========================================================================= 13,570,598 ========================================================================= RETAIL-11.00% Developers Diversified Realty Corp. 53,700 3,380,415 ------------------------------------------------------------------------- Federal Realty Investment Trust 19,800 1,683,000 ------------------------------------------------------------------------- General Growth Properties, Inc. 51,200 2,674,176 ------------------------------------------------------------------------- Kimco Realty Corp. 55,800 2,508,210 ------------------------------------------------------------------------- Macerich Co. (The) 31,900 2,761,583 ------------------------------------------------------------------------- Regency Centers Corp. 32,400 2,532,708 ------------------------------------------------------------------------- Simon Property Group, Inc. 56,100 5,682,369 ========================================================================= 21,222,461 ========================================================================= Total Domestic Real Estate Investment Trusts, Common Stocks and Other Equity Interests (Cost $56,469,800) 80,028,318 ========================================================================= MONEY MARKET FUNDS-1.72% Liquid Assets Portfolio-Institutional Class(b) 1,658,878 1,658,878 ------------------------------------------------------------------------- Premier Portfolio-Institutional Class(b) 1,658,879 1,658,879 ========================================================================= Total Money Market Funds (Cost $3,317,757) 3,317,757 ========================================================================= TOTAL INVESTMENTS-99.36% (Cost $146,556,641) 191,684,507 ========================================================================= OTHER ASSETS LESS LIABILITIES-0.64% 1,243,703 ========================================================================= NET ASSETS-100.00% $192,928,210 _________________________________________________________________________ =========================================================================
Investment Abbreviations: REIT - Real Estate Investment Trust
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $80,264,303, which represented 41.60% of the Fund's Net Assets. See Note 1A. (b) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Real Estate Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $143,238,884) $188,366,750 ------------------------------------------------------------- Investments in affiliated money market funds (cost $3,317,757) 3,317,757 ============================================================= Total investments (cost $146,556,641) 191,684,507 ============================================================= Cash 7,413 ------------------------------------------------------------- Receivables for: Investments sold 1,891,124 ------------------------------------------------------------- Fund shares sold 88,268 ------------------------------------------------------------- Dividends 796,379 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 9,794 ============================================================= Total assets 194,477,485 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 1,153,923 ------------------------------------------------------------- Fund shares reacquired 214,219 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 13,109 ------------------------------------------------------------- Accrued administrative services fees 102,160 ------------------------------------------------------------- Accrued distribution fees-Series II 188 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,739 ------------------------------------------------------------- Accrued transfer agent fees 2,919 ------------------------------------------------------------- Accrued operating expenses 59,018 ============================================================= Total liabilities 1,549,275 ============================================================= Net assets applicable to shares outstanding $192,928,210 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $123,472,726 ------------------------------------------------------------- Undistributed net investment income 2,317,639 ------------------------------------------------------------- Undistributed net realized gain from investment securities and foreign currencies 22,002,591 ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 45,135,254 ============================================================= $192,928,210 _____________________________________________________________ ============================================================= NET ASSETS: Series I $192,617,384 _____________________________________________________________ ============================================================= Series II $ 310,826 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 6,703,139 _____________________________________________________________ ============================================================= Series II 10,880 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 28.74 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 28.57 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $168,480) $ 3,017,252 ------------------------------------------------------------ Dividends from affiliated money market funds 248,888 ============================================================ Total investment income 3,266,140 ============================================================ EXPENSES: Advisory fees 1,195,348 ------------------------------------------------------------ Administrative services fees 350,878 ------------------------------------------------------------ Custodian fees 76,811 ------------------------------------------------------------ Distribution fees-Series II 453 ------------------------------------------------------------ Transfer agent fees 17,659 ------------------------------------------------------------ Trustees' and officer's fees and benefits 18,444 ------------------------------------------------------------ Other 67,821 ============================================================ Total expenses 1,727,414 ============================================================ Less: Fees waived and expense offset arrangements (208,092) ============================================================ Net expenses 1,519,322 ============================================================ Net investment income 1,746,818 ============================================================ REALIZED AND UNREALIZED GAIN FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain from: Investment securities 22,739,211 ------------------------------------------------------------ Foreign currencies 45,143 ============================================================ 22,784,354 ============================================================ Change in net unrealized appreciation of: Investment securities 24,874,492 ------------------------------------------------------------ Foreign currencies 7,419 ============================================================ 24,881,911 ============================================================ Net gain from investment securities and foreign currencies 47,666,265 ============================================================ Net increase in net assets resulting from operations $49,413,083 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Real Estate Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 1,746,818 $ 1,645,886 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 22,784,354 6,325,916 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities and foreign currencies 24,881,911 3,518,916 ========================================================================================== Net increase in net assets resulting from operations 49,413,083 11,490,718 ========================================================================================== Distributions to shareholders from net investment income: Series I (1,802,157) (1,018,056) ------------------------------------------------------------------------------------------ Series II (2,803) (468) ========================================================================================== Total distributions from net investment income (1,804,960) (1,018,524) ========================================================================================== Distributions to shareholders from net realized gains: Series I (6,223,841) (2,594,476) ------------------------------------------------------------------------------------------ Series II (9,875) (1,222) ========================================================================================== Total distributions from net realized gains (6,233,716) (2,595,698) ========================================================================================== Decrease in net assets resulting from distributions (8,038,676) (3,614,222) ========================================================================================== Share transactions-net: Series I 51,326,244 12,711,422 ------------------------------------------------------------------------------------------ Series II 188,721 46,237 ========================================================================================== Net increase in net assets resulting from share transactions 51,514,965 12,757,659 ========================================================================================== Net increase in net assets 92,889,372 20,634,155 ========================================================================================== NET ASSETS: Beginning of year 100,038,838 79,404,683 ========================================================================================== End of year (including undistributed net investment income of $2,317,639 and $1,635,123, respectively) $192,928,210 $100,038,838 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Global Real Estate Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Global Real Estate Fund, formerly AIM V.I. Real Estate Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to achieve high total return through growth of capital and current income. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Global Real Estate Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. The Fund recharacterizes distributions received from REIT investments based on information provided by the REIT into the following categories: ordinary income, long-term and short-term capital gains, and return of capital. If information is not available on a timely basis from the REIT, the recharacterization will be based on available information which may include the previous year's allocation. If new or additional information becomes available from the REIT at a later date, a recharacterization will be made in the following year. The Fund records as dividend income the amount recharacterized as ordinary income and as realized gain the amount recharacterized as capital gain in the Statement of Operations, and the amount recharacterized as return of capital as a reduction to the cost of investments in the Statement of Assets and Liabilities. These recharacterizations are reflected in the accompanying financial statements. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. AIM V.I. Global Real Estate Fund NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.90% of the Fund's average daily net assets. Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.75% ------------------------------------------------------------------- Next $250 million 0.74% ------------------------------------------------------------------- Next $500 million 0.73% ------------------------------------------------------------------- Next $1.5 billion 0.72% ------------------------------------------------------------------- Next $2.5 billion 0.71% ------------------------------------------------------------------- Next $2.5 billion 0.70% ------------------------------------------------------------------- Next $2.5 billion 0.69% ------------------------------------------------------------------- Over $10 billion 0.68% __________________________________________________________________ ===================================================================
Under the terms of a master sub-advisory agreement between AIM and INVESCO Institutional (N.A.), Inc. (INVESCO Real Estate) ("INVESCO"), AIM pays INVESCO 40% of the amount of AIM's compensation on the sub advised assets. AIM has also contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $200,570. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $300,878 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Global Real Estate Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $ -- $29,881,384 $(28,222,506) $ -- $1,658,878 $ 74,099 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class 5,533,127 53,140,833 (57,015,081) -- 1,658,879 174,789 -- ================================================================================================================================== Total Investments in Affiliates $5,533,127 $83,022,217 $(85,237,587) $ -- $3,317,757 $248,888 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $7,522. NOTE 5--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,185 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 6--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceed 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. Global Real Estate Fund NOTE 7--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $2,692,485 $2,067,539 -------------------------------------------------------------------------------------- Long-term capital gain 5,346,191 1,546,683 ====================================================================================== Total distributions $8,038,676 $3,614,222 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 11,618,646 ---------------------------------------------------------------------------- Undistributed long-term gain 19,727,411 ---------------------------------------------------------------------------- Unrealized appreciation-investments 38,137,006 ---------------------------------------------------------------------------- Temporary book/tax differences (10,423) ---------------------------------------------------------------------------- Post-October Currency loss deferral (17,156) ---------------------------------------------------------------------------- Shares of beneficial interest 123,472,726 ============================================================================ Total net assets $192,928,210 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and the recognition of income for tax purposes on certain passive foreign investment companies. The tax-basis net unrealized appreciation on investments amount includes appreciation on foreign currencies of $7,388. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. NOTE 8--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $156,136,193 and $108,211,471, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 38,269,615 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (139,997) =============================================================================== Net unrealized appreciation of investment securities $ 38,129,618 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $153,554,889.
NOTE 9--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions and passive foreign investment companies, on December 31, 2006, undistributed net investment income was increased by $740,658 and undistributed net realized gain was decreased by $740,658. This reclassification had no effect on the net assets of the Fund. AIM V.I. Global Real Estate Fund NOTE 10--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(a) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 3,140,879 $ 79,652,136 2,014,083 $ 39,818,911 ---------------------------------------------------------------------------------------------------------------------- Series II 9,339 226,643 2,307 48,084 ====================================================================================================================== Issued as reinvestment of dividends: Series I 286,030 8,025,998 171,210 3,612,532 ---------------------------------------------------------------------------------------------------------------------- Series II 454 12,678 81 1,690 ====================================================================================================================== Reacquired: Series I (1,471,561) (36,351,890) (1,587,102) (30,720,021) ---------------------------------------------------------------------------------------------------------------------- Series II (1,862) (50,600) (172) (3,537) ====================================================================================================================== 1,963,279 $ 51,514,965 600,407 $ 12,757,659 ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 66% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 11--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and intends for the Fund to adopt FIN 48 provisions during the fiscal year ended December 31, 2007. AIM V.I. Global Real Estate Fund NOTE 12--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 21.06 $ 19.13 $ 14.34 $ 10.49 $ 9.97 --------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.33(a) 0.38(a) 0.32(a) 0.20 0.14 --------------------------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 8.61 2.34 4.92 3.87 0.50 ===================================================================================================================== Total from investment operations 8.94 2.72 5.24 4.07 0.64 ===================================================================================================================== Less distributions: Dividends from net investment income (0.28) (0.22) (0.14) (0.22) (0.12) --------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.98) (0.57) (0.31) - - ===================================================================================================================== Total distributions (1.26) (0.79) (0.45) (0.22) (0.12) ===================================================================================================================== Net asset value, end of period $ 28.74 $ 21.06 $ 19.13 $ 14.34 $ 10.49 _____________________________________________________________________________________________________________________ ===================================================================================================================== Total return(b) 42.60% 14.24% 36.58% 38.82% 6.37% _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $192,617 $99,977 $79,391 $26,087 $12,869 _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.15%(c) 1.21% 1.31% 1.35% 1.36% --------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.30%(c) 1.36% 1.42% 1.62% 1.89% ===================================================================================================================== Ratio of net investment income to average net assets 1.32%(c) 1.91% 1.96% 3.02% 4.53% _____________________________________________________________________________________________________________________ ===================================================================================================================== Portfolio turnover rate 84% 51% 34% 126% 191% _____________________________________________________________________________________________________________________ =====================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $132,635,257. AIM V.I. Global Real Estate Fund NOTE 12--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II -------------------------------------- APRIL 30, 2004 YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO -------------------- DECEMBER 31, 2006 2005 2004 ---------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 20.98 $19.12 $ 13.96 ---------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.27(a) 0.34(a) 0.20(a) ---------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 8.58 2.31 5.41 ==================================================================================================== Total from investment operations 8.85 2.65 5.61 ==================================================================================================== Less distributions: Dividends from net investment income (0.28) (0.22) (0.14) ---------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.98) (0.57) (0.31) ==================================================================================================== Total distributions (1.26) (0.79) (0.45) ==================================================================================================== Net asset value, end of period $ 28.57 $20.98 $ 19.12 ____________________________________________________________________________________________________ ==================================================================================================== Total return(b) 42.30% 13.85% 40.23% ____________________________________________________________________________________________________ ==================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 311 $ 62 $ 14 ____________________________________________________________________________________________________ ==================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.40%(c) 1.45% 1.45%(d) ---------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.55%(c) 1.61% 1.66%(d) ==================================================================================================== Ratio of net investment income to average net assets 1.07%(c) 1.67% 1.82%(d) ____________________________________________________________________________________________________ ==================================================================================================== Portfolio turnover rate(e) 84% 51% 34% ____________________________________________________________________________________________________ ====================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $181,163. (d) Annualized (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 13--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor--Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. AIM V.I. Global Real Estate Fund NOTE 13--LEGAL PROCEEDINGS--(CONTINUED) Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Global Real Estate Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Global Real Estate Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Global Real Estate Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Global Real Estate Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $5,346,191 Corporate Dividends Received Deduction* 0%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Global Real Estate Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Global Real Estate Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS SUB-ADVISOR 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers INVESCO Suite 100 11 Greenway Plaza Inc. LLP Institutional Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street (NA), Inc. Houston, TX 77046-1173 Suite 100 Suite 2900 INVESCO Houston, TX 77046-1173 Houston, TX 77002-5678 Alternatives Group Division Three Galleria Tower, Suite 500 13155 Noel Road Dallas, TX 75240-5042 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
Fixed Income AIM V.I. GOVERNMENT SECURITIES FUND Intermediate-Term Taxable Investment Grade Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's [COVER GLOBE IMAGE] Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 AIM V.I. GOVERNMENT SECURITIES FUND seeks to or on the AIM Web site, AIMinvestments.com. On achieve a high level of current income consistent the home page, scroll down and click on AIM with a reasonable concern for safety of principal. Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT click on Required Notices and then click on IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ - Registered Trademark - EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. GOVERNMENT SECURITIES FUND ======================================================================================= PERFORMANCE SUMMARY much principal risk we take relative to our benchmark. For the fiscal year ended December 31, 2006, AIM V.I. Government Securities Fund, excluding sales charges, underperformed the Fund's broad market and style-specific After our top-down strategic decisions, indexes. In this environment of tightening monetary policy, our duration structure and we identify securities we believe are cash management techniques were major detractors from Fund's performance relative to undervalued given the prevailing market its broad market and style-specific indexes. environment or potential future developments. Your Fund's long-term performance appears on pages 4-5. Instances in which we sell a security FUND VS. INDEXES include, but are not limited to, when: TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF - A change in the economic or market VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. outlook indicates assets should be reallocated. Series I Shares 3.55% Series II Shares 3.28 - A mortgage security is prepaying faster Lehman Brothers U.S. Aggregate Bond Index (Broad Market Index) 4.33 or slower than we would like. Lehman Brothers Intermediate U.S. Government and Mortgage Index (Style-Specific Index) 4.59 - A security is likely to be called, and Lipper Intermediate U.S. Government Funds Index (Peer Group Index) 3.71 we prefer to own one with a longer maturity date. SOURCE: A I M MANAGEMENT GROUP INC., LEHMAN BROTHERS INC. AND LIPPER INC. - A security has become fully valued. ======================================================================================= Market conditions and your Fund HOW WE INVEST The U.S. economy continued to show clear We seek to enhance returns by taking direction of interest rates. We develop a signs of deceleration in the pace of its calculated risks in sector allocation, short-term strategic outlook and look to expansion by the end of 2006. Growth in duration management and security selection take advantage of tactical opportunities real gross domestic product (GDP) slipped to take advantage of prevailing market when they arise. This strategic outlook to a 2.0% annual rate in the third conditions and future developments. helps determine the Fund's allocation quarter, down from a 2.6% pace in the Duration is a measure of a debt security's strategy among the three sectors second quarter and from a surprisingly sensitivity to interest rate changes, represented in our style-specific strong 5.6% in the first quarter. The expressed in terms of years. Longer benchmark -- U.S. Treasuries, U.S. agency slowdown was mostly attributable to durations usually are more sensitive to bonds and U.S. agency mortgage backed softening in the residential construction interest rate movements. securities (MBS) -- and where we position market. However, deceleration in the Fund's duration within a band of plus homebuilding had not yet noticeably We begin by assessing the overall or minus 1.50 years around our benchmark's impacted the other sectors of the economy, economic environment and its impact on the duration. This duration band places limits as consumer spending and business level and on how investment remained solid. ======================================================================================= PORTFOLIO COMPOSITION TOP FIXED INCOME ISSUERS* On December 12, 2006, the U.S. Federal --------------------------------------------------------------------------------------- Reserve Board (the Fed) decided to keep By sector, based on total investments 1. Federal National Mortgage the target federal funds rate at 5.25%. Mortgage U.S. Agency Obligations 65.3% Association (FNMA) 50.7% This was the fourth consecutive rate pause Non-Mortgage U.S. Agency Obligations 25.5 2. Federal Home Loan after 17 consecutive rate increases. While Money Market Funds 8.3 Mortgage Corp. (FHLMC) 33.1 this pause refreshed the financial U.S. Treasury Obligations 0.6 3. Government National markets, members of the Fed reiterated Foreign Sovereign Bonds 0.3 Mortgage Association (GNMA) 11.6 that some inflation risks persist and that 4. Federal Home Loan Bank (FHLB) 9.1 future target interest rate actions would Total Net Assets $923.62 million 5. Federal Farm Credit Bank 7.2 continue to depend on incoming economic 6. Tennessee Valley Authority 1.2 data. Total Number of Holdings* 738 7. Federal Agricultural Mortgage Corp. 1.1 The U.S. Treasury yield curve, which 8. U.S. Treasury Securities 0.8 represents the yields of Treasury 9. Israel Government AID Bond securities with different maturities, was (Israel) 0.4 inverted for much of 2006 as the Fed 10. Private Export Funding Corp. 0.3 raised short rates through June. That meant that shorter term Treasuries were generally yielding more than longer term Treasuries, a reversal of the norm. The two- to 10-year spread was inverted by 11 basis points on December 29, 2006. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ====================================================================================================================================
2
AIM V.I. GOVERNMENT SECURITIES FUND In 2006, the bond market was were among the top performing securities Scot W. Johnson characterized by low volatility. The in the MBS market therefore an emphasis on Chartered Financial Analyst, Lehman Brothers U.S. Aggregate Bond Index, the higher-coupon pools slightly detracted [JOHNSON senior portfolio manager, is a measure of the investment-grade bond from performance. PHOTO] lead manager of AIM V.I. market performance, delivered a total Government Securities Fund. return of 4.33% for the year. Over the The Fund's assets were diversified Mr. Johnson joined AIM in 1994. He earned same period, MBS generated the highest across different types of MBS issuers such both a B.A. in economics and an M.B.A. in total return, 5.22%, relative to other as the Government National Mortgage finance from Vanderbilt University. investment-grade bond segments as measured Association (GNMA), the Federal Home Loan by the Lehman Brothers Mortgage Backed Mortgage Corporation (FHLMC) and Federal Clint W. Dudley Securities Index. This was primarily due National Mortgage Association (FNMA). The Chartered Financial Analyst, to strong demand from foreign investors. pools issued by FNMA outperformed [DUDLEY portfolio manager, is manager mortgages issued by GNMA and FHLMC. PHOTO] of AIM V.I. Government The vast majority of the Fund's Investing about 50% of the Fund's assets Securities Fund. Mr. Dudley holdings were MBS, although the Fund can in securities issued by FNMA helped joined AIM in 1998. He earned both a own all forms of government securities. We performance. B.B.A. and an M.B.A. from Baylor prefer the higher yields and potential University. returns of MBS over U.S. Treasury Throughout the year, we used securities, as we believe that over longer mortgage dollar roll transactions to take Assisted by the Taxable Investment Grade periods the greater yields may result in advantage of opportunities in the mortgage Bond Team higher income and total return for our market and to enhance current income. In shareholders. Considering the MBS market mortgage dollar roll transactions, we sell delivered excellent performance for the a mortgage-backed security and year, the Fund's large weight in mortgages simultaneously agree to later repurchase a had a positive effect on relative substantially similar mortgage-backed performance. security with the same interest rate and maturity date. While giving up the right Throughout the year, the Fund's to receive interest and principal payments duration was kept at levels below that of on the security we sold, the Fund may its style-specific benchmark, reflecting benefit from the interest earned on our belief that the Fed would hike investing the proceeds of the sale. interest rates to slow the economic However, the Fund may lose money if these growth. However, at the August meeting types of securities decline in value, due monetary policymakers decided to pause to market conditions or prepayments of the with its interest rate tightening underlying mortgages. During the first campaign. Although during the first and half of the year, rising interest rates fourth quarters the Fund's short duration and inflationary pressure in the economy structure benefited performance, our caused some dollar roll holdings of the relatively more aggressive duration Fund to decline in value, which slightly underweight had a negative impact on hindered the Fund's performance. returns. IN CLOSING We began to implement a new strategy of using derivatives in 2006-- We thank you for your investment in AIM specifically U.S. Treasury futures--to V.I. Government Securities Fund. gain exposure to the U.S. Treasury market for purposes of managing the Fund's THE VIEWS AND OPINIONS EXPRESSED IN duration. U.S. Treasury futures offer a MANAGEMENT'S DISCUSSION OF FUND variety of standardized contracts, are PERFORMANCE ARE THOSE OF A I M ADVISORS, exchange traded and provide a high level INC. THESE VIEWS AND OPINIONS ARE SUBJECT of liquidity. This strategy offers us the TO CHANGE AT ANY TIME BASED ON FACTORS opportunity to employ the Fund's cash more SUCH AS MARKET AND ECONOMIC CONDITIONS. effectively, compared to buying actual THESE VIEWS AND OPINIONS MAY NOT BE RELIED bonds. During the year we used two-and UPON AS INVESTMENT ADVICE OR five-year U.S. Treasury Note futures for RECOMMENDATIONS, OR AS AN OFFER FOR A purposes of maintaining a relatively PARTICULAR SECURITY. THE INFORMATION IS shorter duration as we viewed the yields NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF on the 10-year U.S. Treasuries to be in ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR the lower range. THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT A I M Within the MBS market, we focused on ADVISORS, INC. MAKES NO REPRESENTATION OR higher coupon securities with lower WARRANTY AS TO THEIR COMPLETENESS OR duration mortgage pools in order to ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE maximize yield. However, lower-coupon IS NO GUARANTEE OF FUTURE RESULTS, THESE FOR A DISCUSSION OF THE RISKS OF INVESTING conventional 30-year mortgages INSIGHTS MAY HELP YOU UNDERSTAND OUR IN YOUR FUND, INDEXES USED IN THIS REPORT INVESTMENT MANAGEMENT PHILOSOPHY. AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
3 AIM V.I. GOVERNMENT SECURITIES FUND YOUR FUND'S LONG-TERM PERFORMANCE ========================================== AVERAGE ANNUAL TOTAL RETURNS SHARES SINCE THEIR INCEPTION AND THE VARIABLE INSURANCE FUNDS, IS CURRENTLY ------------------------------------------ RESTATED HISTORICAL PERFORMANCE OF SERIES OFFERED THROUGH INSURANCE COMPANIES As of 12/31/06 I SHARES (FOR PERIODS PRIOR TO INCEPTION ISSUING VARIABLE PRODUCTS. YOU CANNOT OF SERIES II SHARES) ADJUSTED TO REFLECT PURCHASE SHARES OF THE FUND DIRECTLY. SERIES I SHARES THE RULE 12b-1 FEES APPLICABLE TO SERIES PERFORMANCE FIGURES GIVEN REPRESENT THE Inception (5/5/93) 4.81% II SHARES. THE PERFORMANCE OF THE FUND'S FUND AND ARE NOT INTENDED TO REFLECT 10 Years 4.89 SERIES I AND SERIES II SHARE CLASSES WILL ACTUAL VARIABLE PRODUCT VALUES. THEY DO 5 Years 3.64 DIFFER PRIMARILY DUE TO DIFFERENT CLASS NOT REFLECT SALES CHARGES, EXPENSES AND 1 Year 3.55 EXPENSES. FEES ASSESSED IN CONNECTION WITH A VARIABLE PRODUCT. SALES CHARGES, EXPENSES SERIES II SHARES THE PERFORMANCE DATA QUOTED REPRESENT AND FEES, WHICH ARE DETERMINED BY THE 10 Years 4.62% PAST PERFORMANCE AND CANNOT GUARANTEE VARIABLE PRODUCT ISSUERS, WILL VARY AND 5 Years 3.38 COMPARABLE FUTURE RESULTS; CURRENT WILL LOWER THE TOTAL RETURN. 1 Year 3.28 PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE ========================================== CONTACT YOUR VARIABLE PRODUCT ISSUER OR PER NASD REQUIREMENTS, THE MOST FINANCIAL ADVISOR FOR THE MOST RECENT RECENT MONTH-END PERFORMANCE DATA AT THE ========================================== MONTH-END VARIABLE PRODUCT PERFORMANCE. FUND LEVEL, EXCLUDING VARIABLE PRODUCT CUMULATIVE TOTAL RETURNS PERFORMANCE FIGURES REFLECT FUND EXPENSES, CHARGES, IS AVAILABLE ON THIS AIM REINVESTED DISTRIBUTIONS AND CHANGES IN AUTOMATED INFORMATION LINE, 866-702-4402. 6 months ended 12/31/06 NET ASSET VALUE. INVESTMENT RETURN AND AS MENTIONED ABOVE, FOR THE MOST RECENT PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MONTH-END PERFORMANCE INCLUDING VARIABLE Series I Shares 3.64% MAY HAVE A GAIN OR LOSS WHEN YOU SELL PRODUCT CHARGES, PLEASE CONTACT YOUR Series II Shares 3.45 SHARES. VARIABLE PRODUCT ISSUER OR FINANCIAL ========================================== ADVISOR. SERIES II SHARES' INCEPTION DATE IS AIM V.I. GOVERNMENT SECURITIES SEPTEMBER 19, 2001. RETURNS SINCE THAT FUND, A SERIES PORTFOLIO OF AIM DATE ARE HISTORICAL. ALL OTHER RETURNS ARE THE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF SERIES II ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND The Fund can invest in U.S. ABOUT INDEXES USED IN THIS REPORT government agency mortgage-backed To the extent the Fund holds cash or cash securities. The Fund may purchase such The unmanaged LEHMAN BROTHERS U.S. equivalents rather than equity securities securities at a premium, which means that AGGREGATE BOND INDEX (the Lehman for risk management purposes, the Fund may a faster-than-expected principal Aggregate), which represents the U.S. not achieve its investment objective. prepayment rate will reduce both the investment-grade fixed-rate bond market market value of and income from such (including government and corporate If the seller of a repurchase securities. securities, mortgage pass-through agreement in which the Fund invests securities and asset-backed securities), defaults on its obligation or declares Foreign securities have additional is compiled by Lehman Brothers, a global bankruptcy, the Fund may experience delays risks, including exchange rate changes, investment bank. in selling the securities underlying the political and economic upheaval, the repurchase agreement. relative lack of information about these The unmanaged LEHMAN BROTHERS companies, relatively low market liquidity INTERMEDIATE U.S. GOVERNMENT AND MORTGAGE There is no guarantee that the and the potential lack of strict financial INDEX is a market-weighted combination of investment techniques and risk analyses and accounting controls and standards. the unmanaged Lehman Brothers Intermediate used by the Fund's portfolio managers will U.S. Government Bond Index and the produce the desired results. Investing in emerging markets unmanaged Lehman Brothers Mortgage Backed involves greater risk than investing in Securities Fixed Rate Index. It includes Debt securities are particularly more established markets. The risks securities in the intermediate maturity vulnerable to credit risk and interest include the relatively smaller size and range of the U.S. Government Index that rate fluctuations. lesser liquidity of these markets, high must have between one year and 10 years to inflation rates, adverse political final maturity, regardless of call Some securities purchased by the developments and lack of timely features, and fixed-rate mortgage-backed Fund are not guaranteed by the U.S. information. securities government. The agencies or instrumentalities issuing such securities may default or otherwise be unable to honor a financial obligation. Continued on page 5
4 AIM V.I. GOVERNMENT SECURITIES FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. In This chart, which is a logarithmic this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value of value of the Fund and its indexes. We the investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same effective than other types of charts in size as the space between $10,000 and illustrating changes in value during the $20,000. early years shown in the chart. The vertical axis, the one that indicates the dollar ==================================================================================================================================== Continued from page 4 collateralized by 15-year, 30-year and The Lipper VUF General U.S. Government net asset values calculated for balloon mortgages issued by GNMA, FHLMC or Funds Index, recently published by Lipper shareholder transactions. Generally FNMA. Inc., comprises the largest underlying accepted accounting principles require funds in each variable insurance category adjustments to be made to the net assets LEHMAN BROTHERS U.S. MORTGAGE BACKED and does not include mortality and expense of the Fund at period end for financial SECURITIES INDEX covers the fixed-rate fees. reporting purposes, and as such, the net agency mortgage-backed pass-through asset values for shareholder transactions securities of Ginnie Mae (GNMA), Fannie The Fund is not managed to track the and the returns based on those net asset Mae (FNMA) and Freddie Mac (FHLMC). performance of any particular index, values may differ from the net asset including the indexes defined here, and values and returns reported in the THE LIPPER INTERMEDIATE U.S. consequently, the performance of the Fund Financial Highlights. Additionally, the GOVERNMENT FUNDS INDEX represents an may deviate significantly from the returns and net asset values shown average of the 10 largest intermediate-term performance of the index. throughout this report are at the Fund U.S. government bond funds tracked by level only and do not include variable Lipper Inc., an independent mutual fund A direct investment cannot be made product issuer charges. If such charges performance monitor. in an index. Unless otherwise indicated, were included, the total returns would be index results include reinvested dividends, lower. In conjunction with the annual and they do not reflect sales charges. prospectus update on or about May 1, 2007, Performance of an index of funds reflects The Chartered Financial Analyst the AIM V.I. Government Securities Fund fund expenses; performance of a market --Registered Trademark-- (CFA --Registered prospectus will be amended to reflect that index does not. Trademark--) designation is a globally the Fund has elected to use the Lipper recognized standard for measuring the Variable Underlying Funds (VUF) General OTHER INFORMATION competence and integrity of investment U.S. Government Funds Index as its professionals. peer group rather than the Lipper The returns shown in the management's Intermediate U.S. Government Funds Index. discussion of Fund performance are based on
5
=================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/93, Fund data from 5/5/93 AIM V.I. GOVERNMENT SECURITIES FUND LIPPER INTERMEDIATE U.S. GOVERNMENT DATE -SERIES I SHARES LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX FUNDS INDEX ----------------------------------------------------------------------------------------------------------------------------------- 4/30/93 $ 10000 $ 10000 5/93 $ 9990 10013 9991 6/93 10150 10194 10154 7/93 10180 10252 10194 8/93 10330 10432 10352 9/93 10363 10460 10394 10/93 10393 10499 10414 11/93 10312 10410 10341 12/93 10355 10466 10383 1/94 10479 10608 10499 2/94 10274 10423 10317 3/94 10064 10166 10113 4/94 9940 10085 10015 5/94 9950 10084 9999 6/94 9923 10062 9980 7/94 10070 10261 10116 8/94 10080 10274 10134 9/94 9969 10123 10017 10/94 9948 10114 10007 11/94 9916 10091 9959 12/94 9970 10161 9998 1/95 10120 10362 10167 2/95 10325 10609 10374 3/95 10367 10674 10440 4/95 10487 10823 10561 5/95 10858 11242 10900 6/95 10935 11324 10963 7/95 10869 11299 10939 8/95 10990 11435 11050 9/95 11077 11546 11141 10/95 11219 11696 11272 11/95 11383 11872 11423 12/95 11520 12038 11554 1/96 11599 12118 11632 2/96 11373 11908 11447 3/96 11293 11825 11368 4/96 11226 11758 11304 5/96 11181 11735 11279 6/96 11317 11892 11407 7/96 11351 11925 11432 8/96 11328 11905 11418 9/96 11498 12112 11596 10/96 11713 12380 11823 11/96 11883 12592 12007 12/96 11784 12475 11904 1/97 11820 12514 11937 2/97 11832 12545 11956 3/97 11736 12406 11843 4/97 11891 12591 12003 5/97 11974 12710 12100 6/97 12094 12861 12229 7/97 12368 13208 12528 8/97 12273 13095 12424 9/97 12428 13289 12595 10/97 12571 13481 12762 11/97 12607 13543 12799 12/97 12744 13680 12918 1/98 12887 13855 13086 2/98 12876 13845 13062 3/98 12923 13893 13103 4/98 12983 13965 13159 5/98 13102 14098 13273 6/98 13210 14217 13383 7/98 13245 14247 13409 8/98 13460 14479 13657 9/98 13734 14818 13982 10/98 13663 14740 13903 11/98 13698 14824 13923 12/98 13729 14868 13974 1/99 13815 14974 14042 2/99 13544 14713 13779 3/99 13617 14794 13868 4/99 13654 14841 13905 5/99 13507 14711 13776 6/99 13446 14664 13731 7/99 13410 14602 13683 8/99 13410 14595 13669 9/99 13545 14764 13817 =================================================================================================================================== SOURCE: LIPPER INC.
=================================================================================================================================== [MOUNTAIN CHART] 10/99 13594 14818 13847 11/99 13594 14817 13848 12/99 13548 14746 13780 1/00 13496 14698 13737 2/00 13649 14875 13888 3/00 13789 15071 14065 4/00 13777 15028 14014 5/00 13789 15021 13999 6/00 14018 15334 14268 7/00 14095 15473 14378 8/00 14262 15697 14582 9/00 14376 15796 14681 10/00 14465 15901 14785 11/00 14682 16160 15027 12/00 14920 16460 15319 1/01 15067 16729 15527 2/01 15188 16875 15682 3/01 15215 16960 15754 4/01 15148 16890 15662 5/01 15201 16991 15743 6/01 15241 17056 15792 7/01 15535 17437 16139 8/01 15656 17637 16309 9/01 15936 17842 16549 10/01 16257 18215 16893 11/01 16042 17964 16614 12/01 15875 17850 16480 1/02 15985 17995 16592 2/02 16137 18169 16764 3/02 15916 17867 16459 4/02 16205 18213 16778 5/02 16302 18368 16928 6/02 16426 18527 17106 7/02 16674 18750 17374 8/02 16923 19067 17649 9/02 17266 19376 17963 10/02 17170 19288 17882 11/02 17060 19282 17768 12/02 17399 19681 18127 1/03 17344 19698 18094 2/03 17526 19970 18332 3/03 17428 19955 18294 4/03 17511 20119 18375 5/03 17735 20495 18690 6/03 17679 20454 18636 7/03 17173 19766 18050 8/03 17159 19897 18114 9/03 17538 20424 18540 10/03 17384 20234 18364 11/03 17454 20282 18379 12/03 17585 20489 18523 1/04 17685 20653 18636 2/04 17800 20877 18805 3/04 17871 21033 18931 4/04 17583 20486 18498 5/04 17511 20404 18424 6/04 17611 20519 18494 7/04 17711 20723 18643 8/04 17927 21118 18929 9/04 17927 21175 18944 10/04 18013 21353 19058 11/04 17956 21183 18920 12/04 18033 21377 19050 1/05 18064 21512 19116 2/05 18004 21385 19013 3/05 17973 21275 18953 4/05 18108 21563 19181 5/05 18197 21796 19337 6/05 18243 21915 19416 7/05 18197 21715 19253 8/05 18286 21994 19476 9/05 18226 21767 19390 10/05 18180 21595 19190 11/05 18226 21690 19253 12/05 18331 21897 19402 1/06 18362 21898 19412 2/06 18394 21971 19448 3/06 18302 21755 19309 4/06 18302 21716 19288 5/06 18302 21692 19284 6/06 18316 21738 19315 7/06 18501 22032 19531 8/06 18640 22370 19777 9/06 18748 22566 19926 10/06 18857 22715 20032 11/06 18964 22979 20229 12/06 18990 22846 20121 ===================================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. GOVERNMENT SECURITIES FUND EXAMPLE ACTUAL EXPENSES 5% per year before expenses, which is not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information about actual cumulative total returns at net ongoing costs, including management fees; actual account values and actual expenses. asset value after expenses for the six distribution and/or service (12b-1) fees; You may use the information in this table, months ended December 31, 2006, appear in and other Fund expenses. This example is together with the amount you invested, to the table "Cumulative Total Returns" on intended to help you understand your estimate the expenses that you paid over page 4. ongoing costs (in dollars) of investing in the period. Simply divide your account the Fund and to compare these costs with value by $1,000 (for example, an $8,600 The hypothetical account values and ongoing costs of investing in other mutual account value divided by $1,000 = 8.6), expenses may not be used to estimate the funds. The example is based on an then multiply the result by the number in actual ending account balance or expenses investment of $1,000 invested at the the table under the heading entitled you paid for the period. You may use this beginning of the period and held for the "Actual Expenses Paid During Period" to information to compare the ongoing costs entire period July 1, 2006, through estimate the expenses you paid on your of investing in the Fund and other funds. December 31, 2006. account during this period. To do so, compare this 5% hypothetical example with the 5% hypothetical examples The actual and hypothetical expenses HYPOTHETICAL EXAMPLE FOR COMPARISON that appear in the shareholder reports of in the examples below do not represent the PURPOSES the other funds. effect of any fees or other expenses assessed in connection with a variable The table below also provides information Please note that the expenses shown in product; if they did, the expenses shown about hypothetical account values and the table are meant to highlight your would be higher while the ending account hypothetical expenses based on the Fund's ongoing costs. Therefore, the hypothetical values shown would be lower. actual expense ratio and an assumed rate information is useful in comparing ongoing of return of costs, and will not help you determine the relative total costs of owning different funds.
=================================================================================================================================== HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $ 1,036.40 $ 3.64 $ 1,021.63 $ 3.62 0.71% Series II 1,000.00 1,034.50 4.92 1,020.37 4.89 0.96 ===================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6 APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. GOVERNMENT SECURITIES FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory should be made to the Fund and that it was Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board not necessary to change the Fund's management of AIM V.I. Government reviewed the services to be provided by portfolio management team at this time. Securities Fund (the "Fund") and, as AIM under the Advisory Agreement. Based on However, due to the Fund's required by law, determines annually such review, the Board concluded that the under-performance, the Board also whether to approve the continuance of the range of services to be provided by AIM concluded that it would be appropriate for Fund's advisory agreement with A I M under the Advisory Agreement was the Board to continue to closely monitor Advisors, Inc. ("AIM"). Based upon the appropriate and that AIM currently is and review the performance of the Fund. recommendation of the Investments providing services in accordance with the Although the independent written Committee of the Board, at a meeting held terms of the Advisory Agreement. evaluation of the Fund's Senior Officer on June 27, 2006, the Board, including all (discussed below) only considered Fund of the independent trustees, approved the - The quality of services to be provided performance through the most recent continuance of the advisory agreement (the by AIM. The Board reviewed the credentials calendar year, the Board also reviewed "Advisory Agreement") between the Fund and and experience of the officers and more recent Fund performance, which did AIM for another year, effective July 1, employees of AIM who will provide not change their conclusions. 2006. investment advisory services to the Fund. In reviewing the qualifications of AIM to - Meetings with the Fund's portfolio The Board considered the factors provide investment advisory services, the managers and investment personnel. With discussed below in evaluating the fairness Board considered such issues as AIM's respect to the Fund, the Board is meeting and reasonableness of the Advisory portfolio and product review process, periodically with such Fund's portfolio Agreement at the meeting on June 27, 2006 various back office support functions managers and/or other investment personnel and as part of the Board's ongoing provided by AIM and AIM's equity and fixed and believes that such individuals are oversight of the Fund. In their income trading operations. Based on the competent and able to continue to carry deliberations, the Board and the review of these and other factors, the out their responsibilities under the independent trustees did not identify any Board concluded that the quality of Advisory Agreement. particular factor that was controlling, services to be provided by AIM was and each trustee attributed different appropriate and that AIM currently is - Overall performance of AIM. The Board weights to the various factors. providing satisfactory services in considered the overall performance of AIM accordance with the terms of the Advisory in providing investment advisory and One responsibility of the Agreement. portfolio administrative services to the independent Senior Officer of the Fund is Fund and concluded that such performance to manage the process by which the Fund's - The performance of the Fund relative to was satisfactory. proposed management fees are negotiated to comparable funds. The Board reviewed the ensure that they are negotiated in a performance of the Fund during the past - Fees relative to those of clients of AIM manner which is at arms' length and one, three and five calendar years against with comparable investment strategies. The reasonable. To that end, the Senior the performance of funds advised by other Board noted that AIM does not serve as an Officer must either supervise a advisors with investment strategies advisor to other mutual funds or other competitive bidding process or prepare an comparable to those of the Fund. The Board clients with investment strategies independent written evaluation. The Senior noted that the Fund's performance in such comparable to those of the Fund. Officer has recommended an independent periods was below the median performance written evaluation in lieu of a of such comparable funds. Based on this - Fees relative to those of comparable competitive bidding process and, upon the review and after taking account of all of funds with other advisors. The Board direction of the Board, has prepared such the other factors that the Board reviewed the advisory fee rate for the an independent written evaluation. Such considered in determining whether to Fund under the Advisory Agreement. The written evaluation also considered certain continue the Advisory Agreement for the Board compared effective contractual of the factors discussed below. In Fund, the Board concluded that no changes advisory fee rates at a common asset level addition, as discussed below, the Senior should be made to the Fund and that it was at the end of the past calendar year and Officer made a recommendation to the Board not necessary to change the Fund's noted that the Fund's rate was comparable in connection with such written portfolio management team at this time. to the median rate of the funds advised by evaluation. However, due to the Fund's other advisors with investment strategies under-performance, the Board also comparable to those of the Fund that the The discussion below serves as a concluded that it would be appropriate for Board reviewed. The Board noted that AIM summary of the Senior Officer's the Board to continue to closely monitor has agreed to limit the Fund's total independent written evaluation and and review the performance of the Fund. operating expenses, as discussed below. recommendation to the Board in connection Although the independent written Based on this review, the Board concluded therewith, as well as a discussion of the evaluation of the Fund's Senior Officer that the advisory fee rate for the Fund material factors and the conclusions with (discussed below) only considered Fund under the Advisory Agreement was fair and respect thereto that formed the basis for performance through the most recent reasonable. the Board's approval of the Advisory calendar year, the Board also reviewed Agreement. After consideration of all of more recent Fund performance, which did - Expense limitations and fee waivers. The the factors below and based on its not change their conclusions. Board noted that AIM has contractually informed business judgment, the Board agreed to waive fees and/or limit expenses determined that the Advisory Agreement is - The performance of the Fund relative to of the Fund through April 30, 2008 so that in the best interests of the Fund and its indices. The Board reviewed the total annual operating expenses are shareholders and that the compensation to performance of the Fund during the past limited to a specified percentage of AIM under the Advisory Agreement is fair one, three and five calendar years against average daily net assets for each class of and reasonable and would have been the performance of the Lipper Variable the Fund. The Board considered the obtained through arm's length Underlying Fund General U.S. Government contractual nature of this fee waiver and negotiations. Fund Index. The Board noted that the noted that it remains in effect until Fund's performance in such periods was April 30, 2008. The Board considered the Unless otherwise stated, information below the performance of such Index. Based effect this fee waiver/expense limitation presented below is as of June 27, 2006 and on this review and after taking account of would have on the Fund's estimated does not reflect any changes that may have all of the other factors that the Board expenses and concluded that the levels of occurred since June 27, 2006, including considered in determining whether to fee waivers/expense limitations for the but not limited to changes to the Fund's continue the Advisory Agreement for the Fund were fair and reasonable. performance, advisory fees, expense Fund, the Board concluded that no changes limitations and/or fee waivers. (continued)
7 AIM V.I. GOVERNMENT SECURITIES FUND - Breakpoints and economies of scale. The - Profitability of AIM and its affiliates. - Other factors and current trends. The Board reviewed the structure of the Fund's The Board reviewed information concerning Board considered the steps that AIM and advisory fee under the Advisory Agreement, the profitability of AIM's (and its its affiliates have taken over the last noting that it includes one breakpoint. affiliates') investment advisory and other several years, and continue to take, in The Board reviewed the level of the Fund's activities and its financial condition. order to improve the quality and advisory fees, and noted that such fees, The Board considered the overall efficiency of the services they provide to as a percentage of the Fund's net assets, profitability of AIM, as well as the the Funds in the areas of investment have decreased as net assets increased profitability of AIM in connection with performance, product line diversification, because the Advisory Agreement includes a managing the Fund. The Board noted that distribution, fund operations, shareholder breakpoint. The Board concluded that the AIM's operations remain profitable, services and compliance. The Board Fund's fee levels under the Advisory although increased expenses in recent concluded that these steps taken by AIM Agreement therefore reflect economies of years have reduced AIM's profitability. have improved, and are likely to continue scale and that it was not necessary to Based on the review of the profitability to improve, the quality and efficiency of change the advisory fee breakpoints in the of AIM's and its affiliates' investment the services AIM and its affiliates Fund's advisory fee schedule. advisory and other activities and its provide to the Fund in each of these financial condition, the Board concluded areas, and support the Board's approval of - Investments in affiliated money market that the compensation to be paid by the the continuance of the Advisory Agreement funds. The Board also took into account Fund to AIM under its Advisory Agreement for the Fund. the fact that uninvested cash and cash was not excessive. collateral from securities lending arrangements, if any (collectively, "cash - Benefits of soft dollars to AIM. The balances") of the Fund may be invested in Board considered the benefits realized by money market funds advised by AIM pursuant AIM as a result of brokerage transactions to the terms of an SEC exemptive order. executed through "soft dollar" The Board found that the Fund may realize arrangements. Under these arrangements, certain benefits upon investing cash brokerage commissions paid by the Fund balances in AIM advised money market and/or other funds advised by AIM are used funds, including a higher net return, to pay for research and execution increased liquidity, increased services. This research may be used by AIM diversification or decreased transaction in making investment decisions for the costs. The Board also found that the Fund Fund. The Board concluded that such will not receive reduced services if it arrangements were appropriate. invests its cash balances in such money market funds. The Board noted that, to the - AIM's financial soundness in light of extent the Fund invests uninvested cash in the Fund's needs. The Board considered affiliated money market funds, AIM has whether AIM is financially sound and has voluntarily agreed to waive a portion of the resources necessary to perform its the advisory fees it receives from the obligations under the Advisory Agreement, Fund attributable to such investment. The and concluded that AIM has the financial Board further determined that the proposed resources necessary to fulfill its securities lending program and related obligations under the Advisory Agreement. procedures with respect to the lending Fund is in the best interests of the - Historical relationship between the Fund lending Fund and its respective and AIM. In determining whether to shareholders. The Board therefore continue the Advisory Agreement for the concluded that the investment of cash Fund, the Board also considered the prior collateral received in connection with the relationship between AIM and the Fund, as securities lending program in the money well as the Board's knowledge of AIM's market funds according to the procedures operations, and concluded that it was is in the best interests of the lending beneficial to maintain the current Fund and its respective shareholders. relationship, in part, because of such knowledge. The Board also reviewed the - Independent written evaluation and general nature of the non-investment recommendations of the Fund's Senior advisory services currently performed by Officer. The Board noted that, upon their AIM and its affiliates, such as direction, the Senior Officer of the Fund, administrative, transfer agency and who is independent of AIM and AIM's distribution services, and the fees affiliates, had prepared an independent received by AIM and its affiliates for written evaluation in order to assist the performing such services. In addition to Board in determining the reasonableness of reviewing such services, the trustees also the proposed management fees of the AIM considered the organizational structure Funds, including the Fund. The Board noted employed by AIM and its affiliates to that the Senior Officer's written provide those services. Based on the evaluation had been relied upon by the review of these and other factors, the Board in this regard in lieu of a Board concluded that AIM and its competitive bidding process. In affiliates were qualified to continue to determining whether to continue the provide non-investment advisory services Advisory Agreement for the Fund, the Board to the Fund, including administrative, considered the Senior Officer's written transfer agency and distribution services, evaluation. and that AIM and its affiliates currently are providing satisfactory non-investment advisory services.
8 AIM V.I. Government Securities Fund SCHEDULE OF INVESTMENTS December 31, 2006
PRINCIPAL AMOUNT VALUE --------------------------------------------------------------------------- U.S. MORTGAGE-BACKED SECURITIES-82.10%(a) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)-31.81% Pass Through Ctfs., 8.00%, 05/01/08 to 09/01/36 $27,582,946 $ 29,198,610 --------------------------------------------------------------------------- 6.00%, 11/01/08 to 02/01/34 23,136,597 23,460,408 --------------------------------------------------------------------------- 6.50%, 12/01/08 to 12/01/35 63,399,976 64,841,841 --------------------------------------------------------------------------- 7.00%, 11/01/10 to 09/01/36 34,079,229 35,114,642 --------------------------------------------------------------------------- 10.50%, 08/01/19 13,545 14,779 --------------------------------------------------------------------------- 8.50%, 09/01/20 to 08/01/31 2,157,759 2,312,528 --------------------------------------------------------------------------- 10.00%, 03/01/21 200,215 219,853 --------------------------------------------------------------------------- 9.00%, 06/01/21 to 06/01/22 1,374,098 1,469,597 --------------------------------------------------------------------------- 7.05%, 05/20/27 607,499 623,781 --------------------------------------------------------------------------- 7.50%, 07/01/29 to 08/01/36 6,296,164 6,546,768 --------------------------------------------------------------------------- Pass Through Ctfs., TBA, 4.50%, 01/01/22(b) 28,134,265 27,114,398 --------------------------------------------------------------------------- 5.00%, 01/01/22 to 01/01/37(b) 53,920,000 52,535,995 --------------------------------------------------------------------------- 5.50%, 01/01/37(b) 33,312,283 32,947,930 --------------------------------------------------------------------------- 6.00%, 02/01/37(b) 17,300,000 17,424,344 =========================================================================== 293,825,474 =========================================================================== FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-38.71% Pass Through Ctfs., 7.50%, 11/01/09 to 10/01/36 32,031,337 33,361,706 --------------------------------------------------------------------------- 6.50%, 10/01/10 to 10/01/35 49,606,224 50,861,261 --------------------------------------------------------------------------- 7.00%, 12/01/10 to 06/01/36 79,164,921 81,708,882 --------------------------------------------------------------------------- 8.00%, 06/01/12 to 11/01/36 27,442,573 29,014,390 --------------------------------------------------------------------------- 8.50%, 06/01/12 to 12/01/36 12,354,977 13,266,953 --------------------------------------------------------------------------- 10.00%, 09/01/13 to 03/01/16 158,570 169,293 --------------------------------------------------------------------------- 6.00%, 03/01/17 to 02/01/34 13,337,908 13,541,361 --------------------------------------------------------------------------- 5.00%, 11/01/17 to 12/01/33 2,572,926 2,530,818 --------------------------------------------------------------------------- 6.75%, 07/01/24 2,141,572 2,198,670 --------------------------------------------------------------------------- 6.95%, 10/01/25 to 09/01/26 244,038 252,174 --------------------------------------------------------------------------- Pass Through Ctfs., TBA, 5.00%, 01/01/22(b) 5,973,250 5,872,451 --------------------------------------------------------------------------- 5.50%, 01/01/22 to 01/01/37(b) 39,709,268 39,636,424 --------------------------------------------------------------------------- 6.00%, 01/01/22 to 01/01/37(b) 66,307,701 66,962,570 --------------------------------------------------------------------------- 6.50%, 01/01/37(b) 17,772,996 18,111,794 =========================================================================== 357,488,747 =========================================================================== GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)-11.58% Pass Through Ctfs., 7.50%, 03/15/08 to 11/15/36 24,948,811 26,021,838 --------------------------------------------------------------------------- 9.00%, 09/15/08 to 12/20/16 191,695 204,452 ---------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-(CONTINUED) 6.50%, 09/20/08 to 09/15/35 $41,811,402 $ 43,164,297 --------------------------------------------------------------------------- 9.38%, 06/15/09 to 12/15/09 720,947 747,763 --------------------------------------------------------------------------- 8.00%, 07/15/12 to 10/15/36 10,257,506 10,875,898 --------------------------------------------------------------------------- 11.00%, 10/15/15 2,818 3,130 --------------------------------------------------------------------------- 9.50%, 09/15/16 4,057 4,398 --------------------------------------------------------------------------- 7.00%, 04/15/17 to 10/15/36 13,844,744 14,378,735 --------------------------------------------------------------------------- 10.50%, 09/15/17 to 11/15/19 5,268 5,889 --------------------------------------------------------------------------- 8.50%, 12/15/17 to 10/15/36 3,275,698 3,508,090 --------------------------------------------------------------------------- 10.00%, 06/15/19 75,778 83,972 --------------------------------------------------------------------------- 6.00%, 06/20/20 to 08/15/33 5,696,591 5,798,337 --------------------------------------------------------------------------- 6.95%, 08/20/25 to 08/20/27 2,140,345 2,202,123 =========================================================================== 106,998,922 =========================================================================== Total U.S. Mortgage-Backed Securities (Cost $764,163,252) 758,313,143 =========================================================================== U.S. GOVERNMENT AGENCY SECURITIES-32.05%(a) FEDERAL AGRICULTURAL MORTGAGE CORP.-1.08% Medium Term Notes, 5.40%, 12/14/11 10,000,000 9,952,900 =========================================================================== FEDERAL FARM CREDIT BANK-7.15% Bonds, 5.75%, 01/18/11 2,000,000 2,052,980 --------------------------------------------------------------------------- 5.70%, 06/08/15 42,500,000 42,164,675 --------------------------------------------------------------------------- 6.15%, 10/05/20 6,000,000 5,943,960 --------------------------------------------------------------------------- 5.59%, 10/04/21 10,075,000 10,003,568 --------------------------------------------------------------------------- Medium Term Notes, 5.75%, 12/07/28 5,500,000 5,864,210 =========================================================================== 66,029,393 =========================================================================== FEDERAL HOME LOAN BANK (FHLB)-9.05% Unsec. Bonds, 5.60%, 06/09/20 2,150,000 2,086,618 --------------------------------------------------------------------------- 6.35%, 10/04/21 5,705,000 5,677,502 --------------------------------------------------------------------------- 6.15%, 12/08/26 43,000,000 42,299,530 --------------------------------------------------------------------------- Unsec. Disc. Bonds, 5.25%, 11/16/15(c) 1,705,000 1,698,691 --------------------------------------------------------------------------- Unsec. Sub. Bonds, 6.15%, 01/03/22 32,000,000 31,854,496 =========================================================================== 83,616,837 =========================================================================== FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)-1.26% Unsec. Global Notes, 5.20%, 03/05/19 2,775,000 2,707,706 --------------------------------------------------------------------------- 5.50%, 08/20/19 9,000,000 8,932,410 =========================================================================== 11,640,116 ===========================================================================
AIM V.I. Government Securities Fund
PRINCIPAL AMOUNT VALUE --------------------------------------------------------------------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)-12.03% Unsec. Global Bonds, 6.63%, 11/15/30 $ 700,000(d) $ 839,587 --------------------------------------------------------------------------- Unsec. Notes, 6.00%, 04/19/13 to 11/17/15 15,868,000 15,832,204 --------------------------------------------------------------------------- 6.13%, 03/21/16 22,695,000 22,653,014 --------------------------------------------------------------------------- 6.50%, 07/26/16 30,000,000 30,063,300 --------------------------------------------------------------------------- 6.38%, 12/28/20 29,466,000 29,444,195 --------------------------------------------------------------------------- 6.50%, 11/25/25 4,762,000 4,755,667 --------------------------------------------------------------------------- 7.15%, 07/10/26 6,625,000 6,638,846 --------------------------------------------------------------------------- Unsec. Sub. Disc. Deb., 6.74%, 10/09/19(e) 1,000,000 500,820 --------------------------------------------------------------------------- 7.37%, 10/09/19(e) 800,000 400,656 =========================================================================== 111,128,289 =========================================================================== PRIVATE EXPORT FUNDING CORP.-0.31% Series G, Sec. Gtd. Notes, 6.67%, 09/15/09 2,701,000 2,814,253 =========================================================================== TENNESSEE VALLEY AUTHORITY-1.17% Series A, Bonds, 6.79%, 05/23/12 5,000,000 5,415,600 --------------------------------------------------------------------------- Series G, Global Bonds, 5.38%, 11/13/08 5,347,000 5,378,494 =========================================================================== 10,794,094 =========================================================================== Total U.S. Government Agency Securities (Cost $297,122,305) 295,975,882 =========================================================================== U.S. TREASURY SECURITIES-0.81%(a) U.S. TREASURY BONDS-0.54% 7.50%, 11/15/24 2,815,000(d) 3,679,289 --------------------------------------------------------------------------- 7.63%, 02/15/25 550,000 728,063 --------------------------------------------------------------------------- 6.88%, 08/15/25 500,000 619,140 =========================================================================== 5,026,492 ===========================================================================
PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------
U.S. TREASURY STRIPS-0.27% 4.78%, 11/15/18(e) $ 1,400,000 $ 790,566 --------------------------------------------------------------------------- 4.94%, 11/15/18(e) 2,100,000 1,185,849 --------------------------------------------------------------------------- 6.37%, 11/15/18(e) 405,000 228,699 --------------------------------------------------------------------------- 6.79%, 11/15/18(e) 250,000 141,173 --------------------------------------------------------------------------- 6.85%, 11/15/18(e) 250,000 141,173 =========================================================================== 2,487,460 =========================================================================== Total U.S. Treasury Securities (Cost $6,974,217) 7,513,952 =========================================================================== FOREIGN SOVEREIGN BONDS-0.40% SOVEREIGN DEBT-0.40%(A) Israel Government AID Bond (Israel), U.S. Gtd. Global Bonds, 5.13%, 11/01/24 (Cost $3,835,384) 3,800,000 3,682,086 =========================================================================== SHARES MONEY MARKET FUNDS-10.43% Government & Agency Portfolio-Institutional Class (Cost $96,350,746)(f)(g) 96,350,746 96,350,746 =========================================================================== TOTAL INVESTMENTS-125.79% (Cost $1,168,445,904) 1,161,835,809 =========================================================================== OTHER ASSETS LESS LIABILITIES-(25.79)% (238,214,465) =========================================================================== NET ASSETS-100.00% $ 923,621,344 ___________________________________________________________________________ ===========================================================================
Investment Abbreviations: Ctfs. - Certificates Deb. - Debentures Disc. - Discounted Gtd. - Guaranteed Sec. - Secured STRIPS - Separately Traded Registered Interest and Principal Security Sub. - Subordinated TBA - To Be Announced Unsec. - Unsecured
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, security fair valued based on an evaluated quote provided by an independent pricing service. The aggregate value of these securities at December 31, 2006 was $1,065,485,063, which represented 115.36% of the Fund's Net Assets. See Note 1A. (b) Security purchased on forward commitment basis. This security is subject to dollar roll transactions. See Note 1J. (c) Step coupon bond. The interest rate represents the coupon rate at which the bond will accrue at a specified future date. (d) All or a portion of the principal balance was pledged as collateral to cover margin requirements for open futures contracts. See Note 1L and Note 6. (e) Security traded on a discount basis. The interest rate shown represents the discount rate at the time of purchase by the Fund. (f) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (g) Security is considered a cash equivalent for the purpose of the Statement of Cash Flows. See Note 1I. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Government Securities Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $1,072,095,158) $1,065,485,063 ------------------------------------------------------------- Investments in affiliated money market funds (cost $96,350,746) 96,350,746 ============================================================= Total investments (cost $1,168,445,904) 1,161,835,809 ============================================================= Receivables for: Investments sold 81,769,429 ------------------------------------------------------------- Variation margin 111,625 ------------------------------------------------------------- Fund shares sold 637,603 ------------------------------------------------------------- Dividends and Interest 7,263,232 ------------------------------------------------------------- Fund expenses absorbed 140,170 ------------------------------------------------------------- Principal paydowns 56,737 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 57,743 ------------------------------------------------------------- Other assets 381 ============================================================= Total assets 1,251,872,729 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 324,817,117 ------------------------------------------------------------- Fund shares reacquired 99,138 ------------------------------------------------------------- Amount due custodian 2,617,382 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 97,590 ------------------------------------------------------------- Accrued administrative services fees 556,664 ------------------------------------------------------------- Accrued distribution fees -- Series II 10,332 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 5,701 ------------------------------------------------------------- Accrued transfer agent fees 1,372 ------------------------------------------------------------- Accrued operating expenses 46,089 ============================================================= Total liabilities 328,251,385 ============================================================= Net assets applicable to shares outstanding $ 923,621,344 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $ 937,112,368 ------------------------------------------------------------- Undistributed net investment income 46,351,185 ============================================================= Undistributed net realized gain (loss) from investment securities and futures contracts (54,239,167) ============================================================= Unrealized appreciation (depreciation) of investment securities and futures contracts (5,603,042) ============================================================= $ 923,621,344 _____________________________________________________________ ============================================================= NET ASSETS: Series I $ 907,402,973 _____________________________________________________________ ============================================================= Series II $ 16,218,371 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 76,904,383 _____________________________________________________________ ============================================================= Series II 1,381,466 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 11.80 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 11.74 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Interest $ 39,176,743 ------------------------------------------------------------- Dividends from affiliated money market funds 7,155,377 ============================================================= Total investment income 46,332,120 ============================================================= EXPENSES: Advisory fees 4,037,516 ------------------------------------------------------------- Administrative services fees 2,318,900 ------------------------------------------------------------- Custodian fees 99,509 ------------------------------------------------------------- Distribution fees -- Series II 43,361 ------------------------------------------------------------- Transfer agent fees 16,892 ------------------------------------------------------------- Trustees' and officer's fees and benefits 38,872 ------------------------------------------------------------- Other 144,680 ============================================================= Total expenses 6,699,730 ============================================================= Less: Fees waived and expense offset arrangements (458,528) ============================================================= Net expenses 6,241,202 ============================================================= Net investment income 40,090,918 ============================================================= REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FUTURES CONTRACTS: Net realized gain (loss) from: Investment securities (5,504,326) ------------------------------------------------------------- Futures contracts (4,685,415) ============================================================= (10,189,741) ============================================================= Change in net unrealized appreciation (depreciation) of: Investment securities (594,910) ------------------------------------------------------------- Futures contracts 1,007,053 ============================================================= 412,143 ============================================================= Net gain (loss) from investment securities and futures contracts (9,777,598) ============================================================= Net increase in net assets resulting from operations $ 30,313,320 _____________________________________________________________ =============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Government Securities Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 40,090,918 $ 28,009,847 ------------------------------------------------------------------------------------------ Net realized gain (loss) from investment securities and futures contracts (10,189,741) (8,167,558) ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities and futures contracts 412,143 (6,469,700) ========================================================================================== Net increase in net assets resulting from operations 30,313,320 13,372,589 ========================================================================================== Distributions to shareholders from net investment income: Series I (35,873,306) (26,201,982) ------------------------------------------------------------------------------------------ Series II (608,462) (562,380) ========================================================================================== Decrease in net assets resulting from distributions (36,481,768) (26,764,362) ========================================================================================== Share transactions-net: Series I 100,669,509 173,693,059 ------------------------------------------------------------------------------------------ Series II (2,567,156) 1,431,974 ========================================================================================== Net increase in net assets resulting from share transactions 98,102,353 175,125,033 ========================================================================================== Net increase in net assets 91,933,905 161,733,260 ========================================================================================== NET ASSETS: Beginning of year 831,687,439 669,954,179 ========================================================================================== End of year (including undistributed net investment income of $46,351,185 and $36,404,291, respectively) $923,621,344 $831,687,439 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Government Securities Fund STATEMENT OF CASH FLOWS For the year ended December 31, 2006 CASH PROVIDED BY OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 30,313,320 ============================================================================= ADJUSTMENTS TO RECONCILE NET INCREASE (DECREASE) IN NET ASSETS TO NET CASH PROVIDED BY (USED IN) OPERATIONS: Purchases of investment securities (513,549,355) ----------------------------------------------------------------------------- Amortization of premium and accretion of discount on investment securities 819,003 ----------------------------------------------------------------------------- Proceeds from disposition of investment securities and principal payments 460,183,602 ----------------------------------------------------------------------------- Realized gain (loss) on investment securities 5,504,326 ----------------------------------------------------------------------------- Change in unrealized appreciation (depreciation) on investment securities 594,910 ----------------------------------------------------------------------------- Increase in variation margin receivable (111,625) ----------------------------------------------------------------------------- Increase in receivables and other assets (1,630,971) ----------------------------------------------------------------------------- Increase in accrued expenses and other payables 37,656 ============================================================================= Net cash provided by (used in) operating activities (17,839,134) ============================================================================= CASH PROVIDED BY FINANCING ACTIVITIES: Proceeds from shares of beneficial interest sold 169,638,849 ----------------------------------------------------------------------------- Disbursements from shares of beneficial interest reacquired (108,129,437) ----------------------------------------------------------------------------- Increase in amount due to custodian 2,617,382 ============================================================================= Net cash provided by financing activities 64,126,794 ============================================================================= Net increase in cash and cash equivalents 46,287,660 ============================================================================= Cash and cash equivalents at beginning of period 50,063,086 ============================================================================= Cash and cash equivalents at end of period $ 96,350,746 ============================================================================= NON-CASH FINANCING ACTIVITIES: Value of capital shares issued in reinvestment of dividends paid to shareholders $ 36,481,768 _____________________________________________________________________________ =============================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Government Securities Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Government Securities Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to achieve a high level of current income consistent with reasonable concern for safety of principal. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Paydown gains and losses on mortgage and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Government Securities Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. CASH AND CASH EQUIVALENTS -- For the purposes of the Statement of Cash Flows the Fund defines Cash and Cash Equivalents as cash (including foreign currency), money market funds and other investments held in lieu of cash and excludes investments made with cash collateral received. J. DOLLAR ROLL TRANSACTIONS -- The Fund may engage in dollar roll transactions with respect to mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a mortgage-backed security held in the Fund to a financial institution such as a bank or broker-dealer, and simultaneously agrees to purchase a substantially similar security (same type, coupon and maturity) from the institution at an agreed upon price and future date. The mortgage-backed securities to be purchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. Based on the typical structure of dollar roll transactions by the Fund, the dollar roll transactions are accounted for as financing transactions in which the Fund receives compensation as either a "fee" or a "drop". "Fee" income which is agreed upon amongst the parties at the commencement of the dollar roll and the "drop" which is the difference between the selling price and the repurchase price of the mortgage-backed securities are amortized to income. During the period between the sale and purchase settlement dates, the Fund will not be entitled to receive interest and principal payments on securities purchased and not yet settled. Proceeds of the sale may be invested in short-term instruments, and the income from these investments, together with any additional fee income received on the sale, could generate income for the Fund exceeding the yield on the security sold. Dollar roll transactions are considered borrowings under the 1940 Act. At the time the Fund enters into the dollar roll, it will segregate liquid assets having a dollar value equal to the purchase price. Dollar roll transactions involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities that the Fund has sold but is obligated to purchase under the agreement. In the event that the buyer of securities in a dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale of the securities may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to purchase the securities. The return earned by the Fund with the proceeds of the dollar roll transaction may not exceed the return on the securities sold. K. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. AIM V.I. Government Securities Fund The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. L. FUTURES CONTRACTS -- The Fund may purchase or sell futures contracts. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities as collateral for the account of the broker (the Fund's agent in acquiring the futures position). During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contracts at the end of each day's trading. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contracts are closed, the Fund recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Fund's basis in the contract. If the Fund were unable to liquidate a futures contract and/or enter into an offsetting closing transaction, the Fund would continue to be subject to market risk with respect to the value of the contracts and continue to be required to maintain the margin deposits on the futures contracts. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.50% ------------------------------------------------------------------- Over $250 million 0.45% __________________________________________________________________ ===================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 0.73% and Series II shares to 0.98% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. AIM is also voluntarily waiving a portion of the advisory fee payable by the Fund equal to the difference between the income earned from investing in the affiliated money market fund and the hypothetical income earned from investing in an appropriate comparative benchmark. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $449,190. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $209,973 for accounting and fund administrative services and reimbursed $2,108,927 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase AIM V.I. Government Securities Fund and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market fund below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments the affiliated money market fund for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) -------------------------------------------------------------------------------------------------------------------------------- Government & Agency Portfolio-Institutional Class $50,063,086 $592,873,651 $(546,585,991) $ -- $96,350,746 $7,155,377 $ -- ________________________________________________________________________________________________________________________________ ================================================================================================================================
NOTE 4--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $9,338. NOTE 5--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $6,800 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 6--FUTURES CONTRACTS On December 31, 2006, $1,200,000 principal amount of U.S. Treasury and U.S. Government obligations were pledged as collateral to cover margin requirements for open futures contracts.
OPEN FUTURES CONTRACTS AT PERIOD END ---------------------------------------------------------------------------------------------------------------------------- UNREALIZED NUMBER OF MONTH/ VALUE APPRECIATION CONTRACT CONTRACTS COMMITMENT 12/31/06 (DEPRECIATION) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 2 Year Notes 136 March-07/Long $ 27,748,250 $ (106,152) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 5 Year Notes 518 March-07/Long 54,422,375 (392,967) ---------------------------------------------------------------------------------------------------------------------------- Subtotal 82,170,625 (499,119) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 10 Year Notes 1,237 March-07/Short (132,938,844) 1,506,172 ============================================================================================================================ Total $ (50,768,219) $1,007,053 ____________________________________________________________________________________________________________________________ ============================================================================================================================
NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties AIM V.I. Government Securities Fund to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------------- Distributions paid from ordinary income $36,481,768 $26,764,362 ________________________________________________________________________________________ ========================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 46,466,899 ---------------------------------------------------------------------------- Unrealized appreciation (depreciation) -- investments (8,482,230) ---------------------------------------------------------------------------- Temporary book/tax differences (88,985) ---------------------------------------------------------------------------- Capital loss carryforward (50,398,524) ---------------------------------------------------------------------------- Post-October capital loss deferral (988,184) ---------------------------------------------------------------------------- Shares of beneficial interest 937,112,368 ============================================================================ Total net assets $923,621,344 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales, the recognition of gains (losses) on dollar roll transactions and the recognition for tax purposes of unrealized gains on certain futures contracts. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2011 $11,708,442 ----------------------------------------------------------------------------- December 31, 2012 7,926,972 ----------------------------------------------------------------------------- December 31, 2013 12,902,211 ----------------------------------------------------------------------------- December 31, 2014 17,860,899 ============================================================================= Total capital loss carryforward $50,398,524 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. AIM V.I. Government Securities Fund NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $648,631,286 and $588,406,797, respectively. During the same period, purchases and sales of U.S. Treasury obligations were $49,789,063 and $66,160,174.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------ Aggregate unrealized appreciation of investment securities $ 1,805,304 ------------------------------------------------------------------------------ Aggregate unrealized (depreciation) of investment securities (10,287,534) ============================================================================== Net unrealized appreciation (depreciation) of investment securities $ (8,482,230) ______________________________________________________________________________ ============================================================================== Cost of investments for tax purposes is $1,170,318,039.
NOTE 10--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of paydowns on mortgage-backed securities, on December 31, 2006, undistributed net investment income was increased by $6,337,744 and undistributed net realized gain (loss) was decreased by $6,337,744. This reclassification had no effect on the net assets of the Fund. NOTE 11--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(a) 2005 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 14,050,842 $ 167,801,734 20,898,858 $ 252,971,625 ------------------------------------------------------------------------------------------------------------------------ Series II 165,527 1,967,287 608,696 7,319,396 ======================================================================================================================== Issued as reinvestment of dividends: Series I 3,040,111 35,873,306 2,216,750 26,201,982 ------------------------------------------------------------------------------------------------------------------------ Series II 51,828 608,462 47,822 562,380 ======================================================================================================================== Reacquired: Series I (8,636,109) (103,005,531) (8,720,788) (105,480,548) ------------------------------------------------------------------------------------------------------------------------ Series II (432,546) (5,142,905) (536,527) (6,449,802) ======================================================================================================================== 8,239,653 $ 98,102,353 14,514,811 $ 175,125,033 ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are two entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 90% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 12--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Government Securities Fund NOTE 13--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 11.87 $ 12.07 $ 12.23 $ 12.40 $ 11.53 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.55 0.45 0.40 0.36 0.49 ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) (0.13) (0.25) (0.09) (0.23) 0.61 ========================================================================================================================= Total from investment operations 0.42 0.20 0.31 0.13 1.10 ========================================================================================================================= Less distributions: Dividends from net investment income (0.49) (0.40) (0.47) (0.30) (0.23) ------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains -- -- -- (0.00) -- ========================================================================================================================= Total distributions (0.49) (0.40) (0.47) (0.30) (0.23) ========================================================================================================================= Net asset value, end of period $ 11.80 $ 11.87 $ 12.07 $ 12.23 $ 12.40 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(b) 3.55% 1.66% 2.56% 1.07% 9.59% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $907,403 $812,824 $652,226 $526,482 $428,322 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.71%(c) 0.85% 0.87% 0.76% 0.81% ------------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 0.77%(c) 0.88% 0.87% 0.76% 0.81% ========================================================================================================================= Ratio of net investment income to average net assets 4.62%(c) 3.68% 3.20% 2.93% 4.01% ========================================================================================================================= Ratio of interest expense to average net assets --% 0.11% 0.09% 0.01% 0.01% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 89% 174% 95% 265% 170% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $852,103,814.
SERIES II ---------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 11.81 $ 12.01 $ 12.17 $ 12.35 $ 11.52 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.52 0.41 0.36 0.33 0.46 ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) (0.13) (0.24) (0.08) (0.22) 0.60 ========================================================================================================================= Total from investment operations 0.39 0.17 0.28 0.11 1.06 ========================================================================================================================= Less distributions: Dividends from net investment income (0.46) (0.37) (0.44) (0.29) (0.23) ------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains -- -- -- (0.00) -- ========================================================================================================================= Total distributions (0.46) (0.37) (0.44) (0.29) (0.23) ========================================================================================================================= Net asset value, end of period $ 11.74 $ 11.81 $ 12.01 $ 12.17 $ 12.35 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(b) 3.28% 1.41% 2.27% 0.93% 9.25% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $16,218 $18,863 $17,728 $22,325 $14,926 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.96%(c) 1.10% 1.12% 1.01% 1.06% ------------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.02%(c) 1.13% 1.12% 1.01% 1.06% ========================================================================================================================= Ratio of net investment income to average net assets 4.37%(c) 3.43% 2.95% 2.68% 3.76% ========================================================================================================================= Ratio of interest expense to average net assets --% 0.11% 0.09% 0.01% 0.01% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 89% 174% 95% 265% 170% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $17,344,206. AIM V.I. Government Securities Fund NOTE 14--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -- Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Government Securities Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Government Securities Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations, of changes in net assets, of cash flows and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Government Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations and its cash flows for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Government Securities Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX U.S. Treasury Obligations* 4.75%
* The above percentages are based on ordinary income dividends paid to shareholders during the fund's fiscal year. AIM V.I. Government Securities Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Government Securities Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
FIXED INCOME AIM V.I. HIGH YIELD FUND Annual Report to Shareholders - December 31, 2006 Taxable Noninvestment Grade The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public [COVER GLOBE IMAGE] Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is AIM V.I. HIGH YIELD FUND seeks to achieve a high level of current income. available without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AS OF click on Required Notices and then click on DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ============================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH --Registered Trademark-- CAREFULLY BEFORE INVESTING. ============================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. HIGH YIELD FUND ====================================================================================== we evaluate securities across the market to find securities that are PERFORMANCE SUMMARY attractively valued. We consider selling a bond when: For the year ended December 31, 2006, AIM V.I. High Yield Fund, excluding variable product issuer charges, outperformed its broad market index but underperformed its style-specific index. As low quality bonds (CCC-rated) outperformed higher quality - It becomes fully valued. bonds (BB- and B-rated) within the high yield market, the Fund's strategy of overweighting B-rated bonds hurt its performance relative to its style-specific - Overall market and economic benchmark. However, the Fund outperformed its broad market index, the investment trends indicate that sector emphasis grade-oriented Lehman Brothers U.S. Aggregate Bond Index, as high yield bonds should be changed. outperformed investment grade bonds during the year. - Fundamentals, such as credit quality ratings, deteriorate for an Your Fund's long-term performance appears on pages 4-5. individual issuer or a sector. FUND VS. INDEXES - An unanticipated change occurs involving an individual issuer or a Total returns, 12/31/05-12/31/06, excluding variable product issuer charges. If sector. variable product issuer charges were included, returns would be lower. Series I Shares 10.74% Series II Shares 10.41 MARKET CONDITIONS AND YOUR FUND Lehman Brothers U.S. Aggregate Bond Index (Broad Market Index) 4.33 Lehman Brothers High Yield Index (Style-Specific Index) 11.85 The U.S. economy continued to show Lipper High Current Yield Bond Funds Index (Peer Group Index) 10.17 signs of deceleration in growth by the SOURCE: LIPPER INC. end of 2006. Growth in real gross ====================================================================================== domestic product (GDP) slipped to a 2.0% annualized rate in the third quarter, down from a 2.6% pace in the second quarter and from a surprisingly HOW WE INVEST strong 5.6% in the first quarter. The slowdown was mostly attrib-utableto Your Fund invests primarily in research. Our top down approach takes the softening in the housing sector. lower-rated credit quality corporate into account overall economic and market However, the deceleration in bonds. Our investment discipline focuses trends. Our bottom-up efforts evaluate homebuilding did not noticeably impact on providing attractive current income individual bond issuers as well as other segments of the economy, as for shareholders and consistent industry sectors. consumer spending and business performance within a framework designed investment remained solid. to control volatility. Additionally, we In conducting our analysis, our seek growth of shareholders' principal team uses input from various sources On December 12, as widely without exposure to undue risk. including company financial statements, anticipated by financial markets, the rating agencies, news services, Wall U.S. Federal Reserve Board (the Fed) Our security selection process Street fixed income and equity analysts, decided to keep the federal funds utilizes both top-down and bottom-up economists, company management meetings target rate at 5.25%. This was the and internally generated credit analysis. fourth consecutive meeting that the Finally, Fed left the rate unchanged after 17 consecutive rate increases. While this pause benefited the financial markets, the Fed reiterated that some inflation risks persist and that future target interest rate
================================================================================================================================= PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 FIXED INCOME ISSUERS* --------------------------------------------------------------------------------------------------------------------------------- By credit quality 1. Broadcasting & Cable TV 5.2% 1. Targeted Return IndexSecurities Trust 3.7% BBB 0.7% 2. Consumer Finance 4.3 2. Ford Motor (Ford) 3.5 BB 23.1 3. Wireless Telecommunication 3. General Motors (GM/GMAC) 3.2 B 56.8 Services 3.9 4. HCA, Inc. 1.3 CCC 8.8 4. Casinos & Gaming 3.7 5. Goodyear Tire & Rubber Co. (The) 1.2 NR 1.2 5. Investment Banking & Brokerage 3.7 6. Travelport Ltd. 1.1 Equity 1.8 7. General Nutrition Centers, Inc. 1.0 Money Market Funds Total Net Assets $59.25 million 8. Caraustar Industries, Inc. 1.0 Plus Other Assets Less Liabilitie 7.6 Total Number of Holdings* 255 9. MGM Mirage 1.0 10. Rainbow National Services LLC 1.0 SOURCES: MOODY'S, STANDARD & POOR'S, FITCH The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. =================================================================================================================================
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AIM V.I. HIGH YIELD FUND actions would to depend on incoming operating territories, benefited from a The views and opinions expressed in economic data. legal ruling involving Sprint, and the management's discussion of Fund company continued to be the subject of performance are those of AIM Advisors, The U.S. Treasury yield curve, takeover speculation. Inc. These views and opinions are subject which represents the yields of Treasury to change at any time based on factors securities with different maturities, was OM GROUP, a metal-based specialty such as market and economic conditions. inverted for much of 2006, as the Fed materials firm based in Cleveland, Ohio, These views and opinions may not be raised short rates through June. That was another positive contributor to Fund relied upon as investment advice or meant that shorter term Treasuries were performance. The company benefited from recommendations, or as an offer for a generally yielding more than longer term improved commodity prices and improved particular security. The information is Treasuries, a reversal of the norm. The overall operational efficiency. We sold not a complete analysis of every aspect two- to 10-year spread was inverted by 11 the stock. of any market, country, industry, basis points (0.11%) on December 29. security or the Fund. Statements of fact As mentioned earlier, during the are from sources considered reliable, but In 2006, the bond market was year, we maintained our focus on the AIM Advisors, Inc. makes no characterized by low volatility. While B-rated segment of the high yield representation or warranty as to their there was more price movement during the market--the middle-quality tier and the completeness or accuracy. Although first few months of the year, the second broadest part of the market. Although historical performance is no guarantee of half of 2006 was calmer due to a fairly limiting the exposure to the lowest future results, these insights may help complacent market. The U.S. high yield quality tier (rated CCC and below) you understand our investment management market continued to perform well due to hindered the Fund's performance relative philosophy. solid corporate profitability, low to its style-specific index for 2006, in defaults and demand for higher yield from our view, the additional yield offered by Peter Ehret investors. most lower quality credits did not Chartered justify the extra risk. [EHRET Financial Analyst, senior On a quality basis, CCC-rated bonds PHOTO] portfolio manager, is co-lead continued to outperform higher quality In addition, we were less focused manager of AIM V.I. High Yield debt instruments. Moody's Investors on the BB-rated category, which is the Fund. Mr. Ehret joined AIM in 2001. He Service global speculative-grade highest quality segment of the high yield graduated cum laude with a B.S. in corporate default rate finished the year market. The lower yield and structure of economics from the University of at 1.7%, the lowest year-end level since BB-rated credit quality bonds Minnesota. He also earned an M.S. in real 1996. historically has made them more estate appraisal and investment analysis susceptible to price declines if U.S. from the University of Wisconsin-Madison. Among the larger industry Treasury yields rise. categories in the high yield market, Carolyn L. Gibbs media/cable, airline and automotive were While the portfolio remained Chartered some of the best performing industry well-diversified across industries and [GIBBS Financial Analyst, senior segments in 2006, while health care and issues, some of the Fund's holdings PHOTO] portfolio manager, is co-lead railroads underperformed. The automotive detracted from performance. HCA had a manager of AIM V.I. High Yield industry continued to remain volatile, as negative impact on the Fund's Fund. Ms. Gibbs has been in the it was driven by the two largest issuers performance, as bonds declined on the investment business since 1983. She in the high yield market, GENERAL MOTORS prospect of increased debt due to the joined AIM in 1992. She graduated magna (GM/GMAC) AND FORD MOTOR (FORD). The leveraged buyout of the company. cum laude from Texas Christian health care sector was negatively University, where she earned a B.A. in affected when a leading hospital SELECT MEDICAL CORP., a health care English. She also earned an M.B.A. in management company, HOSPITAL CORPORATION operator of specialty hospitals and finance from The Wharton School at the OF AMERICA (HCA), announced the sale of outpatient rehabilitation clinics, was University of Pennsylvania. the company in a leveraged buyout another detractor from Fund performance. transaction. Recently, the company's net operating Darren S. Hughes revenue and profit decreased due to the Chartered We increased our exposure to regulatory changes that have reduced the [HUGHES Financial Analyst, portfolio General Motors, GMAC and Ford throughout payment rates, a decline in Medicare PHOTO] manager, is manager of AIM V.I. the year, but maintained an underweight volume and the competitive nature of the High Yield Fund. He joined AIM in position relative to the Fund's physical therapy practices. 1992. Mr. Hughes earned a B.B.A. in style-specific index. Despite our finance and economics from Baylor relative underweight positions, which we Finally, MAGNACHIP SEMICONDUCTOR University. viewed as prudent diversification detracted from performance as a result of measures, GM/GMAC and Ford were the new product launch delays, pricing Assisted by Taxable High Yield Team Fund's largest holdings and positively pressure and the resulting lower contributed to performance for the year. profitability. FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN IPCS, a wireless voice and data IN CLOSING THIS REPORT AND YOUR FUND'S LONG-TERM provider company, was one of the top PERFORMANCE, PLEASE SEE PAGES 4-5. contributors to Fund performance. IPCS, We appreciate your continued which uses the Sprint brand in its participation in AIM V.I. High Yield Fund.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. HIGH YIELD FUND HISTORICAL. ALL OTHER RETURNS ARE THE AIM V.I. HIGH YIELD FUND, A SERIES ========================================= BLENDED RETURNS OF THE HISTORICAL PORTFOLIO OF AIM VARIABLE INSURANCE AVERAGE ANNUAL TOTAL RETURNS PERFORMANCE OF SERIES II SHARES SINCE FUNDS, IS CURRENTLY OFFERED THROUGH ----------------------------------------- THEIR INCEPTION AND THE RESTATED INSURANCE COMPANIES ISSUING VARIABLE As of 12/31/06 HISTORICAL PERFORMANCE OF SERIES I SHARES PRODUCTS. YOU CANNOT PURCHASE SHARES OF (FOR PERIODS PRIOR TO INCEPTION OF SERIES THE FUND DIRECTLY. PERFORMANCE FIGURES SERIES I SHARES II SHARES) ADJUSTED TO REFLECT THE RULE GIVEN REPRESENT THE FUND AND ARE NOT Inception (5/1/98) 2.11% 12B-1 FEES APPLICABLE TO SERIES II INTENDED TO REFLECT ACTUAL VARIABLE 5 Years 8.81 SHARES. THE INCEPTION DATE OF SERIES I PRODUCT VALUES. THEY DO NOT REFLECT SALES 1 Year 10.74 SHARES IS MAY 1, 1998. THE PERFORMANCE OF CHARGES, EXPENSES AND FEES ASSESSED IN THE FUND'S SERIES I AND SERIES II SHARE CONNECTION WITH A VARIABLE PRODUCT. SALES SERIES II SHARES CLASSES WILL DIFFER PRIMARILY DUE TO CHARGES, EXPENSES AND FEES, WHICH ARE Inception 1.88% DIFFERENT CLASS EXPENSES. DETERMINED BY THE VARIABLE PRODUCT 5 Years 8.59 ISSUERS, WILL VARY AND WILL LOWER THE 1 Year 10.41 THE PERFORMANCE DATA QUOTED TOTAL RETURN. ========================================= REPRESENT PAST PERFORMANCE AND CANNOT GUARANTEE COMPARABLE FUTURE RESULTS; PER NASD REQUIREMENTS, THE MOST ========================================= CURRENT PERFORMANCE MAY BE LOWER OR RECENT MONTH-END PERFORMANCE DATA AT THE CUMULATIVE TOTAL RETURNS HIGHER. PLEASE CONTACT YOUR VARIABLE FUND LEVEL, EXCLUDING VARIABLE PRODUCT 6 months ended 12/31/06 PRODUCT ISSUER OR FINANCIAL ADVISOR FOR CHARGES, IS AVAILABLE ON THIS AIM Series I Shares 8.05% THE MOST RECENT MONTH-END VARIABLE AUTOMATED INFORMATION LINE, 866-702-4402. Series II Shares 7.90 PRODUCT PERFORMANCE. PERFORMANCE FIGURES AS MENTIONED ABOVE, FOR THE MOST RECENT ========================================= REFLECT FUND EXPENSES, REINVESTED MONTH-END PERFORMANCE INCLUDING VARIABLE DISTRIBUTIONS AND CHANGES IN NET ASSET PRODUCT CHARGES, PLEASE CONTACT YOUR VALUE. INVESTMENT RETURN AND PRINCIPAL VARIABLE PRODUCT ISSUER OR FINANCIAL SERIES II SHARES' INCEPTION DATE IS MARCH VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE ADVISOR. 26, 2002. RETURNS SINCE THAT DATE ARE A GAIN OR LOSS WHEN YOU SELL SHARES. ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND risks, including exchange rate changes, bankruptcy, the Fund may experience political and economic upheaval, the delays in selling the securities Prices of equity securities change in relative lack of information about these underlying the repurchase agreement. response to many factors including the companies, relatively low market historical and prospective earnings of liquidity and the potential lack of There is no guarantee that the the issuer, the value of its assets, strict financial and accounting controls investment techniques and risk analyses general economic conditions, interest and standards. used by the Fund's portfolio managers rates, investor perceptions and market will produce the desired results. liquidity. Investing in emerging markets involves greater risk than investing in ABOUT INDEXES USED IN THIS REPORT Debt securities are particularly more established markets. The risks vulnerable to credit risk and interest include the relatively smaller size and The unmanaged LEHMAN BROTHERS U.S. rate fluctuations. lesser liquidity of these markets, high AGGREGATE BOND INDEX (the Lehman inflation rates, adverse political Aggregate), which represents the U.S. The Fund may invest in developments and lack of timely investment-grade fixed-rate bond market lower-quality debt securities, commonly information. (including government and corporate known as "junk bonds". Compared to higher securities, mortgage pass-through quality debt securities, junk bonds To the extent the Fund holds cash securities and asset-backed securities), involve greater risk of default or price or cash equivalents rather than equity is compiled by Lehman Brothers, a global changes due to changes in credit quality securities for risk management purposes, investment bank. of the issuer because they are generally the Fund may not achieve its investment unsecured and may be subordinated to objective. The unmanaged LIPPER HIGH CURRENT other creditors' claims. Credit ratings YIELD BOND FUNDS INDEX represents an on junk bonds do not necessarily reflect If the seller of a repurchase average of the 30 largest high-yield bond their actual market risk. agreement in which the Fund invests funds tracked by Lipper Inc., an defaults on its obligation or declares independent mutual fund performance Foreign securities have additional monitor.
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AIM V.I. HIGH YIELD FUND Past performance cannot guarantee vertical axis, the one that indicates the comparable future results. dollar value of an investment, is constructed with each segment This chart, which is a logarithmic representing a percent change in the chart, presents the fluctuations in the value of the investment. In this chart, value of the Fund and its indexes. We each segment represents a doubling, or believe that a logarithmic chart is more 100% change, in the value of the effective than other types of charts in investment. In other words, the space illustrating changes in value during the between $5,000 and $10,000 is the same early years shown in the chart. The size as the space between $10,000 and $20,000. ==================================================================================================================================== Continued from page 4 The unmanaged LEHMAN BROTHERS HIGH A direct investment cannot be made of Morgan Stanley Capital International YIELD INDEX, which represents the in an index. Unless otherwise indicated, Inc. and Standard & Poor's. performance of high-yield debt index results include reinvested securities, is compiled by Lehman dividends, and they do not reflect sales The returns shown in management's Brothers, a global investment bank. charges. Performance of an index of funds discussion of Fund performance are based reflects fund expenses; performance of a on net asset values calculated for In conjunction with the annual market index does not. shareholder transactions. Generally prospectus update on or about May 1, accepted accounting principles require 2007, the AIM V.I. High Yield Fund Other information adjustments to be made to the net assets prospectus will be amended to reflect of the Fund at period end for financial that the Fund has elected to use the The average credit quality of the Fund's reporting purposes, and as such, the net Lipper Variable Underlying Funds (VUF) holdings as of the close of the reporting asset values for shareholder transactions High Current Yield Bond Funds Category period represents the weighted average and the returns based on those net asset Average as its peer group rather than the quality rating of the securities in the values may differ from the net asset Lipper High Current Yield Bond Funds portfolio as assigned by Nationally values and returns reported in the Index. The Lipper VUF High Current Yield Recognized Statistical Rating Financial Highlights. Additionally, the Bond Funds Category Average, recently Organizations based on assessment of the returns and net asset values shown published by Lipper Inc., comprises the credit quality of the individual throughout this report are at the Fund underlying funds in each insurance securities. level only and do not include variable category and does not include mortality product issuer charges. If such charges and expense fees. Industry classifications used in were included, the total returns would be this report are generally according to lower. The Fund is not managed to track the Global Industry Classification the performance of any particular index, Standard, which was developed by and is The Chartered Financial Analyst including the indexes defined here, and the exclusive property and a service mark -REGISTERED TRADEMARK-- (CFA --REGISTERED consequently, the performance of the Fund TRADEMARK--) designation is a globally may deviate significantly from the recognized standard for measuring the performance of the indexes. competence and integrity of investment professionals.
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============================================================================================================================= [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/98, Fund data from 5/1/98 AIM V.I. HIGH YIELD FUND LEHMAN BROTHERS LEHMAN BROTHERS LIPPER HIGH CURRENT YIELD DATE -SERIES I SHARES U.S. AGGREGATE BOND INDEX HIGH YIELD INDEX BOND FUNDS INDEX ----------------------------------------------------------------------------------------------------------------------------- 4/30/98 $10000 $10000 $10000 5/98 $10080 10095 10035 9989 6/98 10050 10180 10071 10006 7/98 10090 10202 10128 10075 8/98 9410 10368 9569 9307 9/98 9129 10611 9612 9251 10/98 8790 10555 9416 9041 11/98 9279 10615 9806 9572 12/98 9239 10647 9817 9542 1/99 9374 10723 9963 9715 2/99 9479 10535 9904 9676 3/99 9584 10594 9999 9847 4/99 9929 10627 10192 10101 5/99 9772 10534 10054 9909 6/99 9803 10501 10033 9911 7/99 9939 10456 10073 9914 8/99 9835 10451 9962 9813 9/99 9720 10572 9890 9737 10/99 9667 10611 9825 9709 11/99 9918 10610 9940 9880 12/99 10211 10559 10052 9999 1/00 10336 10525 10008 9950 2/00 10506 10652 10028 10020 3/00 10211 10792 9817 9847 4/00 9928 10761 9833 9804 5/00 9646 10756 9732 9629 6/00 9883 10980 9930 9807 7/00 9826 11080 10006 9825 8/00 9769 11240 10074 9876 9/00 9622 11311 9986 9731 10/00 8750 11386 9666 9398 11/00 8139 11572 9284 8874 12/00 8270 11787 9463 9028 1/01 8998 11979 10172 9627 2/01 8986 12084 10307 9657 3/01 8479 12145 10065 9337 4/01 8232 12094 9939 9214 5/01 8310 12167 10118 9314 6/01 7933 12213 9834 9040 7/01 7907 12486 9979 9093 8/01 7919 12629 10097 9133 9/01 7334 12776 9418 8488 10/01 7581 13044 9651 8682 11/01 7919 12864 10003 8958 12/01 7858 12782 9962 8934 1/02 7858 12886 10032 8955 2/02 7621 13010 9892 8797 3/02 7784 12794 10130 8971 4/02 7829 13042 10288 9065 5/02 7740 13153 10235 8974 6/02 7311 13267 9480 8469 7/02 7045 13427 9066 8191 8/02 7119 13653 9325 8332 9/02 7045 13874 9202 8216 10/02 6956 13811 9122 8164 11/02 7297 13808 9687 8635 12/02 7400 14093 9822 8719 1/03 7548 14105 10149 8912 2/03 7622 14300 10274 9031 3/03 7829 14289 10570 9256 4/03 8229 14407 11197 9711 5/03 8347 14676 11313 9826 6/03 8584 14646 11638 10091 7/03 8525 14154 11510 10013 8/03 8629 14248 11643 10148 9/03 8851 14625 11961 10394 10/03 9073 14489 12202 10627 11/03 9221 14523 12387 10751 12/03 9475 14671 12668 11017 1/04 9682 14789 12910 11194 2/04 9635 14949 12877 11172 3/04 9650 15061 12965 11214 4/04 9682 14669 12876 11189 5/04 9476 14611 12658 11016 =============================================================================================================================
Source: Lipper Inc.
============================================================================================================================= [MOUNTAIN CHART] 6/04 9634 14693 12840 11170 7/04 9713 14839 13014 11259 8/04 9903 15122 13270 11443 9/04 10062 15163 13462 11602 10/04 10252 15290 13706 11808 11/04 10394 15168 13871 11976 12/04 10540 15308 14078 12156 1/05 10557 15404 14059 12126 2/05 10786 15313 14266 12312 3/05 10475 15234 13851 11985 4/05 10312 15440 13716 11845 5/05 10508 15608 13960 12035 6/05 10687 15693 14234 12228 7/05 10867 15550 14483 12418 8/05 10900 15749 14510 12477 9/05 10785 15587 14365 12396 10/05 10671 15464 14265 12294 11/05 10736 15532 14340 12406 12/05 10826 15680 14463 12521 1/06 10952 15680 14694 12682 2/06 11078 15733 14792 12788 3/06 11132 15578 14880 12841 4/06 11167 15550 14972 12915 5/06 11167 15533 14970 12886 6/06 11096 15566 14917 12815 7/06 11186 15777 15063 12912 8/06 11347 16018 15308 13088 9/06 11473 16159 15525 13233 10/06 11635 16266 15736 13424 11/06 11814 16455 16000 13656 12/06 11987 16359 16176 13794 =============================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. HIGH YIELD FUND EXAMPLE ACTUAL EXPENSES actual expense ratio and an assumed rate of return of 5% per year before expenses, As a shareholder of the Fund, you incur The table below provides information which is not the Fund's actual return. ongoing costs, including management fees; about actual account values and actual The Fund's actual cumulative total distribution and/or service (12b-1) fees; expenses. You may use the information in returns at net asset value after expenses and other Fund expenses. This example is this table, together with the amount you for the six months ended December 31, intended to help you understand your invested, to estimate the expenses that 2006, appear in the table "Cumulative ongoing costs (in dollars) of investing you paid over the period. Simply divide Total Returns" on page 4. in the Fund and to compare these costs your account value by $1,000 (for with ongoing costs of investing in other example, an $8,600 account value divided The hypothetical account values and mutual funds. The example is based on an by $1,000 = 8.6), then multiply the expenses may not be used to estimate the investment of $1,000 invested at the result by the number in the table under actual ending account balance or expenses beginning of the period and held for the the heading entitled "Actual Expenses you paid for the period. You may use this entire period July 1, 2006, through Paid During Period" to estimate the information to compare the ongoing costs December 31, 2006. expenses you paid on your account during of investing in the Fund and other funds. this period. To do so, compare this 5% hypothetical The actual and hypothetical example with the 5% hypothetical examples expenses in the examples below do not HYPOTHETICAL EXAMPLE FOR COMPARISON that appear in the shareholder reports of represent the effect of any fees or other PURPOSES the other funds. expenses assessed in connection with a variable product; if they did, the The table below also provides information Please note that the expenses shown expenses shown would be higher while the about hypothetical account values and in the table are meant to highlight your ending account values shown would be hypothetical expenses based on the Fund's ongoing costs. Therefore, the lower. hypothetical information is useful in comparing ongoing costs, and will not help you determine the relative total costs of owning different funds. ====================================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ Series I $ 1,000.00 $ 1,080.50 $ 5.03 $ 1,020.37 $ 4.89 0.96% Series II 1,000.00 1,079.00 6.34 1,019.11 6.16 1.21 (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ====================================================================================================================================
6 AIM V.I. HIGH YIELD FUND Approval of Investment Advisory Agreement services to be provided by AIM under the performance, which did not change their The Board of Trustees of AIM Variable Advisory Agreement was appropriate and conclusions. Insurance Funds (the "Board") oversees that AIM currently is providing services the management of AIM V.I. High Yield in accordance with the terms of the - Meetings with the Fund's portfolio Fund (the "Fund") and, as required by Advisory Agreement. managers and investment personnel. With law, determines annually whether to respect to the Fund, the Board is meeting approve the continuance of the Fund's - The quality of services to be provided periodically with such Fund's portfolio advisory agreement with A I M Advisors, by AIM. The Board reviewed the managers and/or other investment Inc. ("AIM"). Based upon the credentials and experience of the personnel and believes that such recommendation of the Investments officers and employees of AIM who will individuals are competent and able to Committee of the Board, at a meeting held provide investment advisory services to continue to carry out their on June 27, 2006, the Board, including the Fund. In reviewing the qualifications responsibilities under the Advisory all of the independent trustees, approved of AIM to provide investment advisory Agreement. the continuance of the advisory agreement services, the Board considered such (the "Advisory Agreement") between the issues as AIM's portfolio and product - Overall performance of AIM. The Board Fund and AIM for another year, effective review process, various back office considered the overall performance of AIM July 1, 2006. support functions provided by AIM and in providing investment advisory and AIM's equity and fixed income trading portfolio administrative services to the The Board considered the factors operations. Based on the review of these Fund and concluded that such performance discussed below in evaluating the and other factors, the Board concluded was satisfactory. fairness and reasonableness of the that the quality of services to be Advisory Agreement at the meeting on June provided by AIM was appropriate and that - Fees relative to those of clients of 27, 2006 and as part of the Board's AIM currently is providing satisfactory AIM with comparable investment ongoing oversight of the Fund. In their services in accordance with the terms of strategies. The Board reviewed the deliberations, the Board and the the Advisory Agreement. effective advisory fee rate (before independent trustees did not identify any waivers) for the Fund under the Advisory particular factor that was controlling, - The performance of the Fund relative to Agreement. The Board noted that this rate and each trustee attributed different comparable funds. The Board reviewed the was (i) above the effective advisory fee weights to the various factors. performance of the Fund during the past rate (before waivers) for a mutual fund one, three and five calendar years advised by AIM with investment strategies One responsibility of the against the performance of funds advised comparable to those of the Fund; and (ii) independent Senior Officer of the Fund is by other advisors with investment above the effective sub-advisory fee rate to manage the process by which the Fund's strategies comparable to those of the for one offshore fund advised and proposed management fees are negotiated Fund. The Board noted that the Fund's sub-advised by AIM affiliates with to ensure that they are negotiated in a performance was above the median investment strategies comparable to those manner which is at arms' length and performance of such comparable funds for of the Fund, although the total advisory reasonable. To that end, the Senior the one and three year periods and below fees for such offshore fund were Officer must either supervise a such median performance for the five year comparable to those for the Fund. The competitive bidding process or prepare an period. Based on this review and after Board noted that AIM has agreed to limit independent written evaluation. The taking account of all of the other the Fund's total operating expenses, as Senior Officer has recommended an factors that the Board considered in discussed below. Based on this review, independent written evaluation in lieu of determining whether to continue the the Board concluded that the advisory fee a competitive bidding process and, upon Advisory Agreement for the Fund, the rate for the Fund under the Advisory the direction of the Board, has prepared Board concluded that no changes should be Agreement was fair and reasonable. such an independent written evaluation. made to the Fund and that it was not Such written evaluation also considered necessary to change the Fund's portfolio - Fees relative to those of comparable certain of the factors discussed below. management team at this time. Although funds with other advisors. The Board In addition, as discussed below, the the independent written evaluation of the reviewed the advisory fee rate for the Senior Officer made a recommendation to Fund's Senior Officer (discussed below) Fund under the Advisory Agreement. The the Board in connection with such written only considered Fund performance through Board compared effective contractual evaluation. the most recent calendar year, the Board advisory fee rates at a common asset also reviewed more recent Fund level at the end of the past calendar The discussion below serves as a performance, which did not change their year and noted that the Fund's rate was summary of the Senior Officer's conclusions. comparable to the median rate of the independent written evaluation and funds advised by other advisors with recommendation to the Board in connection - The performance of the Fund relative to investment strategies comparable to those therewith, as well as a discussion of the indices. The Board reviewed the of the Fund that the Board reviewed. The material factors and the conclusions with performance of the Fund during the past Board noted that AIM has agreed to limit respect thereto that formed the basis for one, three and five calendar years the Fund's total operating expenses, as the Board's approval of the Advisory against the performance of the Lipper discussed below. Based on this review, Agreement. After consideration of all of Variable Underlying Fund High Yield the Board concluded that the advisory fee the factors below and based on its Index. The Board noted that the Fund's rate for the Fund under the Advisory informed business judgment, the Board performance for the one and three year Agreement was fair and reasonable. determined that the Advisory Agreement is periods was comparable to the performance in the best interests of the Fund and its of such Index and below such Index for - Expense limitations and fee waivers. shareholders and that the compensation to the five year period. Based on this The Board noted that AIM has AIM under the Advisory Agreement is fair review and after taking account of all of contractually agreed to waive fees and/or and reasonable and would have been the other factors that the Board limit expenses of the Fund through April obtained through arm's length considered in determining whether to 30, 2008 in an amount necessary to limit negotiations. continue the Advisory Agreement for the total annual operating expenses to a Fund, the Board concluded that no changes specified percentage of average daily net Unless otherwise stated, should be made to the Fund and that it assets for each class of the Fund. The information presented below is as of June was not necessary to change the Fund's Board considered the contractual nature 27, 2006 and does not reflect any changes portfolio management team at this time. of this fee waiver/expense limitation and that may have occurred since June 27, Although the independent written noted that it remains in effect until 2006, including but not limited to evaluation of the Fund's Senior Officer April 30, 2008. The Board considered the changes to the Fund's performance, (discussed below) only considered Fund effect this fee waiver/expense limitation advisory fees, expense limitations and/or performance through the most recent would have on the Fund's estimated fee waivers. calendar year, the Board also reviewed expenses and concluded that the levels of more recent Fund fee waivers/expense limitations for the - The nature and extent of the advisory Fund were fair and reasonable. services to be provided by AIM. The Board reviewed the services to be provided by AIM under the Advisory Agreement. Based on such review, the Board concluded that the range of
7
AIM V.I. HIGH YIELD FUND - Breakpoints and economies of scale. The - Profitability of AIM and its - Other factors and current trends. The Board reviewed the structure of the affiliates. The Board reviewed Board considered the steps that AIM and Fund's advisory fee under the Advisory information concerning the profitability its affiliates have taken over the last Agreement, noting that it includes three of AIM's (and its affiliates') investment several years, and continue to take, in breakpoints. The Board reviewed the level advisory and other activities and its order to improve the quality and of the Fund's advisory fees, and noted financial condition. The Board considered efficiency of the services they provide that such fees, as a percentage of the the overall profitability of AIM, as well to the Funds in the areas of investment Fund's net assets, would decrease as net as the profitability of AIM in connection performance, product line assets increase because the Advisory with managing the Fund. The Board noted diversification, distribution, fund Agreement includes breakpoints. The Board that AIM's operations remain profitable, operations, shareholder services and noted that, due to the Fund's asset although increased expenses in recent compliance. The Board concluded that levels at the end of the past calendar years have reduced AIM's profitability. these steps taken by AIM have improved, year and the way in which the advisory Based on the review of the profitability and are likely to continue to improve, fee breakpoints have been structured, the of AIM's and its affiliates' investment the quality and efficiency of the Fund has yet to benefit from the advisory and other activities and its services AIM and its affiliates provide breakpoints. The Board concluded that the financial condition, the Board concluded to the Fund in each of these areas, and Fund's fee levels under the Advisory that the compensation to be paid by the support the Board's approval of the Agreement therefore would reflect Fund to AIM under its Advisory Agreement continuance of the Advisory Agreement for economies of scale at higher asset levels was not excessive. the Fund. and that it was not necessary to change the advisory fee breakpoints in the - Benefits of soft dollars to AIM. The Fund's advisory fee schedule. Board considered the benefits realized by AIM as a result of brokerage transactions - Investments in affiliated money market executed through "soft dollar" funds. The Board also took into account arrangements. Under these arrangements, the fact that uninvested cash and cash brokerage commissions paid by the Fund collateral from securities lending and/or other funds advised by AIM are arrangements, if any (collectively, "cash used to pay for research and execution balances") of the Fund may be invested in services. This research may be used by money market funds advised by AIM AIM in making investment decisions for pursuant to the terms of an SEC exemptive the Fund. The Board concluded that such order. The Board found that the Fund may arrangements were appropriate. realize certain benefits upon investing cash balances in AIM advised money market - AIM's financial soundness in light of funds, including a higher net return, the Fund's needs. The Board considered increased liquidity, increased whether AIM is financially sound and has diversification or decreased transaction the resources necessary to perform its costs. The Board also found that the Fund obligations under the Advisory Agreement, will not receive reduced services if it and concluded that AIM has the financial invests its cash balances in such money resources necessary to fulfill its market funds. The Board noted that, to obligations under the Advisory Agreement. the extent the Fund invests uninvested cash in affiliated money market funds, - Historical relationship between the AIM has voluntarily agreed to waive a Fund and AIM. In determining whether to portion of the advisory fees it receives continue the Advisory Agreement for the from the Fund attributable to such Fund, the Board also considered the prior investment. The Board further determined relationship between AIM and the Fund, as that the proposed securities lending well as the Board's knowledge of AIM's program and related procedures with operations, and concluded that it was respect to the lending Fund is in the beneficial to maintain the current best interests of the lending Fund and relationship, in part, because of such its respective shareholders. The Board knowledge. The Board also reviewed the therefore concluded that the investment general nature of the non-investment of cash collateral received in connection advisory services currently performed by with the securities lending program in AIM and its affiliates, such as the money market funds according to the administrative, transfer agency and procedures is in the best interests of distribution services, and the fees the lending Fund and its respective received by AIM and its affiliates for shareholders. performing such services. In addition to reviewing such services, the trustees - Independent written evaluation and also considered the organizational recommendations of the Fund's Senior structure employed by AIM and its Officer. The Board noted that, upon their affiliates to provide those services. direction, the Senior Officer of the Based on the review of these and other Fund, who is independent of AIM and AIM's factors, the Board concluded that AIM and affiliates, had prepared an independent its affiliates were qualified to continue written evaluation in order to assist the to provide non-investment advisory Board in determining the reasonableness services to the Fund, including of the proposed management fees of the administrative, transfer agency and AIM Funds, including the Fund. The Board distribution services, and that AIM and noted that the Senior Officer's written its affiliates currently are providing evaluation had been relied upon by the satisfactory non-investment advisory Board in this regard in lieu of a services. competitive bidding process. In determining whether to continue the Advisory Agreement for the Fund, the Board considered the Senior Officer's written evaluation.
8 AIM V.I. High Yield Fund SCHEDULE OF INVESTMENTS December 31, 2006
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- BONDS & NOTES-86.68% AEROSPACE & DEFENSE-1.85% Argo-Tech Corp., Sr. Unsec. Gtd. Global Notes, 9.25%, 06/01/11(a) $ 261,000 $ 284,490 ----------------------------------------------------------------------- Armor Holdings, Inc., Sr. Sub. Global Notes, 8.25%, 08/15/13(a) 160,000 166,600 ----------------------------------------------------------------------- DRS Technologies, Inc., Sr. Gtd. Notes, 6.63%, 02/01/16(a) 165,000 167,681 ----------------------------------------------------------------------- Sr. Unsec. Conv. Putable Notes, 2.00%, 02/01/11 (Acquired 01/30/06; Cost $110,000)(a)(b) 110,000 116,325 ----------------------------------------------------------------------- Hexcel Corp., Sr. Unsec. Sub. Global Notes, 6.75%, 02/01/15(a) 367,000 361,954 ======================================================================= 1,097,050 ======================================================================= AIRLINES-0.37% Continental Airlines Inc., Unsec. Unsub. Notes, 8.75%, 12/01/11(a) 60,000 60,600 ----------------------------------------------------------------------- Delta Air Lines Inc.-Series 02-1, Class C, Pass Through Ctfs., 7.78%, 01/02/12(a) 157,234 157,038 ======================================================================= 217,638 ======================================================================= ALTERNATIVE CARRIERS-1.03% Hughes Network Systems LLC/HNS Finance Corp., Sr. Unsec. Gtd. Global Notes, 9.50%, 04/15/14(a) 105,000 109,594 ----------------------------------------------------------------------- Level 3 Communications Inc., Sr. Unsec. Unsub. Global Notes, 11.50%, 03/01/10(a) 180,000 191,250 ----------------------------------------------------------------------- Level 3 Financing Inc., Sr. Notes, 9.25%, 11/01/14 (Acquired 10/25/06-12/13/06; Cost $308,238)(a)(b) 305,000 312,244 ======================================================================= 613,088 ======================================================================= ALUMINUM-0.47% Century Aluminum Co., Sr. Unsec. Gtd. Global Notes, 7.50%, 08/15/14(a) 103,000 104,545 ----------------------------------------------------------------------- Novelis Inc. (Canada), Sr. Notes, 8.25%, 02/15/15 (Acquired 05/25/06-06/20/06; Cost $172,225)(a)(b) 180,000 174,150 ======================================================================= 278,695 ======================================================================= APPAREL RETAIL-0.69% Payless ShoeSource, Inc., Sr. Unsec. Gtd. Sub. Global Notes, 8.25%, 08/01/13(a) 390,000 406,575 ======================================================================= APPAREL, ACCESSORIES & LUXURY GOODS-2.29% American Achievement Corp., Sr. Unsec. Gtd. Sub. Global Notes, 8.25%, 04/01/12(a) 145,000 149,531 ----------------------------------------------------------------------- Broder Brothers Co.-Series B, Sr. Unsec. Gtd. Global Notes, 11.25%, 10/15/10(a) 426,000 416,415 ----------------------------------------------------------------------- Hanesbrands Inc., Sr. Floating Rate Notes, 8.74%, 12/15/14 (Acquired 12/11/06; Cost $60,000)(a)(b)(c) 60,000 61,275 ----------------------------------------------------------------------- Levi Strauss & Co., Sr. Unsec. Unsub. Global Notes, 8.88%, 04/01/16(a)(d) 300,000 314,250 -----------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
APPAREL, ACCESSORIES & LUXURY GOODS-(CONTINUED) Perry Ellis International, Inc.-Series B, Sr. Sub. Global Notes, 8.88%, 09/15/13(a) $ 212,000 $ 214,120 ----------------------------------------------------------------------- Warnaco Inc., Sr. Unsec. Global Notes, 8.88%, 06/15/13(a) 187,000 199,623 ======================================================================= 1,355,214 ======================================================================= AUTO PARTS & EQUIPMENT-2.05% Cooper-Standard Automotive Inc., Sr. Unsec. Gtd. Global Notes, 7.00%, 12/15/12(a)(d) 165,000 148,500 ----------------------------------------------------------------------- Delphi Corp., Global Notes, 6.50%, 05/01/09(a)(e) 105,000 118,650 ----------------------------------------------------------------------- Lear Corp., Sr. Notes, 8.50%, 12/01/13 (Acquired 11/20/06; Cost $90,000)(a)(b) 90,000 87,862 ----------------------------------------------------------------------- 8.75%, 12/01/16 (Acquired 11/20/06; Cost $120,000)(a)(b) 120,000 116,700 ----------------------------------------------------------------------- Tenneco Inc., Sr. Unsec. Gtd. Sub. Global Notes, 8.63%, 11/15/14(a) 160,000 164,600 ----------------------------------------------------------------------- TRW Automotive Inc., Sr. Global Notes, 9.38%, 02/15/13(a) 243,000 261,225 ----------------------------------------------------------------------- Visteon Corp., Sr. Unsec. Notes, 7.00%, 03/10/14(a)(d) 360,000 318,150 ======================================================================= 1,215,687 ======================================================================= AUTOMOBILE MANUFACTURERS-2.34% Ford Motor Co., Sr. Unsec. Conv. Putable Notes, 4.25%, 12/20/16(a) 305,000 329,223 ----------------------------------------------------------------------- Unsec. Unsub. Global Notes, 7.45%, 07/16/31(a)(d) 305,000 239,614 ----------------------------------------------------------------------- General Motors Corp., Global Notes, 7.20%, 01/15/11(a) 350,000 340,375 ----------------------------------------------------------------------- Sr. Unsec. Unsub. Global Deb., 8.38%, 07/15/33(a)(d) 515,000 477,663 ======================================================================= 1,386,875 ======================================================================= BROADCASTING & CABLE TV-5.00% Adelphia Communications Corp., Sr. Unsec. Unsub. Notes, 10.88%, 10/01/10(a)(d)(e) 178,000 163,760 ----------------------------------------------------------------------- CCH I Holdings LLC/CCH I Holdings Captial Corp., Sr. Sec. Gtd. Global Notes, 11.00%, 10/01/15(a) 300,000 309,000 ----------------------------------------------------------------------- CSC Holdings, Inc. Series B, Sr. Unsec. Unsub. Notes, 7.63%, 04/01/11(a) 392,000 401,310 ----------------------------------------------------------------------- Echostar DBS Corp., Sr. Unsec. Gtd. Global Notes, 6.38%, 10/01/11(a) 280,000 279,650 ----------------------------------------------------------------------- 7.00%, 10/01/13(a) 120,000 120,300 ----------------------------------------------------------------------- Intelsat Subsidiary Holding Co. Ltd. (Bermuda), Sr. Global Notes, 8.25%, 01/15/13(a) 357,000 366,371 ----------------------------------------------------------------------- Mediacom Broadband LLC/Mediacom Broadband Corp., Sr. Notes, 8.50%, 10/15/15 (Acquired 09/28/06; Cost $119,100)(a)(b) 120,000 122,400 ----------------------------------------------------------------------- Sr. Unsec. Global Notes, 8.50%, 10/15/15(a) 155,000 157,325 -----------------------------------------------------------------------
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- BROADCASTING & CABLE TV-(CONTINUED) NTL Cable PLC (United Kingdom), Sr. Unsec. Gtd. Global Notes, 8.75%, 04/15/14(a) $ 105,000 $ 110,513 ----------------------------------------------------------------------- Rainbow National Services LLC, Sr. Notes, 8.75%, 09/01/12 (Acquired 08/13/04-09/22/06; Cost $556,527)(a)(b) 538,000 567,590 ----------------------------------------------------------------------- Videotron Ltee (Canada), Sr. Unsec. Gtd. Global Notes, 6.88%, 01/15/14(a) 212,000 215,180 ----------------------------------------------------------------------- XM Satellite Radio Inc., Sr. Unsec. Gtd. Floating Rate Global Notes, 9.87%, 05/01/13(a)(c) 155,000 151,900 ======================================================================= 2,965,299 ======================================================================= BUILDING PRODUCTS-1.56% Associated Materials Inc., Sr. Unsec. Disc. Global Notes, 11.25%, 03/01/14(a)(f) 120,000 81,600 ----------------------------------------------------------------------- Sr. Unsec. Gtd. Sub. Global Notes, 9.75%, 04/15/12(a) 120,000 124,200 ----------------------------------------------------------------------- Goodman Global Holdings Inc., Sr. Unsec. Sub. Global Notes, 7.88%, 12/15/12(a)(d) 224,000 221,760 ----------------------------------------------------------------------- Series B, Sr. Unsec. Gtd. Floating Rate Global Notes, 8.36%, 06/15/12(a)(c) 270,000 276,075 ----------------------------------------------------------------------- Indalex Holding Corp., Sr. Sec. Notes, 11.50%, 02/01/14 (Acquired 04/13/06-04/24/06; Cost $204,950)(a)(b) 210,000 219,450 ======================================================================= 923,085 ======================================================================= CASINOS & GAMING-3.73% Galaxy Entertainment Finance Co. Ltd. (China), Gtd. Notes, 9.88%, 12/15/12 (Acquired 12/04/06; Cost $31,950)(a)(b) 30,000 32,288 ----------------------------------------------------------------------- Harrah's Operating Co., Inc., Notes, 6.50%, 06/01/16(a) 365,000 328,317 ----------------------------------------------------------------------- Isle of Capri Casinos, Inc., Sr. Unsec. Gtd. Sub. Global Notes, 7.00%, 03/01/14(a) 180,000 179,100 ----------------------------------------------------------------------- MGM Mirage, Sr. Unsec. Gtd. Global Notes, 6.63%, 07/15/15(a) 273,000 262,080 ----------------------------------------------------------------------- Sr. Unsec. Gtd. Notes, 7.63%, 01/15/17(a) 305,000 308,050 ----------------------------------------------------------------------- Penn National Gaming, Inc., Sr. Unsec. Sub. Global Notes, 6.75%, 03/01/15(a) 199,000 197,508 ----------------------------------------------------------------------- Poster Financial Group Inc., Sr. Sec. Global Notes, 8.75%, 12/01/11(a) 439,000 460,401 ----------------------------------------------------------------------- Seneca Gaming Corp., Sr. Global Notes, 7.25%, 05/01/12(a) 124,000 127,100 ----------------------------------------------------------------------- Station Casinos, Inc., Sr. Unsec. Global Notes, 6.00%, 04/01/12(a) 140,000 132,650 ----------------------------------------------------------------------- Sr. Unsec. Notes, 7.75%, 08/15/16(a) 180,000 182,025 ======================================================================= 2,209,519 ======================================================================= COAL & CONSUMABLE FUELS-0.51% Massey Energy Co., Sr. Global Notes, 6.63%, 11/15/10(a) 300,000 300,375 =======================================================================
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
COMMERCIAL PRINTING-0.45% Quebecor World Capital Corp. (Canada), Sr. Notes, 8.75%, 03/15/16 (Acquired 12/06/06-12/13/06; Cost $264,288)(a)(b) $ 275,000 $ 265,375 ======================================================================= COMMODITY CHEMICALS-0.99% BCP Crystal US Holdings Corp., Sr. Sub. Global Notes, 9.63%, 06/15/14(a) 111,000 122,932 ----------------------------------------------------------------------- Lyondell Chemical Co., Sr. Unsec. Gtd. Global Notes, 8.25%, 09/15/16(a) 120,000 126,600 ----------------------------------------------------------------------- Montell Finance Co. B.V. (Netherlands), Unsec. Gtd. Yankee Deb., 8.10%, 03/15/27 (Acquired 01/06/05-09/22/06; Cost $327,683)(a)(b) 347,000 334,855 ======================================================================= 584,387 ======================================================================= COMMUNICATIONS EQUIPMENT-0.65% MasTec, Inc.-Series B, Sr. Sub. Notes, 7.75%, 02/01/08(a) 325,000 324,188 ----------------------------------------------------------------------- Superior Essex Communications LLC/Essex Group Inc., Sr. Global Notes, 9.00%, 04/15/12(a) 60,000 62,700 ======================================================================= 386,888 ======================================================================= CONSTRUCTION & ENGINEERING-0.55% Great Lakes Dredge & Dock Corp., Sr. Unsec. Gtd. Sub. Global Notes, 7.75%, 12/15/13(a) 331,000 326,035 ======================================================================= CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS-0.62% Esco Corp., Sr. Notes, 8.63%, 12/15/13 (Acquired 12/12/06; Cost $55,000)(a)(b) 55,000 56,513 ----------------------------------------------------------------------- Titan International Inc., Sr. Notes, 8.00%, 01/15/12 (Acquired 12/19/06; Cost $120,000)(a)(b) 120,000 121,350 ----------------------------------------------------------------------- Wabtec Corp., Sr. Unsec. Gtd. Global Notes, 6.88%, 07/31/13(a) 190,000 190,000 ======================================================================= 367,863 ======================================================================= CONSTRUCTION MATERIALS-0.60% U.S. Concrete, Inc., Sr. Sub. Notes, 8.38%, 04/01/14 (Acquired 06/29/06; Cost $108,086)(a)(b) 110,000 108,075 ----------------------------------------------------------------------- Sr. Unsec. Gtd. Sub. Global Notes, 8.38%, 04/01/14(a) 255,000 250,538 ======================================================================= 358,613 ======================================================================= CONSUMER FINANCE-4.29% Ford Motor Credit Co., Sr. Notes, 9.88%, 08/10/11(a) 120,000 129,174 ----------------------------------------------------------------------- Sr. Unsec. Notes, 8.63%, 11/01/10(a) 490,000 507,062 ----------------------------------------------------------------------- 8.00%, 12/15/16(a) 125,000 124,606 ----------------------------------------------------------------------- Unsub. Global Notes, 7.00%, 10/01/13(a) 770,000 743,050 ----------------------------------------------------------------------- General Motors Acceptance Corp., Global Bonds, 8.00%, 11/01/31(a) 425,000 489,812 ----------------------------------------------------------------------- Global Notes, 6.75%, 12/01/14(a)(d) 365,000 377,815 ----------------------------------------------------------------------- Sr. Unsec. Unsub. Notes, 6.00%, 12/15/11(a) 170,000 169,883 ======================================================================= 2,541,402 =======================================================================
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- DATA PROCESSING & OUTSOURCED SERVICES-0.04% Sungard Data Systems Inc., Sr. Unsec. Gtd. Global Notes, 9.13%, 08/15/13(a) $ 21,000 $ 22,234 ======================================================================= DIVERSIFIED CHEMICALS-0.76% Innophos Inc., Sr. Unsec. Gtd. Sub. Global Notes, 8.88%, 08/15/14(a) 440,000 449,900 ======================================================================= DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES-1.95% Corrections Corp. of America, Sr. Unsec. Gtd. Sub. Global Notes, 6.25%, 03/15/13(a) 171,000 169,290 ----------------------------------------------------------------------- GEO Group, Inc. (The), Sr. Unsec. Global Notes, 8.25%, 07/15/13(a) 143,000 148,005 ----------------------------------------------------------------------- Mobile Services Group Inc., Sr. Notes, 9.75%, 08/01/14 (Acquired 07/20/06; Cost $60,000)(a)(b) 60,000 63,300 ----------------------------------------------------------------------- Travelport Ltd., Sr. Notes, 9.88%, 09/01/14 (Acquired 08/11/06-09/20/06; Cost $296,100)(a)(b) 300,000 305,250 ----------------------------------------------------------------------- Sr. Sub. Notes, 11.88%, 09/01/16 (Acquired 08/11/06-11/28/06; Cost $351,700)(a)(b) 355,000 366,537 ----------------------------------------------------------------------- Worldspan L.P./WS Financing Corp., Sr. Sec. Gtd. Floating Rate Global Second Lien Notes, 11.62%, 02/15/11(a)(c) 100,000 103,000 ======================================================================= 1,155,382 ======================================================================= DRUG RETAIL-0.87% Jean Coutu Group (PJC) Inc. (The) (Canada), Sr. Unsec. Global Notes, 7.63%, 08/01/12(a) 388,000 409,340 ----------------------------------------------------------------------- Rite Aid Corp., Sr. Sec. Gtd. Global Second Lien Notes, 8.13%, 05/01/10(a) 103,000 105,704 ======================================================================= 515,044 ======================================================================= ELECTRIC UTILITIES-2.78% Dynegy Holdings, Inc., Sr. Unsec. Global Notes, 8.38%, 05/01/16(a) 185,000 195,406 ----------------------------------------------------------------------- Edison Mission Energy, Sr. Unsec. Global Notes, 7.75%, 06/15/16(a)(d) 155,000 164,881 ----------------------------------------------------------------------- LSP Energy L.P./LSP Batesville Funding Corp.- Series C, Sr. Sec. Bonds, 7.16%, 01/15/14(a) 178,291 179,851 ----------------------------------------------------------------------- Midwest Generation, LLC, Sr. Sec. Second Priority Putable Global Notes, 8.75%, 05/01/14(a) 145,000 158,050 ----------------------------------------------------------------------- Mirant North America, LLC, Sr. Unsec. Gtd. Global Notes, 7.38%, 12/31/13(a) 185,000 189,162 ----------------------------------------------------------------------- Mission Energy Holding Co., Sr. Sec. Global Notes, 13.50%, 07/15/08(a) 231,000 256,121 ----------------------------------------------------------------------- Nevada Power Co., Series M, Sr. General Refunding Mortgage Global Notes, 5.95%, 03/15/16(a) 55,000 55,046 ----------------------------------------------------------------------- Series O, Sr. General Refunding Mortgage Global Notes, 6.50%, 05/15/18(a) 50,000 51,970 -----------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
ELECTRIC UTILITIES-(CONTINUED) Reliant Energy, Inc., Sr. Sec. Gtd. Notes, 6.75%, 12/15/14(a) $ 175,000 $ 171,938 ----------------------------------------------------------------------- Tenaska Alabama Partners LP, Sr. Sec. Notes, 7.00%, 06/30/21 (Acquired 12/12/06; Cost $223,754)(a)(b) 222,918 223,476 ======================================================================= 1,645,901 ======================================================================= ENVIRONMENTAL & FACILITIES SERVICES-0.83% Allied Waste North America, Inc., Series B, Sr. Sec. Gtd. Global Notes, 8.50%, 12/01/08(a) 234,000 246,577 ----------------------------------------------------------------------- 7.13%, 05/15/16(a) 245,000 243,469 ======================================================================= 490,046 ======================================================================= FERTILIZERS & AGRICULTURAL CHEMICALS-0.31% Mosaic Co. (The), Sr. Notes, 7.38%, 12/01/14 (Acquired 11/16/06; Cost $120,000)(a)(b) 120,000 123,450 ----------------------------------------------------------------------- 7.63%, 12/01/16 (Acquired 11/16/06; Cost $60,000)(a)(b) 60,000 62,325 ======================================================================= 185,775 ======================================================================= FOOD RETAIL-0.11% Supervalu Inc., Sr. Medium Term Notes, 7.50%, 11/15/14(a) 60,000 62,550 ======================================================================= FOREST PRODUCTS-0.38% Millar Western Forest Products Ltd. (Canada), Sr. Unsec. Global Notes, 7.75%, 11/15/13(a) 247,000 223,535 ======================================================================= GAS UTILITIES-0.22% SEMCO Energy, Inc., Sr. Global Notes, 7.75%, 05/15/13(a) 68,000 69,700 ----------------------------------------------------------------------- Sr. Unsec. Global Notes, 7.13%, 05/15/08(a) 60,000 60,525 ======================================================================= 130,225 ======================================================================= GENERAL MERCHANDISE STORES-0.23% Pantry, Inc. (The), Sr. Sub. Global Notes, 7.75%, 02/15/14(a) 135,000 136,519 ======================================================================= HEALTH CARE EQUIPMENT-0.10% Encore Medical Finance LLC/Encore Medical Finance Corp., Sr. Sub. Notes, 11.75%, 11/15/14 (Acquired 10/30/06; Cost $60,000)(a)(b) 60,000 60,150 =======================================================================
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- HEALTH CARE FACILITIES-2.95% Concentra Operating Corp., Sr. Unsec. Gtd. Sub. Global Notes, 9.13%, 06/01/12(a) $ 147,000 $ 154,534 ----------------------------------------------------------------------- HCA, Inc., Sr. Sec. Notes, 9.13%, 11/15/14 (Acquired 11/09/06; Cost $30,000)(a)(b) 30,000 32,100 ----------------------------------------------------------------------- 9.25%, 11/15/16 (Acquired 11/09/06; Cost $60,000)(a)(b) 60,000 64,350 ----------------------------------------------------------------------- Sr. Unsec. Bonds, 7.50%, 11/06/33(a) 165,000 136,125 ----------------------------------------------------------------------- Sr. Unsec. Global Notes, 6.38%, 01/15/15(a) 110,000 93,775 ----------------------------------------------------------------------- 6.50%, 02/15/16(a) 165,000 139,838 ----------------------------------------------------------------------- Sr. Unsec. Notes, 8.75%, 09/01/10(a) 245,000 256,637 ----------------------------------------------------------------------- 6.25%, 02/15/13(a) 21,850 19,392 ----------------------------------------------------------------------- Select Medical Corp., Sr. Unsec. Gtd. Sub. Global Notes, 7.63%, 02/01/15(a) 348,000 289,710 ----------------------------------------------------------------------- Tenet Healthcare Corp., Sr. Unsec. Notes, 6.38%, 12/01/11(a) 419,000 385,480 ----------------------------------------------------------------------- 7.38%, 02/01/13(a) 21,000 19,425 ----------------------------------------------------------------------- Triad Hospitals, Inc., Sr. Unsec. Sub. Notes, 7.00%, 11/15/13(a) 155,000 156,162 ======================================================================= 1,747,528 ======================================================================= HEALTH CARE SERVICES-2.00% AmeriPath, Inc., Sr. Unsec. Gtd. Sub. Global Notes, 10.50%, 04/01/13(a) 305,000 331,688 ----------------------------------------------------------------------- Omnicare, Inc., Sr. Sub. Notes, 6.88%, 12/15/15(a) 110,000 109,175 ----------------------------------------------------------------------- Rural/Metro Corp., Sr. Gtd. Sub. Global Notes, 9.88%, 03/15/15(a) 56,000 58,520 ----------------------------------------------------------------------- Universal Hospital Services Inc., Sr. Unsec. Global Notes, 10.13%, 11/01/11(a) 345,000 371,306 ----------------------------------------------------------------------- US Oncology, Inc., Sr. Unsec. Gtd. Global Notes, 9.00%, 08/15/12(a) 295,000 314,175 ======================================================================= 1,184,864 ======================================================================= HEALTH CARE SUPPLIES-0.27% Inverness Medical Innovations, Inc., Sr. Sub. Global Notes, 8.75%, 02/15/12(a) 155,000 161,975 ======================================================================= HOMEBUILDING-0.27% Technical Olympic USA, Inc., Sr. Unsec. Gtd. Global Notes, 9.00%, 07/01/10(a) 163,000 159,944 ======================================================================= HOMEFURNISHING RETAIL-0.41% Rent-A-Center Inc.-Series B, Sr. Unsec. Gtd. Sub. Global Notes, 7.50%, 05/01/10(a) 240,000 240,600 =======================================================================
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
HOTELS, RESORTS & CRUISE LINES-1.14% Grupo Posadas S.A. de C.V. (Mexico), Sr. Notes, 8.75%, 10/04/11 (Acquired 09/27/04; Cost $183,000)(a)(b) $ 183,000 $ 192,150 ----------------------------------------------------------------------- NCL Corp., Sr. Unsec. Unsub. Global Notes, 10.63%, 07/15/14(a) 476,000 480,760 ======================================================================= 672,910 ======================================================================= HOUSEHOLD APPLIANCES-0.09% Gregg Appliances, Inc., Sr. Unsec. Gtd. Global Notes, 9.00%, 02/01/13(a) 53,000 51,145 ======================================================================= INDEPENDENT POWER PRODUCERS & ENERGY TRADERS-2.58% AES Corp. (The), Sr. Unsec. Unsub. Notes, 7.75%, 03/01/14(a)(d) 396,000 419,760 ----------------------------------------------------------------------- AES Red Oak LLC-Series A, Sr. Sec. Bonds, 8.54%, 11/30/19(a) 418,897 458,693 ----------------------------------------------------------------------- Mirant Americas Generation LLC, Sr. Unsec. Notes, 8.30%, 05/01/11(a) 120,000 123,600 ----------------------------------------------------------------------- NRG Energy, Inc., Sr. Unsec. Gtd. Notes, 7.38%, 02/01/16(a) 160,000 161,200 ----------------------------------------------------------------------- 7.38%, 01/15/17(a) 365,000 367,051 ======================================================================= 1,530,304 ======================================================================= INDUSTRIAL CONGLOMERATES-0.36% TransDigm Inc., Sr. Unsec. Gtd. Sub. Global Notes, 7.75%, 07/15/14(a) 205,000 211,919 ======================================================================= INDUSTRIAL MACHINERY-0.79% Columbus McKinnon Corp., Sr. Sub. Global Notes, 8.88%, 11/01/13(a) 318,000 337,477 ----------------------------------------------------------------------- Stewart & Stevenson LLC/Stewart & Stevenson Corp., Sr. Notes, 10.00%, 07/15/14 (Acquired 12/06/06; Cost $132,031)(a)(b) 125,000 132,344 ======================================================================= 469,821 ======================================================================= INTEGRATED TELECOMMUNICATION SERVICES-0.84% Empresa Brasileira de Telecom S.A. (Brazil)-Series B, Gtd. Global Notes, 11.00%, 12/15/08(a) 216,000 237,060 ----------------------------------------------------------------------- Hawaiian Telcom Communications Inc.-Series B, Sr. Unsec. Gtd. Sub. Global Notes, 12.50%, 05/01/15(a)(d) 250,000 263,750 ======================================================================= 500,810 ======================================================================= METAL & GLASS CONTAINERS-0.56% Greif, Inc., Sr. Unsec. Gtd. Sub. Global Notes, 8.88%, 08/01/12(a) 128,000 135,040 ----------------------------------------------------------------------- Owens-Brockway Glass Container Inc., Sr. Unsec. Gtd. Global Notes, 8.25%, 05/15/13(a) 56,000 58,030 ----------------------------------------------------------------------- Pliant Corp., Sr. Sec. Global Notes, 11.63%, 06/15/09(a) 127,085 139,476 ======================================================================= 332,546 =======================================================================
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- MOVIES & ENTERTAINMENT-1.80% AMC Entertainment Inc.-Series B, Sr. Unsec. Gtd. Global Notes, 8.63%, 08/15/12(a) $ 165,000 $ 173,250 ----------------------------------------------------------------------- Cinemark Inc., Sr. Unsec. Disc. Global Notes, 9.75%, 03/15/14(a)(f) 270,000 232,875 ----------------------------------------------------------------------- Imax Corp. (Canada), Sr. Unsec. Gtd. Global Notes, 9.63%, 12/01/10(a) 120,000 103,200 ----------------------------------------------------------------------- Marquee Holdings Inc., Sr. Disc. Global Notes, 12.00%, 08/15/14(a)(f) 245,000 207,025 ----------------------------------------------------------------------- WMG Acquisition Corp., Sr. Sub. Global Notes, 7.38%, 04/15/14(a) 353,000 352,117 ======================================================================= 1,068,467 ======================================================================= OIL & GAS EQUIPMENT & SERVICES-2.36% Allis-Chalmers Energy, Inc., Sr. Unsec. Gtd. Notes, 9.00%, 01/15/14 (Acquired 08/09/06; Cost $120,000)(a)(b) 120,000 120,750 ----------------------------------------------------------------------- Basic Energy Services Inc., Sr. Unsec. Gtd. Global Notes, 7.13%, 04/15/16(a) 130,000 128,537 ----------------------------------------------------------------------- CHC Helicopter Corp. (Canada), Sr. Sub. Global Notes, 7.38%, 05/01/14(a) 310,000 301,475 ----------------------------------------------------------------------- Complete Production Services Inc., Sr. Notes, 8.00%, 12/15/16 (Acquired 11/29/06; Cost $60,000)(a)(b) 60,000 61,650 ----------------------------------------------------------------------- Geokinetics Inc., Sr. Sec. Floating Rate Notes, 11.86%, 12/15/12 (Acquired 12/11/06; Cost $125,000)(a)(b)(c) 125,000 126,250 ----------------------------------------------------------------------- Hanover Compressor Co., Sr. Notes, 9.00%, 06/01/14(a) 106,000 114,745 ----------------------------------------------------------------------- PHI Inc., Sr. Unsec. Gtd. Global Notes, 7.13%, 04/15/13(a) 565,000 548,050 ======================================================================= 1,401,457 ======================================================================= OIL & GAS EXPLORATION & PRODUCTION-3.22% Clayton Williams Energy, Inc., Sr. Unsec. Gtd. Global Notes, 7.75%, 08/01/13(a) 197,000 181,732 ----------------------------------------------------------------------- Delta Petroleum Corp., Sr. Unsec. Gtd. Global Notes, 7.00%, 04/01/15(a) 180,000 167,400 ----------------------------------------------------------------------- Encore Acquisition Co., Sr. Unsec. Sub. Global Notes, 6.00%, 07/15/15(a) 270,000 247,725 ----------------------------------------------------------------------- OPTI Canada Inc. (Canada), Sr. Sec. Gtd. Notes, 8.25%, 12/15/14 (Acquired 12/08/06; Cost $125,000)(a)(b) 125,000 128,438 ----------------------------------------------------------------------- Paramount Resources Ltd. (Canada), Sr. Unsec. Unsub. Yankee Notes, 8.50%, 01/31/13(a) 504,000 500,220 ----------------------------------------------------------------------- Quicksilver Resources Inc., Sr. Unsec. Gtd. Sub. Notes, 7.13%, 04/01/16(a) 105,000 102,375 ----------------------------------------------------------------------- Sabine Pass LNG LP, Sr. Sec. Notes, 7.25%, 11/30/13 (Acquired 11/01/06; Cost $425,000)(a)(b) 425,000 423,937 ----------------------------------------------------------------------- Whiting Petroleum Corp., Sr. Unsec. Gtd. Sub. Global Notes, 7.00%, 02/01/14(a) 155,000 154,613 ======================================================================= 1,906,440 ======================================================================= OIL & GAS REFINING & MARKETING-0.53% United Refining Co., Sr. Unsec. Gtd. Global Notes, 10.50%, 08/15/12(a) 300,000 315,375 =======================================================================
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
OIL & GAS STORAGE & TRANSPORTATION-3.31% Copano Energy LLC, Sr. Unsec. Gtd. Global Notes, 8.13%, 03/01/16(a) $ 410,000 $ 426,400 ----------------------------------------------------------------------- El Paso Production Holding Co., Sr. Unsec. Gtd. Global Notes, 7.75%, 06/01/13(a) 120,000 126,000 ----------------------------------------------------------------------- MarkWest Energy Partners L.P./MarkWest Energy Finance Corp., Sr. Notes, 8.50%, 07/15/16 (Acquired 10/16/06-12/07/06; Cost $197,494)(a)(b) 195,000 202,556 ----------------------------------------------------------------------- Series B, Sr. Unsec. Global Notes, 6.88%, 11/01/14(a) 304,000 295,260 ----------------------------------------------------------------------- SemGroup LP, Sr. Notes, 8.75%, 11/15/15 (Acquired 10/03/06; Cost $179,100)(a)(b) 180,000 182,700 ----------------------------------------------------------------------- Sonat Inc., Sr. Unsec. Notes, 7.63%, 07/15/11(a) 517,000 550,605 ----------------------------------------------------------------------- Tennessee Gas Pipeline Co., Unsec. Deb., 7.50%, 04/01/17(a) 105,000 115,500 ----------------------------------------------------------------------- Williams Partners LP/Williams Partners Finance Corp., Bonds, 7.25%, 02/01/17 (Acquired 12/06/06; Cost $60,000)(a)(b) 60,000 61,500 ======================================================================= 1,960,521 ======================================================================= PACKAGED FOODS & MEATS-1.34% Chiquita Brands International, Inc., Sr. Unsec. Global Notes, 7.50%, 11/01/14(a)(d) 175,000 160,562 ----------------------------------------------------------------------- Dole Foods Co. Inc., Sr. Unsec. Gtd. Global Notes, 7.25%, 06/15/10(a) 335,000 323,275 ----------------------------------------------------------------------- Nutro Products Inc., Sr. Floating Rate Notes, 9.40%, 10/15/13 (Acquired 04/13/06; Cost $25,000)(a)(b)(c) 25,000 25,875 ----------------------------------------------------------------------- Sr. Sub. Notes, 10.75%, 04/15/14 (Acquired 04/13/06-10/10/06; Cost $269,419)(a)(b) 260,000 285,350 ======================================================================= 795,062 ======================================================================= PAPER PACKAGING-1.42% Caraustar Industries, Inc., Unsec. Unsub. Notes, 7.38%, 06/01/09(a) 600,000 583,500 ----------------------------------------------------------------------- Jefferson Smurfit Corp., Sr. Unsec. Gtd. Unsub. Global Notes, 7.50%, 06/01/13(a) 274,000 259,957 ======================================================================= 843,457 ======================================================================= PAPER PRODUCTS-2.97% Abitibi-Consolidated Finance L.P., Unsec. Gtd. Notes, 7.88%, 08/01/09(a) 155,000 152,094 ----------------------------------------------------------------------- Abitibi-Consolidated Inc. (Canada), Unsec. Unsub. Yankee Notes, 8.55%, 08/01/10(a) 185,000 178,294 ----------------------------------------------------------------------- Boise Cascade LLC, Sr. Unsec. Gtd. Sub. Global Notes, 7.13%, 10/15/14(a) 142,000 138,450 ----------------------------------------------------------------------- Bowater Inc., Global Notes, 6.50%, 06/15/13(a) 95,000 86,806 ----------------------------------------------------------------------- Cellu Tissue Holdings, Inc., Sec. Gtd. Global Notes, 9.75%, 03/15/10(a) 182,000 180,635 ----------------------------------------------------------------------- Domtar Inc. (Canada), Yankee Notes, 5.38%, 12/01/13(a) 50,000 45,500 ----------------------------------------------------------------------- 7.13%, 08/15/15(a) 118,000 117,115 -----------------------------------------------------------------------
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- PAPER PRODUCTS-(CONTINUED) Exopack Holding Corp., Sr. Notes, 11.25%, 02/01/14 (Acquired 01/26/06-01/27/06; Cost $145,025)(a)(b) $ 145,000 $ 153,338 ----------------------------------------------------------------------- Georgia-Pacific Corp., Sr. Gtd. Notes, 7.00%, 01/15/15 (Acquired 12/13/06; Cost $120,000)(a)(b) 120,000 119,850 ----------------------------------------------------------------------- 7.13%, 01/15/17 (Acquired 12/13/06; Cost $60,000)(a)(b) 60,000 60,000 ----------------------------------------------------------------------- Mercer International Inc., Sr. Global Notes, 9.25%, 02/15/13(a) 167,000 164,495 ----------------------------------------------------------------------- Neenah Paper, Inc., Sr. Unsec. Gtd. Global Notes, 7.38%, 11/15/14(a) 179,000 172,287 ----------------------------------------------------------------------- Verso Paper Holdings LLC/Verson Paper Inc., Sr. Sec. Notes, 9.13%, 08/01/14 (Acquired 07/26/06; Cost $180,000)(a)(b) 180,000 189,450 ======================================================================= 1,758,314 ======================================================================= PERSONAL PRODUCTS-0.83% DEL Laboratories Inc., Sr. Unsec. Gtd. Sub. Global Notes, 8.00%, 02/01/12(a) 235,000 222,663 ----------------------------------------------------------------------- NBTY, Inc., Sr. Unsec. Sub. Global Notes, 7.13%, 10/01/15(a) 269,000 266,982 ======================================================================= 489,645 ======================================================================= PHARMACEUTICALS-2.40% Athena Neurosciences Finance, LLC, Sr. Unsec. Gtd. Unsub. Notes, 7.25%, 02/21/08(a) 526,000 536,278 ----------------------------------------------------------------------- Elan Finance PLC/Elan Finance Corp. (Ireland), Sr. Unsec. Gtd. Global Notes, 7.75%, 11/15/11(a) 166,000 163,095 ----------------------------------------------------------------------- Sr. Unsec. Notes, 8.88%, 12/01/13 (Acquired 11/17/06; Cost $180,000)(a)(b) 180,000 180,000 ----------------------------------------------------------------------- Leiner Health Products Inc., Sr. Sub. Global Notes, 11.00%, 06/01/12(a) 195,000 202,069 ----------------------------------------------------------------------- Valeant Pharmaceuticals International, Sr. Unsec. Global Notes, 7.00%, 12/15/11(a) 355,000 339,912 ======================================================================= 1,421,354 ======================================================================= PROPERTY & CASUALTY INSURANCE-0.22% Crum & Forster Holdings Corp., Sr. Global Notes, 10.38%, 06/15/13(a) 120,000 130,500 ======================================================================= PUBLISHING-2.19% Dex Media Inc., Unsec. Disc. Global Notes, 9.00%, 11/15/13(a)(d)(f) 449,000 404,100 ----------------------------------------------------------------------- Idearc Inc., Sr. Notes, 8.00%, 11/15/16 (Acquired 11/01/06; Cost $245,000)(a)(b) 245,000 250,819 ----------------------------------------------------------------------- MediMedia USA Inc., Sr. Sub. Notes, 11.38%, 11/15/14 (Acquired 11/01/06; Cost $30,000)(a)(b) 30,000 31,575 ----------------------------------------------------------------------- Nielsen Finance LLC/Nielsen Finance Co., Sr. Notes, 10.00%, 08/01/14 (Acquired 11/30/06; Cost $324,063)(a)(b) 305,000 331,687 ----------------------------------------------------------------------- Vertis Inc.-Series B, Sr. Unsec. Gtd. Global Notes, 10.88%, 06/15/09(a)(d) 280,000 282,450 ======================================================================= 1,300,631 =======================================================================
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
RAILROADS-1.05% Kansas City Southern de Mexico, S.A. de C.V. (Mexico), Sr. Global Notes, 9.38%, 05/01/12(a) $ 507,000 $ 543,757 ----------------------------------------------------------------------- Kansas City Southern Railway, Sr. Unsec. Gtd. Global Notes, 7.50%, 06/15/09(a) 75,000 75,938 ======================================================================= 619,695 ======================================================================= RESTAURANTS-0.67% Carrols Corp., Sr. Unsec. Gtd. Sub. Global Notes, 9.00%, 01/15/13(a) 385,000 396,550 ======================================================================= SEMICONDUCTOR EQUIPMENT-1.04% Amkor Technology Inc., Sr. Unsec. Global Notes, 7.13%, 03/15/11(a) 545,000 512,981 ----------------------------------------------------------------------- Sensata Technologies B.V. (Netherlands), Sr. Notes, 8.25%, 05/01/14 (Acquired 04/21/06-04/25/06; Cost $105,600)(a)(b)(f) 105,000 101,588 ======================================================================= 614,569 ======================================================================= SEMICONDUCTORS-1.03% Conexant Systems Inc., Sr. Sec. Floating Rate Notes, 9.13%, 11/15/10 (Acquired 11/07/06; Cost $60,000)(a)(b)(c) 60,000 61,350 ----------------------------------------------------------------------- Freescale Semiconductor Inc., Sr. Notes, 8.88%, 12/15/14 (Acquired 11/16/06; Cost $60,000)(a)(b) 60,000 60,150 ----------------------------------------------------------------------- Sr. Sub. Notes, 10.13%, 12/15/16 (Acquired 11/16/06; Cost $60,000)(a)(b) 60,000 60,450 ----------------------------------------------------------------------- MagnaChip Semiconductor S.A./MagnaChip Semiconductor Finance Co. (South Korea), Sr. Sec. Deb. Global Notes, 6.88%, 12/15/11(a) 310,000 264,275 ----------------------------------------------------------------------- Viasystems Inc., Sr. Unsec. Sub. Global Notes, 10.50%, 01/15/11(a) 165,000 166,237 ======================================================================= 612,462 ======================================================================= SPECIALTY CHEMICALS-1.11% Johnsondiversey Holdings Inc., Unsec. Disc. Global Notes, 10.67%, 05/15/13(a)(f) 190,000 184,775 ----------------------------------------------------------------------- Johnsondiversey Inc.-Series B, Sr. Unsec. Gtd. Sub. Global Notes, 9.63%, 05/15/12(a) 105,000 110,513 ----------------------------------------------------------------------- NewMarket Corp., Sr. Notes, 7.13%, 12/15/16 (Acquired 12/07/06; Cost $150,000)(a)(b) 150,000 150,375 ----------------------------------------------------------------------- Polypore Inc., Sr. Sub. Global Notes, 8.75%, 05/15/12(a) 120,000 119,850 ----------------------------------------------------------------------- Polypore International Inc., Sr. Unsec. Disc. Global Notes, 10.50%, 10/01/12(a)(f) 120,000 96,000 ======================================================================= 661,513 =======================================================================
AIM V.I. High Yield Fund
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- SPECIALTY STORES-1.73% General Nutrition Centers Inc., Sr. Unsec. Sub. Global Notes, 8.50%, 12/01/10(a) $ 570,000 $ 587,100 ----------------------------------------------------------------------- GNC Parent Corp., Floating Rate Notes, 12.14%, 12/01/11 (Acquired 11/15/06; Cost $89,100)(a)(b)(c) 90,000 90,225 ----------------------------------------------------------------------- Linens 'n Things Inc., Sr. Sec. Gtd. Floating Rate Global Notes, 11.00%, 01/15/14(a)(c) 360,000 349,200 ======================================================================= 1,026,525 ======================================================================= STEEL-0.57% AK Steel Corp., Sr. Unsec. Gtd. Global Notes, 7.75%, 06/15/12(a) 165,000 166,650 ----------------------------------------------------------------------- Metals USA, Inc., Sr. Sec. Gtd. Global Notes, 11.13%, 12/01/15(a) 155,000 171,275 ======================================================================= 337,925 ======================================================================= TEXTILES-0.60% INVISTA, Sr. Notes, 9.25%, 05/01/12 (Acquired 06/17/04-11/09/06; Cost $342,763)(a)(b) 330,000 354,750 ======================================================================= THRIFTS & MORTGAGE FINANCE-0.28% Fremont General Corp.-Series B, Sr. Unsec. Notes, 7.88%, 03/17/09(a) 165,000 164,175 ======================================================================= TIRES & RUBBER-1.16% Goodyear Tire & Rubber Co. (The), Sr. Notes, 8.63%, 12/01/11 (Acquired 11/16/06; Cost $180,000)(a)(b) 180,000 186,075 ----------------------------------------------------------------------- Sr. Unsec. Global Notes, 9.00%, 07/01/15(a) 475,000 501,125 ======================================================================= 687,200 ======================================================================= TRADING COMPANIES & DISTRIBUTORS-0.70% H&E Equipment Services Inc., Sr. Unsec. Gtd. Global Notes, 8.38%, 07/15/16(a) 120,000 126,600 ----------------------------------------------------------------------- United Rentals North America, Inc., Sr. Unsec. Gtd. Global Notes, 6.50%, 02/15/12(a) 180,000 178,200 ----------------------------------------------------------------------- Wesco Distribution Inc., Sr. Unsec. Gtd. Sub. Global Notes, 7.50%, 10/15/17(a) 110,000 112,475 ======================================================================= 417,275 ======================================================================= WIRELESS TELECOMMUNICATION SERVICES-3.27% American Cellular Corp.-Series B, Sr. Global Notes, 10.00%, 08/01/11(a) 85,000 90,419 ----------------------------------------------------------------------- Centennial Cellular Operating Co. LLC/Centennial Communications Corp., Sr. Unsec. Gtd. Global Notes, 10.13%, 06/15/13(a) 353,000 383,005 ----------------------------------------------------------------------- Dobson Cellular Systems Inc., Sr. Sec. Notes, 8.38%, 11/01/11 (Acquired 05/11/06-09/22/06; Cost $324,875)(a)(b) 310,000 327,825 ----------------------------------------------------------------------- Rogers Wireless Inc. (Canada), Sr. Sec. Global Notes, 6.38%, 03/01/14(a) 290,000 295,437 -----------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE -----------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES-(CONTINUED) Rural Cellular Corp., Sr. Sec. Global Notes, 8.25%, 03/15/12(a) $ 80,000 $ 83,600 ----------------------------------------------------------------------- Sr. Unsec. Global Notes, 9.88%, 02/01/10(a) 332,000 356,485 ----------------------------------------------------------------------- Suncom Wireless, Inc., Sr. Unsec. Gtd. Global Notes, 8.50%, 06/01/13(a)(d) 415,000 398,400 ======================================================================= 1,935,171 ======================================================================= Total Bonds & Notes (Cost $50,036,007) 51,360,323 ======================================================================= BUNDLED SECURITIES-3.73% INVESTMENT BANKING & BROKERAGE Targeted Return Index Securities Trust-Series HY 2006-1 Sec. Bonds, 7.55, 05/01/16 (Acquired 06/27/06-09/27/06; Cost $2,127,600) (Cost $2,128,773)(a)(b)(d) 2,160,000 2,207,904 ======================================================================= SHARES PREFERRED STOCKS-0.95% INDEPENDENT POWER PRODUCERS & ENERGY TRADERS-0.84% AES Trust VII, $3.00 Conv. Pfd. 9,995 $ 494,753 ======================================================================= MULTI-UTILITIES-0.11% NRG Energy, Inc. $14.38 Conv. Pfd. 250 67,406 ======================================================================= Total Preferred Stocks (Cost $495,223) 562,159 ======================================================================= COMMON STOCKS & OTHER EQUITY INTERESTS-0.86% BROADCASTING & CABLE TV-0.18% NTL Inc. 4,129 104,216 ----------------------------------------------------------------------- XM Satellite Radio Inc.-Wts., expiring 03/15/10(g) 182 1,301 ======================================================================= 105,517 ======================================================================= CONSTRUCTION MATERIALS-0.00% Dayton Superior Corp.-Wts., expiring 06/15/09 (Acquired 08/07/00; Cost $0)(b)(g)(h)(i) 175 0 ======================================================================= GENERAL MERCHANDISE STORES-0.03% Travelcenters of America, Inc.-Wts., expiring 05/01/09(a)(g)(h) 318 16,218 ======================================================================= INTEGRATED TELECOMMUNICATION SERVICES-0.00% NTELOS Inc.-Wts., expiring 08/15/10 (Acquired 07/21/00-11/15/00; Cost $7,710)(b)(g)(h)(i) 832 0 ----------------------------------------------------------------------- XO Holdings Inc.(j) 33 142 ----------------------------------------------------------------------- XO Holdings Inc.-Class A-Wts., expiring 01/16/10(j) 1,533 1,073 ----------------------------------------------------------------------- XO Holdings Inc.-Class B-Wts., expiring 01/16/10(j) 1,148 494 ----------------------------------------------------------------------- XO Holdings Inc.-Class C-Wts., expiring 01/16/10(j) 1,148 252 ======================================================================= 1,961 =======================================================================
AIM V.I. High Yield Fund
SHARES VALUE ----------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES-0.65% American Tower Corp.-Class A(k) 4,129 $ 153,929 ----------------------------------------------------------------------- iPCS, Inc.(k) 4,209 233,011 ======================================================================= 386,940 ======================================================================= Total Domestic Common Stocks (Cost $228,609) 510,636 ======================================================================= PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- ASSET-BACKED SECURITIES-0.27% ELECTRIC UTILITIES-0.27% Reliant Energy Mid-Atlantic Power Holdings, LLC- Series B, Sr. Unsec. Asset-Backed Pass Through Ctfs., 9.24%, 07/02/17 (Cost $143,400)(a) $ 142,787 160,010 ======================================================================= SENIOR SECURED FLOATING RATE INTEREST LOANS-0.18% AIRLINES-0.18% Evergreen International Aviation, Inc. First Lien Term Loan 8.82%, 10/31/11 (Cost $108,721)(a) 109,800 107,604 ======================================================================= MONEY MARKET FUNDS-5.04% Liquid Assets Portfolio-Institutional Class(l) 1,494,785 1,494,785 ----------------------------------------------------------------------- Premier Portfolio-Institutional Class(l) 1,494,785 1,494,785 ======================================================================= Total Money Market Funds (Cost $2,989,570) 2,989,570 ======================================================================= Total Investments (excluding investments purchased with cash collateral from securities loaned)-97.71% (Cost $56,130,303) 57,898,206 =======================================================================
-----------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------- INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-7.56% Liquid Assets Portfolio-Institutional Class(l)(m) $2,240,339 $ 2,240,339 ----------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class(l)(m) 2,240,340 2,240,340 ======================================================================= Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $4,480,679) 4,480,679 ======================================================================= TOTAL INVESTMENTS-105.27% (Cost $60,610,982) 62,378,885 ======================================================================= OTHER ASSETS LESS LIABILITIES-(5.27)% (3,123,952) ======================================================================= NET ASSETS-100.00% $59,254,933 _______________________________________________________________________ =======================================================================
Investment Abbreviations: Conv. - Convertible Ctfs. - Certificates Deb. - Debentures Disc. - Discounted Gtd. - Guaranteed Pfd. - Preferred Sec. - Secured Sr. - Senior Sub. - Subordinated Unsec. - Unsecured Unsub. - Unsubordinated Wts. - Warrants
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, security fair valued based on an evaluated quote provided by an independent pricing service. The aggregate value of these securities at December 31, 2006 was $53,852,059, which represented 90.88% of the Fund's Net Assets. See Note 1A. (b) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $10,858,301, which represented 18.32% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (c) Interest or dividend rate is redetermined periodically. Rate shown is the rate in effect on December 31, 2006. (d) All or a portion of this security was out on loan at December 31, 2006. (e) Defaulted security. Adelphia Communications Corp. and Delphi Corp. have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The aggregate value of these securities at December 31, 2006 was $282,410, which represented 0.48% of the Fund's Net Assets. (f) Step coupon bond issued at discount. The interest rate represents the coupon rate at which the bond will accrue at a specified future date. (g) Non-income producing security acquired as part of a unit with or in exchange for other securities. (h) Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. The aggregate value of these securities considered illiquid at December 31, 2006 was $16,218, which represented 0.03% of the Fund's Net Assets. (i) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The aggregate value of these securities at December 31, 2006 was $0, which represented 0% of the Fund's Net Assets. See Note 1A. (j) Non-income producing security acquired through a corporate action. (k) Non-income producing security. (l) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (m) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. High Yield Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $53,140,733)* $ 54,908,636 ------------------------------------------------------------- Investments in affiliated money market funds (cost $7,470,249) 7,470,249 ============================================================= Total investments (cost $60,610,982) 62,378,885 ============================================================= Cash 17,552 ------------------------------------------------------------- Receivables for: Investments sold 63,075 ------------------------------------------------------------- Fund shares sold 6,076 ------------------------------------------------------------- Dividends and Interest 1,071,788 ------------------------------------------------------------- Investments matured (Note 10) 304,965 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 42,786 ============================================================= Total assets 63,885,127 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Fund shares reacquired 12,493 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 46,448 ------------------------------------------------------------- Collateral upon return of securities loaned 4,480,679 ------------------------------------------------------------- Fund expenses advanced 9,701 ------------------------------------------------------------- Accrued administrative services fees 37,953 ------------------------------------------------------------- Accrued distribution fees -- Series II 579 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,420 ------------------------------------------------------------- Accrued transfer agent fees 1,051 ------------------------------------------------------------- Accrued operating expenses 37,870 ============================================================= Total liabilities 4,630,194 ============================================================= Net assets applicable to shares outstanding $ 59,254,933 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $ 64,906,871 ------------------------------------------------------------- Undistributed net investment income 3,856,303 ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (11,306,264) ------------------------------------------------------------- Unrealized appreciation of investment securities 1,798,023 ============================================================= $ 59,254,933 _____________________________________________________________ ============================================================= NET ASSETS: Series I $ 58,335,547 _____________________________________________________________ ============================================================= Series II $ 919,386 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 9,534,547 _____________________________________________________________ ============================================================= Series II 150,954 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 6.12 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 6.09 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $4,202,054 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Interest $4,124,304 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $133,094) 247,932 ------------------------------------------------------------ Dividends 36,012 ============================================================ Total investment income 4,408,248 ============================================================ EXPENSES: Advisory fees 337,335 ------------------------------------------------------------ Administrative services fees 175,709 ------------------------------------------------------------ Custodian fees 22,073 ------------------------------------------------------------ Distribution fees -- Series II 2,631 ------------------------------------------------------------ Transfer agent fees 12,421 ------------------------------------------------------------ Trustees' and officer's fees and benefits 16,183 ------------------------------------------------------------ Professional services fees 49,769 ------------------------------------------------------------ Other 23,593 ============================================================ Total expenses 639,714 ============================================================ Less: Fees waived and expense offset arrangements (124,772) ------------------------------------------------------------ Net expenses 514,942 ============================================================ Net investment income 3,893,306 ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $41,365) 1,322,992 ------------------------------------------------------------ Foreign currencies (1,119) ============================================================ 1,321,873 ============================================================ Change in net unrealized appreciation of investment securities 486,551 ============================================================ Net gain from investment securities and foreign currencies 1,808,424 ============================================================ Net increase in net assets resulting from operations $5,701,730 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. High Yield Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ----------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 3,893,306 $ 4,842,726 ----------------------------------------------------------------------------------------- Net realized gain from investment securities and foreign currencies 1,321,873 2,184,161 ----------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investment securities 486,551 (4,907,554) ========================================================================================= Net increase in net assets resulting from operations 5,701,730 2,119,333 ========================================================================================= Distributions to shareholders from net investment income: Series I (4,779,802) (5,020,673) ----------------------------------------------------------------------------------------- Series II (74,015) (138,745) ========================================================================================= Decrease in net assets resulting from distributions (4,853,817) (5,159,418) ========================================================================================= Share transactions-net: Series I 2,787,332 (38,922,743) ----------------------------------------------------------------------------------------- Series II (666,577) 575,779 ========================================================================================= Net increase (decrease) in net assets resulting from share transactions 2,120,755 (38,346,964) ========================================================================================= Net increase (decrease) in net assets 2,968,668 (41,387,049) ========================================================================================= NET ASSETS: Beginning of year 56,286,265 97,673,314 ========================================================================================= End of year (including undistributed net investment income of $3,856,303 and $4,816,796, respectively) $59,254,933 $ 56,286,265 _________________________________________________________________________________________ =========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. High Yield Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. High Yield Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to achieve a high level of current income. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Senior secured floating rate loans and senior secured floating rate debt securities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may reflect appropriate factors such as ratings, tranche type, industry, company performance, spread, individual trading characteristics, institution-size trading in similar groups of securities and other market data. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, AIM V.I. High Yield Fund accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. LOWER-RATED SECURITIES -- The Fund normally invests at least 80% of its net assets in lower-quality debt securities, i.e., "junk bonds". Investments in lower-rated securities or unrated securities of comparable quality tend to be more sensitive to economic conditions than higher rated securities. Junk bonds involve a greater risk of default by the issuer because such securities are generally unsecured and are often subordinated to other creditors' claims. AIM V.I. High Yield Fund NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $200 million 0.625% -------------------------------------------------------------------- Next $300 million 0.55% -------------------------------------------------------------------- Next $500 million 0.50% -------------------------------------------------------------------- Over $1 billion 0.45% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 0.95% and Series II shares to 1.20% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $120,651. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $125,709 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. High Yield Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $2,064,801 $18,976,548 $(19,546,564) $ -- $1,494,785 $ 57,466 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 11,133,980 (9,639,195) -- 1,494,785 43,015 -- ---------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 2,064,801 11,116,755 (13,181,556) -- -- 14,357 -- ================================================================================================================================== Subtotal $4,129,602 $41,227,283 $(42,367,315) $ -- $2,989,570 $114,838 $ -- ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) --------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $ 850,448 $ 8,896,961 $ (7,507,070) $ -- $2,240,339 $66,400 $ -- --------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 850,448 8,896,961 (7,507,069) -- 2,240,340 66,694 -- ================================================================================================================================= Subtotal $1,700,896 $17,793,922 $(15,014,139) $ -- $4,480,679 $133,094 $ -- ================================================================================================================================= Total Investments in Affiliates $5,830,498 $59,021,205 $(57,381,454) $ -- $7,470,249 $247,932 $ -- _________________________________________________________________________________________________________________________________ =================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $1,643,331, which resulted in net realized gains of $41,365, and securities purchases of $2,546,837. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $4,121. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,963 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate AIM V.I. High Yield Fund available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $4,202,054 were on loan to brokers. The loans were secured by cash collateral of $4,480,679 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $133,094 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from ordinary income $4,853,817 $5,159,418 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 3,894,112 ---------------------------------------------------------------------------- Unrealized appreciation -- investments 1,711,320 ---------------------------------------------------------------------------- Temporary book/tax differences (37,809) ---------------------------------------------------------------------------- Capital loss carryover (11,219,561) ---------------------------------------------------------------------------- Shares of beneficial interest 64,906,871 ============================================================================ Total net assets $ 59,254,933 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis unrealized appreciation on investments amount includes remaining proceeds to be received on Century Communications Corp. of $30,120. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the AIM V.I. High Yield Fund Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $4,014,008 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $837,157 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ---------------------------------- December 31, 2010 $11,219,561 __________________________________ ==================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $70,084,131 and $69,513,209, respectively. Receivable for investments matured represents the estimated proceeds to the Fund by Century Communications Corp. which is in default with respect to the principal payments on $251,000 par value, Senior Unsecured Notes, 9.50%, which were due March 1, 2005. The estimate was determined in accordance with the fair valuation procedures authorized by the Board of Trustees. Unrealized appreciation in aggregate at December 31, 2006 was $30,120.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 2,014,580 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (333,380) =============================================================================== Net unrealized appreciation of investment securities $ 1,681,200 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $60,697,685.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions on December 31, 2006, undistributed net investment income was increased by $18 and undistributed net realized gain was decreased by $18. This reclassification had no effect on the net assets of the Fund. NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006(a) 2005 -------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------------------------------------------------- Sold: Series I 3,750,321 $ 23,392,683 7,537,516 $ 48,935,734 ----------------------------------------------------------------------------------------------------------------------- Series II 1,887 11,586 220,053 1,408,205 ======================================================================================================================= Issued as reinvestment of dividends: Series I 786,151 4,779,801 836,779 5,020,673 ----------------------------------------------------------------------------------------------------------------------- Series II 12,214 74,015 23,240 138,745 ======================================================================================================================= Reacquired: Series I (4,078,880) (25,385,152) (14,270,486) (92,879,150) ----------------------------------------------------------------------------------------------------------------------- Series II (122,412) (752,178) (150,740) (971,171) ======================================================================================================================= 349,281 $ 2,120,755 (5,803,638) $(38,346,964) _______________________________________________________________________________________________________________________ =======================================================================================================================
(a) There are six entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 75% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. AIM V.I. High Yield Fund NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 6.03 $ 6.45 $ 5.97 $ 5.00 $ 5.31 -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.45 0.43 0.42 0.49 0.51 -------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 0.19 (0.26) 0.23 0.91 (0.82) ==================================================================================================================== Increase from payments by affiliates -- -- 0.02 -- -- ==================================================================================================================== Total from investment operations 0.64 0.17 0.67 1.40 (0.31) ==================================================================================================================== Less dividends from net investment income (0.55) (0.59) (0.19) (0.43) -- ==================================================================================================================== Net asset value, end of period $ 6.12 $ 6.03 $ 6.45 $ 5.97 $ 5.00 ____________________________________________________________________________________________________________________ ==================================================================================================================== Total return(b) 10.74% 2.72% 11.25%(c) 28.04% (5.84)% ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $58,336 $54,731 $96,602 $37,267 $24,984 ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.96%(d) 1.01% 1.04% 1.20% 1.30% -------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.18%(d) 1.16% 1.04% 1.20% 1.30% ==================================================================================================================== Ratio of net investment income to average net assets 7.22%(d) 6.58% 6.79% 8.54% 10.20% ____________________________________________________________________________________________________________________ ==================================================================================================================== Portfolio turnover rate 135% 69% 131% 101% 74% ____________________________________________________________________________________________________________________ ====================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Total return is after reimbursement the advisor has agreed to pay for an economic loss due to a trading error. Total return before reimbursement by the advisor was 10.90% (d) Ratios are based on average daily net assets of $52,921,198. AIM V.I. High Yield Fund NOTE 14--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II -------------------------------------------------------- MARCH 26, 2002 (DATE SALES YEAR ENDED DECEMBER 31, COMMENCED) TO --------------------------------------- DECEMBER 31, 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 6.00 $ 6.43 $ 5.95 $ 4.99 $ 5.27 ---------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.43 0.41 0.41 0.49 0.38 ---------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 0.19 (0.26) 0.24 0.90 (0.66) ====================================================================================================================== Increase from payments by affiliates -- -- 0.01 -- -- ====================================================================================================================== Total from investment operations 0.62 0.15 0.66 1.39 (0.28) ====================================================================================================================== Less dividends from net investment income (0.53) (0.58) (0.18) (0.43) -- ====================================================================================================================== Net asset value, end of period $ 6.09 $ 6.00 $ 6.43 $ 5.95 $ 4.99 ______________________________________________________________________________________________________________________ ====================================================================================================================== Total return(b) 10.41% 2.43% 11.14%(c) 27.89% (5.31)% ______________________________________________________________________________________________________________________ ====================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 919 $1,556 $1,072 $1,251 $ 142 ______________________________________________________________________________________________________________________ ====================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.21%(d) 1.22% 1.24% 1.45% 1.45%(e) ---------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.43%(d) 1.41% 1.29% 1.45% 1.55%(e) ====================================================================================================================== Ratio of net investment income to average net assets 6.97%(d) 6.37% 6.59% 8.29% 10.05%(e) ______________________________________________________________________________________________________________________ ====================================================================================================================== Portfolio turnover rate(f) 135% 69% 131% 101% 74% ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Total return is after reimbursement the advisor has agreed to pay for an economic loss due to a trading error. Total return before reimbursement by the advisor was 10.96% (d) Ratios are based on average daily net assets of $1,052,399. (e) Annualized. (f) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. AIM V.I. High Yield Fund NOTE 15--LEGAL PROCEEDINGS--(CONTINUED) Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. High Yield Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. High Yield Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. High Yield Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. High Yield Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. High Yield Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
INTERNATIONAL/ AIM V.I. INTERNATIONAL GROWTH FUND GLOBAL EQUITY International/Global Growth Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, [COVER GLOBE IMAGE] sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services AIM V.I. INTERNATIONAL GROWTH FUND seeks department at 800-410-4246 or on the AIM to provide long-term growth of capital. Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT tab, click on Required Notices and then IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ================================================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH --Registered Trademark-- CAREFULLY BEFORE INVESTING. ================================================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. INTERNATIONAL GROWTH FUND We believe disciplined sell decisions are key to successful investing. We ======================================================================================= consider selling a stock when: PERFORMANCE SUMMARY - A company's fundamentals deteriorate, or it posts disappointing earnings. Foreign equity markets posted strong positive returns over the year, ending 2006 with a fourth consecutive year of double-digit gains. Following a trend of recent years, - A stock's price seems overvalued. foreign equities continued to outperform U.S. equities. - A more attractive opportunity becomes We are pleased to have provided shareholders with double-digit Fund performance. available. As the table below illustrates, AIM V.I. International Growth Fund -- excluding applicable sales charges -- significantly outperformed both its broad market and Market conditions and your Fund style-specific benchmarks. We attribute our comparative success to strong stock selection in Europe and Asia/Pacific. Our exposure to emerging markets, which Markets continued to rally in Europe, as outperformed during the year, provided a competitive advantage as well. positive economic data and strong company earnings continued to bolster investor Your Fund's long-term performance appears on pages 4 - 5. confidence. Asian stock markets also performed strongly during the year. FUND VS. INDEXES Japanese shares, though, remained lackluster. Emerging markets experienced a Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. If volatile 12-month period during which variable product issuer charges were included, returns would be lower. stocks hit record highs in many countries before correcting from early May. A Series I Shares 28.23% combination of higher global interest Series II Shares 27.88 rates and an unwinding of leverage amid MSCI EAFE --REGISTERED TRADEMARK-- Index (Broad Market Index) 26.34 rising levels of risk aversion accentuated MSCI EAFE --REGISTERED TRADEMARK-- Growth Index (Style-Specific Index) 22.33 the sell-off of equities. Most of these Lipper International Multi-Cap Growth Funds Index (Peer Group Index) 25.50 markets bounced back from July onward, ending the year with strong positive SOURCE: LIPPER INC. overall returns. ======================================================================================= Fund performance was broad based with all major regions registering double-digit How we invest whose prices do not fully reflect these positive returns for the fiscal year. Our attributes. largest regional allocation remained in When selecting stocks for your Fund, we European stocks. Strong stock selection employ a disciplined investment strategy While research responsibilities across multiple markets (including France, that emphasizes fundamental research, within the portfolio management team are Germany, Switzerland and the United supported by both quantitative analysis focused by region and market Kingdom) helped us outperform our and portfolio construction techniques. Our capitalization, such as large- or style-specific benchmark in Europe, "EQV" (Earnings, Quality, Valuation) mid/small-cap, we select investments for although we continued to underweight our strategy focuses primarily on identifying the Fund by using a "bottom-up" investment exposure to the region. This allocation quality companies that have experienced, approach. We construct the Fund on a strategy should not be construed as a bias or exhibit the potential for, accelerated stock-by-stock basis, focusing on against European stocks -- we continue to or above-average earnings growth but strengths of individual companies rather find very compelling than on sectors, countries or market-cap trends.
========================================== ========================================== ========================================== PORTFOLIO COMPOSITION TOP FIVE COUNTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector 1. Japan 13.2% 1. Syngenta A.G. (Switzerland) 2.0% Financials 22.3% 2. United Kingdom 10.1 2. Roche Holding A.G. (Switzerland) 2.0 Consumer Discretionary 16.0 3. Germany 9.5 3. Vinci S.A. (France) 1.9 Consumer Staples 11.3 4. Switzerland 9.3 4. BNP Paribas (France) 1.9 Industrials 11.3 5. France 9.1 5. UBS A.G. (Switzerland) 1.7 Information Technology 9.9 6. Canon Inc. (Japan) 1.7 Energy 7.1 Total Net Assets $727.12 million 7. Anglo Irish Bank Corp. PLC 1.6 Health Care 6.2 (Ireland) Materials 5.8 Total Number of Holdings* 95 Telecommunication Services 2.1 8. Infosys Technologies Ltd. (India) 1.6 Utilities 1.1 Money Market Funds Plus 9. Total S.A. (France) 1.6 Other Assets Less Liabilities 6.9 10. Toyota Motor Corp. (Japan) 1.5 The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ========================================== ========================================== ==========================================
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AIM V.I. INTERNATIONAL GROWTH FUND investment opportunities there -- but However, favorable stock selection Clas G. Olsson rather an indication of our flexibility in delivered strong positive returns, seeking opportunities across international offsetting losses caused by the [OLSSON Senior portfolio manager, is markets, both developed and emerging. For underweight position. PHOTO] lead manager of AIM V.I. instance, allocations across emerging International Growth Fund with markets such as India, Mexico and China In addition to regional and sector respect to the Fund's investments in (countries not represented in the EAFE contributions, the Fund also benefited Europe and Canada. Mr. Olsson joined AIM benchmarks) gave the Fund a competitive from its large/mid-cap flexibility, which in 1994. Mr. Olsson became a commissioned edge. These markets continued to be enabled us to invest in several naval officer at the Royal Swedish Naval underpinned by positive macroeconomic news attractive, under-followed mid-cap stocks. Academy in 1988. He also earned a B.B.A. and, in most cases, were further supported Foreign exchange was another contributor from The University of Texas at Austin. by attractive valuations. The Fund's to Fund performance. As we do not emerging markets exposure is limited to typically hedge currencies -- we buy Barrett K. Sides less than 20%. stocks in their local currency and then translate that value into dollars for the [SIDES Senior Portfolio manager, is The Fund's relative outperformance Fund -- foreign currency appreciation, PHOTO] lead manager of AIM V.I. was also aided by strong stock selection predominantly in the euro, provided a International Growth Fund with combined with a continued underweight boost to Fund performance. respect to the Fund's investments in Asia exposure versus the style-specific Pacific and Latin America. He joined AIM benchmark to the weak Japanese equity As indicated by the Fund's strong in 1990. Mr. Sides graduated with a B.S. market. Despite improving fundamentals at relative and absolute performance, in economics from Bucknell University. He the company level, we believe valuations detractors over the year were limited and also earned a master's in international in Japanese equities remained less predominantly stock specific. TEVA business from the University of St.Thomas. attractive compared with other markets in PHARMACEUTICALS (Israel/pharmaceuticals), the region. The Fund's bottom-up stock NITTO DENKO CORPORATION (Japan, materials) Shuxin Cao selection process enabled us -- despite and HYUNDAI MOTOR CO. (South mixed macroeconomic fundamentals -- to Korea/automobile manufacturer) were key [CAO Chartered Financial Analyst, identify strong-performing companies not detractors. We either trimmed or sold out PHOTO] portfolio manager,is manager included in the style-specific benchmark, of these positions over the year. of AIM V.I.International including TOYOTA MOTORS and SUZUKI MOTORS. Growth Fund. He joined AIM in 1997. In closing Mr. Cao graduated from Tianjin Foreign Beyond regional diversity, sector Language Institute with a B.A. in English. performance was also broad based, with Over the past 12 months, the Fund has He also received an M.B.A. from Texas A&M every sector registering double-digit experienced strong double-digit returns. University and is a certified public returns for the year. The Fund It would be imprudent for us to suggest accountant. outperformed its style-specific index that such a level of performance is across all sectors with top contributors sustainable over the long term. Regardless Matthew W. Dennis coming from the Fund's information of macro-economic trends, the Fund technology, financials, industrials, maintained a disciplined strategy of [DENNIS Chartered Financial Analyst, consumer discretionary and energy selecting attractive investment PHOTO] portfolio manager, is manager holdings. French financial giant BNP opportunities based on its "EQV" of AIM V.I. International PARIBAS and French construction company investment strategy. We welcome new Growth Fund. He has been in the investment VINCI were both top-10 contributors for investors and thank all of our business since 1994. Mr. Dennis earned a the year. shareholders for investing in AIM V.I. B.A. in economics from The University of International Growth Fund. Texas at Austin. He also earned an M.S. in BNP PARIBAS, a Fund holding since finance from Texas A&M University 1997, is one of Europe's largest banks and THE VIEWS AND OPINIONS EXPRESSED IN a good example of what we look for in an MANAGEMENT'S DISCUSSION OF FUND Jason T. Holzer investment. It's the leading French bank PERFORMANCE ARE THOSE OF A I M ADVISORS, operating in a strong domestic market INC. THESE VIEWS AND OPINIONS ARE SUBJECT [HOLZER Chartered Financial Analyst, where mortgage lending and consumer TO CHANGE AT ANY TIME BASED ON FACTORS PHOTO] senior portfolio manager, is finance are growing rapidly and generating SUCH AS MARKET AND ECONOMIC CONDITIONS. manager of AIM V.I. strong returns. BNP is also expanding THESE VIEWS AND OPINIONS MAY NOT BE RELIED International Growth Fund. Mr. Holzer abroad both in emerging markets and the upon as investment advice or joined AIM in 1996. He earned a B.A. in United States, and it recently acquired RECOMMENDATIONS, OR AS AN OFFER FOR A quantitative economics and an M.S. in BNL in Italy. The management team has a PARTICULAR SECURITY. THE INFORMATION IS engineering-economic systems from Stanford successful track record of allocating NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF University. capital efficiently and delivered strong ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR returns with relatively low risk. Capable THE FUND. STATEMENTS OF FACT ARE FROM Assisted by Asia Pacific/Latin America management has made the company a top Fund SOURCES CONSIDERED RELIABLE, BUT A I M Team and Europe/Canada Team holding that is trading at an attractive ADVISORS, INC. MAKES NO REPRESENTATION OR valuation. WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE In contrast, the Fund's underweight IS NO GUARANTEE OF FUTURE RESULTS, THESE exposure to the utilities sector relative INSIGHTS MAY HELP YOU UNDERSTAND OUR to its style-specific benchmark detracted INVESTMENT MANAGEMENT PHILOSOPHY. FROM performance. FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4 - 5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. INTERNATIONAL GROWTH FUND ========================================== AVERAGE ANNUAL TOTAL RETURNS RESTATED HISTORICAL PERFORMANCE OF SERIES THROUGH INSURANCE COMPANIES ISSUING ------------------------------------------ I SHARES (FOR PERIODS PRIOR TO INCEPTION VARIABLE PRODUCTS. YOU CANNOT PURCHASE OF SERIES II SHARES) ADJUSTED TO REFLECT SHARES OF THE FUND DIRECTLY. PERFORMANCE As of 12/31/06 THE RULE 12b-1 FEES APPLICABLE TO SERIES FIGURES GIVEN REPRESENT THE FUND AND ARE II SHARES. THE PERFORMANCE OF THE FUND'S NOT INTENDED TO REFLECT ACTUAL VARIABLE SERIES I SHARES SERIES I AND SERIES II SHARE CLASSES WILL PRODUCT VALUES. THEY DO NOT REFLECT SALES Inception (5/5/93) 9.88% DIFFER PRIMARILY DUE TO DIFFERENT CLASS CHARGES, EXPENSES AND FEES ASSESSED IN 5 Years 15.34 EXPENSES. CONNECTION WITH A VARIABLE PRODUCT. SALES 1 Year 28.23 CHARGES, EXPENSES AND FEES, WHICH ARE THE PERFORMANCE DATA QUOTED REPRESENT DETERMINED BY THE VARIABLE PRODUCT SERIES II SHARES PAST PERFORMANCE AND CANNOT GUARANTEE ISSUERS, WILL VARY AND WILL LOWER THE 10 Years 7.92% COMPARABLE FUTURE RESULTS; CURRENT TOTAL RETURN. 5 Years 15.03 PERFORMANCE MAY BE LOWER OR HIGHER. PLEASE 1 Year 27.88 CONTACT YOUR VARIABLE PRODUCT ISSUER OR PER NASD REQUIREMENTS, THE MOST ========================================== FINANCIAL ADVISOR FOR THE MOST RECENT RECENT MONTH-END PERFORMANCE DATA AT THE MONTH-END VARIABLE PRODUCT PERFORMANCE. FUND LEVEL, EXCLUDING VARIABLE PRODUCT ========================================== PERFORMANCE FIGURES REFLECT FUND EXPENSES, CHARGES, IS AVAILABLE ON THIS AIM CUMULATIVE TOTAL RETURNS REINVESTED DISTRIBUTIONS AND CHANGES IN AUTOMATED INFORMATION LINE, 866-702-4402. ------------------------------------------ NET ASSET VALUE. INVESTMENT RETURN AND AS MENTIONED ABOVE, FOR THE MOST RECENT PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MONTH-END PERFORMANCE INCLUDING VARIABLE 6 months ended 12/31/06 MAY HAVE A GAIN OR LOSS WHEN YOU SELL PRODUCT CHARGES, PLEASE CONTACT YOUR SHARES. VARIABLE PRODUCT ISSUER OR FINANCIAL Series I Shares 17.72% ADVISOR Series II Shares 17.56 AIM V.I. INTERNATIONAL GROWTH FUND, A SERIES PORTFOLIO OF AIM VARIABLE INSURANCE SERIES II SHARES' INCEPTION DATE IS FUNDS, IS CURRENTLY OFFERED SEPTEMBER 19, 2001. RETURNS SINCE THAT DATE ARE HISTORICAL. ALL OTHER RETURNS ARE THE BLENDED RETURNS OF THE HISTORICAL PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE
==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND tion or declares bankruptcy, the Fund may the largest underlying funds in each experience delays in selling the variable insurance category and does not Prices of equity securities change in securities underlying the repurchase include mortality and expense fees. response to many factors including the agreement. historical and prospective earnings of the The Fund is not managed to track the issuer, the value of its assets, general There is no guarantee that the performance of any particular index, economic conditions, interest rates, investment techniques and risk analyses including the index defined here, and investor perceptions and market liquidity. used by the Fund's portfolio managers will consequently, the performance of the Fund produce the desired results. may deviate significantly from the Foreign securities have additional performance of the indexes. risks, including exchange rate changes, About indexes used in this report political and economic upheaval, the A direct investment cannot be made in relative lack of information about these The unmanaged MSCI EUROPE, AUSTRALASIA AND an index. Unless otherwise indicated, companies, relatively low market liquidity THE FAR EAST INDEX (the MSCI EAFE) is a index results include reinvested and the potential lack of strict financial group of foreign securities tracked by dividends, and they do not reflect sales and accounting controls and standards. Morgan Stanley Capital International. charges. Performance of an index of funds reflects fund expenses; performance of a Investing in emerging markets The unmanaged MSCI EUROPE, market index does not. involves greater risk than investing in AUSTRALASIA AND THE FAR EAST (the MSCI more established markets. The risks EAFE) GROWTH INDEX is a subset of the Other information include the relatively smaller size and unmanaged MSCI EAFE, which represents the lesser liquidity of these markets, high performance of foreign stocks tracked by The returns shown in the management's inflation rates, adverse political Morgan Stanley Capital International. The discussion of Fund performance are based developments and lack of timely Growth portion measures performance of on net asset values calculated for information. companies with higher price/earnings shareholder transactions. Generally ratios and higher forecasted growth accepted accounting principles require To the extent the Fund holds cash or values. adjustments to be made to the net assets cash equivalents rather than equity of the Fund at period end for financial securities for risk management purposes, The unmanaged LIPPER INTERNATIONAL reporting purposes, and as such, the net the Fund may not achieve its investment MULTI-CAP GROWTH FUNDS INDEX represents an asset values for shareholder transactions objective. average of the performance of the 10 and the returns based on those net asset largest international multi-capitalization values may differ from the net asset If the seller of a repurchase growth funds tracked by Lipper Inc., an values and returns reported in the agreement in which the Fund invests independent mutual fund performance Financial Highlights. Additionally, the defaults on its obliga- monitor. returns and net asset values shown throughout this report are at the Fund In conjunction with the annual level only and do not include variable prospectus update on or about May 1, 2007, product issuer charges. If such charges the AIM V.I. International Growth Fund were included, the total returns would be prospectus will be amended to reflect that lower. the Fund has elected to use the LIPPER VUF INTERNATIONAL GROWTH FUNDS INDEX as its Industry classifications used in this peer group rather than the Lipper report are generally according to the International Multi-Cap Growth Funds Global Industry Classification Standard, Index. The Lipper Variable Underlying which was developed by and is the Funds (VUF) International Growth Funds exclusive property and a service mark of Index, recently published by Lipper Inc., Morgan Stanley Capital International Inc. comprises and Standard & Poor's. The Chartered Financial Analyst --REGISTERED TRADEMARK-- (CFA --REGISTERED TRADEMARK--) designation is a globally recognized standard for measuring the competence and integrity of investment professionals.
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AIM V.I. INTERNATIONAL GROWTH FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. In This chart, which is a logarithmic this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value of value of the Fund and its indexes. We the investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same effective than other types of charts in size as the space between $10,000 and illustrating changes in value during the $20,000, and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar
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================================================================================ [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Index data from 4/30/93, Fund data from 5/5/93 AIM V.I. INTERNATIONAL GROWTH FUND DATE -SERIES I SHARES MSCI EAFE INDEX MSCI EAFE GROWTH INDEX ---------------------------------------------------------------------------------------- 4/30/93 $ 10000 $ 10000 5/93 $ 10190 10211 10294 6/93 9880 10052 10201 7/93 9931 10404 10499 8/93 10611 10965 11035 9/93 10661 10719 10766 10/93 11241 11049 11106 11/93 10910 10083 10016 12/93 11890 10811 10607 1/94 12490 11725 11405 2/94 12121 11693 11319 3/94 11561 11189 10761 4/94 11931 11664 11206 5/94 11801 11597 11075 6/94 11620 11761 11180 7/94 12041 11874 11278 8/94 12340 12155 11534 9/94 12070 11772 11149 10/94 12430 12164 11461 11/94 11750 11580 10946 12/94 11698 11652 11087 1/95 11057 11204 10661 2/95 11328 11172 10657 3/95 11739 11869 11328 4/95 12100 12315 11829 5/95 12411 12169 11693 6/95 12671 11955 11451 7/95 13383 12700 12181 8/95 13093 12215 11668 9/95 13334 12454 11935 10/95 13274 12119 11613 11/95 13314 12456 11932 12/95 13716 12958 12348 1/96 14067 13011 12357 2/96 14358 13055 12399 3/96 14630 13332 12697 4/96 15102 13720 13004 5/96 15182 13468 12733 6/96 15504 13543 12777 7/96 14741 13148 12364 8/96 15102 13176 12376 9/96 15534 13526 12715 10/96 15485 13388 12610 11/96 16228 13921 13013 12/96 16468 13742 12776 1/97 16438 13261 12243 2/97 16629 13478 12433 3/97 16508 13526 12506 4/97 16478 13598 12632 5/97 17475 14483 13374 6/97 18391 15282 14152 7/97 19135 15529 14490 8/97 17484 14369 13372 9/97 19035 15174 14256 10/97 17394 14008 12907 11/97 17444 13865 12879 12/97 17610 13986 13045 1/98 17784 14625 13635 2/98 18967 15564 14539 3/98 20139 16043 14736 4/98 20447 16170 14883 5/98 20848 16092 14779 6/98 20921 16214 14983 7/98 21281 16378 15051 8/98 18434 14349 13434 9/98 18032 13909 13056 10/98 18834 15359 14380 11/98 19637 16146 15076 12/98 20340 16783 15942 1/99 20651 16733 16025 2/99 19738 16334 15505 3/99 20050 17016 15714 4/99 20734 17706 15875 5/99 20018 16794 15185 6/99 21241 17448 15773 7/99 21728 17967 16077 8/99 21749 18033 16167 9/99 22226 18214 16423 ================================================================================
SOURCE: LIPPER INC. ================================================================================ [MOUNTAIN CHART] 10/99 23844 18896 17303 11/99 26891 19553 18571 12/99 31535 21308 20638 1/00 29337 19954 19477 2/00 32341 20491 20557 3/00 31274 21286 20942 4/00 28731 20165 19558 5/00 26964 19673 18347 6/00 28105 20442 19001 7/00 27428 19585 17811 8/00 28481 19755 18000 9/00 26146 18793 16808 10/00 24326 18349 16031 11/00 22226 17661 15292 12/00 23202 18289 15578 1/01 23513 18280 15534 2/01 20873 16909 13957 3/01 19351 15782 12991 4/01 20469 16879 13881 5/01 20101 16283 13322 6/01 19858 15617 12675 7/01 19397 15333 12367 8/01 18693 14944 11803 9/01 16940 13431 10686 10/01 17263 13775 11111 11/01 17436 14283 11682 12/01 17743 14367 11749 1/02 17040 13604 11116 2/02 17267 13699 11266 3/02 17992 14507 11746 4/02 18015 14536 11756 5/02 18206 14720 11779 6/02 17849 14134 11475 7/02 16041 12739 10252 8/02 16006 12710 10173 9/02 14316 11345 9287 10/02 14863 11955 9812 11/02 15100 12497 10101 12/02 14961 12077 9867 1/03 14411 11573 9378 2/03 14244 11307 9176 3/03 14016 11085 9079 4/03 14902 12172 9866 5/03 15800 12909 10375 6/03 16135 13221 10556 7/03 16208 13541 10694 8/03 16519 13868 10890 9/03 16902 14296 11258 10/03 17981 15187 11906 11/03 18340 15524 12184 12/03 19310 16737 13023 1/04 19924 16974 13277 2/04 20478 17366 13528 3/04 20429 17464 13539 4/04 20021 17068 13203 5/04 20201 17105 13169 6/04 20514 17501 13345 7/04 19876 16933 12803 8/04 20045 17008 12817 9/04 20803 17452 13133 10/04 21633 18048 13573 11/04 22956 19280 14508 12/04 23944 20126 15122 1/05 23556 19757 14774 2/05 24597 20611 15365 3/05 24075 20093 14989 4/05 23396 19620 14699 5/05 23591 19630 14743 6/05 24147 19890 14862 7/05 25152 20500 15315 8/05 25987 21018 15754 9/05 26616 21954 16417 10/05 25817 21313 15968 11/05 26773 21834 16269 12/05 28232 22850 17130 1/06 30327 24253 18186 2/06 30108 24200 17979 3/06 30996 24997 18674 4/06 32410 26191 19524 5/06 30802 25174 18698 6/06 30753 25172 18722 7/06 31070 25421 18809 8/06 32083 26120 19263 9/06 32253 26161 19155 10/06 33546 27178 19807 11/06 34921 27990 20384 12/06 36209 28869 20955 ================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. INTERNATIONAL GROWTH FUND EXAMPLE ACTUAL EXPENSES Fund's actual return. The Fund's actual cumulative total returns at net asset As a shareholder of the Fund, you incur The table below provides information about value after expenses for the six months ongoing costs, including management fees; actual account values and actual expenses. ended December 31, 2006, appear in the distribution and/or service (12b-1) fees; You may use the information in this table, table "Cumulative Total Returns" on page and other Fund expenses. This example is together with the amount you invested, to 4. intended to help you understand your estimate the expenses that you paid over ongoing costs (in dollars) of investing in the period. Simply divide your account The hypothetical account values and the Fund and to compare these costs with value by $1,000 (for example, an $8,600 expenses may not be used to estimate the ongoing costs of investing in other mutual account value divided by $1,000 = 8.6), actual ending account balance or expenses funds. The example is based on an then multiply the result by the number in you paid for the period. You may use this investment of $1,000 invested at the the table under the heading entitled information to compare the ongoing costs beginning of the period and held for the "Actual Expenses Paid During Period" to of investing in the Fund and other funds. entire period July 1, 2006, through estimate the expenses you paid on your To do so, compare this 5% hypothetical December 31, 2006. account during this period. example with the 5% hypothetical examples that appear in the shareholder reports of The actual and hypothetical expenses Hypothetical example for comparison the other funds. in the examples below do not represent the purposes effect of any fees or other expenses Please note that the expenses shown in assessed in connection with a variable The table below also provides information the table are meant to highlight your product; if they did, the expenses shown about hypothetical account values and ongoing costs. Therefore, the hypothetical would be higher while the ending account hypothetical expenses based on the Fund's information is useful in comparing ongoing values shown would be lower. actual expense ratio and an assumed rate costs, and will not help you determine the of return of 5% per year before expenses, relative total costs of owning different which is not the funds. ===================================================================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO -------------------------------------------------------------------------------------------------------- Series I $ 1,000.00 $ 1,177.20 $ 6.04 $ 1,019.66 $ 5.60 1.10% Series II 1,000.00 1,175.60 7.40 1,018.40 6.87 1.35 (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ===================================================================================================================================
6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. INTERNATIONAL GROWTH FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory Agreement for the Fund, the Board Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board concluded that no changes should be made management of AIM V.I. International reviewed the services to be provided by to the Fund and that it was not necessary Growth Fund (the "Fund") and, as required AIM under the Advisory Agreement. Based on to change the Fund's portfolio management by law, determines annually whether to such review, the Board concluded that the team at this time. Although the approve the continuance of the Fund's range of services to be provided by AIM independent written evaluation of the advisory agreement with A I M Advisors, under the Advisory Agreement was Fund's Senior Officer (discussed below) Inc. ("AIM"). Based upon the appropriate and that AIM currently is only considered Fund performance through recommendation of the Investments providing services in accordance with the the most recent calendar year, the Board Committee of the Board, at a meeting held terms of the Advisory Agreement. also reviewed more recent Fund on June 27, 2006, the Board, including all performance, which did not change their of the independent trustees, approved the - The quality of services to be provided conclusions. continuance of the advisory agreement (the by AIM. The Board reviewed the credentials "Advisory Agreement") between the Fund and and experience of the officers and - Meetings with the Fund's portfolio AIM for another year, effective July 1, employees of AIM who will provide managers and investment personnel. With 2006. investment advisory services to the Fund. respect to the Fund, the Board is meeting In reviewing the qualifications of AIM to periodically with such Fund's portfolio The Board considered the factors provide investment advisory services, the managers and/or other investment personnel discussed below in evaluating the fairness Board considered such issues as AIM's and believes that such individuals are and reasonableness of the Advisory portfolio and product review process, competent and able to continue to carry Agreement at the meeting on June 27, 2006 various back office support functions out their responsibilities under the and as part of the Board's ongoing provided by AIM and AIM's equity and fixed Advisory Agreement. oversight of the Fund. In their income trading operation. Based on the deliberations, the Board and the review of these and other factors, the - Overall performance of AIM. The Board independent trustees did not identify any Board concluded that the quality of considered the overall performance of AIM particular factor that was controlling, services to be provided by AIM was in providing investment advisory and and each trustee attributed different appropriate and that AIM currently is portfolio administrative services to the weights to the various factors. providing satisfactory services in Fund and concluded that such performance accordance with the terms of the Advisory was satisfactory. One responsibility of the independent Agreement. Senior Officer of the Fund is to manage - Fees relative to those of clients of AIM the process by which the Fund's proposed - The performance of the Fund relative to with comparable investment strategies. The management fees are negotiated to ensure comparable funds. The Board reviewed the Board reviewed the effective advisory fee that they are negotiated in a manner which performance of the Fund during the past rate (before waivers) for the Fund under is at arms' length and reasonable. To that one, three and five calendar years against the Advisory Agreement. The Board noted end, the Senior Officer must either the performance of funds advised by other that this rate was (i) below the effective supervise a competitive bidding process or advisors with investment strategies advisory fee rate (before waivers) for one prepare an independent written evaluation. comparable to those of the Fund. The Board mutual fund advised by AIM with investment The Senior Officer has recommended an noted that the Fund's performance was strategies comparable to those of the independent written evaluation in lieu of above the median performance of such Fund; (ii) above the effective a competitive bidding process and, upon comparable funds for the one and five year sub-advisory fee rate for one Canadian the direction of the Board, has prepared periods and below such median performance mutual fund advised by an AIM affiliate such an independent written evaluation. for the three year period. Based on this and sub-advised by AIM with investment Such written evaluation also considered review and after taking account of all of strategies comparable to those of the certain of the factors discussed below. In the other factors that the Board Fund, although the total advisory fees for addition, as discussed below, the Senior considered in determining whether to such Canadian mutual fund were above those Officer made a recommendation to the Board continue the Advisory Agreement for the for the Fund; (iii) above the effective in connection with such written Fund, the Board concluded that no changes sub-advisory fee rates for two variable evaluation. should be made to the Fund and that it was insurance funds sub-advised by an AIM not necessary to change the Fund's affiliate and offered to insurance company The discussion below serves as a portfolio management team at this time. separate accounts with investment summary of the Senior Officer's Although the independent written strategies comparable to those of the independent written evaluation and evaluation of the Fund's Senior Officer Fund, although the total advisory fees for recommendation to the Board in connection (discussed below) only considered Fund such variable insurance funds were above therewith, as well as a discussion of the performance through the most recent those for the Fund; and (iv) comparable to material factors and the conclusions with calendar year, the Board also reviewed the total advisory fee rate for one respect thereto that formed the basis for more recent Fund performance, which did separately managed account/wrap account the Board's approval of the Advisory not change their conclusions. managed by an AIM affiliate with Agreement. After consideration of all of investment strategies comparable to those the factors below and based on its - The performance of the Fund relative to of the Fund and above the total advisory informed business judgment, the Board indices. The Board reviewed the fee rates for 10 other separately managed determined that the Advisory Agreement is performance of the Fund during the past accounts/wrap accounts managed by an AIM in the best interests of the Fund and its one, three and five calendar years against affiliate with investment strategies shareholders and that the compensation to the performance of the Lipper Variable comparable to those of the Fund. The Board AIM under the Advisory Agreement is fair Underlying Fund International Growth noted that AIM has agreed to limit the and reasonable and would have been Index. The Board noted that the Fund's Fund's total operating expenses, as obtained through arm's length performance was comparable to the discussed below. Based on this review, the negotiations. performance of such Index for the one year Board concluded that the advisory fee rate period and above such Index for the three for the Fund under the Advisory Agreement Unless otherwise stated, information and five year periods. Based on this was fair and reasonable. presented below is as of June 27, 2006 and review and after taking account of all of does not reflect any changes that may have the other factors that the Board occurred since June 27, 2006, including considered in determining whether to but not limited to changes to the Fund's continue the Advisory performance, advisory fees, expense limitations and/or fee waivers.
(continued) 7
AIM V.I. INTERNATIONAL GROWTH FUND - Fees relative to those of comparable Fund invests uninvested cash in affiliated form its obligations under the Advisory funds with other advisors. The Board money market funds, AIM has voluntarily Agreement, and concluded that AIM has the reviewed the advisory fee rate for the agreed to waive a portion of the advisory financial resources necessary to fulfill Fund under the Advisory Agreement. The fees it receives from the Fund its obligations under the Advisory Board compared effective contractual attributable to such investment. The Board Agreement. advisory fee rates at a common asset level further determined that the proposed at the end of the past calendar year and securities lending program and related - Historical relationship between the Fund noted that the Fund's rate was below the procedures with respect to the lending and AIM. In determining whether to median rate of the funds advised by other Fund is in the best interests of the continue the Advisory Agreement for the advisors with investment strategies lending Fund and its respective Fund, the Board also considered the prior comparable to those of the Fund that the shareholders. The Board therefore relationship between AIM and the Fund, as Board reviewed. The Board noted that AIM concluded that the investment of cash well as the Board's knowledge of AIM's has agreed to limit the Fund's total collateral received in connection with the operations, and concluded that it was operating expenses, as discussed below. securities lending program in the money beneficial to maintain the current Based on this review, the Board concluded market funds according to the procedures relationship, in part, because of such that the advisory fee rate for the Fund is in the best interests of the lending knowledge. The Board also reviewed the under the Advisory Agreement was fair and Fund and its respective shareholders. general nature of the non-investment reasonable. advisory services currently performed by - Independent written evaluation and AIM and its affiliates, such as - Expense limitations and fee waivers. The recommendations of the Fund's Senior administrative, transfer agency and Board noted that AIM has contractually Officer. The Board noted that, upon their distribution services, and the fees agreed to waive fees and/or limit expenses direction, the Senior Officer of the Fund, received by AIM and its affiliates for of the Fund through April 30, 2008 in an who is independent of AIM and AIM's performing such services. In addition to amount necessary to limit total annual affiliates, had prepared an independent reviewing such services, the trustees also operating expenses to a specified written evaluation in order to assist the considered the organizational structure percentage of average daily net assets for Board in determining the reasonableness of employed by AIM and its affiliates to each class of the Fund. The Board the proposed management fees of the AIM provide those services. Based on the considered the contractual nature of this Funds, including the Fund. The Board noted review of these and other factors, the fee waiver/expense limitation and noted that the Senior Officer's written Board concluded that AIM and its that it remains in effect until April 30, evaluation had been relied upon by the affiliates were qualified to continue to 2008. The Board considered the effect this Board in this regard in lieu of a provide non-investment advisory services fee waiver/expense limitation would have competitive bidding process. In to the Fund, including administrative, on the Fund's estimated expenses and determining whether to continue the transfer agency and distribution services, concluded that the levels of fee Advisory Agreement for the Fund, the Board and that AIM and its affiliates currently waivers/expense limitations for the Fund considered the Senior Officer's written are providing satisfactory non-investment were fair and reasonable. evaluation. advisory services. - Breakpoints and economies of scale. The - Profitability of AIM and its affiliates. - Other factors and current trends. The Board reviewed the structure of the Fund's The Board reviewed information concerning Board considered the steps that AIM and advisory fee under the Advisory Agreement, the profitability of AIM's (and its its affiliates have taken over the last noting that it includes one breakpoint. affiliates') investment advisory and other several years, and continue to take, in The Board reviewed the level of the Fund's activities and its financial condition. order to improve the quality and advisory fees, and noted that such fees, The Board considered the overall efficiency of the services they provide to as a percentage of the Fund's net assets, profitability of AIM, as well as the the Funds in the areas of investment have decreased as net assets increased profitability of AIM in connection with performance, product line diversification, because the Advisory Agreement includes a managing the Fund. The Board noted that distribution, fund operations, shareholder breakpoint. The Board concluded that the AIM's operations remain profitable, services and compliance. The Board Fund's fee levels under the Advisory although increased expenses in recent concluded that these steps taken by AIM Agreement therefore reflect economies of years have reduced AIM's profitability. have improved, and are likely to continue scale and that it was not necessary to Based on the review of the profitability to improve, the quality and efficiency of change the advisory fee breakpoints in the of AIM's and its affiliates' investment the services AIM and its affiliates Fund's advisory fee schedule. advisory and other activities and its provide to the Fund in each of these financial condition, the Board concluded areas, and support the Board's approval of - Investments in affiliated money market that the compensation to be paid by the the continuance of the Advisory Agreement funds. The Board also took into account Fund to AIM under its Advisory Agreement for the Fund. the fact that uninvested cash and cash was not excessive. collateral from securities lending arrangements, if any (collectively, "cash - Benefits of soft dollars to AIM. The balances") of the Fund may be invested in Board considered the benefits realized by money market funds advised by AIM pursuant AIM as a result of brokerage transactions to the terms of an SEC exemptive order. executed through "soft dollar" The Board found that the Fund may realize arrangements. Under these arrangements, certain benefits upon investing cash brokerage commissions paid by the Fund balances in AIM advised money market and/or other funds advised by AIM are used funds, including a higher net return, to pay for research and execution increased liquidity, increased services. This research may be used by AIM diversification or decreased transaction in making investment decisions for the costs. The Board also found that the Fund Fund. The Board concluded that such will not receive reduced services if it arrangements were appropriate. invests its cash balances in such money market funds. The Board noted that, to the - AIM's financial soundness in light of extent the the Fund's needs. The Board considered whether AIM is financially sound and has the resources necessary to per-
8 AIM V.I. International Growth Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ------------------------------------------------------------------------- FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-88.92% AUSTRALIA-3.25% Babcock & Brown Ltd. (Other Diversified Financial Services)(a)(b) 235,000 $ 4,584,240 ------------------------------------------------------------------------- BHP Billiton Ltd. (Diversified Metals & Mining)(a)(b) 393,700 7,827,892 ------------------------------------------------------------------------- Brambles Ltd. (Diversified Commercial & Professional Services)(c) 611,088 6,189,101 ------------------------------------------------------------------------- QBE Insurance Group Ltd. (Property & Casualty Insurance) 219,600 5,001,212 ========================================================================= 23,602,445 ========================================================================= BELGIUM-2.44% InBev N.V. (Brewers)(a) 168,429 11,103,134 ------------------------------------------------------------------------- KBC Groep N.V. (Diversified Banks)(a) 54,191 6,634,443 ========================================================================= 17,737,577 ========================================================================= BRAZIL-0.73% All America Latina Logistica (Railroads)(a)(d)() 516,600 5,316,482 ========================================================================= CANADA-3.47% Canadian National Railway Co. (Railroads) 124,000 5,326,367 ------------------------------------------------------------------------- Canadian Natural Resources Ltd. (Oil & Gas Exploration & Production) 102,163 5,447,116 ------------------------------------------------------------------------- Manulife Financial Corp. (Life & Health Insurance) 176,061 5,943,465 ------------------------------------------------------------------------- Suncor Energy, Inc. (Integrated Oil & Gas) 108,575 8,549,822 ========================================================================= 25,266,770 ========================================================================= CHINA-1.37% Ping An Insurance (Group) Co. of China Ltd.- Class H (Life & Health Insurance) 1,805,000 9,990,261 ========================================================================= DENMARK-0.97% Novo Nordisk A.S.-Class B (Pharmaceuticals) 84,798 7,064,060 ========================================================================= FRANCE-9.10% Axa (Multi-Line Insurance)(a)(b) 173,638 7,002,500 ------------------------------------------------------------------------- BNP Paribas (Diversified Banks)(a) 128,841 13,996,916 ------------------------------------------------------------------------- Cap Gemini S.A. (IT Consulting & Other Services)(a) 80,118 5,012,176 ------------------------------------------------------------------------- Sanofi-Aventis (Pharmaceuticals)(a) 60,485 5,570,507 ------------------------------------------------------------------------- Societe Generale (Diversified Banks)(a) 54,617 9,242,212 ------------------------------------------------------------------------- Total S.A. (Integrated Oil & Gas) 157,790 11,384,811 ------------------------------------------------------------------------- Vinci S.A. (Construction & Engineering)(a)(b) 109,860 13,998,571 ========================================================================= 66,207,693 ========================================================================= GERMANY-6.50% Bayer A.G. (Diversified Chemicals)(a) 135,108 7,249,525 ------------------------------------------------------------------------- Commerzbank A.G. (Diversified Banks)(a) 221,874 8,421,453 ------------------------------------------------------------------------- Continental A.G. (Tires & Rubber)(a) 38,329 4,456,604 ------------------------------------------------------------------------- MAN A.G. (Industrial Machinery)(a) 81,097 7,328,020 -------------------------------------------------------------------------
SHARES VALUE ------------------------------------------------------------------------- GERMANY-(CONTINUED) Merck KGaA (Pharmaceuticals)(a) 45,253 $ 4,690,634 ------------------------------------------------------------------------- Puma A.G. Rudolf Dassler Sport (Footwear)(a) 24,532 9,572,976 ------------------------------------------------------------------------- Siemens A.G. (Industrial Conglomerates) 55,699 5,525,541 ========================================================================= 47,244,753 ========================================================================= GREECE-0.97% OPAP S.A. (Casinos & Gaming)(a) 182,260 7,043,454 ========================================================================= HONG KONG-1.55% Esprit Holdings Ltd. (Apparel Retail)(a) 681,500 7,565,866 ------------------------------------------------------------------------- Hutchison Whampoa Ltd. (Industrial Conglomerates)(a) 368,000 3,727,548 ========================================================================= 11,293,414 ========================================================================= HUNGARY-0.92% OTP Bank Nyrt. (Diversified Banks)(a) 146,288 6,661,113 ========================================================================= INDIA-2.70% Housing Development Finance Corp. Ltd. (Thrifts & Mortgage Finance)(a) 118,764 4,365,913 ------------------------------------------------------------------------- Infosys Technologies Ltd. (IT Consulting & Other Services)(a) 232,360 11,724,486 ------------------------------------------------------------------------- Maruti Udyog Ltd. (Automobile Manufacturers)(a) 168,268 3,532,841 ========================================================================= 19,623,240 ========================================================================= INDONESIA-0.73% PT Telekomunikasi Indonesia-Series B (Integrated Telecommunication Services) 4,728,000 5,309,702 ========================================================================= IRELAND-2.74% Anglo Irish Bank Corp. PLC (Diversified Banks)(a) 571,610 11,853,536 ------------------------------------------------------------------------- CRH PLC (Construction Materials)(a) 195,465 8,109,832 ========================================================================= 19,963,368 ========================================================================= ISRAEL-0.68% Teva Pharmaceutical Industries Ltd.-ADR (Pharmaceuticals) 158,626 4,930,096 ========================================================================= ITALY-1.48% Eni S.p.A. (Integrated Oil & Gas)(a) 319,302 10,744,586 ========================================================================= JAPAN-13.23% AEON Co., Ltd. (Hypermarkets & Super Centers)(a) 183,500 3,951,318 ------------------------------------------------------------------------- Canon Inc. (Office Electronics)(a)(b) 212,500 12,035,000 ------------------------------------------------------------------------- Denso Corp. (Auto Parts & Equipment) 133,100 5,278,817 ------------------------------------------------------------------------- FANUC Ltd. (Industrial Machinery)(a) 94,000 9,218,269 ------------------------------------------------------------------------- Hitachi High-Technologies Corp. (Trading Companies & Distributors)(a) 161,400 4,773,129 ------------------------------------------------------------------------- Hoya Corp. (Electronic Equipment Manufacturers)(a) 187,200 7,308,299 ------------------------------------------------------------------------- IBIDEN Co., Ltd. (Electronic Equipment Manufacturers)(a)(b) 113,800 5,747,884 -------------------------------------------------------------------------
AIM V.I. International Growth Fund
SHARES VALUE ------------------------------------------------------------------------- JAPAN-(CONTINUED) JSR Corp. (Specialty Chemicals)(b) 161,000 $ 4,166,709 ------------------------------------------------------------------------- Keyence Corp. (Electronic Equipment Manufacturers)(b) 22,300 5,525,813 ------------------------------------------------------------------------- Mizuho Financial Group, Inc. (Diversified Banks)(a) 512 3,662,105 ------------------------------------------------------------------------- Mizuho Financial Group, Inc. (Diversified Banks) (Acquired 10/24/2005; Cost $2,127,848)(a)(e) 354 2,532,002 ------------------------------------------------------------------------- Nissan Motor Co., Ltd. (Automobile Manufacturers)(a)(b) 572,500 6,954,545 ------------------------------------------------------------------------- ORIX Corp. (Consumer Finance)(a) 28,250 8,197,040 ------------------------------------------------------------------------- Suzuki Motor Corp. (Automobile Manufacturers)(b) 198,200 5,595,765 ------------------------------------------------------------------------- Toyota Motor Corp. (Automobile Manufacturers)(a) 171,900 11,275,226 ========================================================================= 96,221,921 ========================================================================= MEXICO-2.42% America Movil S.A. de C.V.-Series L-ADR (Wireless Telecommunication Services) 155,763 7,043,603 ------------------------------------------------------------------------- Grupo Televisa S.A.-ADR (Broadcasting & Cable TV) 157,284 4,248,241 ------------------------------------------------------------------------- Wal-Mart de Mexico S.A. de C.V.-Series V (Hypermarkets & Super Centers) 1,436,600 6,320,614 ========================================================================= 17,612,458 ========================================================================= NETHERLANDS-1.10% Heineken Holding N.V. (Brewers)(a) 131,934 5,352,344 ------------------------------------------------------------------------- ING Groep N.V. (Other Diversified Financial Services)(a) 59,280 2,627,487 ========================================================================= 7,979,831 ========================================================================= NORWAY-1.07% Petroleum Geo-Services A.S.A. (Oil & Gas Equipment & Services)(a)(c) 331,140 7,749,051 ========================================================================= RUSSIA-0.56% LUKOIL-ADR (Integrated Oil & Gas) 46,256 4,042,774 ========================================================================= SINGAPORE-1.30% Keppel Corp. Ltd. (Industrial Conglomerates)(a) 486,000 5,564,536 ------------------------------------------------------------------------- United Overseas Bank Ltd. (Diversified Banks)(a) 310,000 3,911,273 ========================================================================= 9,475,809 ========================================================================= SOUTH AFRICA-1.15% Standard Bank Group Ltd. (Diversified Banks)(a)(b) 373,930 5,039,199 ------------------------------------------------------------------------- Telkom South Africa Ltd. (Integrated Telecommunication Services)(a)(b) 163,970 3,308,256 ========================================================================= 8,347,455 ========================================================================= SOUTH KOREA-1.99% Hana Financial Group Inc. (Diversified Banks)(a) 75,100 3,938,630 ------------------------------------------------------------------------- Hyundai Heavy Industries Co., Ltd. (Construction & Farm Machinery & Heavy Trucks)(a)(c) 21,300 2,876,584 ------------------------------------------------------------------------- Samsung Electronics Co., Ltd. (Semiconductors)(a) 11,680 7,649,558 ========================================================================= 14,464,772 =========================================================================
SHARES VALUE ------------------------------------------------------------------------- SPAIN-2.30% Banco Santander Central Hispano S.A. (Diversified Banks)(a) 380,899 $ 7,087,640 ------------------------------------------------------------------------- Industria de Diseno Textil, S.A. (Apparel Retail)(a) 178,927 9,616,128 ========================================================================= 16,703,768 ========================================================================= SWEDEN-1.65% Atlas Copco A.B.-Class A (Industrial Machinery)(a) 208,870 6,982,285 ------------------------------------------------------------------------- Swedish Match A.B. (Tobacco)(a) 270,600 5,056,507 ========================================================================= 12,038,792 ========================================================================= SWITZERLAND-9.29% Compagnie Financiere Richemont A.G.-Class A (Apparel, Accessories & Luxury Goods)(a)(f) 188,442 10,945,279 ------------------------------------------------------------------------- Credit Suisse Group (Diversified Capital Markets)(a) 93,383 6,515,388 ------------------------------------------------------------------------- Nestle S.A. (Packaged Foods & Meats)(a) 24,756 8,779,256 ------------------------------------------------------------------------- Roche Holding A.G. (Pharmaceuticals)(a) 79,899 14,295,618 ------------------------------------------------------------------------- Syngenta A.G. (Fertilizers & Agricultural Chemicals)(a)(c) 78,276 14,559,529 ------------------------------------------------------------------------- UBS A.G. (Diversified Capital Markets)(a) 205,548 12,444,917 ========================================================================= 67,539,987 ========================================================================= TAIWAN-2.30% Hon Hai Precision Industry Co., Ltd. (Electronic Manufacturing Services)(a) 1,207,451 8,621,159 ------------------------------------------------------------------------- MediaTek Inc. (Semiconductors)(a) 454,700 4,707,119 ------------------------------------------------------------------------- Taiwan Semiconductor Manufacturing Co. Ltd.-ADR (Semiconductors)(b) 308,146 3,368,036 ========================================================================= 16,696,314 ========================================================================= TURKEY-0.84% Akbank T.A.S. (Diversified Banks)(a) 1,007,188 6,093,074 ========================================================================= UNITED KINGDOM-10.12% Aviva PLC (Multi-Line Insurance)(a)(b) 405,515 6,512,420 ------------------------------------------------------------------------- Capita Group PLC (Human Resource & Employment Services)(a) 466,592 5,545,562 ------------------------------------------------------------------------- Enterprise Inns PLC (Restaurants)(a) 181,289 4,792,961 ------------------------------------------------------------------------- Imperial Tobacco Group PLC (Tobacco)(a) 264,497 10,424,129 ------------------------------------------------------------------------- Informa PLC (Publishing)(a) 621,080 7,238,694 ------------------------------------------------------------------------- International Power PLC (Independent Power Producers & Energy Traders)(a) 1,056,689 7,899,232 ------------------------------------------------------------------------- Reckitt Benckiser PLC (Household Products)(a) 179,385 8,198,450 ------------------------------------------------------------------------- Shire PLC (Pharmaceuticals)(a) 403,677 8,341,134 ------------------------------------------------------------------------- Tesco PLC (Food Retail)(a) 936,553 7,402,911 ------------------------------------------------------------------------- WPP Group PLC (Advertising)(a) 534,771 7,243,932 ========================================================================= 73,599,425 ========================================================================= Total Foreign Common Stocks & Other Equity Interests (Cost $394,657,327) 646,564,445 =========================================================================
AIM V.I. International Growth Fund
SHARES VALUE ------------------------------------------------------------------------- FOREIGN PREFERRED STOCKS & OTHER EQUITY INTERESTS-4.15% BRAZIL-1.20% Companhia de Bebidas das Americas-Pfd.-ADR (Brewers)(b) 98,565 $ 4,809,972 ------------------------------------------------------------------------- Petroleo Brasileiro S.A. Pfd.-ADR (Integrated Oil & Gas) 42,235 3,917,719 ========================================================================= 8,727,691 ========================================================================= GERMANY-2.95% Henkel KGaA-Pfd. (Household Products)(a) 72,042 10,600,554 ------------------------------------------------------------------------- Porsche A.G.-Pfd. (Automobile Manufacturers)(a) 8,544 10,868,454 ========================================================================= 21,469,008 ========================================================================= Total Foreign Preferred Stocks & Other Equity Interests (Cost $19,248,845) 30,196,699 ========================================================================= MONEY MARKET FUNDS-6.26% Liquid Assets Portfolio-Institutional Class(g) 22,755,651 22,755,651 ------------------------------------------------------------------------- Premier Portfolio-Institutional Class(g) 22,755,651 22,755,651 ========================================================================= Total Money Market Funds (Cost $45,511,302) 45,511,302 ========================================================================= TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-99.33% (Cost $459,417,474) 722,272,446 =========================================================================
SHARES VALUE ------------------------------------------------------------------------- INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-7.76% Liquid Assets Portfolio-Institutional Class(g)(h) 28,210,678 $ 28,210,678 ------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class(g)(h) 28,210,678 28,210,678 ========================================================================= Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $56,421,356) 56,421,356 ========================================================================= TOTAL INVESTMENTS-107.09% (Cost $515,838,830) 778,693,802 ========================================================================= OTHER ASSETS LESS LIABILITIES-(7.09)% (51,576,830) ========================================================================= NET ASSETS-100.00% $727,116,972 _________________________________________________________________________ =========================================================================
Investment Abbreviations: ADR - American Depositary Receipt Pfd. - Preferred
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $541,781,527, which represented 74.51% of the Fund's Net Assets. See Note 1A. (b) All or a portion of this security was out on loan at December 31, 2006. (c) Non-income producing security. (d) Each unit represents one common share and four preferred shares. (e) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The value of this security at December 31, 2006 represented 0.35% of the Fund's Net Assets. Unless otherwise indicated, this security is not considered to be illiquid. (f) Each unit represents one A bearer share in the company and one bearer share participation certificate in Richemont S.A. (g) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (h) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. International Growth Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $413,906,172)* $676,761,144 ------------------------------------------------------------- Investments in affiliated money market funds (cost $101,932,658) 101,932,658 ============================================================= Total investments (cost $515,838,830) 778,693,802 ============================================================= Cash 96,095 ------------------------------------------------------------- Foreign currencies, at value (cost $4,552,580) 4,535,499 ------------------------------------------------------------- Receivables for: Investments sold 4,718,172 ------------------------------------------------------------- Fund shares sold 1,816,049 ------------------------------------------------------------- Dividends 918,763 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 59,106 ------------------------------------------------------------- Other assets 190 ============================================================= Total assets 790,837,676 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 5,150,207 ------------------------------------------------------------- Fund shares reacquired 1,402,077 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 90,011 ------------------------------------------------------------- Collateral upon return of securities loaned 56,421,356 ------------------------------------------------------------- Accrued administrative services fees 463,424 ------------------------------------------------------------- Accrued distribution fees-Series II 82,248 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 4,601 ------------------------------------------------------------- Accrued transfer agent fees 4,067 ------------------------------------------------------------- Accrued operating expenses 102,713 ============================================================= Total liabilities 63,720,704 ============================================================= Net assets applicable to shares outstanding $727,116,972 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $483,572,069 ------------------------------------------------------------- Undistributed net investment income 2,692,485 ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (22,000,453) ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 262,852,871 ============================================================= $727,116,972 _____________________________________________________________ ============================================================= NET ASSETS: Series I $563,460,316 _____________________________________________________________ ============================================================= Series II $163,656,656 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 19,141,751 _____________________________________________________________ ============================================================= Series II 5,612,936 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 29.44 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 29.16 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $53,890,552 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $1,058,197) $ 10,156,875 ------------------------------------------------------------- Dividends from affiliated money market funds (includes securities lending income of $244,666) 1,636,938 ------------------------------------------------------------- Interest 5,807 ============================================================= Total investment income 11,799,620 ============================================================= EXPENSES: Advisory fees 4,271,146 ------------------------------------------------------------- Administrative services fees 1,500,504 ------------------------------------------------------------- Custodian fees 581,910 ------------------------------------------------------------- Distribution fees-Series II 236,205 ------------------------------------------------------------- Transfer agent fees 49,166 ------------------------------------------------------------- Trustees' and officer's fees and benefits 30,282 ------------------------------------------------------------- Other 104,356 ============================================================= Total expenses 6,773,569 ============================================================= Less: Fees waived and expense offset arrangements (56,487) ============================================================= Net expenses 6,717,082 ============================================================= Net investment income 5,082,538 ============================================================= REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $145,689 and is net of tax on the sale of foreign investments of $3,733-Note 1I) 36,802,618 ------------------------------------------------------------- Foreign currencies (32,053) ============================================================= 36,770,565 ============================================================= Change in net unrealized appreciation (depreciation) of: Investment securities (net of change in estimated tax on foreign investments held of $11,315-Note 1I) 106,373,408 ------------------------------------------------------------- Foreign currencies (13,496) ============================================================= 106,359,912 ============================================================= Net gain from investment securities and foreign currencies 143,130,477 ============================================================= Net increase in net assets resulting from operations $148,213,015 _____________________________________________________________ =============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. International Growth Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 5,082,538 $ 4,447,352 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 36,770,565 27,592,644 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities and foreign currencies 106,359,912 39,522,580 ========================================================================================== Net increase in net assets resulting from operations 148,213,015 71,562,576 ========================================================================================== Distributions to shareholders from net investment income: Series I (5,173,427) (2,648,284) ------------------------------------------------------------------------------------------ Series II (1,205,499) (290,407) ========================================================================================== Decrease in net assets resulting from distributions (6,378,926) (2,938,691) ========================================================================================== Share transactions-net: Series I 317,895 35,930,996 ------------------------------------------------------------------------------------------ Series II 85,698,882 26,609,350 ========================================================================================== Net increase in net assets resulting from share transactions 86,016,777 62,540,346 ========================================================================================== Net increase in net assets 227,850,866 131,164,231 ========================================================================================== NET ASSETS: Beginning of year 499,266,106 368,101,875 ========================================================================================== End of year (including undistributed net investment income of $2,692,485 and $3,973,621, respectively) $727,116,972 $499,266,106 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. International Growth Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. International Growth Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to provide long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. International Growth Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.75% ------------------------------------------------------------------- Over $250 million 0.70% __________________________________________________________________ ===================================================================
AIM V.I. International Growth Fund AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit net annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $6,840. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $146,231 for accounting and fund administrative services and reimbursed $1,354,273 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ----------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $10,902,709 $112,108,559 $(100,255,617) $ -- $22,755,651 $ 696,002 $ -- ----------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class -- 70,805,659 (48,050,008) -- 22,755,651 416,288 -- ----------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio- Institutional Class 10,902,709 53,041,947 (63,944,656) -- -- 279,982 -- =================================================================================================================================== Subtotal $21,805,418 $235,956,165 $(212,250,281) $ -- $45,511,302 $1,392,272 $ -- ===================================================================================================================================
AIM V.I. International Growth Fund INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ----------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $12,938,532 $183,135,614 $(167,863,468) $ -- $ 28,210,678 $ 122,046 $ -- ----------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio- Institutional Class 12,938,532 187,657,262 (172,385,116) -- 28,210,678 122,620 -- =================================================================================================================================== Subtotal $25,877,064 $370,792,876 $(340,248,584) $ -- $ 56,421,356 $ 244,666 $ -- =================================================================================================================================== Total Investments in Affiliates $47,682,482 $606,749,041 $(552,498,865) $ -- $101,932,658 $1,636,938 $ -- ___________________________________________________________________________________________________________________________________ ===================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $2,900,973, which resulted in net realized gains of $145,689, and securities purchases of $143,959. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $49,647. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $5,728 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. International Growth Fund NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $53,890,552 were on loan to brokers. The loans were secured by cash collateral of $56,421,356 received by the Fund and subsequently invested in affiliated money market funds. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $244,666 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from ordinary income $6,378,926 $2,938,691 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 5,868,782 ---------------------------------------------------------------------------- Net unrealized appreciation-investments 258,703,141 ---------------------------------------------------------------------------- Temporary book & tax difference (81,203) ---------------------------------------------------------------------------- Capital loss carryover (20,815,284) ---------------------------------------------------------------------------- Post-October currency loss deferral (130,533) ---------------------------------------------------------------------------- Shares of beneficial interest 483,572,069 ============================================================================ Total net assets $727,116,972 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and the recognition of unrealized gains for tax purposes on passive foreign investment companies. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $(2,101). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $20,815,284 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $36,770,213 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* --------------------------------------------------------------------------- December 31, 2007 $ 431,410 --------------------------------------------------------------------------- December 31, 2010 20,383,874 =========================================================================== Total capital loss carryforward $20,815,284 ___________________________________________________________________________ ===========================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. AIM V.I. International Growth Fund NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $265,468,317 and $192,010,143, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 259,975,279 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (1,270,037) =============================================================================== Net unrealized appreciation of investment securities $ 258,705,242 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $519,988,560.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions, foreign tax on realized capital gains and passive foreign investment companies, on December 31, 2006, undistributed net investment income was increased by $15,252 and undistributed net realized gain (loss) was decreased by $15,252. This reclassification had no effect on the net assets of the Fund. NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(a) 2005 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 5,527,297 $ 145,984,568 8,088,898 $ 167,053,477 ------------------------------------------------------------------------------------------------------------------------ Series II 4,213,039 111,448,899 1,749,163 36,041,813 ======================================================================================================================== Issued as reinvestment of dividends: Series I 172,402 4,966,887 109,906 2,525,639 ------------------------------------------------------------------------------------------------------------------------ Series II 42,239 1,205,499 12,732 290,407 ======================================================================================================================== Reacquired: Series I (5,743,301) (150,633,560) (6,547,697) (133,648,120) ------------------------------------------------------------------------------------------------------------------------ Series II (1,018,904) (26,955,516) (479,060) (9,722,870) ======================================================================================================================== 3,192,772 $ 86,016,777 2,933,942 $ 62,540,346 ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are eight entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 53% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these shareholders are also owned beneficially. NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. International Growth Fund NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 23.17 $ 19.77 $ 16.04 $ 12.49 $ 14.91 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.23 0.23 0.15 0.09 0.06 ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 6.32 3.31 3.70 3.54 (2.40) ========================================================================================================================= Total from investment operations 6.55 3.54 3.85 3.63 (2.34) ========================================================================================================================= Less dividends from net investment income (0.28) (0.14) (0.12) (0.08) (0.08) ========================================================================================================================= Net asset value, end of period $ 29.44 $ 23.17 $ 19.77 $ 16.04 $ 12.49 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(b) 28.28% 17.93% 24.00% 29.06% (15.67)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $563,460 $444,608 $346,605 $290,680 $247,580 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets 1.10%(c) 1.11% 1.14% 1.10% 1.09% ========================================================================================================================= Ratio of net investment income to average net assets 0.90%(c) 1.11% 0.90% 0.69% 0.41% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 34% 36% 48% 79% 71% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $497,824,497.
SERIES II ------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 23.00 $ 19.65 $ 15.97 $ 12.45 $ 14.90 --------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.17 0.18 0.11 0.06 0.03 --------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 6.25 3.30 3.66 3.51 (2.40) ===================================================================================================================== Total from investment operations 6.42 3.48 3.77 3.57 (2.37) ===================================================================================================================== Less dividends from net investment income (0.26) (0.13) (0.09) (0.05) (0.08) ===================================================================================================================== Net asset value, end of period $ 29.16 $ 23.00 $ 19.65 $ 15.97 $ 12.45 _____________________________________________________________________________________________________________________ ===================================================================================================================== Total return(b) 27.92% 17.70% 23.63% 28.68% (15.89)% _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $163,657 $54,658 $21,497 $10,972 $ 4,751 _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratio of expenses to average net assets 1.35%(c) 1.36% 1.39% 1.35% 1.31%(d) ===================================================================================================================== Ratio of net investment income to average net assets 0.65%(c) 0.86% 0.65% 0.44% 0.19% _____________________________________________________________________________________________________________________ ===================================================================================================================== Portfolio turnover rate 34% 36% 48% 79% 71% _____________________________________________________________________________________________________________________ =====================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $94,482,108. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.34% for the year ended December 31, 2002. NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in AIM V.I. International Growth Fund NOTE 15--LEGAL PROCEEDINGS--(CONTINUED) funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. International Growth Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. International Growth Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. International Growth Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. International Growth Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 0.00%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. For the fiscal year ended December 31, 2006, the amount of income received by the Fund from sources within foreign countries and possessions of the United States was $0.2948 per share (representing a total of $6,913,687). The amount of taxes paid by the Fund to such countries for the fiscal year end December 31, 2006 was $0.0202 per share (representing a total of $473,132). The following table provides a breakdown by country of ordinary income received and foreign taxes paid by the Fund during the fiscal year ended December 31, 2006. The per share amount is based on shareholders of record on December 8, 2006.
COUNTRY GROSS INCOME % FOREIGN TAX PAID % ---------------------------------------------------------------------------------- Australia 1.61% 0.00% ---------------------------------------------------------------------------------- Austria 0.04% 0.14% ---------------------------------------------------------------------------------- Belgium 0.88% 3.57% ---------------------------------------------------------------------------------- Brazil 1.31% 2.65% ---------------------------------------------------------------------------------- Canada 2.46% 10.02% ---------------------------------------------------------------------------------- China 0.44% 0.00% ---------------------------------------------------------------------------------- France 5.31% 22.33% ---------------------------------------------------------------------------------- Germany 0.41% 1.66% ---------------------------------------------------------------------------------- Greece 2.76% 0.00% ---------------------------------------------------------------------------------- Hong Kong 2.01% 0.00% ---------------------------------------------------------------------------------- Hungary 1.29% 0.00% ---------------------------------------------------------------------------------- India 1.46% 0.00% ---------------------------------------------------------------------------------- Indonesia 0.91% 3.69% ---------------------------------------------------------------------------------- Ireland 1.55% 0.00% ---------------------------------------------------------------------------------- Israel 0.30% 1.29% ---------------------------------------------------------------------------------- Italy 0.27% 1.10% ---------------------------------------------------------------------------------- Japan 4.37% 8.28% ---------------------------------------------------------------------------------- Mexico 0.22% 0.00% ---------------------------------------------------------------------------------- The Netherlands 0.97% 3.97% ---------------------------------------------------------------------------------- Russia 0.41% 1.69% ---------------------------------------------------------------------------------- Singapore 2.25% 0.00% ---------------------------------------------------------------------------------- South Africa 1.74% 0.00% ---------------------------------------------------------------------------------- South Korea 0.94% 4.18% ---------------------------------------------------------------------------------- Spain 3.59% 14.64% ---------------------------------------------------------------------------------- Sweden 0.50% 2.03% ---------------------------------------------------------------------------------- Switzerland 3.99% 8.53% ---------------------------------------------------------------------------------- Taiwan 1.18% 10.07% ---------------------------------------------------------------------------------- Turkey 0.79% 0.16% ---------------------------------------------------------------------------------- United Kingdom 9.81% 0.00% ================================================================================== Total 53.77% 0.00% ================================================================================== United States 46.23% 0.00% ================================================================================== TOTAL 100.00% 100.00% __________________________________________________________________________________ ================================================================================== Foreign Tax Paid per share $0.0202 __________________________________________________________________________________ ==================================================================================
( ) AIM V.I. International Growth Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. International Growth Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
Domestic Equity AIM V.I. LARGE CAP GROWTH FUND Large-Cap Growth Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form [COVER GLOBE IMAGE] N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client AIM V.I. LARGE CAP GROWTH FUND seeks to Services department at 800-410-4246 or on the AIM provide long-term growth of capital Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT click on Proxy Voting Activity. Next, select the IS AS OF DECEMBER 31, 2006 AND IS BASED ON TOTAL NET ASSETS. DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Fund 2006, from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ======================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE [AIM INVESTMENTS LOGO] INVESTING. -- Registered Trademark-- ======================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. LARGE CAP GROWTH FUND ================================================================================ strong growth in earnings, revenue and cash flows. PERFORMANCE SUMMARY - Quality. We seek companies with For the year ended December 31, 2006, AIM V.I. Large Cap Growth Fund had sustainable earnings growth and positive returns, excluding variable issuer charges, and narrowly underperformed management teams that reinvest the Fund's style-specific index, the Russell 1000 --REGISTERED TRADEMARK-- shareholder cash flow profitably. Growth Index. This underperformance was primarily due to stock selection in the health care sector, as well as an underweight position in the consumer - Valuation. We focus on companies discretionary sector. Some of this underperformance was offset by strong stock that are attractively valued given selection in other sectors, including industrials, information technology, their growth potential. telecommunication services and materials. - Risk assessment. We avoid "high The Fund underperformed the broad market as represented by the S&P 500 risk" companies as defined below. --REGISTERED TRADEMARK-- Index primarily due to the large weighting in value stocks in the index, as well as weak performance and an overweight position in - Price momentum. We seek companies the health care sector. with an upward trend in stock price. However, the Fund outperformed peers as represented by the Lipper Our fundamental analysis seeks to Large-Cap Growth Funds Index by a wide margin. determine the company's earnings drivers and identify Your Fund's long-term performance appears on pages 4-5. upside-to-earnings estimates. To accomplish this goal, we examine FUND VS. INDEXES financial statements and analyze relevant trends, growth rates and the TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF competitive landscape. We often meet VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. with company management to evaluate proprietary products and the quality Series I Shares 8.05% of management. We believe stocks that Series II Shares 7.81 pass our quantitative and fundamental S&P 500 Index (Broad Market Index) 15.78 screens are more likely to Russell 1000 Growth Index (Style-Specific Index) 9.07 outperform. Lipper Large-Cap Growth Funds Index (Peer Group Index) 4.72 SOURCE: LIPPER INC. We construct the portfolio using a bottom-up strategy--focusing on ================================================================================ stocks rather than industries or sectors. While there are no formal HOW WE INVEST yet reflected in investor sector guidelines or constraints, expectations or equity valuations. internal controls and proprietary We believe a growth investment software help us monitor risk levels strategy is an essential component of Our quantitative model ranks and sector concentration. a diversified portfolio. companies based on factors we have found to be highly correlated with Our sell process is designed to avoid Our investment process combines outperformance in the large-cap high-risk situations we believe lead quantitative and fundamental analysis growth universe, including: to underperformance, including: to uncover companies exhibiting long-term, sustainable earnings and - Earnings. We focus on companies - Deteriorating business prospects. cash flow growth that is not exhibiting - Extended valuation. ===================================== ================================ - Slowing earnings growth. - Weakened balance sheet. ==========================================
================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ---------------------------------------------------------------------------------------------------------------------------------- By sector 1. Aerospace & Defense 8.9% 1. Cisco Systems, Inc. 3.8% Information Technology 21.4% 2. Investment Banking & Brokerage 8.3 2. Hewlett-Packard Co. 3.7 Financials 15.7 3. Systems Software 6.3 3. Goldman Sachs Group, Inc (The) 3.6 Industrials 15.0 4. Pharmaceuticals 5.9 4. Lockheed Martin Corp. 3.0 Health Care 14.8 5. Department Stores 5.7 5. America Movil S.A. de C.V.-Series Consumer Discretionary 14.5 Total Net Assets $122.77 million L-ADR (Mexico) 2.8 Consumer Staples 6.0 Total Number of Holdings* 66 6. Accenture Ltd.-Class A 2.5 Materials 4.4 7. Oracle Corp. 2.4 Telecommunication Services 4.0 8. Lehman Brothers Holdings Inc. 2.2 Energy 2.7 9. News Corp.-Class A 2.2 10. ABB Ltd. (Switzerland) 2.2 Money Market Funds Plus Other Assets Less Liabilities 1.5 *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ====================================================================================================================================
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MARKET CONDITIONS AND YOUR FUND AIM V.I. LARGE CAP GROWTH FUND Domestic equities posted solid returns during Fund holding AMERICA MOPVIL, Latin America's to our investment process of the year, with several major market indexes leading mobile phone provider, performed well focusing on the attractively priced near-multiyear highs. Strong economic growth, due to continued subscriber growth throughout stocks of large-cap growth favorable corporate earnings results and Latin America, where the company continues to companies with sustainable cash continued benign inflation supported grow rapidly. flow and earnings growth. We thank equities, despite high energy prices, a you for your commitment to AIM V.I. slowing housing market and the U.S. Federal In the financials sector, investment Large Cap Growth Fund. Reserve Board's (the Fed) tightening banking and brokerage stocks generally campaign. continued to perform well during the year. THE VIEWS AND OPINIONS EXPRESSED IN Our investment process led us to an MANAGEMENT'S DISCUSSION OF FUND Although mixed signals from the Fed overweight position versus the style-specific PERFORMANCE ARE THOSE OF A I M created some market volatility in May and benchmark in this area. Several of the Fund's ADVISORS, INC. THESE VIEWS AND June, the market began to rally when the Fed holdings contributed to performance, OPINIONS ARE SUBJECT TO CHANGE AT left interest rates unchanged at several including GOLDMAN SACHS GROUP, LEHMAN ANY TIME BASED ON FACTORS SUCH AS meetings beginning in August. In addition, BROTHERS, BEAR STEARNS Companies and Morgan MARKET AND ECONOMIC CONDITIONS. the price of crude oil and other commodities Stanley. Favorable capital markets and solid THESE VIEWS AND OPINIONS MAY NOT BE stabilized, fostering optimism that a hard merger and acquisition activity continued to RELIED UPON AS INVESTMENT ADVICE OR landing for the U.S. economy could be drive these stocks during the year. RECOMMENDATIONS, OR AS AN OFFER FOR avoided. While small-cap stocks continued to A PARTICULAR SECURITY. THE lead the market higher, large- and mid-cap The Fund underperformed the Russell 1000 INFORMATION IS NOT A COMPLETE stocks also had double-digit returns. Growth Index by the widest margin in the ANALYSIS OF EVERY ASPECT OF ANY Additionally, value stocks outperformed health care sector. The Fund's MARKET, COUNTRY, INDUSTRY, SECURITY growth stocks. Positive performance was broad underperformance in this sector was driven OR THE FUND. STATEMENTS OF FACT ARE among S&P 500 sectors, with the best returns primarily by several health care providers FROM SOURCES CONSIDERED RELIABLE, found in telecommunication services, energy, and services holdings--AETNA, UNITEDHEALTH BUT A I M ADVISORS, INC. MAKES NO utilities and financials. GROUP and CIGNA. In addition, eye care REPRESENTATION OR WARRANTY AS TO holding ALCON INC. was a significant THEIR COMPLETENESS OR ACCURACY. The Fund posted a modest absolute return detractor. With the exception of UnitedHealth ALTHOUGH HISTORICAL PERFORMANCE IS in a year that strongly favored the value Group, these holdings were sold before the NO GUARANTEE OF FUTURE RESULTS, style of investing over the growth style. close of the fiscal year. THESE INSIGHTS MAY HELP YOU Outperformance versus the Russell 1000 Growth UNDERSTAND OUR INVESTMENT Index in the industrials, materials, The Fund also underperformed in the MANAGEMENT PHILOSOPHY. telecommunication services and financials consumer discretionary sector, where two sectors was offset by underperformance in the holdings in the specialty retail industry Geoffrey V. Keeling health care and consumer discretionary drove underperformance--BEST BUY and CIRCUIT [KEELING Chartered sectors. CITY. These two holdings were subsequently PHOTO] Financial Analyst, sold. An underweight position in the sector senior portfolio The industrials sector benefited from a relative to the style-specific benchmark also manager, is co-manager of broad-based rally during the first quarter of detracted from performance. AIM V.I. Large Cap Growth 2006, and the Fund outperformed the benchmark Fund. He joined AIM in 1995 and Russell 1000 Growth Index in this sector due Our investment process led us to reduce assumed his present responsibi- to strong stock selection. Specific areas of exposure to the health care, energy and lities in 1999. Mr. Keeling strength for the Fund included the aerospace information technology sectors due to less earned a B.B.A. in finance from The and defense and electrical equipment upside-to-earnings estimates. Proceeds from University of Texas at Austin. industries. Aerospace and defense holdings these sales were primarily invested in a that performed particularly well included number of attractive opportunities in the LOCKHEED MARTIN, BOEING and GENERAL DYNAMICS. consumer discretionary, consumer staples, [SHOSS Robert L. Shoss In the electrical equipment area, ABB LTD was industrials and materials sectors. All PHOTO] Senior portfolio manager, one of the Fund's top contributors during the changes to the Fund were based on our is co-manager of AIM year. bottom-up stock selection process of V.I. Large Cap Growth Fund. identifying high-quality growth companies He joined AIM in 1995 and Outperformance in the materials sector was trading at what we believe are attractive assumed his present driven largely by stock selection and an valuations. responsibilities in 1999. Mr. overweight position relative to the Shoss earned a B.A from The style-specific index in metals and mining IN CLOSING University of Texas at Austin stocks. In this area, copper producer PHELPS and an M.B.A. and a J.D. from DODGE made a significant contribution to Fund Although we are pleased to have provided the University of Houston. returns. positive returns for our investors for the year, we are always striving to improve Assisted by the Large/Multi-Cap In the telecommunication services sector, performance. We remain committed Growth Team the Fund benefited from strong stock selection in the wireless telecommunication FOR A DISCUSSION OF THE RISKS services area. OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. LARGE CAP GROWTH FUND ========================================== AVERAGE ANNUAL TOTAL RETURNS RESULTS; CURRENT PERFORMANCE MAY BE LOWER PRODUCT VALUES. THEY DO NOT REFLECT SALES ------------------------------------------ OR HIGHER. PLEASE CONTACT YOUR VARIABLE CHARGES, EXPENSES AND FEES ASSESSED IN As of 12/31/06 PRODUCT ISSUER OR FINANCIAL ADVISOR FOR CONNECTION WITH A VARIABLE PRODUCT. SALES SERIES I SHARES THE MOST RECENT MONTH-END VARIABLE PRODUCT CHARGES, EXPENSES AND FEES, WHICH ARE Inception (8/29/03) 10.14% PERFORMANCE. PERFORMANCE FIGURES REFLECT DETERMINED BY THE VARIABLE PRODUCT 1 Year 8.05 FUND EXPENSES, REINVESTED DISTRIBUTIONS ISSUERS, WILL VARY AND WILL LOWER THE AND CHANGES IN NET ASSET VALUE. INVESTMENT TOTAL RETURN. SERIES II SHARES RETURN AND PRINCIPAL VALUE WILL FLUCTUATE Inception (8/29/03) 9.94% SO THAT YOU MAY HAVE A GAIN OR LOSS WHEN PER NASD REQUIREMENTS, THE MOST RECENT 1 Year 7.81 YOU SELL SHARES. SERIES I AND SERIES II MONTH-END PERFORMANCE DATA AT THE FUND SHARES INVEST IN THE SAME PORTFOLIO OF LEVEL, EXCLUDING VARIABLE PRODUCT =================================== SECURITIES AND WILL HAVE SUBSTANTIALLY CHARGES, IS AVAILABLE ON THIS AIM SIMILAR PERFORMANCE, EXCEPT TO THE EXTENT AUTOMATED INFORMATION LINE, 866-702-4402. CUMULATIVE TOTAL RETURNS THAT EXPENSES BORNE BY EACH CLASS DIFFER. AS MENTIONED ABOVE, FOR THE MOST RECENT ------------------------------------------ MONTH-END PERFORMANCE INCLUDING VARIABLE 6 months ended 12/31/06 AIM V.I. LARGE CAP GROWTH FUND, A PRODUCT CHARGES, PLEASE CONTACT YOUR Series I Shares 8.73% SERIES PORTFOLIO OF AIM VARIABLE INSURANCE VARIABLE PRODUCT ISSUER OR FINANCIAL Series II Shares 8.58 FUNDS, IS CURRENTLY OFFERED THROUGH ADVISOR. =================================== INSURANCE COMPANIES ISSUING VARIABLE PRODUCTS. YOU CANNOT PURCHASE SHARES OF HAD THE ADVISOR NOT WAIVED FEES AND/OR THE PERFORMANCE OF THE FUND'S SERIES I AND THE FUND DIRECTLY. PERFORMANCE FIGURES REIMBURSED EXPENSES, PERFORMANCE WOULD SERIES II SHARE CLASSES WILL DIFFER GIVEN REPRESENT THE FUND AND ARE NOT HAVE BEEN LOWER. PRIMARILY DUE TO DIFFERENT CLASS EXPENSES. INTENDED TO REFLECT ACTUAL VARIABLE THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND CANNOT GUARANTEE COMPARABLE FUTURE ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND The Fund invests in synthetic Large-Cap Growth Funds Index, recently Prices of equity securities change in instruments, the value of which may not published by Lipper Inc., comprises the response to many factors including the correlate perfectly with the overall largest underlying funds in each variable historical and prospective earnings of the securities markets. Rising interest rates insurance category and does not include issuer, the value of its assets, general and market price fluctuations will affect mortality and expense fees. economic conditions, interest rates, the performance of the Fund's investments investor perceptions and market liquidity. in synthetic instruments. Also, synthetic The Fund is not managed to track the instruments are subject to counter party performance of any particular index, The value of convertible securities in risk--the risk that the other party in the including the indexes defined here, and which the Fund invests may be affected by transaction will not fulfill its consequently, the performance of the Fund market interest rates, the risk that the contractual obligation to complete the may deviate significantly from the issuer may default on interest or transaction with the Fund. performance of the index. principal payments and the value of the underlying common stock into which these ABOUT INDEXES USED IN THIS REPORT A direct investment cannot be made in securities may be converted. an index. Unless otherwise indicated, The unmanaged STANDARD & POOR'S COMPOSITE index results include reinvested Foreign securities have additional INDEX OF 500 Stocks (the S&P 500 Index) is dividends, and they do not reflect sales risks, including exchange rate changes, an index of common stocks frequently used charges. Performance of an index of funds political and economic upheaval, the as a general measure of U.S. stock market reflects fund expenses; performance of a relative lack of information about these performance. market index does not. companies, relatively low market liquidity and the potential lack of strict financial OTHER INFORMATION and accounting controls and standards. The returns shown in the management's If the seller of a repurchase agreement The unmanaged Russell 1000 Growth Index discussion of Fund performance are based in which the Fund invests defaults on its is a subset of the unmanaged Russell 1000 on net asset values calculated for obligation or declares bankruptcy, the Index, which represents the performance of shareholder transactions. Generally Fund may experience delays in selling the the stocks of large-capitalization accepted accounting principles require securities underlying the repurchase companies; the Growth subset measures the adjustments to be made to the net assets agreement. performance of Russell 1000 companies with of the Fund at period end for financial higher price/book ratios and higher reporting purposes, and as such, the net There is no guarantee that the forecasted growth values. The Russell 1000 asset values for shareholder transactions investment techniques and risk analyses Index is a trademark/service mark of the and the returns based on those net asset used by the Fund's portfolio managers will Frank Russell Company. Russell values may differ from the net asset produce the desired results. --Registered Trademark-- is a trademark of values and returns reported in the the Frank Russell Company. Financial Highlights. Additionally, the returns and net asset values shown The unmanaged LIPPER LARGE-CAP GROWTH throughout this report are at the Fund FUNDS INDEX represents an average of the level only and do not include variable performance of the 30 largest product issuer charges. If such charges large-capitalization growth funds tracked were included, the total returns would be by Lipper Inc., an independent mutual fund lower. performance monitor. Industry classifications used in this In conjunction with the annual report are generally according to the prospectus update on or about May 1, 2007, Global Industry Classification Standard, the AIM V.I. Large Cap Growth Fund which was developed by and is the prospectus will be amended to reflect that exclusive property and a service mark of the Fund has elected to use the Lipper Morgan Stanley Capital International Inc. Variable Underlying Funds (VUF) Large-Cap and Standard & Poor's. Growth Funds Index as its peer group rather than the Lipper Large-Cap Growth The Chartered Financial Analyst Funds Index. The Lipper VUF --Registered Trademark-- (CFA --Registered Trademark--) designation is a globally recognized standard for measuring the competence and integrity of investment professionals.
4 AIM V.I. LARGE CAP GROWTH FUND Past performance cannot guarantee comparable future results. 5 RESULTS OF A $10,000 INVESTMENT Fund data from 8/29/03, index data from 08/31/03 [MOUNTAIN CHART]
AIM V.I. LARGE AIM V.I. LARGE CAP GROWTH FUND CAP GROWTH FUND LIPPER DATE -SERIES I SHARES -SERIES II SHARES S&P 500 INDEX RUSSELL 1000 GROWTH INDEX LARGE-CAP GROWTH FUNDS INDEX -------------------------------------------------------------------------------------------------------------------------------- 8/29/03 $ 10000 $ 10000 8/03 10000 10000 $ 10000 $ 10000 $ 10000 9/03 9840 9840 9894 9893 9787 10/03 10610 10610 10454 10449 10381 11/03 10830 10830 10545 10558 10480 12/03 10917 10911 11098 10923 10775 1/04 11107 11101 11302 11146 10982 2/04 11117 11111 11459 11217 11029 3/04 11177 11171 11286 11009 10906 4/04 10916 10911 11109 10881 10661 5/04 11257 11241 11261 11084 10854 6/04 11457 11442 11480 11222 11010 7/04 10777 10761 11100 10588 10359 8/04 10676 10661 11145 10536 10286 9/04 10987 10971 11265 10636 10527 10/04 10958 10941 11437 10802 10654 11/04 11569 11542 11900 11173 11129 12/04 11909 11881 12305 11611 11578 1/05 11617 11590 12005 11224 11180 2/05 11738 11711 12257 11344 11253 3/05 11547 11520 12041 11137 11048 4/05 11075 11049 11812 10925 10808 5/05 11617 11591 12188 11453 11408 6/05 11777 11752 12205 11411 11430 7/05 12148 12113 12659 11969 12005 8/05 11998 11963 12544 11815 11877 9/05 12329 12294 12645 11869 12019 10/05 12169 12123 12434 11754 11941 11/05 12691 12645 12904 12261 12488 12/05 12777 12731 12909 12222 12456 1/06 13421 13363 13250 12437 12795 2/06 13190 13132 13286 12417 12623 3/06 13412 13353 13452 12601 12745 4/06 13412 13344 13632 12583 12725 5/06 12688 12620 13240 12157 12131 6/06 12698 12641 13258 12109 12091 7/06 12597 12531 13340 11878 11782 8/06 12759 12691 13656 12249 12054 9/06 13041 12973 14008 12585 12314 10/06 13442 13364 14464 13028 12685 11/06 13644 13565 14739 13286 12975 12/06 13805 13725 14946 13331 13043 ================================================================================================================================ SOURCE: LIPPER INC.
CALCULATING YOUR ONGOING FUND EXPENSES
AIM V.I. LARGE CAP GROWTH FUND EXAMPLE ACTUAL EXPENSES 5% per year before expenses, which is not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information about actual cumulative total returns at net ongoing costs, including management fees; actual account values and actual expenses. asset value after expenses for the six distribution and/or service (12b-1) fees; You may use the information in this table, months ended December 31, 2006, appear in and other Fund expenses. This example is together with the amount you invested, to the table "Cumulative Total Returns" on intended to help you understand your estimate the expenses that you paid over page 4. ongoing costs (in dollars) of investing in the period. Simply divide your account the Fund and to compare these costs with value by $1,000 (for example, an $8,600 The hypothetical account values and ongoing costs of investing in other mutual account value divided by $1,000 = 8.6), expenses may not be used to estimate the funds. The example is based on an then multiply the result by the number in actual ending account balance or expenses investment of $1,000 invested at the the table under the heading entitled you paid for the period. You may use this beginning of the period and held for the "Actual Expenses Paid During Period" to information to compare the ongoing costs entire period July 1, 2006, through estimate the expenses you paid on your of investing in the Fund and other funds. December 31, 2006. account during this period. To do so, compare this 5% hypothetical example with the 5% hypothetical examples The actual and hypothetical expenses in HYPOTHETICAL EXAMPLE FOR COMPARISON that appear in the shareholder reports of the examples below do not represent the PURPOSES the other funds. effect of any fees or other expenses assessed in connection with a variable The table below also provides information Please note that the expenses shown in product; if they did, the expenses shown about hypothetical account values and the table are meant to highlight your would be higher while the ending account hypothetical expenses based on the Fund's ongoing costs. Therefore, the hypothetical values shown would be lower. actual expense ratio and an assumed rate information is useful in comparing ongoing of return of costs only, and will not help you determine the relative total costs of owning different funds. ====================================================================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------- Series I $ 1,000.00 $ 1,087.30 $ 5.37 $ 1,020.06 $5.19 1.02% Series II 1,000.00 1,085.80 6.68 1,018.80 6.46 1.27 (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ===================================================================================================================================
6 APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. LARGE CAP GROWTH FUND The Board of Trustees of AIM Variable - The nature and extent of the advisory the independent written evaluation of the Insurance Funds (the "Board") oversees the services to be provided by AIM. The Board Fund's Senior Officer (discussed below) management of AIM V.I. Large Cap Growth reviewed the services to be provided by only considered Fund performance through Fund (the "Fund") and, as required by law, AIM under the Advisory Agreement. Based on the most recent calendar year, the Board determines annually whether to approve the such review, the Board concluded that the also reviewed more recent Fund continuance of the Fund's advisory range of services to be provided by AIM performance, which did not change their agreement with A I M Advisors, Inc. under the Advisory Agreement was conclusions. ("AIM"). Based upon the recommendation of appropriate and that AIM currently is the Investments Committee of the Board, at providing services in accordance with the - Meetings with the Fund's portfolio a meeting held on June 27, 2006, the terms of the Advisory Agreement. managers and investment personnel. With Board, including all of the independent respect to the Fund, the Board is meeting trustees, approved the continuance of the - The quality of services to be provided periodically with such Fund's portfolio advisory agreement (the "Advisory by AIM. The Board reviewed the credentials managers and/or other investment personnel Agreement") between the Fund and AIM for and experience of the officers and and believes that such individuals are another year, effective July 1, 2006. employees of AIM who will provide competent and able to continue to carry investment advisory services to the Fund. out their responsibilities under the The Board considered the factors In reviewing the qualifications of AIM to Advisory Agreement. discussed below in evaluating the fairness provide investment advisory services, the and reasonableness of the Advisory Board considered such issues as AIM's - Overall performance of AIM. The Board Agreement at the meeting on June 27, 2006 portfolio and product review process, considered the overall performance of AIM and as part of the Board's ongoing various back office support functions in providing investment advisory and oversight of the Fund. In their provided by AIM and AIM's equity and fixed portfolio administrative services to the deliberations, the Board and the income trading operations. Based on the Fund and concluded that such performance independent trustees did not identify any review of these and other factors, the was satisfactory. particular factor that was controlling, Board concluded that the quality of and each trustee attributed different services to be provided by AIM was - Fees relative to those of clients of AIM weights to the various factors. appropriate and that AIM currently is with comparable investment strategies. The providing satisfactory services in Board reviewed the effective advisory fee One responsibility of the independent accordance with the terms of the Advisory rate (before waivers) for the Fund under Senior Officer of the Fund is to manage Agreement. the Advisory Agreement. The Board noted the process by which the Fund's proposed that this rate was (i) above the effective management fees are negotiated to ensure - The performance of the Fund relative to advisory fee rates (before waivers) for that they are negotiated in a manner which comparable funds. The Board reviewed the two mutual funds advised by AIM with is at arms' length and reasonable. To that performance of the Fund during the past investment strategies comparable to those end, the Senior Officer must either calendar year against the performance of of the Fund; (ii) above the effective supervise a competitive bidding process or funds advised by other advisors with advisory and sub-advisory fee rates for prepare an independent written evaluation. investment strategies comparable to those one offshore fund advised by an AIM The Senior Officer has recommended an of the Fund. The Board noted that the affiliate and sub-advised by AIM with independent written evaluation in lieu of Fund's performance was below the median investment strategies comparable to those a competitive bidding process and, upon performance of such comparable funds for of the Fund; (iv) above the effective the direction of the Board, has prepared the one year period. Based on this review sub-advisory fee rates for two variable such an independent written evaluation. and after taking account of all of the insurance funds sub-advised by an AIM Such written evaluation also considered other factors that the Board considered in affiliate and offered to insurance company certain of the factors discussed below. In determining whether to continue the separate accounts with investment addition, as discussed below, the Senior Advisory Agreement for the Fund, the Board strategies comparable to those of the Officer made a recommendation to the Board concluded that no changes should be made Fund, although the total advisory fees for in connection with such written to the Fund and that it was not necessary such variable insurance funds were above evaluation. to change the Fund's portfolio management those for the Fund; and (v) above the team at this time. Although total advisory fee rates for 19 separately The discussion below serves as a the independent written evaluation of the managed accounts/wrap accounts managed by summary of the Senior Officer's Fund's Senior Officer (discussed below) an AIM affiliate with investment independent written evaluation and only considered Fund performance through strategies comparable to those of the recommendation to the Board in connection the most recent calendar year, the Board Fund. The Board noted that AIM has agreed therewith, as well as a discussion of the also reviewed more recent Fund to waive advisory fees of the Fund and to material factors and the conclusions with performance, which did not change their limit the Fund's total operating expenses, respect thereto that formed the basis for conclusions. as discussed below. Based on this review, the Board's approval of the Advisory the Board concluded that the advisory fee Agreement. After consideration of all of - The performance of the Fund relative to rate for the Fund under the Advisory the factors below and based on its indices. The Board reviewed the Agreement was fair and reasonable. informed business judgment, the Board performance of the Fund during the past determined that the Advisory Agreement is calendar year against the performance of - Fees relative to those of comparable in the best interests of the Fund and its the Lipper Variable Underlying Fund funds with other advisors. The Board shareholders and that the compensation to Large-Cap Growth Index. The Board noted reviewed the advisory fee rate for the AIM under the Advisory Agreement is fair that the Fund's performance was below the Fund under the Advisory Agreement. The and reasonable and would have been performance of such Index for the one year Board compared effective contractual obtained through arm's length period. Based on this review and after advisory fee rates at a common asset level negotiations. taking account of all of the other factors at the end of the calendar year and noted that the Board considered in determining that the Fund's rate was comparable to the Unless otherwise stated, information whether to continue the Advisory Agreement median rate of the funds advised by other presented below is as of June 27, 2006 and for the Fund, the Board concluded that no advisors with investment strategies does not reflect any changes that may have changes should be made to the Fund and comparable to those of the Fund that the occurred since June 27, 2006, including that it was not necessary to change the Board reviewed. The Board noted that AIM but not limited to changes to the Fund's Fund's portfolio management team at this has agreed to waive advisory fees of the performance, advisory fees, expense time. Although Fund and limitations and/or fee waivers.
(continued) 7 AIM V.I. LARGE CAP GROWTH FUND to limit the Fund's total operating exemptive order. The Board found that the Advisory Agreement was not excessive. expenses, as discussed below. Based on Fund may realize certain benefits upon this review, the Board concluded that the investing cash balances in AIM advised - Benefits of soft dollars to AIM. The advisory fee rate for the Fund under the money market funds, including a higher net Board considered the benefits realized by Advisory Agreement was fair and return, increased liquidity, increased AIM as a result of brokerage transactions reasonable. diversification or decreased transaction executed through "soft dollar" costs. The Board also found that the Fund arrangements. Under these arrangements, - Expense limitations and fee waivers. The will not receive reduced services if it brokerage commissions paid by the Fund Board noted that AIM has contractually invests its cash balances in such money and/or other funds advised by AIM are used agreed to waive advisory fees of the Fund market funds. The Board noted that, to the to pay for research and execution through December 31, 2009 to the extent extent the Fund invests uninvested cash in services. This research may be used by AIM necessary so that the advisory fees affiliated money market funds, AIM has in making investment decisions for the payable by the Fund do not exceed a voluntarily agreed to waive a portion of Fund. The Board concluded that such specified maximum advisory fee rate, which the advisory fees it receives from the arrangements were appropriate. maximum rate includes breakpoints and is Fund attributable to such investment. The based on net asset levels. The Board Board further determined that the proposed - AIM's financial soundness in light of considered the contractual nature of this securities lending program and related the Fund's needs. The Board considered fee waiver and noted that it remains in procedures with respect to the lending whether AIM is financially sound and has effect until December 31, 2009. The Board Fund is in the best interests of the the resources necessary to perform its noted that AIM has contractually agreed to lending Fund and its respective obligations under the Advisory Agreement, waive fees and/or limit expenses of the shareholders. The Board therefore and concluded that AIM has the financial Fund through April 30, 2008 in an amount concluded that the investment of cash resources necessary to fulfill its necessary to limit total annual operating collateral received in connection with the obligations under the Advisory Agreement. expenses to a specified percentage of securities lending program in the money average daily net assets for each class of market funds according to the procedures - Historical relationship between the Fund the Fund. The Board considered the is in the best interests of the lending and AIM. In determining whether to contractual nature of this fee Fund and its respective shareholders. continue the Advisory Agreement for the waiver/expense limitation and noted that Fund, the Board also considered the prior it remains in effect until April 30, 2008. - Independent written evaluation and relationship between AIM and the Fund, as The Board considered the effect these fee recommendations of the Fund's Senior well as the Board's knowledge of AIM's waivers/expense limitations would have on Officer. The Board noted that, upon their operations, and concluded that it was the Fund's estimated expenses and direction, the Senior Officer of the Fund, beneficial to maintain the current concluded that the levels of fee who is independent of AIM and AIM's relationship, in part, because of such waivers/expense limitations for the Fund affiliates, had prepared an independent knowledge. The Board also reviewed the were fair and reasonable. written evaluation in order to assist the general nature of the non-investment Board in determining the reasonableness of advisory services currently performed by - Breakpoints and economies of scale. The the proposed management fees of the AIM AIM and its affiliates, such as Board reviewed the structure of the Fund's Funds, including the Fund. The Board noted administrative, transfer agency and advisory fee under the Advisory Agreement, that the Senior Officer's written distribution services, and the fees noting that it includes two breakpoints. evaluation had been relied upon by the received by AIM and its affiliates for The Board reviewed the level of the Fund's Board in this regard in lieu of a performing such services. In addition to advisory fees, and noted that such fees, competitive bidding process. In reviewing such services, the trustees also as a percentage of the Fund's net assets, determining whether to continue the considered the organizational structure would decrease as net assets increase Advisory Agreement for the Fund, the Board employed by AIM and its affiliates to because the Advisory Agreement includes considered the Senior Officer's written provide those services. Based on the breakpoints. The Board noted that, due to evaluation and the recommendation made by review of these and other factors, the the Fund's asset levels at the end of the the Senior Officer to the Board that the Board concluded that AIM and its past calendar year and the way in which Board consider whether the advisory fee affiliates were qualified to continue to the advisory fee breakpoints have been waivers for certain equity AIM Funds, provide non-investment advisory services structured, the Fund has yet to benefit including the Fund, should be simplified. to the Fund, including administrative, from the breakpoints. The Board noted that The Board concluded that it would be transfer agency and distribution services, AIM has contractually agreed to waive advisable to consider this issue and reach and that AIM and its affiliates currently advisory fees of the Fund through December a decision prior to the expiration date of are providing satisfactory non-investment 31, 2009 to the extent necessary so that such advisory fee waivers. advisory services. the advisory fees payable by the Fund do not exceed a specified maximum advisory - Profitability of AIM and its affiliates. - Other factors and current trends. The fee rate, which maximum rate includes The Board reviewed information concerning Board considered the steps that AIM and breakpoints and is based on net asset the profitability of AIM's (and its its affiliates have taken over the last levels. The Board concluded that the affiliates') investment advisory and other several years, and continue to take, in Fund's fee levels under the Advisory activities and its financial condition. order to improve the quality and Agreement therefore would reflect The Board considered the overall efficiency of the services they provide to economies of scale at higher asset levels profitability of AIM, as well as the the Funds in the areas of investment and that it was not necessary to change profitability of AIM in connection with performance, product line diversification, the advisory fee breakpoints in the Fund's managing the Fund. The Board noted that distribution, fund operations, shareholder advisory fee schedule. AIM's operations remain profitable, services and compliance. The Board although increased expenses in recent concluded that these steps taken by AIM - Investments in affiliated money market years have reduced AIM's profitability. have improved, and are likely to continue funds. The Board also took into account Based on the review of the profitability to improve, the quality and efficiency of the fact that uninvested cash and cash of AIM's and its affiliates' investment the services AIM and its affiliates collateral from securities lending advisory and other activities and its provide to the Fund in each of these arrangements, if any (collectively, "cash financial condition, the Board concluded areas, and support the Board's approval of balances") of the Fund may be invested in that the compensation to be paid by the the continuance of the Advisory Agreement money market funds advised by AIM pursuant Fund to AIM under its for the Fund. to the terms of an SEC
8 AIM V.I. Large Cap Growth Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE --------------------------------------------------------------------- DOMESTIC COMMON STOCKS-83.84% AEROSPACE & DEFENSE-8.91% Boeing Co. (The) 26,004 $ 2,310,195 --------------------------------------------------------------------- General Dynamics Corp. 29,665 2,205,593 --------------------------------------------------------------------- Lockheed Martin Corp. 39,775 3,662,084 --------------------------------------------------------------------- Northrop Grumman Corp. 14,456 978,671 --------------------------------------------------------------------- Raytheon Co. 33,662 1,777,354 ===================================================================== 10,933,897 ===================================================================== APPAREL RETAIL-1.92% American Eagle Outfitters, Inc. 36,494 1,138,962 --------------------------------------------------------------------- TJX Cos., Inc. (The) 42,792 1,220,428 ===================================================================== 2,359,390 ===================================================================== APPLICATION SOFTWARE-3.00% Amdocs Ltd.(a) 58,935 2,283,731 --------------------------------------------------------------------- BEA Systems, Inc.(a) 111,182 1,398,670 ===================================================================== 3,682,401 ===================================================================== AUTOMOTIVE RETAIL-0.77% AutoZone, Inc.(a) 8,200 947,592 ===================================================================== BREWERS-0.99% Anheuser-Busch Cos., Inc. 24,747 1,217,552 ===================================================================== BROADCASTING & CABLE TV-0.78% Comcast Corp.-Class A(a) 22,500 952,425 ===================================================================== COMMUNICATIONS EQUIPMENT-5.16% Cisco Systems, Inc.(a) 172,428 4,712,457 --------------------------------------------------------------------- Motorola, Inc. 79,224 1,628,846 ===================================================================== 6,341,303 ===================================================================== COMPUTER HARDWARE-3.67% Hewlett-Packard Co. 109,482 4,509,564 ===================================================================== DEPARTMENT STORES-5.69% J.C. Penney Co., Inc. 22,796 1,763,499 --------------------------------------------------------------------- Kohl's Corp.(a) 20,771 1,421,359 --------------------------------------------------------------------- Nordstrom, Inc. 47,436 2,340,492 --------------------------------------------------------------------- Sears Holdings Corp.(a) 8,661 1,454,442 ===================================================================== 6,979,792 ===================================================================== DIVERSIFIED METALS & MINING-1.92% Phelps Dodge Corp. 19,730 2,362,076 ===================================================================== ENVIRONMENTAL & FACILITIES SERVICES-1.63% Waste Management, Inc. 54,539 2,005,399 ===================================================================== FOOD RETAIL-0.90% Safeway Inc. 32,115 1,109,894 =====================================================================
SHARES VALUE ---------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS-3.03% AmerisourceBergen Corp. 38,238 $ 1,719,181 --------------------------------------------------------------------- McKesson Corp. 39,373 1,996,211 ===================================================================== 3,715,392 ===================================================================== HEALTH CARE SERVICES-1.78% Laboratory Corp. of America Holdings(a) 29,666 2,179,561 ===================================================================== HUMAN RESOURCE & EMPLOYMENT SERVICES-1.06% Manpower Inc. 17,395 1,303,407 ===================================================================== INDUSTRIAL CONGLOMERATES-1.29% McDermott International, Inc.(a) 31,039 1,578,643 ===================================================================== INTEGRATED OIL & GAS-2.67% Marathon Oil Corp. 19,068 1,763,790 --------------------------------------------------------------------- Occidental Petroleum Corp. 30,973 1,512,412 ===================================================================== 3,276,202 ===================================================================== INTERNET SOFTWARE & SERVICES-0.84% Google Inc.-Class A(a) 2,244 1,033,317 ===================================================================== INVESTMENT BANKING & BROKERAGE-8.28% Bear Stearns Cos. Inc. (The) 9,117 1,484,065 --------------------------------------------------------------------- Goldman Sachs Group, Inc. (The) 22,174 4,420,387 --------------------------------------------------------------------- Lehman Brothers Holdings Inc. 34,208 2,672,329 --------------------------------------------------------------------- Morgan Stanley 19,568 1,593,422 ===================================================================== 10,170,203 ===================================================================== IT CONSULTING & OTHER SERVICES-2.46% Accenture Ltd.-Class A 81,759 3,019,360 ===================================================================== LIFE & HEALTH INSURANCE-1.74% Prudential Financial, Inc. 24,885 2,136,626 ===================================================================== LIFE SCIENCES TOOLS & SERVICES-1.15% Applera Corp.-Applied Biosystems Group 38,394 1,408,676 ===================================================================== MANAGED HEALTH CARE-3.01% Humana Inc.(a) 21,627 1,196,189 --------------------------------------------------------------------- UnitedHealth Group Inc. 22,782 1,224,077 --------------------------------------------------------------------- WellPoint Inc.(a) 16,227 1,276,903 ===================================================================== 3,697,169 ===================================================================== MOVIES & ENTERTAINMENT-2.16% News Corp.-Class A 123,516 2,653,124 ===================================================================== MULTI-LINE INSURANCE-1.42% Assurant, Inc. 31,462 1,738,275 ===================================================================== OTHER DIVERSIFIED FINANCIAL SERVICES-1.23% JPMorgan Chase & Co. 31,344 1,513,915 =====================================================================
AIM V.I. Large Cap Growth Fund
SHARES VALUE --------------------------------------------------------------------- PHARMACEUTICALS-2.01% Forest Laboratories, Inc.(a) 19,000 $ 961,400 --------------------------------------------------------------------- Merck & Co. Inc. 34,676 1,511,874 ===================================================================== 2,473,274 ===================================================================== PROPERTY & CASUALTY INSURANCE-3.05% Ambac Financial Group, Inc. 12,666 1,128,161 --------------------------------------------------------------------- Chubb Corp. (The) 31,251 1,653,490 --------------------------------------------------------------------- SAFECO Corp. 15,359 960,705 ===================================================================== 3,742,356 ===================================================================== PUBLISHING-0.96% McGraw-Hill Cos., Inc. (The) 17,300 1,176,746 ===================================================================== SOFT DRINKS-1.39% PepsiCo, Inc. 27,205 1,701,673 ===================================================================== SPECIALTY STORES-1.45% Office Depot, Inc.(a) 46,686 1,782,005 ===================================================================== SYSTEMS SOFTWARE-6.26% BMC Software, Inc.(a) 40,229 1,295,374 --------------------------------------------------------------------- Microsoft Corp. 83,736 2,500,357 --------------------------------------------------------------------- Oracle Corp.(a) 170,953 2,930,134 --------------------------------------------------------------------- Symantec Corp.(a) 46,000 959,100 ===================================================================== 7,684,965 ===================================================================== TOBACCO-1.26% UST Inc. 26,537 1,544,453 ===================================================================== Total Domestic Common Stocks (Cost $85,193,589) 102,930,627 ===================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-14.69% HONG KONG-1.16% China Mobile Ltd. (Wireless Telecommunication Services)(b) 164,500 1,421,873 =====================================================================
SHARES VALUE ---------------------------------------------------------------------
MEXICO-3.61% America Movil S.A. de C.V.-Series L-ADR (Wireless Telecommunication Services) 77,075 $ 3,485,332 --------------------------------------------------------------------- Grupo Televisa S.A.-ADR (Broadcasting & Cable TV) 35,000 945,350 ===================================================================== 4,430,682 ===================================================================== SWITZERLAND-4.43% ABB Ltd. (Heavy Electrical Equipment)(b) 147,471 2,642,947 --------------------------------------------------------------------- Roche Holding A.G. (Pharmaceuticals)(b) 8,745 1,564,665 --------------------------------------------------------------------- Syngenta A.G. (Fertilizers & Agricultural Chemicals)(b) 6,611 1,229,662 ===================================================================== 5,437,274 ===================================================================== UNITED KINGDOM-5.49% AstraZeneca PLC-ADR (Pharmaceuticals) 41,515 2,223,128 --------------------------------------------------------------------- Diageo PLC (Distillers & Vintners)(b) 89,170 1,750,557 --------------------------------------------------------------------- Rio Tinto PLC-ADR (Diversified Metals & Mining) 8,573 1,821,677 --------------------------------------------------------------------- Shire PLC (Pharmaceuticals)(b) 45,691 944,108 ===================================================================== 6,739,470 ===================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $14,530,944) 18,029,299 ===================================================================== MONEY MARKET FUNDS-1.41% Liquid Assets Portfolio-Institutional Class(c) 868,402 868,402 --------------------------------------------------------------------- Premier Portfolio-Institutional Class(c) 868,402 868,402 ===================================================================== Total Money Market Funds (Cost $1,736,804) 1,736,804 ===================================================================== TOTAL INVESTMENTS-99.94% (Cost $101,461,337) 122,696,730 ===================================================================== OTHER ASSETS LESS LIABILITIES-0.06% 76,565 ===================================================================== NET ASSETS-100.00% $122,773,295 _____________________________________________________________________ =====================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) Non-income producing security. (b) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $9,553,812, which represented 7.78% of the Fund's Net Assets. See Note 1A. (c) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Large Cap Growth Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $99,724,533) $120,959,926 ------------------------------------------------------------- Investments in affiliated money market funds (cost $1,736,804) 1,736,804 ============================================================= Total investments (cost $101,461,337) 122,696,730 ============================================================= Foreign currencies, at value (cost $74) 77 ------------------------------------------------------------- Receivables for: Investments sold 577,804 ------------------------------------------------------------- Fund shares sold 16,290 ------------------------------------------------------------- Dividends 94,079 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 34,419 ============================================================= Total assets 123,419,399 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 359,427 ------------------------------------------------------------- Fund shares reacquired 114,424 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 41,131 ------------------------------------------------------------- Fund expenses advanced 15,308 ------------------------------------------------------------- Accrued administrative services fees 75,185 ------------------------------------------------------------- Accrued distribution fees-Series II 1,276 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,605 ------------------------------------------------------------- Accrued transfer agent fees 659 ------------------------------------------------------------- Accrued operating expenses 35,089 ============================================================= Total liabilities 646,104 ============================================================= Net assets applicable to shares outstanding $122,773,295 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $116,158,241 ------------------------------------------------------------- Undistributed net investment income (loss) (132,060) ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities and foreign currencies (14,488,435) ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 21,235,549 ============================================================= $122,773,295 _____________________________________________________________ ============================================================= NET ASSETS: Series I $120,824,686 _____________________________________________________________ ============================================================= Series II $ 1,948,609 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 8,811,587 _____________________________________________________________ ============================================================= Series II 142,680 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 13.71 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 13.66 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $5,499) $ 659,168 ------------------------------------------------------------ Dividends from affiliated money market funds 78,966 ------------------------------------------------------------ Interest 26,260 ============================================================ Total investment income 764,394 ============================================================ EXPENSES: Advisory fees 534,625 ------------------------------------------------------------ Administrative services fees 221,467 ------------------------------------------------------------ Custodian fees 27,705 ------------------------------------------------------------ Distribution fees-Series II 3,477 ------------------------------------------------------------ Transfer agent fees 5,060 ------------------------------------------------------------ Trustees' and officer's fees and benefits 17,698 ------------------------------------------------------------ Professional services fees 62,216 ------------------------------------------------------------ Other 4,791 ============================================================ Total expenses 877,039 ============================================================ Less: Fees waived and expense offset arrangements (152,092) ============================================================ Net expenses 724,947 ============================================================ Net investment income 39,447 ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) from: Investment securities (1,585,606) ------------------------------------------------------------ Foreign currencies 18,174 ============================================================ (1,567,432) ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities 15,090,005 ------------------------------------------------------------ Foreign currencies (467) ============================================================ 15,089,538 ============================================================ Net gain from investment securities and foreign currencies 13,522,106 ============================================================ Net increase in net assets resulting from operations $13,561,553 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Large Cap Growth Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ---------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) $ 39,447 $ (2,758) ---------------------------------------------------------------------------------------- Net realized gain (loss) from investment securities and foreign currencies (1,567,432) (43,281) ---------------------------------------------------------------------------------------- Change in net unrealized appreciation of investment securities and foreign currencies 15,089,538 316,169 ======================================================================================== Net increase in net assets resulting from operations 13,561,553 270,130 ======================================================================================== Distributions to shareholders from net investment income-Series 1 (201,184) -- ======================================================================================== Distributions to shareholders from net realized gains: Series I -- (5,480) ---------------------------------------------------------------------------------------- Series II -- (828) ======================================================================================== Total distributions from net realized gains -- (6,308) ======================================================================================== Decrease in net assets resulting from distributions (201,184) (6,308) ======================================================================================== Share transactions-net: Series I 103,311,208 3,533,583 ---------------------------------------------------------------------------------------- Series II 1,113,671 828 ======================================================================================== Net increase in net assets resulting from share transactions 104,424,879 3,534,411 ======================================================================================== Net increase in net assets 117,785,248 3,798,233 ======================================================================================== NET ASSETS: Beginning of year 4,988,047 1,189,814 ======================================================================================== End of year (including undistributed net investment income (loss) of $(132,060) and $(4,582), respectively) $122,773,295 $4,988,047 ________________________________________________________________________________________ ========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Large Cap Growth Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Large Cap Growth Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Large Cap Growth Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $350 million 0.75% -------------------------------------------------------------------- Over $350 million 0.625% ____________________________________________________________________ ====================================================================
AIM V.I. Large Cap Growth Fund Through December 31, 2009, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.695% -------------------------------------------------------------------- Next $250 million 0.67% -------------------------------------------------------------------- Next $500 million 0.645% -------------------------------------------------------------------- Next $1.5 billion 0.62% -------------------------------------------------------------------- Next $2.5 billion 0.595% -------------------------------------------------------------------- Next $2.5 billion 0.57% -------------------------------------------------------------------- Next $2.5 billion 0.545% -------------------------------------------------------------------- Over $10 billion 0.52% ____________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.01% and Series II shares to 1.26% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $148,589. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $171,467 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Large Cap Growth Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $ -- $10,149,786 $ (9,281,384) $ -- $ 868,402 $39,517 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 10,149,786 (9,281,384) -- 868,402 39,449 -- ================================================================================================================================== Total Investments in Affiliates $ -- $20,299,572 $(18,562,768) $ -- $1,736,804 $78,966 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $3,503. NOTE 5--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,925 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 6--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceed 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. Large Cap Growth Fund NOTE 7--DISTRIBUTION TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------- Distributions paid from: Ordinary income $201,184 $ 459 -------------------------------------------------------------------------------- Long-term capital gain -- 5,849 ================================================================================ Total distributions $201,184 $6,308 ________________________________________________________________________________ ================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 -------------------------------------------------------------------------- Unrealized appreciation-investments $ 20,147,588 -------------------------------------------------------------------------- Temporary book/tax differences (36,002) -------------------------------------------------------------------------- Capital loss carryover (13,106,061) -------------------------------------------------------------------------- Post-October Capital loss deferral (294,413) -------------------------------------------------------------------------- Post-October PFIC loss deferral (96,058) -------------------------------------------------------------------------- Shares of beneficial interest 116,158,241 ========================================================================== Total net assets $122,773,295 __________________________________________________________________________ ==========================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis unrealized appreciation on investments amount includes appreciation on foreign currencies of $156. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $12,019,235 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* --------------------------------------------------------------------------- December 31, 2009 $ 7,793,745 --------------------------------------------------------------------------- December 31, 2010 3,544,700 --------------------------------------------------------------------------- December 31, 2013 10,284 --------------------------------------------------------------------------- December 31, 2014 1,757,332 =========================================================================== Total capital loss carryforward $13,106,061 ___________________________________________________________________________ ===========================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. To the extent that unrealized gains as of June 12, 2006, the date of the reorganization of AIM V.I. Blue Chip Fund into the Fund are realized on securities held in each Fund at such date, the capital loss carryforward may be further limited for up to five years from the date of the reorganization. AIM V.I. Large Cap Growth Fund NOTE 8--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $97,491,172 and $29,872,762, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $21,010,934 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (863,502) =============================================================================== Net unrealized appreciation of investment securities $20,147,432 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $102,549,298.
NOTE 9--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of passive foreign investment companies, foreign currency transactions and expenses related to the plan of reorganization, on December 31, 2006, undistributed net investment income was increased by $60,662, undistributed net realized gain (loss) was decreased by $45,366 and shares of beneficial interest decreased by $15,296. Further as a result of tax deferrals acquired in the reorganization of AIM V.I. Blue Chip Fund into the Fund on June 12, 2006, undistributed net investment income was decreased by $26,403, undistributed net realized gain (loss) was decreased by $12,832,387 and shares of beneficial interest increased by $12,858,790. These reclassifications had no effect on the net assets of the Fund. NOTE 10--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ----------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------- 2006(A) 2005 -------------------------- --------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------------------------------------------- Sold: Series I 2,493,288 $ 31,035,114 330,217 $3,990,691 ----------------------------------------------------------------------------------------------------------------- Series II 2,883 35,815 -- -- ================================================================================================================= Issued as reinvestment of dividends: Series I 14,674 201,184 423 5,480 ----------------------------------------------------------------------------------------------------------------- Series II -- -- 64 828 ================================================================================================================= Issued in connection with acquisitions:(b) Series I 9,167,026 112,588,851 -- -- ----------------------------------------------------------------------------------------------------------------- Series II 104,182 1,274,141 -- -- ================================================================================================================= Reacquired: Series I (3,205,686) (40,513,941) (38,554) (462,588) ----------------------------------------------------------------------------------------------------------------- Series II (14,623) (196,285) -- -- ================================================================================================================= 8,561,744 $104,424,879 292,150 $3,534,411 _________________________________________________________________________________________________________________ =================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 88% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, distribution, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. (b) As of the opening of business on June 12, 2006, the Fund acquired all the net assets of AIM V.I. Blue Chip Fund pursuant to the plan of reorganization approved by the Trustees of the Fund on November 14, 2005 and by the shareholders of AIM V.I. Blue Chip Fund on April 4, 2006. The acquisition was accomplished by a tax-free exchange of 9,271,208 shares of the Fund for 16,731,926 shares outstanding of AIM V.I. Blue Chip Fund as of the close of business on June 9, 2006. Each class of shares of AIM V.I. Blue Chip Fund was exchanged for the like class of shares of the Fund based on the relative net asset value of AIM V.I. Blue Chip Fund to the net asset value of the Fund on the close of business, June 9, 2006. AIM V.I. Blue Chip Fund's net assets as of the close of business on June 9, 2006 of $113,862,992 including $5,643,661 of unrealized appreciation as of the close of business on June 9, 2006 were combined with the net assets of the Fund immediately before the acquisition of $9,848,334. The combined aggregate net assets of the Fund subsequent to the reorganization were $123,711,326. AIM V.I. Large Cap Growth Fund NOTE 11--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. NOTE 12--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I --------------------------------------------------- AUGUST 29, 2003 (DATE OPERATIONS YEAR ENDED DECEMBER 31, COMMENCED) TO ------------------------------- DECEMBER 31, 2006 2005 2004 2003 ----------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.71 $11.86 $10.90 $10.00 ----------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.02 (0.01)(a) (0.04)(b) (0.03) ----------------------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 1.00 0.88 1.03 0.95 ================================================================================================================= Total from investment operations 1.02 0.87 0.99 0.92 ================================================================================================================= Less distributions: Dividends from net investment income (0.02) -- -- (0.02) ----------------------------------------------------------------------------------------------------------------- Distributions from net realized gains -- (0.02) (0.03) -- ================================================================================================================= Total distributions (0.02) (0.02) (0.03) (0.02) ================================================================================================================= Net asset value, end of period $ 13.71 $12.71 $11.86 $10.90 _________________________________________________________________________________________________________________ ================================================================================================================= Total return(c) 8.05% 7.30% 9.08% 9.16% _________________________________________________________________________________________________________________ ================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $120,825 $4,352 $ 596 $ 546 _________________________________________________________________________________________________________________ ================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.02%(d) 1.13% 1.33% 1.33%(e) ----------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.23%(d) 7.30% 9.88% 14.54%(e) _________________________________________________________________________________________________________________ ================================================================================================================= Ratio of net investment income (loss) to average net assets 0.06%(d) (0.06)% (0.35)%(b) (0.73)%(e) _________________________________________________________________________________________________________________ ================================================================================================================= Portfolio turnover rate(f) 76% 99% 104% 37% _________________________________________________________________________________________________________________ =================================================================================================================
(a) Calculated using average shares outstanding. (b) Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.06) and (0.51)%, respectively. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $69,892,709. (e) Annualized. (f) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Large Cap Growth Fund NOTE 12--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ------------------------------------------------- AUGUST 29, 2003 (DATE OPERATIONS YEAR ENDED DECEMBER 31, COMMENCED) TO ----------------------------- DECEMBER 31, 2006 2005 2004 2003 --------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $12.67 $11.84 $10.90 $10.00 --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.01) (0.03)(a) (0.06)(b) (0.03) --------------------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 1.00 0.88 1.03 0.94 =============================================================================================================== Total from investment operations 0.99 0.85 0.97 0.91 =============================================================================================================== Less distributions: Dividends from net investment income -- -- -- (0.01) --------------------------------------------------------------------------------------------------------------- Distributions from net realized gains -- (0.02) (0.03) -- =============================================================================================================== Total distributions -- (0.02) (0.03) (0.01) =============================================================================================================== Net asset value, end of period $13.66 $12.67 $11.84 $10.90 _______________________________________________________________________________________________________________ =============================================================================================================== Total return(c) 7.81% 7.15% 8.89% 9.11% _______________________________________________________________________________________________________________ =============================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $1,949 $ 636 $ 594 $ 546 _______________________________________________________________________________________________________________ =============================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.27%(d) 1.33% 1.48% 1.48%(e) --------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.48%(d) 7.55% 10.13% 14.79%(e) _______________________________________________________________________________________________________________ =============================================================================================================== Ratio of net investment income (loss) to average net assets (0.19)%(d) (0.26)% (0.50)%(b) (0.88)%(e) _______________________________________________________________________________________________________________ =============================================================================================================== Portfolio turnover rate(f) 76% 99% 104% 37% _______________________________________________________________________________________________________________ ===============================================================================================================
(a) Calculated using average shares outstanding. (b) Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.08) and (0.66)%, respectively. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $1,390,637. (e) Annualized. (f) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 13--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary AIM V.I. Large Cap Growth Fund NOTE 13--LEGAL PROCEEDINGS--(CONTINUED) sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Large Cap Growth Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Large Cap Growth Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Large Cap Growth Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report dated February 4, 2005 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Large Cap Growth Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 100%
* The above percentage is based on ordinary income dividends paid to shareholders during the fund's fiscal year. AIM V.I. Large Cap Growth Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Large Cap Growth Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. Leisure Fund Annual Report to Shareholders - December 31, 2006 Sectors The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC [COVER GLOBE IMAGE] Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client AIM V.I. LEISURE FUND seeks capital growth. Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT June 30, 2006, is available at our Web IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ================================================================================ THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH -- Registered Trademark -- CAREFULLY BEFORE INVESTING. ================================================================================ NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. LEISURE FUND Management's discussion of Fund performance related stocks, including those of cable ====================================================================================== television companies, satellite PERFORMANCE SUMMARY programming companies, publishers, cruise lines, advertising agencies, hotels, We are pleased to report that for the year ended December 31, 2006, and excluding casinos, electronic game and toy variable product issuer charges, AIM V.I. Leisure Fund delivered positive returns to manufacturers and entertainment shareholders that exceeded those of the Fund's broad market and style-specific index, companies. the S&P 500 --REGISTERED TRADEMARK-- Index. Relative to the S&P 500 Index, the Fund benefited from strong stock selection and overweight positions in media stocks as well We consider selling or trimming a as stocks in the hotels, restaurants and leisure industry. stock when: Your Fund's long-term performance appears on pages 4-5. - There is a change in the company's fundamental business prospects. FUND VS. INDEXES - A stock's valuation rises so that it is Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. If no longer attractive relative to other variable product issuer charges were included, returns would be lower. investment opportunities. Series I Shares 24.61% MARKET CONDITIONS AND YOUR FUND Series II Shares 24.28 S&P 500 Index (Board Market Index / Style-Specific Index) 15.78 The year started off on a positive note as the markets were encouraged by strong Source: Lipper Inc. economic data. However, tensions in the ================================================================================ Middle East escalated with the HOW WE INVEST ding financial goals. We then evaluate Israel-Lebanon conflict, residential whether the company has the right housing markets showed signs of cooling We focus on companies that profit from management in place, appropriate and rising energy prices heightened consumer spending on leisure activities competitive position and adequate inflation concerns. These factors led to (products and/or services purchased with resources to realize their vision. a slight sell-off in the markets mid way consumers' discretionary dollars) and through the year as investors became that are growing their market share, cash - Valuation analysis involves using concerned about an economic downturn. flow and earnings at rates greater than financial models for each company in an the broad market. effort to estimate its fair valuation However, the markets staged a rally over the next two to three years based beginning in August after the Fed held We perform both fundamental and primarily on our expectations for free interest rates steady after 17 valuation analysis: cash flow growth. consecutive increases. Also contributing to the rally was a series of solid - Fundamental research includes Just as we look for managements with economic reports that indicated the interviews with company managements, long-term visions, we maintain a economy, while slowing, continued to buyers, customers and competitors. We ask long-term investment horizon, resulting expand and inflation remained within company management teams to detail their in relatively low portfolio turnover. We manageable levels. three- to five-year strategic plan and manage risk by diversifying the Fund's their correspon holdings across a variety of leisure- Against this backdrop, telecommunication services and energy were the best-performing sectors of the S&P 500 Index, while health care ========================================= ========================================= ========================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* By sector 1. Hotels, Resorts & Cruise Lines 16.1% 1. Omnicom Group Inc. 5.9% Consumer Discretionary 82.9% 2. Broadcasting & Cable TV 14.3 2. News Corp.-Class A 5.2 Consumer Staples 9.3 3. Movies & Entertainment 11.0 3. Harrah's Entertainment, Inc. 5.0 Financials 6.3 4. Advertising 9.1 4. Hilton Hotels Corp. 3.8 Information Technology 0.3 5. Casinos & Gaming 8.8 5. Starwood Hotels & Resorts Money Market Funds Plus Other Total Net Assets $52.83 million Worldwide, Inc. 3.1 Assets Less Liabilities 1.2 Total Number of Holdings* 77 6. Polo Ralph Lauren Corp. 2.6 7. Walt Disney Co. (The) 2.6 8. Comcast Corp.-Class A 2.6 9. Time Warner Inc. 2.6 10. Groupe Bruxelles Lambert S.A. (Belgium) 2.5 The Fund's portfolio is subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings. ========================================= ========================================= ==========================================
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AIM V.I. Leisure Fund and information technology trailed the company, performed well during the year as THE VIEWS AND OPINIONS EXPRESSED IN index. The Fund is most closely correlated the market recognized compelling MANAGEMENT'S DISCUSSION OF FUND to the consumer discretionary sector of valuations and management's ability to PERFORMANCE ARE THOSE OF A I M ADVISORS, the S&P 500 Index, which outperformed the increase earnings. INC. THESE VIEWS AND OPINIONS ARE SUBJECT index as a whole for the year. The sector TO CHANGE AT ANY TIME BASED ON FACTORS was strong despite evidence that On the other hand, Fund holdings Yahoo! SUCH AS MARKET AND ECONOMIC CONDITIONS. historically high energy and gasoline and Carnival underperformed during the THESE VIEWS AND OPINIONS MAY NOT BE RELIED prices caused consumers to reduce their year. Shares of Yahoo! declined after the UPON AS INVESTMENT ADVICE OR discretionary spending, therefore hurting company delayed the release of its new RECOMMENDATIONS, OR AS AN OFFER FOR A the profits of many consumer discretionary search platform and lowered its guidance PARTICULAR SECURITY. THE INFORMATION IS companies. on advertising-related sales. The entrance NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF of Google (not a Fund holding) into areas ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR It is important to emphasize that we do other than search functions, such as THE FUND. STATEMENTS OF FACT ARE FROM not make investments or position the Fund e-mail and instant messaging, also created SOURCES CONSIDERED RELIABLE, BUT A I M on the basis of short-term outlooks for uncertainty around Yahoo!'s competitive ADVISORS, INC. MAKES NO REPRESENTATION OR such economic factors as changes in energy positioning. We sold our position in WARRANTY AS TO THEIR COMPLETENESS OR prices. We remind shareholders that our Yahoo! due to these developments. ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE time horizon for the stocks in the Fund is IS NO GUARANTEE OF FUTURE RESULTS, THESE two to three years. Carnival, the world's largest cruise INSIGHTS MAY HELP YOU UNDERSTAND OUR operator, also detracted from Fund INVESTMENT MANAGEMENT PHILOSOPHY. For the year, the Fund's media holdings performance over the year. The company cut were among the top contributors to its earnings outlook during the year Mark D. Greenberg Chartered performance. NEWS CORP., CABLEVISION AND citing accounting changes, higher fuel [GREENBERG Financial Analyst, senior OMNICOM GROUP -- all long-term Fund costs and lower bookings for its Caribbean PHOTO] portfolio manager, is manager holdings -- were strong contributors. As a voyages. However, the company received a of AIM V.I. Leisure Fund. group, media stocks were fairly flat for reprieve as oil prices fell from their Mr. Greenberg began his career in 1980, the first half of the year as investors July highs and as the 2006 hurricane and media and entertainment stocks became worried that broadcast advertising season was uneventful. We continued to his focus in 1983. He joined the Fund's revenues might weaken, given economic hold this stock because we remained advisor in 1996. Mr. Greenberg attended uncertainty and a continued shift from optimistic regarding the company's City University in London, England, and traditional advertising to online management and its ability to prosper from earned his B.S.B.A. in economics with a advertising. However, media staged a rally demographic and economic trends. specialization in finance from Marquette in the second half, with many media stocks University. posting significant returns for the year. Portfolio changes are usually the result of insight that comes from our ========================================== bottom-up investment process and long-term The Fund is most investment horizon. This long-term closely correlated investment horizon is one reason for the to the consumer Fund's low portfolio turnover rate discretionary sector of relative to other domestic equity funds. the S&P 500 Index, During the year, we took profits and sold which outperformed our position in CBRL GROUP and trimmed our the index as a whole position in HARRAH'S ENTERTAINMENT. We for the year. used the proceeds to initiate positions in ========================================== KOHL'S, ABERCROMBIE & FITCH and COACH -- three stocks in which we saw strong News Corp., in particular, was a fundamentals and attractive valuations. standout performer as its MySpace.com Web site and its motion pictures were well At the close of the year, we were received and continued to generate solid comfortable with the quality of the revenue growth. companies that we had selected for inclusion in AIM V.I. Leisure Fund. The Cablevision operates some of the most Fund was positioned in line with its attractive cable assets in the country and mandate and had exposure to a variety of the company issued a $10 per-share leisure-related industries based on our dividend in April. Our largest holding, bottom-up, stock-by-stock approach to Omnicom Group, a diversified advertising, investing. marketing and communications IN CLOSING For a discussion of the risks of investing As always, we thank you for your continued in your Fund, indexes used in this report investment and welcome any new investors and your Fund's long-term performance, to AIM V.I. Leisure Fund. please see pages 4 - 5.
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AIM V.I. LEISURE FUND YOUR FUND'S LONG-TERM PERFORMANCE ========================================= AVERAGE ANNUAL TOTAL RETURNS TO REFLECT THE RULE 12B-1 FEES APPLICABLE FIGURES GIVEN REPRESENT THE FUND AND ARE TO THE SERIES II SHARES. THE INCEPTION NOT INTENDED TO REFLECT ACTUAL VARIABLE As of 12/31/06 DATE OF SERIES I SHARES IS APRIL 30, PRODUCT VALUES. THEY DO NOT REFLECT SALES SERIES I SHARES 2002. THE PERFORMANCE OF THE FUND'S CHARGES, EXPENSES AND FEES ASSESSED IN Inception (4/30/02) 9.54% SERIES I AND SERIES II SHARE CLASSES WILL CONNECTION WITH A VARIABLE PRODUCT. SALES 1 Year 24.61 DIFFER PRIMARILY DUE TO DIFFERENT CLASS CHARGES, EXPENSES AND FEES, WHICH ARE SERIES II SHARES EXPENSES. DETERMINED BY THE VARIABLE PRODUCT Inception 9.30% ISSUERS, WILL VARY AND WILL LOWER THE 1 Year 24.28 THE PERFORMANCE DATA QUOTED REPRESENT TOTAL RETURN. ========================================= PAST PERFORMANCE AND CANNOT GUARANTEE COMPARABLE FUTURE RESULTS; CURRENT PER NASD REQUIREMENTS, THE MOST RECENT ========================================= PERFORMANCE MAY BE LOWER OR HIGHER. MONTH-END PERFORMANCE DATA AT THE FUND PLEASE CONTACT YOUR VARIABLE PRODUCT LEVEL, EXCLUDING VARIABLE PRODUCT CUMULATIVE TOTAL RETURNS ISSUER OR FINANCIAL ADVISOR FOR THE MOST CHARGES, IS AVAILABLE ON THIS AIM RECENT MONTH-END VARIABLE PRODUCT AUTOMATED INFORMATION LINE, 866-702-4402. 6 months ended 12/31/06 PERFORMANCE. PERFORMANCE FIGURES REFLECT AS MENTIONED ABOVE, FOR THE MOST RECENT FUND EXPENSES, REINVESTED DISTRIBUTIONS MONTH-END PERFORMANCE INCLUDING VARIABLE Series I Shares 17.67% AND CHANGES IN NET ASSET VALUE. PRODUCT CHARGES, PLEASE CONTACT YOUR Series II Shares 17.53 INVESTMENT RETURN AND PRINCIPAL VALUE VARIABLE PRODUCT ISSUER OR FINANCIAL WILL FLUCTUATE SO THAT YOU MAY HAVE A ADVISOR. SERIES II SHARES' INCEPTION DATE IS APRIL GAIN OR LOSS WHEN YOU SELL SHARES. 30, 2004. RETURNS SINCE THAT DATE ARE HAD THE ADVISOR NOT WAIVED FEES AND/OR HISTORICAL. ALL OTHER RETURNS ARE THE AIM V.I. LEISURE FUND, A SERIES REIMBURSED EXPENSES, PERFORMANCE WOULD BLENDED RETURNS OF THE HISTORICAL PORTFOLIO OF AIM VARIABLE INSURANCE HAVE BEEN LOWER. PERFORMANCE OF SERIES II SHARES SINCE FUNDS, IS CURRENTLY OFFERED THROUGH THEIR INCEPTION AND THE RESTATED INSURANCE COMPANIES ISSUING VARIABLE HISTORICAL PERFORMANCE OF SERIES I SHARES PRODUCTS. YOU CANNOT PURCHASE SHARES OF (FOR PERIODS PRIOR TO INCEPTION OF SERIES THE FUND DIRECTLY. PERFORMANCE II SHARES) ADJUSTED ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND investing in more established companies, A direct investment cannot be made in such as business risk, stock price an index. Unless otherwise indicated, Foreign securities have additional risks, fluctuations and illiquidity. index results include reinvested including exchange rate changes, dividends, and they do not reflect sales political and economic upheaval, the The Fund may use enhanced investment charges. Performance of an index of funds relative lack of information about these techniques such as derivatives. The reflects fund expenses; performance of a companies, relatively low market principal risk of investments in market index does not. liquidity and the potential lack of derivatives is that the fluctuations in strict financial and accounting controls their values may not correlate perfectly OTHER INFORMATION and standards. with the overall securities markets. Derivatives are subject to counter party The returns shown in the management's Investing in emerging markets involves risk -- the risk that the other party discussion of Fund performance are based greater risk than investing in more will not complete the transaction with on net asset values calculated for established markets. The risks include the Fund. shareholder transactions. Generally the relatively smaller size and lesser accepted accounting principles require liquidity of these markets, high The prices of securities held by the adjustments to be made to the net assets inflation rates, adverse political Fund may decline in response to market of the Fund at period end for financial developments and lack of timely risks. reporting purposes, and as such, the net information. asset values for shareholder transactions ABOUT INDEXES USED IN THIS REPORT and the returns based on those net asset If the seller of a repurchase values may differ from the net asset agreement in which the Fund invests THE UNMANAGED STANDARD & POOR'S COMPOSITE values and returns reported in the defaults on its obligation or declares INDEX OF 500 STOCKS (the S&P 500 Index) Financial Highlights. Additionally, the bankruptcy, the Fund may experience is an index of common stocks frequently returns and net asset values shown delays in selling the securities used as a general measure of U.S. stock throughout this report are at the Fund underlying the repurchase agreement. market performance. level only and do not include variable product issuer charges. If such charges There is no guarantee that the The fund is not managed to track the were included, the total returns would be investment techniques and risk analyses performance of any particular index, lower. used by the Fund's portfolio managers including the index defined here, and will produce the desired results. consequently, the performance of the Fund may deviate significantly from the Investing in a fund that invests in performance of the index. Continued on page 5 smaller companies involves risks not associated with
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AIM V.I. LEISURE FUND Past performance cannot guarantee comparable future results. ==================================================================================================================================== Continued from page 4 Industry classifications used in this report are generally according to the Global Industry Classification Standard, which was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc. and Standard & Poor's. The Chartered Financial Analyst --Registered Trademark-- (CFA --Registered Trademark--) designation is a globally recognized standard for measuring the competence and integrity of investment professionals.
5
==================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund and index data from 4/30/02 DATE AIM V.I. LEISURE FUND-SERIES I SHARES S&P 500 INDEX 4/30/02 $ 10000 $ 10000 5/02 10030 9927 6/02 9010 9220 7/02 8400 8501 8/02 8610 8557 9/02 8110 7628 10/02 8320 8299 11/02 8950 8786 12/02 8520 8271 1/03 8320 8054 2/03 8039 7933 3/03 8260 8010 4/03 8959 8670 5/03 9479 9126 6/03 9509 9242 7/03 9649 9406 8/03 9969 9589 9/03 9699 9487 10/03 10229 10023 11/03 10478 10112 12/03 10958 10641 1/04 11068 10837 2/04 11278 10987 3/04 11258 10822 4/04 11088 10652 5/04 11098 10798 6/04 11118 11008 7/04 10477 10643 8/04 10418 10686 9/04 10888 10802 10/04 11268 10967 11/04 11838 11410 12/04 12426 11799 1/05 12054 11511 2/05 12245 11753 3/05 12104 11545 4/05 11662 11326 5/05 11983 11686 6/05 12164 11703 7/05 12424 12138 8/05 12203 12028 9/05 12053 12125 10/05 11582 11923 11/05 12053 12373 12/05 12276 12378 1/06 12524 12705 2/06 12545 12740 3/06 12897 12898 4/06 13311 13071 5/06 13072 12696 6/06 13000 12712 7/06 12525 12791 8/06 12959 13095 9/06 13466 13432 10/06 14274 13869 11/06 14771 14133 12/06 15303 14331 ==================================================================================================================================== SOURCE: LIPPER INC.
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. LEISURE FUND EXAMPLE You may use the information in this The hypothetical account values and table, together with the amount you expenses may not be used to estimate the As a shareholder of the Fund, you incur invested, to estimate the expenses that actual ending account balance or expenses ongoing costs, including management fees; you paid over the period. Simply divide you paid for the period. You may use this distribution and/or service (12b-1) fees; your account value by $1,000 (for information to compare the ongoing costs and other Fund expenses. This example is example, an $8,600 account value of investing in the Fund and other funds. intended to help you understand your divided by $1,000 = 8.6), then multiply To do so, compare this 5% hypothetical ongoing costs (in dollars) of investing the result by the number in the table example with the 5% hypothetical examples in the Fund and to compare these costs under the heading entitled "Actual that appear in the shareholder reports of with ongoing costs of investing in other Expenses Paid During Period" to estimate the other funds. mutual funds. The example is based on an the expenses you paid on your account investment of $1,000 invested at the during this period. Please note that the expenses shown in beginning of the period and held for the the table are meant to highlight your entire period July 1, 2006, through HYPOTHETICAL EXAMPLE FOR COMPARISON ongoing costs. Therefore, the December 31, 2006. PURPOSES hypothetical information is useful in comparing ongoing costs, and will not The actual and hypothetical expenses The table below also provides information help you determine the relative total in the examples below do not represent about hypothetical account values and costs of owning different funds. the effect of any fees or other expenses hypothetical expenses based on the Fund's assessed in connection with a variable actual expense ratio and an assumed rate product; if they did, the expenses shown of return of 5% per year before expenses, would be higher while the ending account which is not the Fund's actual return. values shown would be lower. The Fund's actual cumulative total returns at net asset value after expenses ACTUAL EXPENSES for the six months ended December 31, 2006, appear in the table "Cumulative The table below provides information Total Returns" on page 4. about actual account values and actual expenses.
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD (2) (12/31/06) PERIOD(2) RATIO ========================================================================================================== Series I $ 1,000.00 $ 1,176.70 $ 5.60 $ 1,020.06 $ 5.19 1.02% Series II 1,000.00 1,175.30 6.96 1,018.80 6.46 1.27
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. LEISURE FUND The Board of Trustees of AIM Variable services to be provided by AIM under the for the Fund, the Board concluded that no Insurance Funds (the "Board") oversees Advisory Agreement was appropriate and changes should be made to the Fund and the management of AIM V.I. Leisure Fund that AIM currently is providing services that it was not necessary to change the (the "Fund") and, as required by law, in accordance with the terms of the Fund's portfolio management team at this determines annually whether to approve Advisory Agreement. time. However, due to the Fund's the continuance of the Fund's advisory under-performance, the Board also agreement with A I M Advisors, Inc. - The quality of services to be provided concluded that it would be appropriate ("AIM"). Based upon the recommendation of by AIM. The Board reviewed the for the Board to continue to closely the Investments Committee of the Board, credentials and experience of the monitor and review the performance of the at a meeting held on June 27, 2006, the officers and employees of AIM who will Fund. Although the independent written Board, including all of the independent provide investment advisory services to evaluation of the Fund's Senior Officer trustees, approved the continuance of the the Fund. In reviewing the qualifications (discussed below) only considered Fund advisory agreement (the "Advisory of AIM to provide investment advisory performance through the most recent Agreement") between the Fund and AIM for services, the Board considered such calendar year, the Board also reviewed another year, effective July 1, 2006. issues as AIM's portfolio and product more recent Fund performance, which did review process, various back office not change their conclusions. The Board considered the factors support functions provided by AIM and discussed below in evaluating the AIM's equity and fixed income trading - Meetings with the Fund's portfolio fairness and reasonableness of the operations. Based on the review of these managers and investment personnel. With Advisory Agreement at the meeting on June and other factors, the Board concluded respect to the Fund, the Board is meeting 27, 2006 and as part of the Board's that the quality of services to be periodically with such Fund's portfolio ongoing oversight of the Fund. In their provided by AIM was appropriate and that managers and/or other investment deliberations, the Board and the AIM currently is providing satisfactory personnel and believes that such independent trustees did not identify any services in accordance with the terms of individuals are competent and able to particular factor that was controlling, the Advisory Agreement. continue to carry out their and each trustee attributed different responsibilities under the Advisory weights to the various factors. - The performance of the Fund relative to Agreement. comparable funds. The Board reviewed the One responsibility of the independent performance of the Fund during the past - Overall performance of AIM. The Board Senior Officer of the Fund is to manage one and three calendar years against the considered the overall performance of AIM the process by which the Fund's proposed performance of funds advised by other in providing investment advisory and management fees are negotiated to ensure advisors with investment strategies portfolio administrative services to the that they are negotiated in a manner comparable to those of the Fund. The Fund and concluded that such performance which is at arms' length and reasonable. Board noted that the Fund's performance was satisfactory. To that end, the Senior Officer must was above the median performance of such either supervise a competitive bidding comparable funds for the one year period - Fees relative to those of clients of process or prepare an independent written and below such median performance for the AIM with comparable investment evaluation. The Senior Officer has three year period. The Board also noted strategies. The Board reviewed the recommended an independent written that AIM began serving as investment effective advisory fee rate (before evaluation in lieu of a competitive advisor to the Fund in April 2004. Based waivers) for the Fund under the Advisory bidding process and, upon the direction on this review and after taking account Agreement. The Board noted that this rate of the Board, has prepared such an of all of the other factors that the was (i) above the effective advisory fee independent written evaluation. Such Board considered in determining whether rate (before waivers) for one mutual fund written evaluation also considered to continue the Advisory Agreement for advised by AIM with investment strategies certain of the factors discussed below. the Fund, the Board concluded that no comparable to those of the Fund; (ii) the In addition, as discussed below, the changes should be made to the Fund and same as the effective advisory fee rates Senior Officer made a recommendation to that it was not necessary to change the (before waivers) for three variable the Board in connection with such written Fund's portfolio management team at this insurance funds advised by AIM and evaluation. time. However, due to the Fund's offered to insurance company separate under-performance, the Board also accounts with investment strategies The discussion below serves as a concluded that it would be appropriate comparable to those of the Fund; and summary of the Senior Officer's for the Board to continue to closely (iii) above the effective sub-advisory independent written evaluation and monitor and review the performance of the fee rates for two offshore funds advised recommendation to the Board in connection Fund. Although the independent written and sub-advised by AIM affiliates with therewith, as well as a discussion of the evaluation of the Fund's Senior Officer investment strategies comparable to those material factors and the conclusions with (discussed below) only considered Fund of the Fund, although the total advisory respect thereto that formed the basis for performance through the most recent fees for one such offshore fund were the Board's approval of the Advisory calendar year, the Board also reviewed above those for the Fund and the total Agreement. After consideration of all of more recent Fund performance, which did advisory fees for the other offshore fund the factors below and based on its not change their conclusions. were comparable to those for the Fund. informed business judgment, the Board The Board noted that AIM has agreed to determined that the Advisory Agreement is - The performance of the Fund relative to waive advisory fees of the Fund and to in the best interests of the Fund and its indices. The Board reviewed the limit the Fund's total operating shareholders and that the compensation to performance of the Fund during the past expenses, as discussed below. Based on AIM under the Advisory Agreement is fair one and three calendar years against the this review, the Board concluded that the and reasonable and would have been performance of the S&P 500 Index. The advisory fee rate for the Fund under the obtained through arm's length Board noted that the Fund's performance Advisory Agreement was fair and negotiations. was below the performance of such Index reasonable. for the one year period and comparable to Unless otherwise stated, information such Index for the three year period. The - Fees relative to those of comparable presented below is as of June 27, 2006 Board also noted that the performance of funds with other advisors. The Board and does not reflect any changes that may such Index does not reflect fees, while reviewed the advisory fee rate for the have occurred since June 27, 2006, the performance of the Fund does reflect Fund under the Advisory Agreement. The including but not limited to changes to fees. The Board also noted that AIM began Board compared effective contractual the Fund's performance, advisory fees, serving as investment advisor to the Fund advisory fee rates at a common asset expense limitations and/or fee waivers. in April 2004. Based on this review and level at the end of the past calendar after taking account of all of the other year and noted that the Fund's rate was - The nature and extent of the advisory factors that the Board considered in below the median rate of the funds services to be provided by AIM. The Board determining whether to continue the advised by other advisors with investment reviewed the services to be provided by Advisory Agreement strategies comparable to those of the AIM under the Advisory Agreement. Based Fund that the Board reviewed. The Board on such review, the Board concluded that noted that AIM has the range of (continued)
7
AIM V.I. Leisure Fund agreed to waive advisory fees of the Fund advised by AIM pursuant to the terms of - Benefits of soft dollars to AIM. The and to limit the Fund's total operating an SEC exemptive order. The Board found Board considered the benefits realized by expenses, as discussed below. Based on that the Fund may realize certain AIM as a result of brokerage transactions this review, the Board concluded that the benefits upon investing cash balances in executed through "soft dollar" advisory fee rate for the Fund under the AIM advised money market funds, including arrangements. Under these arrangements, Advisory Agreement was fair and a higher net return, increased liquidity, brokerage commissions paid by the Fund reasonable. increased diversification or decreased and/or other funds advised by AIM are transaction costs. The Board also found used to pay for research and execution - Expense limitations and fee waivers. that the Fund will not receive reduced services. This research may be used by The Board noted that AIM has services if it invests its cash balances AIM in making investment decisions for contractually agreed to waive advisory in such money market funds. The Board the Fund. The Board concluded that such fees of the Fund through April 30, 2008 noted that, to the extent the Fund arrangements were appropriate. to the extent necessary so that the invests uninvested cash in affiliated advisory fees payable by the Fund do not money market funds, AIM has voluntarily - AIM's financial soundness in light of exceed a specified maximum advisory fee agreed to waive a portion of the advisory the Fund's needs. The Board considered rate, which maximum rate includes fees it receives from the Fund whether AIM is financially sound and has breakpoints and is based on net asset attributable to such investment. The the resources necessary to perform its levels. The Board considered the Board further determined that the obligations under the Advisory Agreement, contractual nature of this fee waiver and proposed securities lending program and and concluded that AIM has the financial noted that it remains in effect until related procedures with respect to the resources necessary to fulfill its April 30, 2008. The Board noted that AIM lending Fund is in the best interests of obligations under the Advisory Agreement. has contractually agreed to waive fees the lending Fund and its respective and/or limit expenses of the Fund through shareholders. The Board therefore - Historical relationship between the April 30, 2008 in an amount necessary to concluded that the investment of cash Fund and AIM. In determining whether to limit total annual operating expenses to collateral received in connection with continue the Advisory Agreement for the a specified percentage of average daily the securities lending program in the Fund, the Board also considered the prior net assets for each class of the Fund. money market funds according to the relationship between AIM and the Fund, as The Board considered the contractual procedures is in the best interests of well as the Board's knowledge of AIM's nature of this fee waiver/expense the lending Fund and its respective operations, and concluded that it was limitation and noted that it remains in shareholders. beneficial to maintain the current effect until April 30, 2008. The Board relationship, in part, because of such considered the effect these fee - Independent written evaluation and knowledge. The Board also reviewed the waivers/expense limitations would have on recommendations of the Fund's Senior general nature of the non-investment the Fund's estimated expenses and Officer. The Board noted that, upon their advisory services currently performed by concluded that the levels of fee direction, the Senior Officer of the AIM and its affiliates, such as waivers/expense limitations for the Fund Fund, who is independent of AIM and AIM's administrative, transfer agency and were fair and reasonable. affiliates, had prepared an independent distribution services, and the fees written evaluation in order to assist the received by AIM and its affiliates for - Breakpoints and economies of scale. The Board in determining the reasonableness performing such services. In addition to Board reviewed the structure of the of the proposed management fees of the reviewing such services, the trustees Fund's advisory fee under the Advisory AIM Funds, including the Fund. The Board also considered the organizational Agreement, noting that it does not noted that the Senior Officer's written structure employed by AIM and its include any breakpoints. The Board evaluation had been relied upon by the affiliates to provide those services. considered whether it would be Board in this regard in lieu of a Based on the review of these and other appropriate to add advisory fee competitive bidding process. In factors, the Board concluded that AIM and breakpoints for the Fund or whether, due determining whether to continue the its affiliates were qualified to continue to the nature of the Fund and the Advisory Agreement for the Fund, the to provide non-investment advisory advisory fee structures of comparable Board considered the Senior Officer's services to the Fund, including funds, it was reasonable to structure the written evaluation and the recommendation administrative, transfer agency and advisory fee without breakpoints. Based made by the Senior Officer to the Board distribution services, and that AIM and on this review, the Board concluded that that the Board consider whether the its affiliates currently are providing it was not necessary to add advisory fee advisory fee waivers for certain equity satisfactory non-investment advisory breakpoints to the Fund's advisory fee AIM Funds, including the Fund, should be services. schedule. The Board reviewed the level of simplified. The Board concluded that it the Fund's advisory fees, and noted that would be advisable to consider this issue - Other factors and current trends. The such fees, as a percentage of the Fund's and reach a decision prior to the Board considered the steps that AIM and net assets, would remain constant under expiration date of such advisory fee its affiliates have taken over the last the Advisory Agreement because the waivers. several years, and continue to take, in Advisory Agreement does not include any order to improve the quality and breakpoints. The Board noted that AIM has - Profitability of AIM and its efficiency of the services they provide contractually agreed to waive advisory affiliates. The Board reviewed to the Funds in the areas of investment fees of the Fund through April 30, 2008 information concerning the profitability performance, product line to the extent necessary so that the of AIM's (and its affiliates') investment diversification, distribution, fund advisory fees payable by the Fund do not advisory and other activities and its operations, shareholder services and exceed a specified maximum advisory fee financial condition. The Board considered compliance. The Board concluded that rate, which maximum rate includes the overall profitability of AIM, as well these steps taken by AIM have improved, breakpoints and is based on net asset as the profitability of AIM in connection and are likely to continue to improve, levels. The Board concluded that the with managing the Fund. The Board noted the quality and efficiency of the Fund's fee levels under the Advisory that AIM's operations remain profitable, services AIM and its affiliates provide Agreement therefore would not reflect although increased expenses in recent to the Fund in each of these areas, and economies of scale, although the advisory years have reduced AIM's profitability. support the Board's approval of the fee waiver reflects economies of scale. Based on the review of the profitability continuance of the Advisory Agreement for of AIM's and its affiliates' investment the Fund. - Investments in affiliated money market advisory and other activities and its funds. The Board also took into account financial condition, the Board concluded the fact that uninvested cash and cash that the compensation to be paid by the collateral from securities lending Fund to AIM under its Advisory Agreement arrangements, if any (collectively, "cash was not excessive. balances") of the Fund may be invested in money market funds
9 AIM V.I. Leisure Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE -------------------------------------------------------------------- DOMESTIC COMMON STOCKS AND OTHER EQUITY INTERESTS-78.77% ADVERTISING-6.49% Harte-Hanks, Inc. 10,777 $ 298,631 -------------------------------------------------------------------- Omnicom Group Inc. 29,924 3,128,255 ==================================================================== 3,426,886 ==================================================================== APPAREL RETAIL-1.25% Abercrombie & Fitch Co.-Class A 9,462 658,839 ==================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-4.32% Carter's, Inc.(a) 23,097 588,973 -------------------------------------------------------------------- Coach, Inc.(a) 7,586 325,895 -------------------------------------------------------------------- Polo Ralph Lauren Corp.(a) 17,577 1,365,030 ==================================================================== 2,279,898 ==================================================================== BREWERS-1.14% Anheuser-Busch Cos., Inc. 12,233 601,863 ==================================================================== BROADCASTING & CABLE TV-12.76% Cablevision Systems Corp.-Class A 43,670 1,243,722 -------------------------------------------------------------------- CBS Corp.-Class A 4,181 130,531 -------------------------------------------------------------------- CBS Corp.-Class B 4,181 130,363 -------------------------------------------------------------------- Clear Channel Communications, Inc. 23,315 828,615 -------------------------------------------------------------------- Comcast Corp.-Class A(a) 32,038 1,356,168 -------------------------------------------------------------------- EchoStar Communications Corp.-Class A(a) 19,140 727,894 -------------------------------------------------------------------- Liberty Global, Inc.-Class A(a) 5,172 150,764 -------------------------------------------------------------------- Liberty Global, Inc.-Series C(a) 7,903 221,284 -------------------------------------------------------------------- Liberty Media Holding Corp.-Capital-Series A(a) 6,389 625,994 -------------------------------------------------------------------- NTL Inc. 9,075 229,053 -------------------------------------------------------------------- Scripps Co. (E.W.) (The)-Class A 8,650 431,981 -------------------------------------------------------------------- Sinclair Broadcast Group, Inc.-Class A 30,338 318,549 -------------------------------------------------------------------- Spanish Broadcasting System, Inc.-Class A(a) 16,433 67,540 -------------------------------------------------------------------- Univision Communications Inc.-Class A(a) 7,914 280,314 ==================================================================== 6,742,772 ==================================================================== CASINOS & GAMING-8.78% Aztar Corp.(a) 4,900 266,658 -------------------------------------------------------------------- Harrah's Entertainment, Inc. 31,976 2,645,055 -------------------------------------------------------------------- International Game Technology 19,070 881,034 -------------------------------------------------------------------- MGM Mirage(a) 14,778 847,518 ==================================================================== 4,640,265 ==================================================================== CATALOG RETAIL-1.23% Liberty Media Holding Corp.-Interactive-Series A(a) 30,148 650,292 ==================================================================== DEPARTMENT STORES-0.69% Kohl's Corp.(a) 5,311 363,432 ====================================================================
SHARES VALUE -------------------------------------------------------------------- FOOTWEAR-2.38% Crocs, Inc.(a) 18,432 $ 796,263 -------------------------------------------------------------------- NIKE, Inc.-Class B 4,677 463,163 ==================================================================== 1,259,426 ==================================================================== GENERAL MERCHANDISE STORES-0.98% Target Corp. 9,120 520,296 ==================================================================== HOME ENTERTAINMENT SOFTWARE-0.35% Electronic Arts Inc.(a) 3,722 187,440 ==================================================================== HOME IMPROVEMENT RETAIL-2.05% Home Depot, Inc. (The) 23,625 948,780 -------------------------------------------------------------------- Lowe's Cos., Inc. 4,300 133,945 ==================================================================== 1,082,725 ==================================================================== HOTELS, RESORTS & CRUISE LINES-11.96% Carnival Corp.(b) 21,916 1,074,980 -------------------------------------------------------------------- Hilton Hotels Corp. 57,543 2,008,251 -------------------------------------------------------------------- Marriott International, Inc.-Class A 25,197 1,202,401 -------------------------------------------------------------------- Royal Caribbean Cruises Ltd. 9,786 404,944 -------------------------------------------------------------------- Starwood Hotels & Resorts Worldwide, Inc. 26,067 1,629,187 ==================================================================== 6,319,763 ==================================================================== HYPERMARKETS & SUPER CENTERS-0.43% Wal-Mart Stores, Inc. 4,893 225,959 ==================================================================== INTERNET RETAIL-1.42% Blue Nile, Inc.(a) 11,852 437,220 -------------------------------------------------------------------- Expedia, Inc.(a) 14,955 313,756 ==================================================================== 750,976 ==================================================================== INVESTMENT COMPANIES-EXCHANGE TRADED FUNDS-2.33% iShares Russell 3000 Index Fund 5,000 409,750 -------------------------------------------------------------------- iShares S&P 500 Index Fund 2,859 405,978 -------------------------------------------------------------------- S&P 500 Depositary Receipts Trust-Series 1 2,920 413,735 ==================================================================== 1,229,463 ==================================================================== MOVIES & ENTERTAINMENT-10.96% News Corp.-Class A 127,279 2,733,953 -------------------------------------------------------------------- Time Warner Inc. 62,160 1,353,845 -------------------------------------------------------------------- Viacom Inc.-Class A(a) 4,181 171,463 -------------------------------------------------------------------- Viacom Inc.-Class B(a) 4,181 171,546 -------------------------------------------------------------------- Walt Disney Co. (The) 39,677 1,359,731 ==================================================================== 5,790,538 ==================================================================== PUBLISHING-3.55% Belo Corp.-Class A 20,516 376,879 -------------------------------------------------------------------- Gannett Co., Inc. 6,421 388,213 --------------------------------------------------------------------
AIM V.I. Leisure Fund
SHARES VALUE -------------------------------------------------------------------- PUBLISHING-(CONTINUED) McClatchy Co. (The)-Class A 8,696 $ 376,537 -------------------------------------------------------------------- McGraw-Hill Cos., Inc. (The) 10,798 734,480 ==================================================================== 1,876,109 ==================================================================== RESTAURANTS-2.59% Burger King Holdings Inc.(a) 9,818 207,160 -------------------------------------------------------------------- McDonald's Corp. 9,700 430,001 -------------------------------------------------------------------- Ruth's Chris Steak House, Inc.(a) 18,622 340,410 -------------------------------------------------------------------- Yum! Brands, Inc. 6,659 391,549 ==================================================================== 1,369,120 ==================================================================== SOFT DRINKS-1.05% PepsiCo, Inc. 8,900 556,695 ==================================================================== SPECIALIZED REIT'S-0.48% Felcor Lodging, Inc. 11,565 252,580 ==================================================================== SPECIALTY STORES-1.58% PetSmart, Inc. 28,859 832,871 ==================================================================== Total Domestic Common Stocks and Other Equity Interests (Cost $32,167,509) 41,618,208 ==================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-20.01% BELGIUM-3.87% Compagnie Nationale a Portfeuille (Multi-Sector Holdings)(c) 1,572 101,303 -------------------------------------------------------------------- Groupe Bruxelles Lambert S.A. (Multi-Sector Holdings)(c) 11,084 1,328,345 -------------------------------------------------------------------- InBev N.V. (Brewers)(c) 9,369 617,621 ==================================================================== 2,047,269 ==================================================================== BRAZIL-1.30% Companhia de Bebidas das Americas-ADR (Brewers) 15,666 687,737 ==================================================================== DENMARK-1.29% Carlsberg A.S.-Class B (Brewers)(c) 6,860 679,886 ==================================================================== FRANCE-3.74% Accor S.A. (Hotels, Resorts & Cruise Lines)(c) 13,623 1,055,199 -------------------------------------------------------------------- JC Decaux S.A. (Advertising)(a)(c) 13,923 396,193 -------------------------------------------------------------------- Pernod Ricard S.A. (Distillers & Vintners)(c) 2,300 526,824 ==================================================================== 1,978,216 ====================================================================
SHARES VALUE -------------------------------------------------------------------- HONG KONG-0.16% Television Broadcasts Ltd.-ADR (Broadcasting & Cable TV)(d) 6,976 $ 85,213 ==================================================================== JAPAN-0.34% Sony Corp.-ADR (Consumer Electronics) 4,141 177,359 ==================================================================== NETHERLANDS-1.39% Jetix Europe N.V. (Broadcasting & Cable TV)(a)(c) 29,033 732,042 ==================================================================== SWEDEN-0.04% REZIDOR HOTEL GROUP (Hotels, Resorts & Cruise Lines)(a) 2,734 23,561 ==================================================================== SWITZERLAND-2.12% Compagnie Financiere Richemont A.G.-Class A (Apparel, Accessories & Luxury Goods)(c) 12,214 709,426 -------------------------------------------------------------------- Pargesa Holding S.A. (Multi-Sector Holdings)(c) 3,600 408,992 ==================================================================== 1,118,418 ==================================================================== UNITED KINGDOM-5.76% Diageo PLC (Distillers & Vintners)(c) 50,773 996,759 -------------------------------------------------------------------- InterContinental Hotels Group PLC (Hotels, Resorts & Cruise Lines)(c) 44,000 1,082,990 -------------------------------------------------------------------- WPP Group PLC (Advertising)(c) 71,007 961,851 ==================================================================== 3,041,600 ==================================================================== Total Foreign Stocks & Other Equity Interests (Cost $6,278,109) 10,571,301 ==================================================================== MONEY MARKET FUNDS-0.83% Liquid Assets Portfolio-Institutional Class(e) 220,127 220,127 -------------------------------------------------------------------- Premier Portfolio-Institutional Class 220,127 220,127 ==================================================================== Total Money Market Funds (Cost $440,254) 440,254 ==================================================================== TOTAL INVESTMENTS-99.61% (Cost $38,885,872) 52,629,763 ==================================================================== OTHER ASSETS LESS LIABILITIES-0.39% 203,574 ==================================================================== NET ASSETS-100.00% $52,833,337 ____________________________________________________________________ ====================================================================
Investment Abbreviations: ADR - American Depositary Receipt REIT - Real Estate Investment Trust
Notes to Schedule of Investments: (a) Non-income producing security. (b) Each unit represents one common share and one trust share. (c) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $9,597,431, which represented 18.17% of the Fund's Net Assets. See Note 1A. (d) In accordance with the procedures established by the Board of Trustees, security fair valued based on an evaluated quote provided by an independent pricing service. The value of this security at December 31, 2006 represented 0.16% of the Fund's Net Assets. See Note 1A. (e) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Leisure Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $38,445,618) $52,189,509 ------------------------------------------------------------ Investments in affiliated money market funds (cost $440,254) 440,254 ============================================================ Total investments (cost $38,885,872) 52,629,763 ============================================================ Foreign currencies, at value (cost $193,576) 194,669 ------------------------------------------------------------ Receivables for: Investments sold 243,165 ------------------------------------------------------------ Dividends 73,507 ------------------------------------------------------------ Investment for trustee deferred compensation and retirement plans 8,354 ============================================================ Total assets 53,149,458 ____________________________________________________________ ============================================================ LIABILITIES: Payables for: Investments purchased 235,012 ------------------------------------------------------------ Fund shares reacquired 4,369 ------------------------------------------------------------ Trustee deferred compensation and retirement plans 10,110 ------------------------------------------------------------ Fund expenses advanced 3,857 ------------------------------------------------------------ Accrued administrative services fees 32,329 ------------------------------------------------------------ Accrued distribution fees -- Series II 8 ------------------------------------------------------------ Accrued trustees' and officer's fees and benefits 3,407 ------------------------------------------------------------ Accrued transfer agent fees 86 ------------------------------------------------------------ Accrued operating expenses 26,943 ============================================================ Total liabilities 316,121 ============================================================ Net assets applicable to shares outstanding $52,833,337 ____________________________________________________________ ============================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $36,532,176 ------------------------------------------------------------ Undistributed net investment income (61,783) ------------------------------------------------------------ Undistributed net realized gain from investment securities and foreign currencies 2,617,214 ------------------------------------------------------------ Unrealized appreciation of investment securities and foreign currencies 13,745,730 ============================================================ $52,833,337 ____________________________________________________________ ============================================================ NET ASSETS: Series I $52,819,611 ____________________________________________________________ ============================================================ Series II $ 13,726 ____________________________________________________________ ============================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 3,821,632 ____________________________________________________________ ============================================================ Series II 996 ____________________________________________________________ ============================================================ Series I: Net asset value per share $ 13.82 ____________________________________________________________ ============================================================ Series II: Net asset value per share $ 13.78 ____________________________________________________________ ============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $17,869) $ 752,675 ------------------------------------------------------------ Dividends from affiliated money market funds 51,322 ============================================================ Total investment income 803,997 ============================================================ EXPENSES: Advisory fees 389,712 ------------------------------------------------------------ Administrative services fees 179,720 ------------------------------------------------------------ Custodian fees 18,466 ------------------------------------------------------------ Distribution fees -- Series II 30 ------------------------------------------------------------ Professional services fees 41,996 ------------------------------------------------------------ Transfer agent fees 1,035 ------------------------------------------------------------ Trustees' and officer's fees and benefits 16,431 ------------------------------------------------------------ Other 9,725 ============================================================ Total expenses 657,115 ============================================================ Less: Fees waived and expense offset arrangements (132,394) ============================================================ Net expenses 524,721 ============================================================ Net investment income 279,276 ============================================================ REALIZED AND UNREALIZED GAIN FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain from: Investment securities (includes net gains from securities sold to affiliates of $21,723) 3,634,002 ------------------------------------------------------------ Foreign currencies 6,934 ============================================================ 3,640,936 ============================================================ Change in net unrealized appreciation of: Investment securities 7,346,421 ------------------------------------------------------------ Foreign currencies 2,167 ============================================================ 7,348,588 ============================================================ Net gain from investment securities and foreign currencies 10,989,524 ============================================================ Net increase in net assets resulting from operations $11,268,800 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Leisure Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ---------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 279,276 $ 178,719 ---------------------------------------------------------------------------------------- Net realized gain from investment securities and foreign currencies 3,640,936 2,638,687 ---------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investment securities and foreign currencies 7,348,588 (3,487,830) ======================================================================================== Net increase (decrease) in net assets resulting from operations 11,268,800 (670,424) ======================================================================================== Distributions to shareholders from net investment income: Series I (576,999) (615,299) ---------------------------------------------------------------------------------------- Series II (129) (115) ======================================================================================== Total distributions from net investment income (577,128) (615,414) ======================================================================================== Distributions to shareholders from net realized gains: Series I (2,816,331) (1,042,369) ---------------------------------------------------------------------------------------- Series II (731) (213) ======================================================================================== Total distributions from net realized gains (2,817,062) (1,042,582) ======================================================================================== Decrease in net assets resulting from distributions (3,394,190) (1,657,996) ======================================================================================== Share transactions-net: Series I (9,244,726) 552,129 ---------------------------------------------------------------------------------------- Series II 859 328 ======================================================================================== Net increase (decrease) in net assets resulting from share transactions (9,243,867) 552,457 ======================================================================================== Net increase (decrease) in net assets (1,369,257) (1,775,963) ======================================================================================== NET ASSETS: Beginning of year 54,202,594 55,978,557 ======================================================================================== End of year (including undistributed net investment income of $(61,783) and $(475,257), respectively) $52,833,337 $54,202,594 ________________________________________________________________________________________ ========================================================================================
NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Leisure Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to seek capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). AIM V.I. Leisure Fund Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these AIM V.I. Leisure Fund arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.01% and Series II shares to 1.26% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the only expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $130,401. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. AIM V.I. Leisure Fund The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $129,720 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED REALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND GAIN FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME (LOSS) ------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $ -- $ 3,474,539 $ (3,254,412) $ -- $220,127 $10,272 $ -- ------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class 1,045,340 9,674,004 (10,499,217) -- 220,127 41,050 -- =============================================================================================================================== Total Investments in Affiliates $1,045,340 $13,148,543 $(13,753,629) $ -- $440,254 $51,322 $ -- _______________________________________________________________________________________________________________________________ ===============================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $46,240, which resulted in net realized gains of $21,723, and securities purchases of $162,180. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $1,993. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. AIM V.I. Leisure Fund During the year ended December 31, 2006, the Fund paid legal fees of $3,961 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving line of credit. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $ 808,707 $ 946,660 -------------------------------------------------------------------------------------- Long-term capital gain 2,585,483 711,336 ====================================================================================== Total distributions $3,394,190 $1,657,996 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 --------------------------------------------------------------------------- Undistributed ordinary income $ 973,261 --------------------------------------------------------------------------- Undistributed long-term gain 2,436,973 --------------------------------------------------------------------------- Unrealized appreciation -- investments 12,901,269 --------------------------------------------------------------------------- Temporary book/tax differences (8,533) --------------------------------------------------------------------------- Post-October Currency loss deferral (1,809) --------------------------------------------------------------------------- Shares of beneficial interest 36,532,176 =========================================================================== Total net assets $52,833,337 ___________________________________________________________________________ ===========================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and the treatment of passive foreign investment companies. The tax-basis unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $1,839. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. AIM V.I. Leisure Fund NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $7,154,129 and $18,586,075, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $13,746,813 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (847,383) =============================================================================== Net unrealized appreciation of investment securities $12,899,430 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $39,730,333.
NOTE 10--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions, passive foreign investment companies, and of partnership interests on December 31, 2006, undistributed net investment income was increased by $711,326, undistributed net realized gain was decreased by $710,579 and shares of beneficial interest decreased by $747. This reclassification had no effect on the net assets of the Fund. NOTE 11--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(A) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 95,922 $ 1,166,490 1,039,602 $ 12,511,490 ---------------------------------------------------------------------------------------------------------------------- Series II -- -- -- -- ====================================================================================================================== Issued as reinvestment of dividends: Series I 249,510 3,393,330 139,417 1,657,668 ---------------------------------------------------------------------------------------------------------------------- Series II 63 859 28 328 ====================================================================================================================== Reacquired: Series I (1,093,508) (13,804,546) (1,128,588) (13,617,029) ====================================================================================================================== (748,013) $ (9,243,867) 50,459 $ 552,457 ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There is one entity that is record owner of more than 5% of the outstanding shares of the Fund and it owns 99% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with this entity whereby this entity sells units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to this entity, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by this entity are also owned beneficially. NOTE 12--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Leisure Fund NOTE 13--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I --------------------------------------------------------------- APRIL 30, 2002 (DATE OPERATIONS YEAR ENDED DECEMBER 31, COMMENCED) TO ------------------------------------------- DECEMBER 31, 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 11.86 $ 12.38 $ 10.96 $ 8.52 $ 10.00 ----------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.07 0.04 0.00 (0.00) (0.00)(a) ----------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.83 (0.19) 1.47 2.44 (1.48) ============================================================================================================================= Total from investment operations 2.90 (0.15) 1.47 2.44 (1.48) ============================================================================================================================= Less distributions: Dividends from net investment income (0.16) (0.14) (0.04) -- -- ----------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.78) (0.23) (0.01) -- -- ============================================================================================================================= Total distributions (0.94) (0.37) (0.05) -- -- ============================================================================================================================= Net asset value, end of period $ 13.82 $ 11.86 $ 12.38 $ 10.96 $ 8.52 _____________________________________________________________________________________________________________________________ ============================================================================================================================= Total return(b) 24.61% (1.19)% 13.40% 28.64% (14.80)% _____________________________________________________________________________________________________________________________ ============================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $52,820 $54,192 $55,967 $34,424 $ 6,097 ============================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.01%(c) 1.16% 1.29% 1.26% 1.29%(d) ----------------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.26%(c) 1.31% 1.34% 1.64% 3.96%(d) ============================================================================================================================= Ratio of net investment income (loss) to average net assets 0.54%(c) 0.34% 0.00% (0.14)% (0.30)%(d) _____________________________________________________________________________________________________________________________ ============================================================================================================================= Portfolio turnover rate(e) 14% 32% 15% 22% 15% _____________________________________________________________________________________________________________________________ =============================================================================================================================
(a) The net investment income (loss) per share was calculated after permanent book tax differences, such as net operating losses, were reclassified from accumulated net investment income (loss) to paid in capital. Had net investment income (loss) per share been calculated using the current method, which is before reclassification of net operating losses, net investment income (loss) per share would have been $(0.01) for the period April 30, 2002 (date operations commenced) to December 31, 2002. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $51,949,711. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Leisure Fund NOTE 13--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ------------------------------------ APRIL 30, 2004 (DATE SALES YEAR ENDED COMMENCED) TO DECEMBER 31, DECEMBER 31, ------------------------------------ 2006 2005 2004 -------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 11.84 $12.37 $ 11.09 -------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.04 0.02 (0.02) -------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.82 (0.19) 1.35 ================================================================================================== Total from investment operations 2.86 (0.17) 1.33 ================================================================================================== Less distributions: Dividends from net investment income (0.14) (0.13) (0.04) -------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.78) (0.23) (0.01) ================================================================================================== Total distributions (0.92) (0.36) (0.05) ================================================================================================== Net asset value, end of period $ 13.78 $11.84 $ 12.37 __________________________________________________________________________________________________ ================================================================================================== Total return(a) 24.28% (1.37)% 11.98% __________________________________________________________________________________________________ ================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 14 $ 11 $ 11 __________________________________________________________________________________________________ ================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.26%(b) 1.36% 1.45%(c) -------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.51%(b) 1.56% 1.60%(c) ================================================================================================== Ratio of net investment income (loss) to average net assets 0.29%(b) 0.14% (0.16)%(c) ================================================================================================== Portfolio turnover rate(d) 14% 32% 15% __________________________________________________________________________________________________ ==================================================================================================
(a) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (b) Ratios are based on average daily net assets of $11,911. (c) Annualized. (d) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 14--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor -- Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. AIM V.I. Leisure Fund NOTE 14--LEGAL PROCEEDINGS--(CONTINUED) Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Leisure Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Leisure Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Leisure Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Leisure Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Leisure Fund
NAME, YEAR OF BIRTH AND TRUSTEE AND/ OTHER POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006:
FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $2,585,483 Corporate Dividends Received Deduction* 46.28%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year.
Domestic Equity AIM V.I. MID CAP CORE EQUITY FUND Mid-Cap Blend ANNUAL REPORT TO SHAREHOLDERS - DECEMBER 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC [COVER GLOBE IMAGE] Public Reference Room in Washington, D.C.You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client AIM V.I. MID CAP CORE EQUITY FUND seeks Services department at 800-410-4246 or on the AIM to provide long-term growth of capital. Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AS OF About Us tab, click on Required Notices and then DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ============================================================================ THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ============================================================================ NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. MID CAP CORE EQUITY FUND Business analysis allows us to identify ========================================================================================= key drivers of the company, understand industry challenges and evaluate the PERFORMANCE SUMMARY sustainability of competitive advantages. Financial analysis provides For the year ended December 31, 2006, AIM V.I. Mid Cap Core Equity Fund produced vital insights into historical and positive returns. However, these results lagged the broad market as measured by the S&P potential ROIC, a key indicator of 500 --Registered Trademark-- Index and the style-specific Russell Midcap --Registered business quality and the caliber of Trademark-- Index due to the portfolio's more defensive positioning. The Fund enjoyed management. Both the business and strong results within consumer staples, materials and information technology (IT) financial analyses serve as a basis to sectors. The Fund's cash weighting and an underweight position in financials relative construct valuation models that help us to the style-specific index detracted from returns. estimate a company's value. We use three primary valuation techniques -- Your Fund's long-term performance appears on pages 4 - 5. discounted cash flow, traditional absolute and industry-relative valuation FUND VS. INDEXES multiples and net asset value. Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. If Our risk management strategy includes variable product issuer charges were included, returns would be lower. in-depth fundamental research, as well as diversifying Fund holdings across Series I Shares 11.24% industries and sectors and generally Series II Shares 10.98 limiting the size of individual holdings S&P 500 Index (Broad Market Index) 15.78 to less than 5% of the portfolio. We Russell Midcap Index (Style-Specific Index) 15.26 consider selling a stock when: Lipper Mid-Cap Core Funds Index (Peer Group Index) 13.44 - The value of the stock exceeds our SOURCE: LIPPER INC. best-case appraisal of its worth. ========================================================================================= - We haven't seen, nor do we envision, a HOW WE INVEST invested capital (ROIC) and appreciation demonstrable improvement in potential. The process we use to identify fundamentals. We manage your Fund as a mid-cap core potential investments includes three phases: fund, seeking to deliver solid absolute - More compelling investment investment results as well as downside - Business analysis to determine both the opportunities exist. protection in difficult markets. We attractiveness of an industry and the believe the Fund can serve as cornerstone company's competitive position MARKET CONDITIONS AND YOUR FUND of, or ballast within, a well-diversified portfolio by complementing more - Financial analysis to determine ROIC Fiscal year 2006 proved to be a better style-specific value and growth levels and trends and to understand capital year for investors than most investments. allocation decisions prognosticators had expected. The market's version of the Goldilocks fable We conduct intensive fundamental - Valuation analysis to identify played out as Wall Street eventually research to gain a thorough understanding attractively valued companies came to the conclusion that the economy of a company's business prospects, return is "just right." However, investors on should remember that in this classic children's tale, the bears eventually do come home. ==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector 1. Specialty Chemicals 7.4% 1. Sigma-Aldrich Corp. 3.3% Consumer Discretionary 14.0% 2. Personal Products 5.4 2. Cadbury Schweppes PLC Consumer Staples 13.2 3. Life Sciences Tools & Services 4.7 (United Kingdom) 3.1 Information Technology 13.0 4. Industrial Machinery 4.5 3. International Flavors & Health Care 10.0 5. Application Software 3.5 Fragrances Inc. 3.0 Financials 8.9 4. Estee Lauder Cos. Inc. Materials 8.7 Total Net Assets $637.92 million (The)-Class A 2.9 Industrials 8.6 Total Number of Holdings* 63 5. Service Corp. International 2.6 Energy 5.9 6. Avon Products, Inc. 2.4 Utilities 4.0 7. UGI Corp. 2.1 Telecommunication Services 1.6 8. Henkel KGaA-Pfd. (Germany) 2.1 Money Market Funds Plus 9. Waters Corp. 2.1 Other Assets Less Liabilities 12.1 10. Scripps Co. (E.W.) (The)-Class A 1.9 *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ====================================================================================================================================
2
AIM V.I. MID CAP CORE EQUITY FUND Strong economic data propelled the staples companies tend to be more profitable to the Russell Midcap Index, with a markets early in the year, with in a slower growth economic environment. A greater emphasis on quality, earnings small-cap stocks leading the way. top performer in 2006 was HEINEKEN N.V. We sustainability and valuations to bolster However, several uncertainties persisted originally invested in 2004 based on what we downside protection. Overweight sectors throughout the year. Ben Bernanke was believed to be a unique valuation were consumer staples and materials appointed the new chairman of the U.S. opportunity created by widespread investor relative to the style-specific benchmark, Federal Reserve Board (the Fed); Middle skepticism about the firm's ability to while significant underweight positions East tensions escalated; U.S. increase revenues and profits. Management were in the financials and consumer residential housing markets showed signs gradually gained the respect of investors discretionary sectors. of cooling; and rising energy prices after several beneficial acquisitions drove heightened inflation concerns. As a market share expansion in high-growth IN CLOSING result, the markets contracted midway markets worldwide. These successful capital through the year as investors allocation decisions have proved profitable As core managers, we are committed to anticipated a potential economic for shareholders such as us, who invested adding value with superior risk-adjusted downturn. This downturn in stock prices amid controversy and with a long-term returns and lower overall volatility affected the more economically sensitive perspective. versus more aggressive equity small-caps stocks more than large caps. investments. As always, we thank you for However, small companies led the rally The Fund was overweight in the materials your continued investment in the AIM V.I. that ensued during the second half of sector with holdings such as INTERNATIONAL Mid Cap Core Equity Fund. 2006 and trended positively until FLAVORS & FRAGRANCES (IFF), a specialty year-end. chemicals company that produces flavors and The views and opinions expressed in fragrances for food and perfume management's discussion of Fund With continued strong broad market manufacturers. IFF was a top contributor to performance are those of A I M Advisors, returns, 2006 caps several years of the Fund's results this year. Our 2003 Inc. These views and opinions are subject strong market performance without a investment took advantage of a short-term to change at any time based on factors significant market correction. In four investor focus and uncertainty regarding such as market and economic conditions. out of the last five years, small caps company's research and development These views and opinions may not be (as represented by the Russell 2000 expenditures. IFF began creating value for relied upon as investment advice or --Registered Trademark-- index) have shareholders by prudently reinvesting recommendations, or as an offer for a outperformed large caps (as represented capital, cutting costs and enhancing particular security. The information is by the Russell 1000 --Registered margins. It is now an industry leader with a not a complete analysis of every aspect Trademark-- Index). Telecommunications, dominant market share and high-quality of any market, country, industry, REITs and energy issues were the best business model. security or the Fund. Statements of fact markets, while IT and health care lagged are from sources considered reliable, but the broader index. BRIGGS & STRATTON, an engine manufacturer A I M Advisors, Inc. makes no originally purchased in 2005, was a representation or warranty as to their While the Fund achieved respectable disappointment for the Fund because of its completeness or accuracy. Although double-digit returns, a more defensive lack of growth due to foreign competition. historical performance is no guarantee of positioning and less exposure to The stock detracted from results and was future results, these insights may help economically sensitive companies caused sold in favor of investments in which we you understand our investment management it to lag the Russell Midcap Index. Our have a higher degree of conviction and which philosophy. fundamental research indicated that have better risk/reward profiles. valuations were extended in the more [SLOAN Ronald S. Sloan Chartered speculative and cyclical parts of the The financials sector detracted from the PHOTO] Financial Analyst, senior market. These extended valuations Fund's relative returns in 2006. We believed portfolio manager, is lead reflected an elevated appetite for risk that regional banks in particular exhibited manager of AIM V.I. Mid Cap Core Equity among investors who believe that a a higher risk profile and less upside Fund. Mr. Sloan has been in the Goldilocks scenario of slower, but potential than we require because of investment industry since 1971. He joined stable, growth and stable inflation increased potential for consumer loan AIM in 1998. Mr. Sloan attended the expectations sets the stage for further defaults resulting from recent lenient University of Missouri, where he earned stock market appreciation. lending restrictions. In addition, some both a B.S. in business administration financial firms' valuations are trading well and an M.B.A. Our emphasis on capital preservation above their historical averages. -- which has been and continues to be Assisted by the Mid/Large Cap Core Team one of our consistent objectives as The Fund's cash position also detracted managers of your Fund -- requires us to from overall returns. While we regret this gain an understanding of downside risk. detraction, our long-term investment Irrespective of broad market trends, we perspective and commitment to investing consistently seek companies that display prudently discourage spending cash solely to what we refer to as "core "chase" market performance, which could characteristics" -- sustainable growth create unnecessary risk. prospects, high ROIC, productive capital allocation practices and opportunistic The Fund is positioned more defensively valuations -- that in our view are relative necessary to deliver competitive long-term returns and mitigate downside risk. Attractive valuation, paired with more stable cash-flow generating business models, led to the Fund's overweight position in consumer staples FOR A DISCUSSION OF THE RISKS OF relative to the style-specific benchmark INVESTING IN YOUR FUND, INDEXES USED IN and resulted in higher sector returns. THIS REPORT AND YOUR FUND'S LONG-TERM Our analysis suggests that consumer PERFORMANCE, PLEASE SEE PAGES 4-5.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. MID CAP CORE EQUITY FUND =========================================== AVERAGE ANNUAL TOTAL RETURNS CANNOT GUARANTEE COMPARABLE FUTURE RESULTS; DETERMINED BY THE VARIABLE PRODUCT ------------------------------------------- CURRENT PERFORMANCE MAY LOWER OR HIGHER. ISSUERS, WILL VARY AND WILL LOWER THE As of 12/31/06 PLEASE CONTACT YOUR VARIABLE PRODUCT ISSUER TOTAL RETURN. OR FINANCIAL ADVISOR FOR THE MOST RECENT SERIES I SHARES MONTH-END VARIABLE PRODUCT PERFORMANCE. PER NASD REQUIREMENTS, THE MOST RECENT Inception (9/10/01) 9.97% PERFORMANCE FIGURES REFLECT FUND EXPENSES, MONTH-END PERFORMANCE DATA AT THE FUND 5 Years 9.05 REINVESTED DISTRIBUTIONS AND CHANGES IN NET LEVEL, EXCLUDING VARIABLE PRODUCT 1 Year 11.24 ASSET VALUE. INVESTMENT RETURN AND PRINCIPAL CHARGES, IS AVAILABLE ON THIS AIM VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE A AUTOMATED INFORMATION LINE, 866-702-4402. SERIES II SHARES GAIN OR LOSS WHEN YOU SELL SHARES. AS MENTIONED ABOVE, FOR THE MOST RECENT Inception (9/10/01) 9.71% MONTH-END PERFORMANCE INCLUDING VARIABLE 5 Years 8.81 AIM V.I. MID CAP CORE EQUITY FUND, A PRODUCT CHARGES, PLEASE CONTACT YOUR 1 Year 10.98 SERIES PORTFOLIO OF AIM VARIABLE INSURANCE VARIABLE PRODUCT ISSUER OR FINANCIAL =========================================== FUNDS, IS CURRENTLY OFFERED THROUGH ADVISOR. INSURANCE COMPANIES ISSUING VARIABLE =========================================== PRODUCTS. YOU CANNOT PURCHASE SHARES OF THE CUMULATIVE TOTAL RETURNS FUND DIRECTLY. ------------------------------------------- 6 MONTHS ENDED 12/31/06 PERFORMANCE FIGURES GIVEN REPRESENT THE SERIES I SHARES 9.31% FUND AND ARE NOT INTENDED TO REFLECT ACTUAL SERIES II SHARES 9.21 VARIABLE PRODUCT VALUES. THEY DO NOT REFLECT =========================================== SALES CHARGES, EXPENSES AND FEES ASSESSED IN CONNECTION WITH A VARIABLE PRODUCT. SALES THE PERFORMANCE OF THE FUND'S SERIES I CHARGES, EXPENSES AND FEES, WHICH ARE AND SERIES II SHARE CLASSES WILL DIFFER PRIMARILY DUE TO DIFFERENT CLASS EXPENSES. THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND FUND'S PORTFOLIO MANAGERS WILL PRODUCE THE THE FUND IS NOT MANAGED TO TRACK THE DESIRED RESULTS. PERFORMANCE OF ANY PARTICULAR INDEX, PRICES OF EQUITY SECURITIES CHANGE IN INCLUDING THE INDEXES DEFINED HERE, AND RESPONSE TO MANY FACTORS INCLUDING THE ABOUT INDEXES USED IN THIS REPORT CONSEQUENTLY, THE PERFORMANCE OF THE FUND HISTORICAL AND PROSPECTIVE EARNINGS OF MAY DEVIATE SIGNIFICANTLY FROM THE THE ISSUER, THE VALUE OF ITS ASSETS, THE UNMANAGED STANDARD & POOR'S COMPOSITE PERFORMANCE OF THE INDEX. GENERAL ECONOMIC CONDITIONS, INTEREST INDEX OF 500 STOCKS (THE S&P 500 INDEX) IS RATES, INVESTOR PERCEPTIONS AND MARKET AN INDEX OF COMMON STOCKS FREQUENTLY USED AS A DIRECT INVESTMENT CANNOT BE MADE IN LIQUIDITY. A GENERAL MEASURE OF U.S. STOCK MARKET AN INDEX. UNLESS OTHERWISE INDICATED, PERFORMANCE. INDEX RESULTS INCLUDE REINVESTED FOREIGN SECURITIES HAVE ADDITIONAL DIVIDENDS, AND THEY DO NOT REFLECT SALES RISKS, INCLUDING EXCHANGE RATE CHANGES, THE UNMANAGED RUSSELL MIDCAP INDEX CHARGES. PERFORMANCE OF AN INDEX OF FUNDS POLITICAL AND ECONOMIC UPHEAVAL, THE REPRESENTS THE PERFORMANCE OF THE STOCKS OF REFLECTS FUND EXPENSES; PERFORMANCE OF A RELATIVE LACK OF INFORMATION ABOUT THESE DOMESTIC MID-CAPITALIZATION COMPANIES. THE MARKET INDEX DOES NOT. COMPANIES, RELATIVELY LOW MARKET RUSSELL MIDCAP INDEX IS A TRADEMARK/SERVICE LIQUIDITY AND THE POTENTIAL LACK OF MARK OF THE FRANK RUSSELL COMPANY. RUSSELL OTHER INFORMATION strict financial and accounting controls --Registered Trademark-- is a trademark of and standards. the Frank Russell Company. The returns shown in management's discussion of Fund performance are based To the extent the Fund holds cash or The unmanaged Lipper Mid-Cap Core Funds on net asset values calculated for cash equivalents rather than equity Index represents an average of the shareholder transactions. Generally securities for risk management purposes, performance of the 30 largest accepted accounting principles require the Fund may not achieve its investment mid-capitalization core funds tracked by adjustments to be made to the net assets objective. Lipper Inc., an independent mutual fund of the Fund at period end for financial performance monitor. reporting purposes, and as such, the net If the seller of a repurchase asset values for shareholder transactions agreement in which the Fund invests The unmanaged Russell 1000 Index and the returns based on those net asset defaults on its obligation or declares represents the performance of the stocks of values may differ from the net asset bankruptcy, the Fund may experience large-capitalization companies. values and returns reported in the delays in selling the securities Financial Highlights. Additionally, the underlying the repurchase agreement. The unmanaged Russell 2000 Index returns and net asset values shown represents the performance of the stocks of throughout this report are at the Fund There is no guarantee that the small-capitalization companies. level only and do not include variable investment techniques and risk analyses product issuer charges. If such charges used by the The Russell 1000 Index and the Russell were included, the total returns would be 2000 Index are trademarks/service marks of lower. the Frank Russell Company. Russell --Registered Trademark-- is a trademark of Industry classifications used in this the Frank Russell Company. report are generally according to the Global Industry Classification Standard, In conjunction with the annual prospectus which was developed by and is the update on or about May 1, 2007, the AIM V.I. exclusive property and a service mark of Mid Cap Core Equity Fund prospectus will be Morgan Stanley Capital International Inc. amended to reflect that the Fund has elected and Standard & Poor's. to use the Lipper Variable Underlying Funds (VUF) Mid-Cap Core Funds Index as its peer The Chartered Financial Analyst group rather than the Lipper Mid-Cap Core --Registered Trademark-- (CFA Funds Index. The Lipper VUF Mid-Cap Core --Registered Trademark--) designation is Funds Index, recently published by Lipper a globally recognized standard for Inc., comprises the largest underlying funds measuring the competence and integrity of in each variable insurance category and does investment professionals. not include mortality and expense fees.
4
AIM V.I. MID CAP CORE EQUITY FUND Past performance cannot guarantee value of an investment, is constructed with comparable future results. each segment representing a percent change in the value of the investment. In this This chart, which is a logarithmic chart, each segment represents a doubling, chart, presents the fluctuations in the or 100% change, in the value of the value of the Fund and its indexes. We investment. In other words, the space believe that a logarithmic chart is more between $5,000 and $10,000 is the same size effective than other types of charts in as the space between $10,000 and $20,000, illustrating changes in value during the and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ====================================================================================================================================
5 RESULTS OF A $10,000 INVESTMENT Index data from 8/31/01, Fund data from 9/10/01
[MOUNTAIN CHART] AIM V.I. MID CAP AIM V.I. MID CAP CORE EQUITY FUND-SERIES CORE EQUITY FUND-SERIES DATE I SHARES II SHARES S&P 500 INDEX RUSSELL MIDCAP-INDEX LIPPER MID-CAP CORE FUNDS INDEX ------------------------------------------------------------------------------------------------------------------------------- 8/31/01 $ 10000 $ 10000 $ 10000 09/01 $ 9560 $ 9560 9193 8794 8722 10/01 9920 9920 9368 9142 9158 11/01 10361 10361 10086 9908 9850 12/01 10738 10722 10175 10306 10295 01/02 10728 10722 10026 10245 10177 02/02 10849 10833 9833 10136 10001 03/02 11300 11284 10203 10744 10675 04/02 11150 11133 9584 10536 10499 05/02 11220 11204 9514 10417 10286 06/02 10529 10512 8837 9718 9542 07/02 9577 9561 8148 8770 8575 08/02 9797 9771 8201 8818 8673 09/02 9015 8991 7311 8004 7980 10/02 9356 9341 7954 8409 8355 11/02 9957 9932 8421 8993 8923 12/02 9547 9521 7927 8638 8506 01/03 9316 9291 7720 8464 8338 02/03 9166 9141 7604 8351 8162 03/03 9136 9100 7677 8434 8183 04/03 9687 9661 8309 9046 8800 05/03 10509 10471 8747 9874 9539 06/03 10639 10592 8858 9974 9707 07/03 10950 10902 9015 10303 10007 08/03 11350 11302 9190 10750 10450 09/03 11080 11032 9093 10616 10275 10/03 11561 11513 9607 11426 11029 11/03 11761 11703 9691 11747 11330 12/03 12155 12096 10199 12099 11618 01/04 12397 12329 10387 12450 11932 02/04 12619 12551 10531 12718 12159 03/04 12578 12510 10372 12721 12130 04/04 12649 12580 10209 12254 11748 05/04 12799 12731 10349 12558 11933 06/04 13142 13064 10550 12905 12258 07/04 12609 12529 10201 12341 11634 08/04 12558 12469 10242 12394 11590 09/04 12791 12701 10353 12797 11997 10/04 12993 12903 10511 13150 12194 11/04 13527 13427 10936 13951 12920 12/04 13835 13738 11308 14545 13411 01/05 13561 13465 11033 14185 13060 02/05 14036 13928 11265 14623 13385 03/05 13931 13822 11066 14508 13249 04/05 13488 13369 10856 14046 12743 05/05 13868 13749 11201 14719 13348 06/05 14090 13970 11217 15114 13663 07/05 14744 14613 11634 15911 14296 08/05 14764 14633 11528 15800 14212 09/05 14627 14496 11621 16009 14329 10/05 14184 14053 11427 15528 13958 11/05 14743 14590 11859 16217 14538 12/05 14889 14735 11863 16385 14680 01/06 15545 15389 12177 17227 15435 02/06 15415 15258 12210 17206 15413 03/06 15612 15443 12362 17632 15834 04/06 15732 15563 12528 17756 15995 05/06 15284 15106 12168 17158 15362 06/06 15152 14974 12184 17178 15312 07/06 14945 14778 12259 16802 15020 08/06 15175 14995 12551 17229 15344 09/06 15601 15420 12874 17541 15541 10/06 16049 15856 13293 18232 16110 11/06 16388 16183 13545 18888 16595 12/06 16557 16354 13735 18886 16653 ===============================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. MID CAP CORE EQUITY FUND EXAMPLE ACTUAL EXPENSES Fund's actual return. The Fund's actual cumulative total returns at net asset As a shareholder of the Fund, you incur The table below provides information about value after expenses for the six months ongoing costs, including management actual account values and actual expenses. ended December 31, 2006, appear in the fees; distribution and/or service You may use the information in this table, table "Cumulative Total Returns" on page (12b-1) fees; and other Fund expenses. together with the amount you invested, to 4. This example is intended to help you estimate the expenses that you paid over the understand your ongoing costs (in period. Simply divide your account value by The hypothetical account values and dollars) of investing in the Fund and to $1,000 (for example, an $8,600 account value expenses may not be used to estimate the compare these costs with ongoing costs divided by $1,000 = 8.6), then multiply the actual ending account balance or expenses of investing in other mutual funds. The result by the number in the table under the you paid for the period. You may use this example is based on an investment of heading entitled "Actual Expenses Paid information to compare the ongoing costs $1,000 invested at the beginning of the During Period" to estimate the expenses you of investing in the Fund and other funds. period and held for the entire period paid on your account during this period. To do so, compare this 5% hypothetical July 1, 2006, through December 31, 2006. example with the 5% hypothetical examples HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES that appear in the shareholder reports of The actual and hypothetical expenses the other funds. in the examples below do not represent The table below also provides information the effect of any fees or other expenses about hypothetical account values and Please note that the expenses shown in assessed in connection with a variable hypothetical expenses based on the Fund's the table are meant to highlight your product; if they did, the expenses shown actual expense ratio and an assumed rate of ongoing costs. Therefore, the would be higher while the ending account return of 5% per year before expenses, which hypothetical information is useful in values shown would be lower. is not the comparing ongoing costs, and will not help you determine the relative total costs of owning different funds.
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------------------------ Series I $1,000.00 $1,093.10 $5.49 $1,019.96 $5.30 1.04% Series II 1,000.00 1,092.10 6.80 1,018.70 6.56 1.29 ====================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. MID CAP CORE EQUITY FUND The Board of Trustees of AIM Variable services to be provided by AIM under the other factors that the Board considered Insurance Funds (the "Board") oversees Advisory Agreement was appropriate and that in determining whether to continue the the management of AIM V.I. Mid Cap Core AIM currently is providing services in Advisory Agreement for the Fund, the Equity Fund (the "Fund") and, as accordance with the terms of the Advisory Board concluded that no changes should be required by law, determines annually Agreement. made to the Fund and that it was not whether to approve the continuance of necessary to change the Fund's portfolio the Fund's advisory agreement with A I M - The quality of services to be provided by management team at this time. However, Advisors, Inc. ("AIM"). Based upon the AIM. The Board reviewed the credentials and due to the Fund's under-performance, the recommendation of the Investments experience of the officers and employees of Board also concluded that it would be Committee of the Board, at a meeting AIM who will provide investment advisory appropriate for the Board to continue to held on June 27, 2006, the Board, services to the Fund. In reviewing the closely monitor and review the including all of the independent qualifications of AIM to provide investment performance of the Fund. Although the trustees, approved the continuance of advisory services, the Board considered such independent written evaluation of the the advisory agreement (the "Advisory issues as AIM's portfolio and product review Fund's Senior Officer (discussed below) Agreement") between the Fund and AIM for process, various back office support only considered Fund performance through another year, effective July 1, 2006. functions provided by AIM and AIM's equity the most recent calendar year, the Board and fixed income trading operations. Based also reviewed more recent Fund The Board considered the factors on the review of these and other factors, performance, which did not change their discussed below in evaluating the the Board concluded that the quality of conclusions. fairness and reasonableness of the services to be provided by AIM was Advisory Agreement at the meeting on appropriate and that AIM currently is - Meetings with the Fund's portfolio June 27, 2006 and as part of the Board's providing satisfactory services in managers and investment personnel. With ongoing oversight of the Fund. In their accordance with the terms of the Advisory respect to the Fund, the Board is meeting deliberations, the Board and the Agreement. periodically with such Fund's portfolio independent trustees did not identify managers and/or other investment any particular factor that was - The performance of the Fund relative to personnel and believes that such controlling, and each trustee attributed comparable funds. The Board reviewed the individuals are competent and able to different weights to the various performance of the Fund during the past one continue to carry out their factors. and three calendar years against the responsibilities under the Advisory performance of funds advised by other Agreement. One responsibility of the independent advisors with investment strategies Senior Officer of the Fund is to manage comparable to those of the Fund. The Board - Overall performance of AIM. The Board the process by which the Fund's proposed noted that the Fund's performance in such considered the overall performance of AIM management fees are negotiated to ensure periods was below the median performance of in providing investment advisory and that they are negotiated in a manner such comparable funds. The Board also noted portfolio administrative services to the which is at arms' length and reasonable. that, in response to their request regarding Fund and concluded that such performance To that end, the Senior Officer must the Fund's under-performance, management had was satisfactory. either supervise a competitive bidding agreed to undertake further study to ensure process or prepare an independent that the Fund's investment philosophy is - Fees relative to those of clients of written evaluation. The Senior Officer properly positioned and marketed. Based on AIM with comparable investment has recommended an independent written this review and after taking account of all strategies. The Board reviewed the evaluation in lieu of a competitive of the other factors that the Board effective advisory fee rate (before bidding process and, upon the direction considered in determining whether to waivers) for the Fund under the Advisory of the Board, has prepared such an continue the Advisory Agreement for the Agreement. The Board noted that this rate independent written evaluation. Such Fund, the Board concluded that no changes was (i) below the effective advisory fee written evaluation also considered should be made to the Fund and that it was rates (before waivers) for two mutual certain of the factors discussed below. not necessary to change the Fund's portfolio funds advised by AIM with investment In addition, as discussed below, the management team at this time. However, due strategies comparable to those of the Senior Officer made a recommendation to to the Fund's under-performance, the Board Fund and comparable to the effective the Board in connection with such also concluded that it would be appropriate advisory fee rate (before waivers) for a written evaluation. for the Board to continue to closely monitor third mutual fund advised by AIM with and review the performance of the Fund. investment strategies comparable to those The discussion below serves as a Although the independent written evaluation of the Fund; (ii) comparable to the summary of the Senior Officer's of the Fund's Senior Officer (discussed effective advisory fee rate (before independent written evaluation and below) only considered Fund performance waivers) for a variable insurance fund recommendation to the Board in through the most recent calendar year, the advised by AIM and offered to insurance connection therewith, as well as a Board also reviewed more recent Fund company separate accounts with investment discussion of the material factors and performance, which did not change their strategies comparable to those of the the conclusions with respect thereto conclusions. Fund; (iii) above the effective that formed the basis for the Board's sub-advisory fee rate for one Canadian approval of the Advisory Agreement. - The performance of the Fund relative to mutual fund advised by an AIM affiliate After consideration of all of the indices. The Board reviewed the performance and sub-advised by AIM with investment factors below and based on its informed of the Fund during the past one and three strategies comparable to those of the business judgment, the Board determined calendar years against the performance of Fund, although the total advisory fees that the Advisory Agreement is in the the Lipper Variable Underlying Fund Mid-Cap for such Canadian mutual fund were above best interests of the Fund and its Core Index. The Board noted that the Fund's those for the Fund; (iv) above the shareholders and that the compensation performance in such periods was below the effective sub-advisory fee rates for two to AIM under the Advisory Agreement is performance of such Index. The Board also variable insurance funds sub-advised by fair and reasonable and would have been noted that, in response to their request an AIM affiliate and offered to insurance obtained through arm's length regarding the Fund's under-performance, company separate accounts with investment negotiations. management had agreed to undertake further strategies comparable to those of the study to ensure that the Fund's investment Fund, although the total advisory fees Unless otherwise stated, information philosophy is properly positioned and for such variable insurance funds were presented below is as of June 27, 2006 marketed. Based on this review and after above those for the Fund; and (v) and does not reflect any changes that taking account of all of the comparable to or below the total advisory may have occurred since June 27, 2006, fee rates for six separately managed including but not limited to changes to accounts/wrap accounts managed by an AIM the Fund's performance, advisory fees, affiliate with investment strategies expense limitations and/or fee waivers. comparable to those of the Fund and above the total advisory fee rates for 26 - The nature and extent of the advisory separately services to be provided by AIM. The Board reviewed the services to be provided by AIM under the Advisory Agreement. Based on such review, the Board concluded that the range of
(continued) 7
AIM V.I. MID CAP CORE EQUITY FUND managed accounts/wrap accounts managed realize certain benefits upon investing cash - AIM's financial soundness in light of by an AIM affiliate with investment balances in AIM advised money market funds, the Fund's needs. The Board considered strategies comparable to those of the including a higher net return, increased whether AIM is financially sound and has Fund. The Board noted that AIM has liquidity, increased diversification or the resources necessary to perform its agreed to limit the Fund's total decreased transaction costs. The Board also obligations under the Advisory Agreement, operating expenses, as discussed below. found that the Fund will not receive reduced and concluded that AIM has the financial Based on this review, the Board services if it invests its cash balances in resources necessary to fulfill its concluded that the advisory fee rate for such money market funds. The Board noted obligations under the Advisory Agreement. the Fund under the Advisory Agreement that, to the extent the Fund invests was fair and reasonable. uninvested cash in affiliated money market - Historical relationship between the funds, AIM has voluntarily agreed to waive a Fund and AIM. In determining whether to - Fees relative to those of comparable portion of the advisory fees it receives continue the Advisory Agreement for the funds with other advisors. The Board from the Fund attributable to such Fund, the Board also considered the prior reviewed the advisory fee rate for the investment. The Board further determined relationship between AIM and the Fund, as Fund under the Advisory Agreement. The that the proposed securities lending program well as the Board's knowledge of AIM's Board compared effective contractual and related procedures with respect to the operations, and concluded that it was advisory fee rates at a common asset lending Fund is in the best interests of the beneficial to maintain the current level at the end of the calendar year lending Fund and its respective relationship, in part, because of such and noted that the Fund's rate was shareholders. The Board therefore concluded knowledge. The Board also reviewed the comparable to the median rate of the that the investment of cash collateral general nature of the non-investment funds advised by other advisors with received in connection with the securities advisory services currently performed by investment strategies comparable to lending program in the money market funds AIM and its affiliates, such as those of the Fund that the Board according to the procedures is in the best administrative, transfer agency and reviewed. The Board noted that AIM has interests of the lending Fund and its distribution services, and the fees agreed to limit the Fund's total respective shareholders. received by AIM and its affiliates for operating expenses, as discussed below. performing such services. In addition to Based on this review, the Board - Independent written evaluation and reviewing such services, the trustees concluded that the advisory fee rate for recommendations of the Fund's Senior also considered the organizational the Fund under the Advisory Agreement Officer. The Board noted that, upon their structure employed by AIM and its was fair and reasonable. direction, the Senior Officer of the Fund, affiliates to provide those services. who is independent of AIM and AIM's Based on the review of these and other - Expense limitations and fee waivers. affiliates, had prepared an independent factors, the Board concluded that AIM and The Board noted that AIM has written evaluation in order to assist the its affiliates were qualified to continue contractually agreed to waive fees Board in determining the reasonableness of to provide non-investment advisory and/or limit expenses of the Fund the proposed management fees of the AIM services to the Fund, including through April 30, 2008 in an amount Funds, including the Fund. The Board noted administrative, transfer agency and necessary to limit total annual that the Senior Officer's written evaluation distribution services, and that AIM and operating expenses to a specified had been relied upon by the Board in this its affiliates currently are providing percentage of average daily net assets regard in lieu of a competitive bidding satisfactory non-investment advisory for each class of the Fund. The Board process. In determining whether to continue services. considered the contractual nature of the Advisory Agreement for the Fund, the this fee waiver/expense limitation and Board considered the Senior Officer's - Other factors and current trends. The noted that it remains in effect until written evaluation. Board considered the steps that AIM and April 30, 2008. The Board considered the its affiliates have taken over the last effect this fee waiver/expense - Profitability of AIM and its affiliates. several years, and continue to take, in limitation would have on the Fund's The Board reviewed information concerning order to improve the quality and estimated expenses and concluded that the profitability of AIM's (and its efficiency of the services they provide the levels of fee waivers/expense affiliates') investment advisory and other to the Funds in the areas of investment limitations for the Fund were fair and activities and its financial condition. The performance, product line reasonable. Board considered the overall profitability diversification, distribution, fund of AIM, as well as the profitability of AIM operations, shareholder services and - Breakpoints and economies of scale. in connection with managing the Fund. The compliance. The Board concluded that The Board reviewed the structure of the Board noted that AIM's operations remain these steps taken by AIM have improved, Fund's advisory fee under the Advisory profitable, although increased expenses in and are likely to continue to improve, Agreement, noting that it includes three recent years have reduced AIM's the quality and efficiency of the breakpoints. The Board reviewed the profitability. Based on the review of the services AIM and its affiliates provide level of the Fund's advisory fees, and profitability of AIM's and its affiliates' to the Fund in each of these areas, and noted that such fees, as a percentage of investment advisory and other activities and support the Board's approval of the the Fund's net assets, have decreased as its financial condition, the Board concluded continuance of the Advisory Agreement for net assets increased because the that the compensation to be paid by the Fund the Fund. Advisory Agreement includes breakpoints. to AIM under its Advisory Agreement was not The Board noted that, due to the Fund's excessive. asset levels at the end of the past calendar year and the way in which the - Benefits of soft dollars to AIM. The Board advisory fee breakpoints have been considered the benefits realized by AIM as a structured, the Fund has yet to fully result of brokerage transactions executed benefit from the breakpoints. The Board through "soft dollar" arrangements. Under concluded that the Fund's fee levels these arrangements, brokerage commissions under the Advisory Agreement therefore paid by the Fund and/or other funds advised reflect economies of scale and that it by AIM are used to pay for research and was not necessary to change the advisory execution services. This research may be fee breakpoints in the Fund's advisory used by AIM in making investment decisions fee schedule. for the Fund. The Board concluded that such arrangements were appropriate. - Investments in affiliated money market funds. The Board also took into account the fact that uninvested cash and cash collateral from securities lending arrangements, if any (collectively, "cash balances") of the Fund may be invested in money market funds advised by AIM pursuant to the terms of an SEC exemptive order. The Board found that the Fund may
8 AIM V.I. Mid Cap Core Equity Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ------------------------------------------------------------------------ DOMESTIC COMMON STOCKS-74.37% ADVERTISING-1.63% Omnicom Group Inc. 99,386 $ 10,389,812 ======================================================================== AEROSPACE & DEFENSE-1.06% Goodrich Corp. 148,973 6,785,720 ======================================================================== APPAREL RETAIL-1.39% Gap, Inc. (The) 453,595 8,845,103 ======================================================================== APPLICATION SOFTWARE-1.65% Cadence Design Systems, Inc.(a) 587,846 10,528,322 ======================================================================== BROADCASTING & CABLE TV-1.88% Scripps Co. (E.W.) (The)-Class A 239,848 11,978,009 ======================================================================== COMMUNICATIONS EQUIPMENT-1.85% ADTRAN, Inc. 223,138 5,065,232 ------------------------------------------------------------------------ Juniper Networks, Inc.(a) 230,495 4,365,575 ------------------------------------------------------------------------ Plantronics, Inc. 112,828 2,391,954 ======================================================================== 11,822,761 ======================================================================== COMPUTER & ELECTRONICS RETAIL-1.26% RadioShack Corp. 479,728 8,049,836 ======================================================================== DISTRIBUTORS-1.49% Genuine Parts Co. 200,306 9,500,514 ======================================================================== ELECTRONIC EQUIPMENT MANUFACTURERS-1.41% Mettler-Toledo International Inc.(a) 114,270 9,010,190 ======================================================================== ENVIRONMENTAL & FACILITIES SERVICES-1.61% Republic Services, Inc. 252,160 10,255,347 ======================================================================== FOOD RETAIL-1.55% SUPERVALU Inc. 275,823 9,860,672 ======================================================================== GAS UTILITIES-2.14% UGI Corp. 499,376 13,622,977 ======================================================================== GENERAL MERCHANDISE STORES-0.83% 99 Cents Only Stores(a) 436,820 5,316,099 ======================================================================== HEALTH CARE EQUIPMENT-1.04% Hospira, Inc.(a) 196,825 6,609,384 ======================================================================== HEALTH CARE FACILITIES-1.32% Health Management Associates, Inc.-Class A 399,617 8,435,915 ======================================================================== HOME IMPROVEMENT RETAIL-1.11% Sherwin-Williams Co. (The) 111,290 7,075,818 ======================================================================== INDUSTRIAL MACHINERY-3.77% Dover Corp. 184,901 9,063,847 ------------------------------------------------------------------------ ITT Corp. 72,084 4,095,813 ------------------------------------------------------------------------
SHARES VALUE ------------------------------------------------------------------------
INDUSTRIAL MACHINERY-(CONTINUED) Pall Corp. 226,275 $ 7,817,801 ------------------------------------------------------------------------ Parker Hannifin Corp. 39,629 3,046,678 ======================================================================== 24,024,139 ======================================================================== INSURANCE BROKERS-1.31% Marsh & McLennan Cos., Inc. 272,815 8,364,508 ======================================================================== LIFE SCIENCES TOOLS & SERVICES-4.71% PerkinElmer, Inc. 377,146 8,383,956 ------------------------------------------------------------------------ Techne Corp.(a) 148,011 8,207,210 ------------------------------------------------------------------------ Waters Corp.(a) 275,000 13,466,750 ======================================================================== 30,057,916 ======================================================================== MANAGED HEALTH CARE-1.03% Health Net Inc.(a) 135,673 6,601,848 ======================================================================== MULTI-LINE INSURANCE-1.41% Genworth Financial Inc.-Class A 262,890 8,993,467 ======================================================================== MULTI-UTILITIES-1.85% Wisconsin Energy Corp. 249,292 11,831,398 ======================================================================== OFFICE ELECTRONICS-1.64% Xerox Corp.(a) 619,142 10,494,457 ======================================================================== OFFICE SERVICES & SUPPLIES-1.40% Pitney Bowes Inc. 192,857 8,908,065 ======================================================================== OIL & GAS DRILLING-1.00% Noble Corp. 84,009 6,397,285 ======================================================================== OIL & GAS EQUIPMENT & SERVICES-2.49% FMC Technologies, Inc.(a) 123,947 7,638,854 ------------------------------------------------------------------------ Smith International, Inc. 200,274 8,225,253 ======================================================================== 15,864,107 ======================================================================== OIL & GAS EXPLORATION & PRODUCTION-2.45% Chesapeake Energy Corp. 230,184 6,686,845 ------------------------------------------------------------------------ Pioneer Natural Resources Co. 175,041 6,947,377 ------------------------------------------------------------------------ Whiting Petroleum Corp.(a) 42,553 1,982,970 ======================================================================== 15,617,192 ======================================================================== PAPER PRODUCTS-1.30% MeadWestvaco Corp. 276,335 8,306,630 ======================================================================== PERSONAL PRODUCTS-5.36% Avon Products, Inc. 468,342 15,474,020 ------------------------------------------------------------------------ Estee Lauder Cos. Inc. (The)-Class A 459,060 18,738,829 ======================================================================== 34,212,849 ========================================================================
AIM V.I. Mid Cap Core Equity Fund
SHARES VALUE ------------------------------------------------------------------------ PHARMACEUTICALS-1.89% Forest Laboratories, Inc.(a) 133,029 $ 6,731,267 ------------------------------------------------------------------------ Warner Chilcott Ltd.-Class A(a) 383,363 5,298,077 ======================================================================== 12,029,344 ======================================================================== PROPERTY & CASUALTY INSURANCE-3.06% Axis Capital Holdings Ltd. 282,644 9,431,830 ------------------------------------------------------------------------ XL Capital Ltd.-Class A 139,838 10,071,133 ======================================================================== 19,502,963 ======================================================================== PUBLISHING-1.21% McClatchy Co. (The)-Class A 177,882 7,702,291 ======================================================================== REGIONAL BANKS-1.67% Marshall & Ilsley Corp. 137,717 6,625,565 ------------------------------------------------------------------------ SVB Financial Group(a) 86,212 4,019,203 ======================================================================== 10,644,768 ======================================================================== SEMICONDUCTORS-2.27% Analog Devices, Inc. 229,287 7,536,664 ------------------------------------------------------------------------ Linear Technology Corp. 228,961 6,942,097 ======================================================================== 14,478,761 ======================================================================== SPECIALIZED CONSUMER SERVICES-2.63% Service Corp. International 1,638,795 16,797,649 ======================================================================== SPECIALTY CHEMICALS-7.38% International Flavors & Fragrances Inc. 394,579 19,397,504 ------------------------------------------------------------------------ Rohm and Haas Co. 130,369 6,664,463 ------------------------------------------------------------------------ Sigma-Aldrich Corp. 270,241 21,003,130 ======================================================================== 47,065,097 ======================================================================== SYSTEMS SOFTWARE-1.32% McAfee Inc.(a) 297,708 8,448,953 ======================================================================== Total Domestic Common Stocks (Cost $404,758,047) 474,430,166 ======================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-11.39% BELGIUM-1.45% Groupe Bruxelles Lambert S.A. (Multi-Sector Holdings)(b) 77,096 9,239,451 ========================================================================
SHARES VALUE ------------------------------------------------------------------------
CANADA-1.04% Nortel Networks Corp. (Communications Equipment)(a) 247,749 $ 6,622,331 ======================================================================== FRANCE-1.81% Business Objects S.A.-ADR (Application Software)(a) 292,825 11,551,946 ======================================================================== JAPAN-0.54% Sega Sammy Holdings Inc. (Leisure Products)(b) 127,900 3,453,781 ======================================================================== NETHERLANDS-1.05% Heineken N.V. (Brewers)(b) 141,004 6,700,898 ======================================================================== SOUTH KOREA-1.64% SK Telecom Co., Ltd.-ADR (Wireless Telecommunication Services) 395,728 10,478,877 ======================================================================== SWEDEN-0.72% Atlas Copco A.B.-Class A (Industrial Machinery)(b) 137,200 4,586,439 ======================================================================== UNITED KINGDOM-3.14% Cadbury Schweppes PLC (Packaged Foods & Meats) 1,871,702 20,033,717 ======================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $61,876,147) 72,667,440 ======================================================================== PREFERRED STOCKS-2.13% HOUSEHOLD PRODUCTS-2.13% Henkel KGaA-Pfd. (Germany)(b) 92,286 13,579,339 ======================================================================== Total Preferred Stocks (Cost $11,192,160) 13,579,339 ======================================================================== MONEY MARKET FUNDS-12.06% Liquid Assets Portfolio-Institutional Class(c) 38,447,715 38,447,715 ------------------------------------------------------------------------ Premier Portfolio-Institutional Class(c) 38,447,715 38,447,715 ======================================================================== Total Money Market Funds (Cost $76,895,430) 76,895,430 ======================================================================== TOTAL INVESTMENTS-99.95% (Cost $554,721,784) 637,572,375 ======================================================================== OTHER ASSETS LESS LIABILITIES-0.05% 347,969 ======================================================================== NET ASSETS-100.00% $637,920,344 ________________________________________________________________________ ========================================================================
Investment Abbreviations: ADR - American Depositary Receipt Pfd. - Preferred
Notes to Schedule of Investments: (a) Non-income producing security. (b) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $37,559,908, which represented 5.89% of the Fund's Net Assets. See Note 1A. (c) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Mid Cap Core Equity Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $477,826,354) $560,676,945 ------------------------------------------------------------- Investments in affiliated money market funds (cost $76,895,430) 76,895,430 ============================================================= Total investments (cost $554,721,784) 637,572,375 ============================================================= Foreign currencies, at value (cost $609,453) 610,864 ------------------------------------------------------------- Receivables for: Fund shares sold 309,526 ------------------------------------------------------------- Dividends 924,892 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 18,115 ============================================================= Total assets 639,435,772 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 610,866 ------------------------------------------------------------- Fund shares reacquired 353,144 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 43,179 ------------------------------------------------------------- Accrued administrative services fees 394,461 ------------------------------------------------------------- Accrued distribution fees-Series II 35,342 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 5,053 ------------------------------------------------------------- Accrued transfer agent fees 7,006 ------------------------------------------------------------- Accrued operating expenses 66,377 ============================================================= Total liabilities 1,515,428 ============================================================= Net assets applicable to shares outstanding $637,920,344 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $546,136,284 ------------------------------------------------------------- Undistributed net investment income (91,298) ------------------------------------------------------------- Undistributed net realized gain from investment securities and foreign currencies 9,028,076 ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 82,847,282 ============================================================= $637,920,344 _____________________________________________________________ ============================================================= NET ASSETS: Series I $581,154,484 _____________________________________________________________ ============================================================= Series II $ 56,765,860 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 42,979,445 _____________________________________________________________ ============================================================= Series II 4,228,859 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 13.52 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 13.42 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $55,736) $ 7,653,930 ------------------------------------------------------------ Dividends from affiliated money market funds 4,807,868 ------------------------------------------------------------ Interest 33,509 ============================================================ Total investment income 12,495,307 ============================================================ EXPENSES: Advisory fees 4,575,563 ------------------------------------------------------------ Administrative services fees 1,724,200 ------------------------------------------------------------ Custodian fees 112,394 ------------------------------------------------------------ Distribution fees-Series II 134,968 ------------------------------------------------------------ Transfer agent fees 33,595 ------------------------------------------------------------ Trustees' and officer's fees and benefits 33,476 ------------------------------------------------------------ Other 126,263 ============================================================ Total expenses 6,740,459 ============================================================ Less: Fees waived and expense offset arrangements (36,133) ============================================================ Net expenses 6,704,326 ============================================================ Net investment income 5,790,981 ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES AND OPTION CONTRACTS: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $1,532,225) 53,566,438 ------------------------------------------------------------ Foreign currencies (84,329) ============================================================ 53,482,109 ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities 6,912,886 ------------------------------------------------------------ Foreign currencies (2,992) ------------------------------------------------------------ Option contracts written 425,649 ============================================================ 7,335,543 ============================================================ Net gain from investment securities, foreign currencies and option contracts 60,817,652 ============================================================ Net increase in net assets resulting from operations $66,608,633 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Mid Cap Core Equity Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 5,790,981 $ 2,801,650 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 53,482,109 28,846,914 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation of investment securities, foreign currencies and option contracts 7,335,543 11,957,849 ========================================================================================== Net increase in net assets resulting from operations 66,608,633 43,606,413 ========================================================================================== Distributions to shareholders from net investment income: Series I (5,369,075) (2,944,117) ------------------------------------------------------------------------------------------ Series II (394,014) (141,476) ========================================================================================== Total distributions from net investment income (5,763,089) (3,085,593) ========================================================================================== Distributions to shareholders from net realized gains: Series I (57,207,085) (17,996,436) ------------------------------------------------------------------------------------------ Series II (5,625,901) (1,538,860) ========================================================================================== Total distributions from net realized gains (62,832,986) (19,535,296) ========================================================================================== Decrease in net assets resulting from distributions (68,596,075) (22,620,889) ========================================================================================== Share transactions-net: Series I (2,215,259) 68,779,573 ------------------------------------------------------------------------------------------ Series II 6,883,123 15,373,802 ========================================================================================== Net increase in net assets resulting from share transactions 4,667,864 84,153,375 ========================================================================================== Net increase in net assets 2,680,422 105,138,899 ========================================================================================== NET ASSETS: Beginning of year 635,239,922 530,101,023 ========================================================================================== End of year (including undistributed net investment income of $(91,298) and $(33,549), respectively) $637,920,344 $635,239,922 __________________________________________________________________________________________ ==========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Mid Cap Core Equity Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Mid Cap Core Equity Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Mid Cap Core Equity Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity AIM V.I. Mid Cap Core Equity Fund for profit if the market price of the security increases and the option is exercised. L. PUT OPTIONS PURCHASED -- The Fund may purchase put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the securities hedged. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $500 million 0.725% -------------------------------------------------------------------- Next $500 million 0.70% -------------------------------------------------------------------- Next $500 million 0.675% -------------------------------------------------------------------- Over $1.5 billion 0.65% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $23,981. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $156,233 for accounting and fund administrative services and reimbursed $1,567,967 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase AIM V.I. Mid Cap Core Equity Fund and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ----------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $38,264,645 $162,785,163 $(162,602,093) $ -- $38,447,715 $2,402,248 $ -- ----------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 114,463,963 (76,016,248) -- 38,447,715 1,265,731 -- ----------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 38,264,645 88,387,726 (126,652,371) -- -- 1,139,889 -- =================================================================================================================================== Total Investments in Affiliates $76,529,290 $365,636,852 $(365,270,712) $ -- $76,895,430 $4,807,868 $ -- ___________________________________________________________________________________________________________________________________ ===================================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $11,794,273, which resulted in net realized gains of $1,532,225, and securities purchases of $5,094,046. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $12,152. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $6,038 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. AIM V.I. Mid Cap Core Equity Fund During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ------------------------------------------------------------------------------------ CALL OPTION CONTRACTS ---------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ------------------------------------------------------------------------------------ Beginning of period 6,280 $ 444,230 ------------------------------------------------------------------------------------ Exercised (6,280) (444,230) ==================================================================================== End of period -- $ -- ____________________________________________________________________________________ ====================================================================================
NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $13,589,126 $ 7,276,229 ---------------------------------------------------------------------------------------- Long-term capital gain 55,006,949 15,344,660 ======================================================================================== Total distributions $68,596,075 $22,620,889 ________________________________________________________________________________________ ========================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 1,334,837 ---------------------------------------------------------------------------- Undistributed long-term gain 9,611,254 ---------------------------------------------------------------------------- Net unrealized appreciation -- investments 80,924,586 ---------------------------------------------------------------------------- Temporary book/tax differences (40,480) ---------------------------------------------------------------------------- Post-October currency loss deferral (46,137) ---------------------------------------------------------------------------- Shares of beneficial interest 546,136,284 ============================================================================ Total net assets $637,920,344 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and the recognition for tax purposes of unrealized gains on passive foreign investment companies. The tax-basis net unrealized appreciation (depreciation) on investments amount includes appreciation (depreciation) on foreign currencies of $(3,308). The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. AIM V.I. Mid Cap Core Equity Fund NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $445,695,406 and $504,804,259, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS -------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $83,638,396 -------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (2,710,502) ================================================================================ Net unrealized appreciation of investment securities $80,927,894 ________________________________________________________________________________ ================================================================================ Cost of investments for tax purposes is $556,644,481.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions and distributions reclass, on December 31, 2006, undistributed net investment income was decreased by $85,641 and undistributed net realized gain was increased by $85,641. This reclassification had no effect on the net assets of the Fund. NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(A) 2005 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 1,804,056 $ 25,439,433 9,458,916 $125,305,035 ------------------------------------------------------------------------------------------------------------------------ Series II 962,594 13,444,373 2,245,440 29,655,326 ======================================================================================================================== Issued as reinvestment of dividends: Series I 4,608,241 62,349,500 1,516,110 20,907,159 ------------------------------------------------------------------------------------------------------------------------ Series II 448,244 6,019,915 122,653 1,680,336 ======================================================================================================================== Reacquired: Series I (6,405,942) (90,004,192) (5,875,151) (77,432,621) ------------------------------------------------------------------------------------------------------------------------ Series II (907,250) (12,581,165) (1,212,147) (15,961,860) ======================================================================================================================== 509,943 $ 4,667,864 6,255,821 $ 84,153,375 ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are two entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 77% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, distribution, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these shareholders are also owned beneficially. NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ended December 31, 2007. AIM V.I. Mid Cap Core Equity Fund NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I -------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 13.61 $ 13.11 $ 12.06 $ 9.53 $ 10.72 --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.14 0.06 0.03(a) 0.00(a) (0.02)(a) --------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.39 0.94 1.63 2.60 (1.17) ================================================================================================================================= Total from investment operations 1.53 1.00 1.66 2.60 (1.19) ================================================================================================================================= Less distributions: Dividends from net investment income (0.14) (0.07) (0.02) -- -- --------------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (1.48) (0.43) (0.59) (0.07) -- ================================================================================================================================= Total distributions (1.62) (0.50) (0.61) (0.07) -- ================================================================================================================================= Net asset value, end of period $ 13.52 $ 13.61 $ 13.11 $ 12.06 $ 9.53 _________________________________________________________________________________________________________________________________ ================================================================================================================================= Total return(b) 11.24% 7.62% 13.82% 27.31% (11.10)% _________________________________________________________________________________________________________________________________ ================================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $581,154 $584,860 $496,606 $293,162 $68,271 _________________________________________________________________________________________________________________________________ ================================================================================================================================= Ratio of expenses to average net assets 1.04%(c) 1.03% 1.04% 1.07% 1.30% ================================================================================================================================= Ratio of net investment income (loss) to average net assets 0.93%(c) 0.50% 0.25% 0.01% (0.22)% _________________________________________________________________________________________________________________________________ ================================================================================================================================= Portfolio turnover rate 83% 70% 55% 37% 36% _________________________________________________________________________________________________________________________________ =================================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $581,807,492. AIM V.I. Mid Cap Core Equity Fund NOTE 14--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 13.52 $ 13.04 $ 12.01 $ 9.51 $ 10.71 ----------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) 0.10 0.03 (0.00)(a) (0.03)(a) (0.04)(a) ----------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.38 0.92 1.62 2.60 (1.16) ============================================================================================================================= Total from investment operations 1.48 0.95 1.62 2.57 (1.20) ============================================================================================================================= Less distributions: Dividends from net investment income (0.10) (0.04) (0.00) -- -- ----------------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (1.48) (0.43) (0.59) (0.07) -- ============================================================================================================================= Total distributions (1.58) (0.47) (0.59) (0.07) -- ============================================================================================================================= Net asset value, end of period $ 13.42 $ 13.52 $ 13.04 $ 12.01 $ 9.51 _____________________________________________________________________________________________________________________________ ============================================================================================================================= Total return(b) 10.98% 7.27% 13.57% 27.05% (11.20)% _____________________________________________________________________________________________________________________________ ============================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $56,766 $50,380 $33,495 $ 4,874 $ 1,214 _____________________________________________________________________________________________________________________________ ============================================================================================================================= Ratio of expenses to average net assets 1.29%(c) 1.28% 1.29% 1.32% 1.45%(d) ============================================================================================================================= Ratio of net investment income (loss) to average net assets 0.68%(c) 0.25% (0.00)% (0.24)% (0.37)% _____________________________________________________________________________________________________________________________ ============================================================================================================================= Portfolio turnover rate 83% 70% 55% 37% 36% _____________________________________________________________________________________________________________________________ =============================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $53,987,158. (d) After fee waivers and/or expense reimbursements. Ratio of expenses to average net assets prior to fee waivers and/or expense reimbursements was 1.55% for the year ended December 31, 2002. AIM V.I. Mid Cap Core Equity Fund NOTE 14--FINANCIAL HIGHLIGHTS--(CONTINUED) NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor - Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Mid Cap Core Equity Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Mid Cap Core Equity Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Mid Cap Core Equity Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report, dated February 4, 2005, expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Mid Cap Core Equity Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006:
FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $55,006,949 Corporate Dividends Received Deduction* 53.00%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Mid Cap Core Equity Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1983 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Mid Cap Core Equity Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
FIXED INCOME AIM V.I. MONEY MARKET FUND Cash Equivalents Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can [COVER GLOBE IMAGE] obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is AIM V.I. MONEY MARKET FUND seeks to provide available without charge, upon request, from as high a level of current income as is consistent our Client Services department at with the preservation of capital and liquidity. 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AIMinvestments.com, access the About Us tab, AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ================================================================ THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH [AIM INVESTMENTS LOGO] CONTAIN MORE COMPLETE INFORMATION, INCLUDING SALES CHARGES AND --Registered Trademark-- EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY BEFORE INVESTING. ================================================================ NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. MONEY MARKET FUND MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE YOUR FUND ======================================================================================= Regardless of economic conditions or Fed PERFORMANCE SUMMARY policy, your Fund continues to focus on three objectives: Yields on shares of AIM V.I. Money Market Fund rose during the year ended December 31, 2006. The seven-day SEC yield on the Fund's Series I shares was 3.49% at the - Safety of principal beginning of the year and 4.56% at its close. The yield on the Fund's Series II shares was 3.24% at the start of the year and 4.31% at its close. As of December 31, - Liquidity 2006, the Fund's total net assets stood at $45.91 million and the Fund's weighted average maturity was 26 days. - The highest possible yield consistent ======================================================================================= with safety of principal Your Fund invests only in high quality U.S. dollar denominated MARKET CONDITIONS AND YOUR FUND August meeting, and for the first time short-term fixed-income obligations. in more than two years, the Fed held its Although a money market fund seeks to The U.S. economy expanded throughout federal funds rate steady. In its August maintain the value of your investment at 2006, but the rate of that expansion statement, the Fed said that "economic $1.00 per share, it is possible to lose slowed. According to the U.S. Department growth has moderated from its quite money by investing in the Fund. of Commerce, gross domestic product, the strong pace earlier this year, partly broadest measure of the nation's reflecting a gradual cooling of the Thank you for your continued economic activity, grew at an annualized housing market and the lagged effects of investment in AIM VI. Money Market Fund. rate of 5.6%, 2.6% and 2.0% in the increases in interest rates and energy first, second and third quarter of 2006, prices." THE VIEWS AND OPINIONS EXPRESSED IN respectively. Initial estimates MANAGEMENT'S DISCUSSION OF FUND suggested the U.S. economy expanded at While the Fed said that some inflation PERFORMANCE ARE THOSE OF AIM ADVISORS, an annualized rate of 3.5% in the fourth risks remained, it left this key INC. THESE VIEWS AND OPINIONS ARE SUBJECT quarter of 2006. Early in the year, interest rate unchanged for the TO CHANGE AT ANY TIME BASED ON FACTORS there was concern that robust economic remainder of the year. Together with SUCH AS MARKET AND ECONOMIC CONDITIONS. growth and a continued strong housing positive economic growth and strong THESE VIEWS AND OPINIONS MAY NOT BE market could cause inflation to rise. corporate profits, this sparked a strong RELIED UPON AS INVESTMENT ADVICE OR stock market rally. The S&P 500 Index, RECOMMENDATIONS, OR AS AN OFFER FOR A In response, the U.S. Federal Reserve which represents the performance of the PARTICULAR SECURITY. THE INFORMATION IS Board (the Fed) continued to work broad U.S. stock market, rose 15.78% for NOT A COMPLETE ANALYSIS OF EVERY ASPECT diligently to ensure that inflation the year. The Lehman Brothers U.S. OF ANY MARKET, COUNTRY, INDUSTRY, remained in check. At its Aggregate Bond Index, which represents SECURITY OR THE FUND. STATEMENTS OF FACT monetary policy meeting in late June, the performance of investment-grade ARE FROM SOURCES CONSIDERED RELIABLE, the Fed raised the key federal funds fixed-income investments, rose 4.33% for BUT AIM ADVISORS, INC. MAKES NO target rate to 5.25% -- its 17th the year. REPRESENTATION OR WARRANTY AS TO THEIR consecutive increase. At its COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Team Managed by AIM Advisors, Inc. =========================================== ===================================================================================== PERFORMANCE QUOTED IS PAST PERFORMANCE AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT AND CANNOT GUARANTEE COMPARABLE FUTURE INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO RESULTS; CURRENT PERFORMANCE MAY BE PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE LOWER OR HIGHER. VISIT MONEY BY INVESTING IN THE FUND. AIMINVESTMENTS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE. =========================================== =====================================================================================
2 AIM V.I. MONEY MARKET FUND PER NASD REQUIREMENTS, THE MOST The Fund's yield will vary as RECENT MONTH-END PERFORMANCE DATA AT THE short-term securities in its portfolio =========================================== FUND LEVEL, EXCLUDING VARIABLE PRODUCT mature and the proceeds are reinvested PORTFOLIO COMPOSITION CHARGES, ARE AVAILABLE ON THE AIM in securities with different interest AUTOMATED INFORMATION LINE, rates. Maturity distribution of Fund holdings 866-702-4402. AS MENTIONED ABOVE, FOR In days, as of 12/31/06 THE MOST RECENT MONTH-END PERFORMANCE The risks generally associated with INCLUDING VARIABLE PRODUCT CHARGES, concentrating investments in the banking 1-7 56.7% PLEASE CONTACT YOUR VARIABLE PRODUCT industry, such as interest rate risk, 8-30 13.1 ISSUER OR FINANCIAL ADVISOR. credit risk and regulatory developments 31-90 23.4 relating to the banking and financial 91-120 6.8 THE RETURNS SHOWN IN MANAGEMENT'S services industries; or the risks 121-180 0.0 DISCUSSION OF FUND PERFORMANCE ARE BASED generally associated with the U.S. 181+ 0.0 ON NET ASSET VALUES CALCULATED FOR dollar-denominated foreign investments, SHAREHOLDER TRANSACTIONS. GENERALLY including political and economic The number of days to maturity of each ACCEPTED ACCOUNTING PRINCIPLES REQUIRE upheaval, seizure or nationalization of holding is determined in accordance with ADJUSTMENTS TO BE MADE TO THE NET ASSETS deposits, imposition of taxes or other the provisions of Rule 2a-7 of the OF THE FUND AT PERIOD END FOR FINANCIAL restrictions on the payment of principal Investment Company Act of 1940. REPORTING PURPOSES, AND AS SUCH, THE NET and interest could reduce the Fund's =========================================== ASSET VALUES FOR SHAREHOLDER income and/or share price. TRANSACTIONS AND THE RETURNS BASED ON THOSE NET ASSET VALUES MAY DIFFER FROM ABOUT INDEXES USED IN THIS REPORT THE PERFORMANCE DATA QUOTED REPRESENT THE NET ASSET VALUES AND RETURNS PAST PERFORMANCE AND CANNOT GUARANTEE REPORTED IN THE FINANCIAL HIGHLIGHTS. The unmanaged LEHMAN BROTHERS U.S. COMPARABLE FUTURE RESULTS; CURRENT ADDITIONALLY, THE RETURNS AND NET ASSET AGGREGATE BOND INDEX (the Lehman PERFORMANCE MAY BE LOWER OR HIGHER. VALUES SHOWN THROUGHOUT THIS REPORT ARE Aggregate), which represents the U.S. PLEASE SEE YOUR VARIABLE PRODUCT ISSUER AT THE FUND LEVEL ONLY AND DO NOT investment-grade fixed-rate bond market OR FINANCIAL ADVISOR FOR THE MOST RECENT INCLUDE VARIABLE PRODUCT ISSUER CHARGES. (including government and corporate MONTH-END VARIABLE PRODUCT PERFORMANCE. IF SUCH CHARGES WERE INCLUDED, THE TOTAL securities, mortgage pass-through PERFORMANCE FIGURES REFLECT FUND RETURNS WOULD BE LOWER. securities and asset-backed securities), EXPENSES, REINVESTED DISTRIBUTIONS AND is compiled by Lehman Brothers, a global CHANGES IN NET ASSET VALUE. INVESTMENT PRINCIPAL RISKS OF INVESTING IN THE FUND investment bank. RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE A GAIN OR The Fund may invest in obligations The unmanaged STANDARD & POOR'S LOSS WHEN YOU SELL SHARES. issued by agencies and instrumentalities COMPOSITE INDEX OF 500 STOCKS (the S&P of the U.S. government that may vary in 500 --Registered Trademark-- Index) is an AIM V.I. MONEY MARKET FUND, A SERIES the level of support they receive from index of common stocks frequently used PORTFOLIO OF AIM VARIABLE INSURANCE the U.S government. The U.S. government as a general measure of U.S. stock FUNDS, IS CURRENTLY OFFERED THROUGH may choose not to provide financial market performance. INSURANCE COMPANIES ISSUING VARIABLE support to U.S. government sponsored PRODUCTS. YOU CANNOT PURCHASE SHARES OF agencies or instrumentalities if it is A direct investment cannot be made in THE FUND DIRECTLY. PERFORMANCE FIGURES not legally obligated to do so, in which an index. Unless otherwise indicated, GIVEN REPRESENT THE FUND AND ARE NOT case, if the issuer defaulted, the index results include reinvested INTENDED TO REFLECT ACTUAL VARIABLE underlying fund holding securities of dividends, and they do not reflect sales PRODUCT VALUES. THEY DO NOT REFLECT such issuer might not be able to recover charges. SALES CHARGES, EXPENSES AND FEES its investment from the U.S government. ASSESSED IN CONNECTION WITH A VARIABLE The Fund is not managed to track the PRODUCT. SALES CHARGES, EXPENSES AND If the seller of a repurchase performance of any particular index, FEES, WHICH ARE DETERMINED BY THE agreement in which the Fund invests including the indexes defined here, and VARIABLE PRODUCT ISSUERS, WILL VARY AND defaults on its obligation or declares consequently, the performance of the WILL LOWER THE TOTAL RETURN. bankruptcy, the Fund may experience Fund may deviate significantly from the delays in selling the securities performance of the indexes. underlying the repurchase agreement.
3 AIM V.I. MONEY MARKET FUND CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE ACTUAL EXPENSES The hypothetical account values and expenses may not be used to estimate the As a shareholder of the Fund, you incur The table below provides information actual ending account balance or ongoing costs, including management about actual account values and actual expenses you paid for the period. You fees; distribution and/or service(12b-l) expenses. You may use the information in may use this information to compare the fees; and other Fund expenses. This this table, together with the amount you ongoing costs of investing in the Fund example is intended to help you invested, to estimate the expenses that and other funds. To do so, compare this understand your ongoing costs (in you paid over the period. Simply divide 5% hypothetical example with the 5% dollars) of investing in the Fund and to your account value by $1,000 (for hypothetical examples that appear in the compare these costs with ongoing costs example, an $8,600 account value divided shareholder reports of the other funds. of investing in other mutual funds. The by $1,000 = 8.6), then multiply the example is based on an investment of result by the number in the table under Please note that the expenses shown $1,000 invested at the beginning of the the heading entitled "Actual Expenses in the table are meant to highlight your period and held for the entire period Paid During Period" to estimate the ongoing costs. Therefore, the July 1,2006, through December 31,2006. expenses you paid on your account during hypothetical information is useful in this period. comparing ongoing costs, and will not The actual and hypothetical expenses help you determine the relative total in the examples below do not represent HYPOTHETICAL EXAMPLE FOR COMPARISON costs of owning different funds. the effect of any fees or other expenses PURPOSES assessed in connection with a variable product; if they did, the expenses shown The table below also provides would be higher while the ending account information about hypothetical account values shown would be lower. values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund's actual return.
=================================================================================================================================== ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series 1 $ 1,000.00 $ 1,022.80 $ 4.59 $ 1,020.67 $ 4.58 0.90% Series II 1,000.00 1,021.50 5.86 1,019.41 5.85 1.15 (1) The actual ending account value is based on the actual total return of the Fund for the period July 1,2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ===================================================================================================================================
4 AIM V.I. MONEY MARKET FUND APPROVAL OF INVESTMENT ADVISORY AGREEMENT The Board of Trustees of AIM Variable - The nature and extent of the advisory changes should be made to the Fund and Insurance Funds (the "Board") oversees services to be provided by AIM. The that it was not necessary to change the the management of AIM V.I. Money Market Board reviewed the services to be Fund's portfolio management team at this Fund (the "Fund") and, as required by provided by AIM under the Advisory time. However, due to the Fund's law, determines annually whether to Agreement. Based on such review, the under-performance, the Board also approve the continuance of the Fund's Board concluded that the range of concluded that it would be appropriate advisory agreement with AIM Advisors, services to be provided by AIM under the for the Board to continue to closely Inc. ("AIM"). Based upon the Advisory Agreement was appropriate and monitor and review the performance of recommendation of the Investments that AIM currently is providing services the Fund. Although the independent Committee of the Board, at a meeting in accordance with the terms of the written evaluation of the Fund's Senior held on June 27, 2006, the Board, Advisory Agreement. Officer (discussed below) only including all of the independent considered Fund performance through the trustees, approved the continuance of - The quality of services to be provided most recent calendar year, the Board the advisory agreement (the "Advisory by AIM. The Board reviewed the also reviewed more recent Fund Agreement") between the Fund and AIM for credentials and experience of the performance, which did not change their another year, effective July 1, 2006. officers and employees of AIM who will conclusions. provide investment advisory services to The Board considered the factors the Fund. In reviewing the - Meetings with the Fund's portfolio discussed below in evaluating the qualifications of AIM to provide managers and investment personnel. With fairness and reasonableness of the investment advisory services, the Board respect to the Fund, the Board is Advisory Agreement at the meeting on considered such issues as AIM's meeting periodically with such Fund's June 27, 2006 and as part of the Board's portfolio and product review process, portfolio managers and/or other ongoing oversight of the Fund. In their AIM's legal and compliance function, investment personnel and believes that deliberations, the Board and the AIM's use of technology, AIM's portfolio such individuals are competent and able independent trustees did not identify administration function and the quality to continue to carry out their any particular factor that was of AIM's investment research. Based on responsibilities under the Advisory controlling, and each trustee attributed the review of these and other factors, Agreement. different weights to the various the Board concluded that the quality of factors. services to be provided by AIM was - Overall performance of AIM. The Board appropriate and that AIM currently is considered the overall performance of One responsibility of the independent providing satisfactory services in AIM in providing investment advisory Senior Officer of the Fund is to manage accordance with the terms of the and portfolio administrative services to the process by which the Fund's proposed Advisory Agreement. the Fund and concluded that such management fees are negotiated to ensure performance was satisfactory. that they are negotiated in a manner - The performance of the Fund relative which is at arms' length and reasonable. to comparable funds. The Board reviewed - Fees relative to those of clients of To that end, the Senior Officer must the performance of the Fund during the AIM with comparable investment either supervise a competitive bidding past one, three and five calendar years strategies. The Board reviewed the process or prepare an independent against the performance of funds advised effective advisory fee rate (before written evaluation. The Senior Officer by other advisors with investment waivers) for the Fund under the Advisory has recommended an independent written strategies comparable to those of the Agreement. The Board noted that this evaluation in lieu of a competitive Fund. The Board noted that the Fund's rate was (i) above the effective bidding process and, upon the direction performance in such periods was below advisory fee rate (before waivers) for a of the Board, has prepared such an the median performance of such mutual fund advised by AIM with independent written evaluation. Such comparable funds. Based on this review investment strategies comparable to written evaluation also considered and after taking account of all of the those of the Fund (which mutual fund has certain of the factors discussed below. other factors that the Board considered an "all-in" fee structure whereby AIM In addition, as discussed below, the in determining whether to continue the pays all of the fund's ordinary oper- Senior Officer made a recommendation to Advisory Agreement for the Fund, the ating expenses) and the same as the the Board in connection with such Board concluded that no changes should effective advisory fee rate (before written evaluation. be made to the Fund and that it was not waivers) for a second mutual fund necessary to change the Fund's portfolio advised by AIM with investment The discussion below serves as a management team at this time. However, strategies comparable to those of the summary of the Senior Officer's due to the Fund's under-performance, the Fund; and (ii) above the effective advi- independent written evaluation and Board also concluded that it would be sory and sub-advisory fee rates for one recommendation to the Board in appropriate for the Board to continue to Canadian mutual fund advised by an AIM connection therewith, as well as a closely monitor and review the affiliate and sub-advised by AIM with discussion of the material factors and performance of the Fund. Although the investment strategies comparable to the conclusions with respect thereto independent written evaluation of the those of the Fund. The Board noted that that formed the basis for the Board's Fund's Senior Officer (discussed below) AIM has agreed to limit the Fund's total approval of the Advisory Agreement. only considered Fund performance through operating expenses, as discussed below. After consideration of all of the the most recent calendar year, the Board Based on this review, the Board con- factors below and based on its informed also reviewed more recent Fund cluded that the advisory fee rate for business judgment, the Board determined performance, which did not change their the Fund under the Advisory Agreement that the Advisory Agreement is in the conclusions. was fair and reasonable. best interests of the Fund and its shareholders and that the compensation - The performance of the Fund relative - Fees relative to those of comparable to AIM under the Advisory Agreement is to indices. The Board reviewed the funds with other advisors. The Board fair and reasonable and would have been performance of the Fund during the past reviewed the advisory fee rate for the obtained through arm's length one, three and five calendar years Fund under the Advisory Agreement. The negotiations. against the performance of the Lipper Board compared effective contractual Variable Underlying Fund Money Market advisory fee rates at a common asset Unless otherwise stated, information Index. The Board noted that the Fund's level at the end of the past calendar presented below is as of June 27, 2006 performance in such periods was below year and noted that the Fund's rate was and does not reflect any changes that the performance of such Index. Based on comparable to the median rate of the may have occurred since June 27, 2006, this review and after taking account of funds advised by including but not limited to changes to all of the other factors that the Board the Fund's performance, advisory fees, considered in determining whether to expense limitations and/or fee waivers. continue the Advisory Agreement for the Fund, the Board concluded that no
5 AIM V.I. MONEY MARKET FUND other advisors with investment affiliated money market funds, AIM has - AIM's financial soundness in light of strategies comparable to those of the voluntarily agreed to waive a portion the Fund's needs. The Board considered Fund that the Board reviewed. The Board of the advisory fees it receives from whether AIM is financially sound and noted that AIM has agreed to limit the the Fund attributable to such has the resources necessary to perform Fund's total operating expenses, as investment. The Board further determined its obligations under the Advisory discussed below. Based on this review, that the proposed securities lending Agreement, and concluded that AIM has the Board concluded that the advisory program and related procedures with the financial resources necessary to fee rate for the Fund under the Advisory respect to the lending Fund is in the fulfill its obligations under the Agreement was fair and reasonable. best interests of the lending Fund and Advisory Agreement. its respective shareholders. The Board - Expense limitations and fee waivers. therefore concluded that the investment - Historical relationship between the The Board noted that AIM has of cash collateral received in Fund and AIM. In determining whether to contractually agreed to waive fees connection with the securities lending continue the Advisory Agreement for the and/or limit expenses of the Fund program in the money market funds Fund, the Board also considered the through April 30, 2008 so that total according to the procedures is in the prior relationship between AIM and the annual operating expenses are limited best interests of the lending Fund and Fund, as well as the Board's knowledge to a specified percentage of average its respective shareholders. of AIM's operations, and concluded that daily net assets for each class of the it was beneficial to maintain the cur- Fund. The Board considered the - Independent written evaluation and rent relationship, in part, because of contractual nature of this fee waiver recommendations of the Fund's Senior such knowledge. The Board also reviewed and noted that it remains in effect Officer. The Board noted that, upon the general nature of the non-investment until April 30, 2008. their direction, the Senior Officer of advisory services currently performed by the Fund, who is independent of AIM and AIM and its affiliates, such as The Board considered the effect AIM's affiliates, had prepared an administrative, transfer agency and this fee waiver/expense limitation independent written evaluation in order distribution services, and the fees would have on the Fund's estimated to assist the Board in determining the received by AIM and its affiliates for expenses and concluded that the reasonableness of the proposed performing such services. In addition to levels of fee waivers/expense management fees of the AIM Funds, reviewing such services, the trustees limitations for the Fund were including the Fund. The Board noted that also considered the organizational fair and reasonable. the Senior Officer's written evaluation structure employed by AIM and its had been relied upon by the Board in affiliates to provide those services. - Breakpoints and economies of scale. this regard in lieu of a competitive Based on the review of these and other The Board reviewed the structure of the bidding process. In determining whether factors, the Board concluded that AIM Fund's advisory fee under the Advisory to continue the Advisory Agreement for and its affiliates were qualified to Agreement, noting that it includes one the Fund, the Board considered the continue to provide non-investment breakpoint. The Board reviewed the level Senior Officer's written evaluation. advisory services to the Fund, including of the Fund's advisory fees, and noted administrative, transfer agency and that such fees, as a percentage of the - Profitability of AIM and its distribution services, and that AIM and Fund's net assets, would decrease as net affiliates. The Board reviewed its affiliates currently are providing assets increase because the Advisory information concerning the profitability satisfactory non-investment advisory Agreement includes a breakpoint. The of AIM's (and its affiliates') services. Board noted that, due to the Fund's investment advisory and other activities asset levels at the end of the past and its financial condition. The Board - Other factors and current trends. The calendar year and the way in which the considered the overall profitability of Board considered the steps that AIM and advisory fee breakpoint has been AIM, as well as the profitability of AIM its affiliates have taken over the last structured, the Fund has yet to benefit in connection with managing the Fund. several years, and continue to take, in from the breakpoint. The Board concluded The Board noted that AIM's operations order to improve the quality and that the Fund's fee levels under the remain profitable, although increased efficiency of the services they provide Advisory Agreement therefore would expenses in recent years have reduced to the Funds in the areas of investment reflect economies of scale at higher AIM's profitability. Based on the review performance, product line asset levels and that it was not of the profitability of AIM's and its diversification, distribution, fund necessary to change the advisory fee affiliates' investment advisory and operations, shareholder services and breakpoints in the Fund's advisory fee other activities and its financial compliance. The Board concluded that schedule. condition, the Board concluded that the these steps taken by AIM have improved, compensation to be paid by the Fund to and are likely to continue to improve, - Investments in affiliated money market AIM under its Advisory Agreement was not the quality and efficiency of the servic- funds. The Board also took into account excessive. es AIM and its affiliates provide to the the fact that uninvested cash and cash Fund in each of these areas, and support collateral from securities lending - Benefits of soft dollars to AIM. The the Board's approval of the continuance arrangements, if any (collectively, Board considered the benefits realized of the Advisory Agreement for the Fund. "cash balances") of the Fund may be by AIM as a result of brokerage invested in money market funds advised transactions executed through "soft by AIM pursuant to the terms of an SEC dollar" arrangements. Under these exemptive order. The Board found that arrangements, brokerage commissions paid the Fund may realize certain benefits by other funds advised by AIM are used upon investing cash balances in AIM to pay for research and execution advised money market funds, including a services. This research may be used by higher net return, increased liquidity, AIM in making investment decisions for increased diversification or decreased the Fund. The Board concluded that such transaction costs. The Board also found arrangements were appropriate. that the Fund will not receive reduced services if it invests its cash balances in such money market funds. The Board noted that, to the extent the Fund invests uninvested cash in
6 AIM V.I. Money Market Fund SCHEDULE OF INVESTMENTS December 31, 2006
PRINCIPAL AMOUNT MATURITY (000) VALUE ---------------------------------------------------------------------------------- COMMERCIAL PAPER-45.42%(A) ASSET-BACKED SECURITIES-COMMERCIAL LOANS/LEASES-10.30% Amstel Funding Corp. (Acquired 11/02/06; Cost $1,468,680) 5.22%(b)(c) 03/26/07 $1,500 $ 1,477,040 ---------------------------------------------------------------------------------- (Acquired 11/01/06; Cost $839,210) 5.25%(b)(c) 02/06/07 851 846,656 ---------------------------------------------------------------------------------- Atlantis One Funding Corp. (Acquired 12/21/06; Cost $893,882) 5.32%(b)(c) 02/05/07 900 895,478 ---------------------------------------------------------------------------------- Fountain Square Commercial Funding Corp. (Acquired 10/03/06; Cost $1,488,708) 5.25%(b) 01/30/07 1,515 1,508,814 ================================================================================== 4,727,988 ================================================================================== ASSET-BACKED SECURITIES-FULLY BACKED-10.29% Concord Minutemen Capital Co., LLC- Series A (Multi CEP's-Liberty Hampshire Co., LLC; agent) (Acquired 09/26/06; Cost $975,733) 5.20%(b) 03/13/07 1,000 989,889 ---------------------------------------------------------------------------------- (Acquired 12/04/06; Cost $1,179,027) 5.20%(b) 04/04/07 1,200 1,184,053 ---------------------------------------------------------------------------------- Govco Inc. (Multi CEP's-Government sponsored entities) (Acquired 09/19/06; Cost $974,042) 5.25%(b) 03/16/07 1,000 989,354 ---------------------------------------------------------------------------------- Tulip Funding Corp. (CEP-ABN AMRO Bank N.V.) (Acquired 12/11/06; Cost $1,556,701) 5.31%(b)(c) 01/03/07 1,562 1,561,770 ================================================================================== 4,725,066 ================================================================================== ASSET-BACKED SECURITIES-MULTI-PURPOSE-6.52% CRC Funding LLC (Acquired 12/01/06; Cost $1,984,804) 5.26%(b) 01/22/07 2,000 1,994,156 ---------------------------------------------------------------------------------- Sheffield Receivables Corp. (Acquired 10/06/06; Cost $986,318) 5.24%(b) 01/12/07 1,000 998,545 ================================================================================== 2,992,701 ==================================================================================
PRINCIPAL AMOUNT MATURITY (000) VALUE ----------------------------------------------------------------------------------
ASSET-BACKED SECURITIES-SECURITY INVESTMENT VEHICLES-16.58% Aquifer Funding Ltd./LLC (Acquired 12/07/06; Cost $1,991,445) 5.31%(b) 01/05/07 $2,000 $ 1,999,115 ---------------------------------------------------------------------------------- Beta Finance Corp./Inc. (Acquired 10/20/06; Cost $973,175) 5.22%(b)(c) 04/23/07 1,000 983,905 ---------------------------------------------------------------------------------- Klio II Funding Ltd./Corp. (Acquired 12/13/06; Cost $1,204,944) 5.26%(b) 03/15/07 1,221 1,208,155 ---------------------------------------------------------------------------------- Liberty Harbour CDO Ltd./Inc. (Acquired 12/11/06; Cost $852,310) 5.29%(b) 02/02/07 859 855,087 ---------------------------------------------------------------------------------- Scaldis Capital Ltd./LLC (Acquired 10/13/06; Cost $974,770) 5.22%(b)(c) 04/05/07 1,000 986,515 ---------------------------------------------------------------------------------- (Acquired 12/21/06; Cost $520,578) 5.32%(b)(c) 02/16/07 525 521,509 ---------------------------------------------------------------------------------- Tierra Alta Funding, Ltd./Corp. (Acquired 11/01/06; Cost $1,049,040) 5.27%(b) 01/17/07 1,061 1,058,670 ================================================================================== 7,612,956 ================================================================================== DIVERSIFIED BANKS-1.73% HBOS Treasury Services PLC 5.30%(c) 02/08/07 800 795,642 ================================================================================== Total Commercial Paper (Cost $20,854,353) 20,854,353 ================================================================================== VARIABLE RATE DEMAND NOTES-26.61%(D) INSURED-0.50%(E) Omaha (City of), Nebraska; Special Tax Redevelopment; Series 2002 B, Taxable RB (INS-Ambac Assurance Corp.) 5.40%(f)(g) 02/01/13 230 230,000 ================================================================================== LETTER OF CREDIT ENHANCED-26.11%(H) Albany (City of), New York Industrial Development Agency (Albany Medical Center Hospital); Series 2006 B, Taxable RB (LOC-Citizens Bank of Pennsylvania) 5.35%(f)(g) 05/01/35 1,000 1,000,000 ---------------------------------------------------------------------------------- Albuquerque (City of), New Mexico (KTech Corp. Project); Series 2002, Taxable RB (LOC-Wells Fargo Bank, N.A.) 5.42%(g) 11/01/22 700 700,000 ----------------------------------------------------------------------------------
AIM V.I. Money Market Fund
PRINCIPAL AMOUNT MATURITY (000) VALUE ---------------------------------------------------------------------------------- LETTER OF CREDIT ENHANCED-(CONTINUED) Corp. Finance Managers Inc.; Floating Rate Notes (LOC-Wells Fargo Bank, N.A.) 5.42%(f)(g) 02/02/43 $2,535 $ 2,535,000 ---------------------------------------------------------------------------------- EPC Allentown, LLC; Series 2005, Floating Rate Bonds (LOC-Wachovia Bank, N.A.) 5.35%(f)(g) 07/01/30 3,200 3,200,000 ---------------------------------------------------------------------------------- Lehigh (County of), Pennsylvania Industrial Development Authority (Bouras Industries Project); Series 2002 C, Taxable IDR (LOC-Wachovia Bank, N.A.) 5.35%(f)(g) 11/01/13 595 595,000 ---------------------------------------------------------------------------------- Moon (Township of), Pennsylvania Industrial Development Authority (One Thorn Run Project); Series 1995 B, Taxable IDR (LOC-National City Bank of Pennsylvania) 5.42%(f)(g) 11/01/15 755 755,000 ---------------------------------------------------------------------------------- Roman Catholic Diocese of Charlotte; Series 2002, Floating Rate Bonds (LOC-Wachovia Bank, N.A.) 5.35%(f)(g) 05/01/14 1,200 1,200,000 ---------------------------------------------------------------------------------- Thomasville (City of), Georgia Payroll Development Authority (American Fresh Foods L.P.); Series 2005 B, Taxable RB (LOC-Wachovia Bank, N.A.) 5.40%(f)(g) 09/01/17 2,000 2,000,000 ================================================================================== 11,985,000 ================================================================================== Total Variable Rate Demand Notes (Cost $12,215,000) 12,215,000 ================================================================================== MEDIUM-TERM NOTES-5.88% Metropolitan Life Global Funding I Floating Rate MTN (Acquired 11/10/04; Cost $700,525) 5.45%(b)(g) 12/28/07 700 700,200 ---------------------------------------------------------------------------------- Societe Generale S.A.; Unsec. Floating Rate MTN (Acquired 10/26/05 Cost $2,000,000) 5.34%(b)(c)(g) 01/02/08 2,000 2,000,000 ================================================================================== Total Medium-Term Notes (Cost $2,700,200) 2,700,200 ================================================================================== MASTER NOTE AGREEMENT-4.35% Merrill Lynch Mortgage Capital, Inc. (Acquired 12/06/06; Cost $2,000,000) 5.44%(b)(f)(g)(i) 02/05/07 2,000 2,000,000 ==================================================================================
PRINCIPAL AMOUNT MATURITY (000) VALUE ----------------------------------------------------------------------------------
ASSET-BACKED SECURITIES-4.36% FULLY BACKED-2.18% RACERS Trust; Series 2004-6-MM, Floating Rate Notes (CEP-Lehman Brothers Holdings Inc.) (Acquired 04/13/04; Cost $1,000,000) 5.37%(b)(g) 05/22/07 $1,000 $ 1,000,000 ================================================================================== STRUCTURED-2.18% Permanent Financing PLC; (United Kingdom) Series 9A, Class 1A, Floating Rate Bonds (Acquired 03/15/06; Cost $1,000,000) 5.32%(b)(c)(g) 03/10/07 1,000 1,000,000 ================================================================================== Total Asset-Backed Securities (Cost $2,000,000) 2,000,000 ================================================================================== FUNDING AGREEMENTS-2.18% New York Life Insurance Co. (Acquired 04/05/06; Cost $1,000,000) 5.42%(b)(g)(j) 04/05/07 1,000 1,000,000 ================================================================================== TOTAL INVESTMENTS (excluding Repurchase Agreements)-88.80% (Cost $40,769,553) 40,769,553 __________________________________________________________________________________ ================================================================================== REPURCHASE AMOUNT ---------------------------------------------------------------------------------- REPURCHASE AGREEMENTS-11.58%(K) Citigroup Global Markets Inc., Joint Term agreement dated 12/27/07, aggregate maturing value $1,301,357,590 (collateralized by Corporate obligations valued at $1,365,000,001; 0%-8.00%, 11/15/18-12/20/46) 5.39%, 01/03/07 2,002,090 2,000,000 ---------------------------------------------------------------------------------- Greenwich Capital Markets, Inc., Joint agreement dated 12/29/07, aggregate maturing value $800,472,889 (collateralized by U.S. government obligations valued at $816,000,064; 3.81%-7.60%, 04/01/16-10/01/46) 5.32%, 01/02/07 3,317,234 3,315,274 ================================================================================== Total Repurchase Agreements (Cost $5,315,274) 5,315,274 ================================================================================== TOTAL INVESTMENTS-100.38% (Cost $46,084,827)(l)(m) 46,084,827 ================================================================================== OTHER ASSETS LESS LIABILITIES-(0.38)% (175,131) ================================================================================== NET ASSETS-100.00% $45,909,696 __________________________________________________________________________________ ==================================================================================
AIM V.I. Money Market Fund Investment Abbreviations: CEP - Credit Enhancement Provider IDR - Industrial Development Revenue Bonds LOC - Letter of Credit MTN - Medium-Term Notes RACERS - Restructured Asset Certificates with Enhanced ReturnS(SM) RB - Revenue Bonds INS - Insurer Unsec. - Unsecured
Notes to Schedule of Investments: (a) Security may be traded on a discount basis. The interest rate shown represents the discount rate at the time of purchase by the Fund. (b) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The aggregate value of these securities at December 31, 2006 was $27,758,911, which represented 60.46% of the Fund's Net Assets. Unless otherwise indicated, these securities are not considered to be illiquid. (c) The security is credit guaranteed, enhanced or has credit risk by a foreign entity. The foreign credit exposure to countries other than the United States of America (as a percentage of net assets) is summarized as follows: Netherlands: 10.4%; United Kingdom: 6.1%; other countries less than 5%: 7.6%. (d) Demand security; payable upon demand by the Fund at specified time intervals no greater than thirteen months. (e) Principal and/or interest payments are secured by the bond insurance company listed. (f) In accordance with the procedures established by the Board of Trustees, investments are through participation in joint accounts with other mutual funds, private accounts and certain non-registered investment companies managed by the investment advisor or its affiliates. (g) Interest rate is redetermined periodically. Rate shown is the rate in effect on December 31, 2006. (h) Principal and interest payments are fully enhanced by a letter of credit from the bank listed or a predecessor bank, branch or subsidiary. (i) The Fund may demand prepayment of notes purchased under the Master Note Purchase Agreement upon one or two business day's notice depending upon the timing of the demand. (j) Security considered to be illiquid. The Fund is limited to investing 10% of net assets in illiquid securities at the time of purchase. The value of this security considered illiquid at December 31, 2006 represented 2.18% of the Fund's Net Assets. (k) Principal amount equals value at period end. See Note 1I. (l) Also represents cost for federal income tax purposes. (m) Entities may either issue, guarantee, back or otherwise enhance the credit quality of a security. The entities are not primarily responsible for the issuer's obligation but may be called upon to satisfy issuers obligations.
ENTITIES PERCENTAGE -------------------------------------------------------------------------- Wachovia Bank, N.A. 15.2% -------------------------------------------------------------------------- Wells Fargo Bank, N.A. 7.0 -------------------------------------------------------------------------- Amstel Funding Corp. 5.1 -------------------------------------------------------------------------- Other Entities Less Than 5% 61.0 __________________________________________________________________________ ==========================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Money Market Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, excluding repurchase agreements, at value (cost $40,769,553) $40,769,553 ------------------------------------------------------------ Repurchase agreements (cost $5,315,274) 5,315,274 ============================================================ Total investments (cost $46,084,827) 46,084,827 ============================================================ Interest receivable 99,086 ------------------------------------------------------------ Investment for trustee deferred compensation and retirement plans 52,578 ============================================================ Total assets 46,236,491 ____________________________________________________________ ============================================================ LIABILITIES: Payables for: Fund shares reacquired 208,476 ------------------------------------------------------------ Trustee deferred compensation and retirement plans 59,055 ------------------------------------------------------------ Accrued administrative services fees 25,046 ------------------------------------------------------------ Accrued distribution fees-Series II 1,473 ------------------------------------------------------------ Accrued trustees' and officer's fees and benefits 3,385 ------------------------------------------------------------ Accrued transfer agent fees 724 ------------------------------------------------------------ Accrued operating expenses 28,636 ============================================================ Total liabilities 326,795 ============================================================ Net assets applicable to shares outstanding $45,909,696 ____________________________________________________________ ============================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $45,903,352 ------------------------------------------------------------ Undistributed net investment income 6,344 ============================================================ $45,909,696 ____________________________________________________________ ============================================================ NET ASSETS: Series I $43,568,246 ____________________________________________________________ ============================================================ Series II $ 2,341,450 ____________________________________________________________ ============================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 43,566,934 ____________________________________________________________ ============================================================ Series II 2,341,336 ____________________________________________________________ ============================================================ Series I: Net asset value per share $ 1.00 ____________________________________________________________ ============================================================ Series II: Net asset value per share $ 1.00 ____________________________________________________________ ============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Interest $2,466,025 ____________________________________________________________ ============================================================ EXPENSES: Advisory fees 193,553 ------------------------------------------------------------ Administrative services fees 141,239 ------------------------------------------------------------ Custodian fees 4,368 ------------------------------------------------------------ Distribution fees-Series II 6,227 ------------------------------------------------------------ Transfer agent fees 6,576 ------------------------------------------------------------ Trustees' and officer's fees and benefits 16,324 ------------------------------------------------------------ Professional services fees 54,419 ------------------------------------------------------------ Other 17,798 ============================================================ Total expenses 440,504 ============================================================ Net investment income 2,025,521 ============================================================ Net increase in net assets resulting from operations 2,025,521 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Money Market Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ----------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 2,025,521 $ 1,334,306 ----------------------------------------------------------------------------------------- Distributions to shareholders from net investment income: Series I (1,928,189) (1,235,959) ----------------------------------------------------------------------------------------- Series II (97,332) (98,347) ========================================================================================= Decrease in net assets resulting from distributions (2,025,521) (1,334,306) ========================================================================================= Share transactions-net: Series I (1,354,278) (9,084,618) ----------------------------------------------------------------------------------------- Series II (738,190) (2,996,593) ========================================================================================= Net increase (decrease) in net assets resulting from share transactions (2,092,468) (12,081,211) ========================================================================================= Net increase (decrease) in net assets (2,092,468) (12,081,211) ========================================================================================= NET ASSETS: Beginning of year 48,002,164 60,083,375 ========================================================================================= End of year (including undistributed net investment income of $6,344 and $6,344, respectively) $45,909,696 $ 48,002,164 _________________________________________________________________________________________ =========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Money Market Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Money Market Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to provide as high a level of current income as is consistent with the preservation of capital and liquidity. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- The Fund's securities are recorded on the basis of amortized cost which approximates value as permitted by Rule 2a-7 under the 1940 Act. This method values a security at its cost on the date of purchase and, thereafter, assumes a constant amortization to maturity of any premiums or accretion of any discounts. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income, adjusted for amortization of premiums and accretion of discounts on investments, is recorded on the accrual basis from settlement date. Paydown gains and losses on mortgage and asset-backed securities are recorded as adjustments to interest income. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates realized capital gains and losses to a class based on the relative net assets of each class. The Fund allocates income to a class based on the relative value of the settled shares of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income are declared daily and paid monthly to separate accounts of participating insurance companies. Distributions from net realized gain, if any, are generally paid annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements. Collateral on repurchase agreements, including the Fund's pro-rata interest in joint repurchase agreements, is taken into possession by the Fund upon entering into the repurchase agreement. Eligible securities for collateral are securities consistent with the Fund's investment objectives and may consist of U.S. Government Securities, U.S. Government Agency Securities AIM V.I. Money Market Fund and/or, Investment Grade Debt Securities. Collateral consisting of U.S. Government Securities and U.S. Government Agency Securities is marked to market daily to ensure its market value is at least 102% of the sales price of the repurchase agreement. Collateral consisting of Investment Grade Debt Securities is marked to market daily to ensure its market value is at least 105% of the sales price of the repurchase agreement. The investments in some repurchase agreements, pursuant to procedures approved by the Board of Trustees, are through participation with other mutual funds, private accounts and certain non-registered investment companies managed by the investment advisor or its affiliates ("Joint repurchase agreements"). The principal amount of the repurchase agreement is equal to the value at period-end. If the seller of a repurchase agreement fails to repurchase the security in accordance with the terms of the agreement, the Fund might incur expenses in enforcing its rights, and could experience losses, including a decline in the value of the collateral and loss of income. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM based on the annual rate of the Fund's average daily net assets as follows:
AVERAGE NET ASSETS RATE ------------------------------------------------------------------- First $250 million 0.40% ------------------------------------------------------------------- Over $250 million 0.35% __________________________________________________________________ ===================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) extraordinary items; (iv) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (v) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $91,239 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the AIM V.I. Money Market Fund Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,948 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 4--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceed 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. During the year ended December 31, 2006 the Fund did not borrow or lend under the interfund lending facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with The Bank of New York, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 5--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $2,025,521 $1,334,306 -------------------------------------------------------------------------------------- Long-term capital gain -- -- ====================================================================================== Total distributions $2,025,521 $1,334,306 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 --------------------------------------------------------------------------- Undistributed ordinary income $ 57,564 --------------------------------------------------------------------------- Temporary book/tax differences (51,220) --------------------------------------------------------------------------- Shares of beneficial interest 45,903,352 =========================================================================== Total net assets $45,909,696 ___________________________________________________________________________ ===========================================================================
The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund does not have a capital loss carryforward as of December 31, 2006. AIM V.I. Money Market Fund NOTE 6--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(A) 2005 -------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 29,676,430 $29,676,430 55,383,109 $ 55,383,109 ------------------------------------------------------------------------------------------------------------------------ Series II 808,564 808,564 10,356,640 10,356,640 ======================================================================================================================== Issued as reinvestment of dividends: Series I 1,928,164 1,928,164 1,235,959 1,235,959 ------------------------------------------------------------------------------------------------------------------------ Series II 97,332 97,332 98,347 98,347 ======================================================================================================================== Reacquired: Series I (32,958,863) (32,958,863) (65,703,686) (65,703,686) ------------------------------------------------------------------------------------------------------------------------ Series II (1,644,095) (1,644,095) (13,451,580) (13,451,580) ======================================================================================================================== (2,092,468) $(2,092,468) (12,081,211) $(12,081,211) ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 84% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 7--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. AIM V.I. Money Market Fund NOTE 8--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 --------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.04 0.02 0.01 0.01 0.01 ===================================================================================================================== Less dividends from net investment income (0.04) (0.02) (0.01) (0.01) (0.01) ===================================================================================================================== Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 _____________________________________________________________________________________________________________________ ===================================================================================================================== Total return(a) 4.27% 2.51% 0.69% 0.58% 1.19% _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $43,568 $44,923 $54,008 $77,505 $119,536 _____________________________________________________________________________________________________________________ ===================================================================================================================== Ratio of expenses to average net assets 0.90%(b) 0.82% 0.75% 0.66% 0.67% ===================================================================================================================== Ratio of net investment income to average net assets 4.20%(b) 2.46% 0.67% 0.59% 1.18% _____________________________________________________________________________________________________________________ =====================================================================================================================
(a) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (b) Ratios are based on average daily net assets of $45,897,600.
SERIES II ---------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.04 0.02 0.004 0.003 0.01 ================================================================================================================== Less dividends from net investment income (0.04) (0.02) (0.004) (0.003) (0.01) ================================================================================================================== Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 __________________________________________________________________________________________________________________ ================================================================================================================== Total return(a) 4.01% 2.26% 0.44% 0.33% 0.93% __________________________________________________________________________________________________________________ ================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 2,341 $3,080 $ 6,076 $ 2,382 $7,831 __________________________________________________________________________________________________________________ ================================================================================================================== Ratio of expenses to average net assets 1.15%(b) 1.07% 1.00% 0.91% 0.92% ================================================================================================================== Ratio of net investment income to average net assets 3.95%(b) 2.21% 0.42% 0.34% 0.93% __________________________________________________________________________________________________________________ ==================================================================================================================
(a) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (b) Ratios are based on average daily net assets of $2,490,676. NOTE 9--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. AIM V.I. Money Market Fund NOTE 9--LEGAL PROCEEDINGS--(CONTINUED) PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor - Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Money Market Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Money Market Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Money Market Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report, dated February 4, 2005, expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Money Market Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Corporate Dividends Received Deduction* 0%
* The above percentage is based on ordinary income dividends paid to shareholders during the fund's fiscal year. AIM V.I. Money Market Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Money Market Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment The Bank of New York Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. 2 Hanson Place 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 Brooklyn, NY 11217-1431 Floor 1177 Avenue of the Houston, TX 77210-4739 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. SMALL CAP EQUITY FUND Small Cap Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C.You can [COVER GLOBE IMAGE] obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, AIM V.I. SMALL CAP EQUITY FUND scroll down and click on AIM Funds Proxy Policy. seeks long-term growth of capital. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT Fund from the drop-down menu. The information is IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
AIM V.I. SMALL CAP EQUITY FUND MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE analysis to make sure there are no signs ========================================================================================== of stock deterioration. This also serves as a risk management measure that helps PER FORMANCE SUMMARY us confirm our high conviction candidates. For the year ended December 31, 2006, AIM V.I. Small Cap Equity Fund, excluding variable product issuer charges, produced positive returns and outperformed the broad market, as We consider selling or trimming a measured by the S&P 500 --REGISTERED TRADEMARK-- Index. The Fund performed in line with stock when: the Russell 2000 --REGISTERED TRADEMARK-- Index -- its style-specific benchmark -- as outperformance in some sectors was offset by underperformance in other sectors. - The company's fundamental business prospects deteriorate. Solid stock selection and strong performance by small-cap stocks enabled the Fund to outperform the large-cap oriented S&P 500 Index. - A stock hits its target price. Your Fund's long-term performance appears on pages 4-5. - The company's technical profile deteriorates. FUND VS. INDEXES MARKET CONDITIONS AND YOUR FUND TOTAL RETURNS, 12/31/05 - 12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. Domestic equities posted solid returns in 2006, leaving several major market indexes near multi-year highs. Strong economic growth, favorable corporate Series I Shares 17.44% earnings results and continued benign Series II Shares 17.12 inflation benefited equities, offsetting S&P 500 Index (Broad Market Index) 15.78 high energy prices, a slowing housing Russell 2000 Index (Style-Specific Index) 18.37 market and the U.S. Federal Reserve Lipper Small-Cap Core Funds Index (Peer Group Index) 13.70 Board's (the Fed) tightening campaign. SOURCE: LIPPER INC. ========================================================================================== Although mixed signals from the Fed created some market volatility in HOW WE INVEST STOCK SELECTION: We select stocks May and June, the market began to rally based on an analysis of individual when the Fed left interest rates We focus on small-cap companies with visible companies. Our three-step selection process unchanged at several meetings beginning and long-term growth opportunities, as includes: in August. In addition, the price of demonstrated by consistent and accelerating crude oil and other commodities earnings growth. Our investment philosophy 1. Fundamental analysis. Building stabilized, fostering optimism that a involves: financial models and conducting in-depth hard landing for the U.S. economy could interviews with company management. be avoided. For the year, while PORTFOLIO CONSTRUCTION: We align the small-cap stocks led the market higher, fund with the S&P 600 Index, the benchmark 2. Valuation analysis. Identifying large-and mid-cap stocks also had we believe represents the small-cap-core attractively valued stocks given their double-digit returns. Additionally, asset class. We seek to control risk by growth potential over a one- to two-year value stocks outperformed growth stocks. keeping the Fund's sector weightings in line horizon. Positive performance was broad among with the benchmark by staying fully Russell 2000 Index sectors, with the diversified in all those sectors. 3. Technical analysis. Identifying the best returns found in materials, "timeliness" of a stock purchase. We review telecommunication services and consumer trading volume characteristics and trend staples.
==================================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* ------------------------------------------------------------------------------------------------------------------------------------ By sector 1. Regional Banks 6.0% 1. NTELOS Holdings Corp. 1.4% Financials 18.1% 2. Semiconductors 4.5 2. Energen Corp. 1.3 Information Technology 17.2 3. Property & Casualty Insurance 4.2 3. Pinnacle Entertainment, Inc. 1.3 Industrials 17.0 4. Application Software 3.8 4. DJO Inc. 1.2 Consumer Discretionary 12.0 5. Oil & Gas Equipment & Services 3.6 5. Snap-On Inc. 1.2 Health Care 11.3 Total Net Assets $94.10 million 6. FMC Corp. 1.2 Energy 7.4 7. UAP Holding Corp. 1.2 Materials 6.1 Total Number of Holdings* 117 8. Compass Minerals International, Consumer Staples 4.0 Inc. 1.2 Telecommunication Services 2.0 9. TreeHouse Foods, Inc. 1.2 Utilities 1.9 10. Philadelphia Consolidated Money Market Funds Plus Holding Co. 1.2 Other Assets Less Liabilities 3.0 *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ====================================================================================================================================
2 AIM V.I. SMALL CAP EQUITY FUND The Fund benefited from positive benefit from the worldwide acceleration in The views and opinions expressed in absolute performance in all 10 economic non-residential construction activity. management's discussion of Fund sectors, with the highest positive impact on However, we sold our position in the company performance are those of A I M Advisors, performance coming from holdings in the before the close of the year. One other Inc. These views and opinions are financials, industrials and consumer holding that performed well was subject to change at any time based on discretionary sectors. On a relative basis, PEOPLESUPPORT, a company that provides factors such as market and economic the Fund performed in line with the Russell outsourced customer care through a call conditions. These views and opinions may 2000 Index, as outperformance in several center in the Philippines. The company not be relied upon as investment advice sectors was offset by underperformance in benefited from solid growth in market share or recommendations, or as an offer for a other sectors. as it had a significant cost advantage over particular security. The information is its key competitors. not a complete analysis of every aspect The Fund outperformed the Russell 2000 of any market, country, industry, Index by the widest margin in the financials The Fund underperformed relative to security or the Fund. Statements of fact sector, primarily due to solid stock the Russell 2000 Index by the largest margin are from sources considered reliable, selection. We had particular success with a in the information technology (IT) and but A I M Advisors, Inc. makes no number of bank stocks, including HANCOCK materials sectors. In the IT sector, Fund representation or warranty as to their HOLDINGS, a leading provider of commercial performance was hindered by several software completeness or accuracy. Although and consumer banking services along the Gulf holdings, including BISYS. BISYS was historical performance is no guarantee coasts of Mississippi and Louisiana. This negatively affected when the company of future results, these insights may bank has benefited from strong earnings reported disappointing results and lowered help you understand our investment growth as a result of increased deposits earnings guidance for 2007. Despite the management philosophy. associated with the rebuilding efforts along pullback, we continued to maintain a the Gulf coast. Commercial real estate position in the stock for several reasons, Juliet S. Ellis services provider JONES LANG LASALLE also including its attractive valuation. One Chartered Financial made a significant contribution to Fund other area of weakness was the semiconductor [ELLIS PHOTO] Analyst, senior performance. This company delivered strong industry, where NEXTEST, DSP GROUP and portfolio manager, is results in all business segments, exceeding SEMTECH detracted from performance. However, lead manager of AIM sales and earnings expectations in several some of this underperformance in these two V.I. Small Cap Equity consecutive quarters. Other areas of industries was offset by strong stock Fund. strength included diversified financials and selection in the hardware industry. insurance. Ms. Ellis joined AIM in 2004. She In the materials sector, previously served as senior portfolio The Fund also outperformed the underperformance versus the Russell 2000 manager of two small-cap funds for style-specific index in the consumer Index was due to both stock selection and an another company and was responsible for discretionary sector due to stock selection underweight position in metals and mining the management of more than $2 billion in the specialty retailing industry. Fund stocks. Many of these stocks had strong in assets. Ms. Ellis began her holding GYMBOREE, a children's apparel performance during the reporting period. investment career in 1981 as a financial retailer, was up more than 65% during the consultant. She is a Cum Laude and Phi reporting period, as the company's strategy The most significant changes to Beta Kappa graduate of Indiana to broaden its assortment of merchandise led overall positioning of the Fund included University with a B.A. in economics and to strong sales growth. Other retailing additions in the materials, political science. holdings that made key contributions telecommunication services and consumer included TOO, which we sold, and CACHE. One discretionary sectors and reductions in the Juan R. Hartsfield other key contributor in the sector was Gulf financials and IT sectors. All changes to Chartered Financial coast casino operator PINNACLE ENTERTAINMENT the Fund were based on our bottom-up stock [HARTSFIELD Analyst, portfolio as the company generated strong revenue selection process of identifying high PHOTO] of manager, is growth from a combination of the successful quality growth companies trading at what we manager AIM V.I. opening of a new upscale facility in Lake believe are attractive valuations. Small Cap Equity Charles, LA., and the closing of several Fund. Prior to competing facilities in the area. IN CLOSING joining AIM in 2004, he began his The Fund also benefited from strong Although we are pleased to have provided investment career in 2000 as an equity stock selection in the industrials sector. positive returns for our investors for the analyst and most recently served as a In the capital goods industry, crane year, we are always striving to improve portfolio manager. Mr. Hartsfield earned manufacturer MANITOWOC was the top performance and help you meet your financial a B.S. in petroleum engineering from The contributor to overall Fund performance goals. We thank you for your commitment to University of Texas and his M.B.A. from during the year. The company's significant AIM V.I. Small Cap Equity Fund. the University of Michigan. global presence positioned it to Assisted by the Small Cap Core/Growth Team FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
3 ============================================ YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. SMALL CAP EQUITY FUND AVERAGE ANNUAL TOTAL RETURNS RESULTS; CURRENT PERFORMANCE MAY BE LOWER OR PRODUCT. SALES CHARGES, EXPENSES AND HIGHER. PLEASE CONTACT YOUR VARIABLE PRODUCT FEES, WHICH ARE DETERMINED BY THE As of 12/31/06 ISSUER OR FINANCIAL ADVISOR FOR THE MOST VARIABLE PRODUCT ISSUERS, WILL VARY AND SERIES I SHARES RECENT MONTH-END VARIABLE PRODUCT WILL LOWER THE TOTAL RETURN. Inception (8/29/03) 14.72% PERFORMANCE. PERFORMANCE FIGURES REFLECT 1 Year 17.44 FUND EXPENSES, REINVESTED DISTRIBUTIONS AND PER NASD REQUIREMENTS, THE MOST CHANGES IN NET ASSET VALUE. INVESTMENT RECENT MONTH-END PERFORMANCE DATA AT THE SERIES II SHARES RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO FUND LEVEL, EXCLUDING VARIABLE PRODUCT Inception (8/29/03) 14.50% THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU CHARGES, IS AVAILABLE ON THIS AIM 1 Year 17.12 SELL SHARES. AUTOMATED INFORMATION LINE, ============================================ 866-702-4402. AS MENTIONED ABOVE, FOR AIM V.I. SMALL CAP EQUITY FUND, A THE MOST RECENT MONTH-END PERFORMANCE SERIES PORTFOLIO OF AIM VARIABLE INSURANCE INCLUDING VARIABLE PRODUCT CHARGES, CUMULATIVE TOTAL RETURNS FUNDS, IS CURRENTLY OFFERED THROUGH PLEASE CONTACT YOUR VARIABLE PRODUCT INSURANCE COMPANIES ISSUING VARIABLE ISSUER OR FINANCIAL ADVISOR. 6 months ended 12/31/06 PRODUCTS. YOU CANNOT PURCHASE SHARES OF THE Series I Shares 6.88% FUND DIRECTLY. PERFORMANCE FIGURES GIVEN HAD THE ADVISOR NOT WAIVED FEES Series II Shares 6.78 REPRESENT THE FUND AND ARE NOT INTENDED TO AND/OR REIMBURSED EXPENSES, PERFORMANCE ============================================ REFLECT ACTUAL VARIABLE PRODUCT VALUES. THEY WOULD HAVE BEEN LOWER. DO NOT REFLECT SALES CHARGES, EXPENSES AND THE PERFORMANCE OF THE FUND'S SERIES I AND FEES ASSESSED IN CONNECTION WITH A VARIABLE SERIES II SHARE CLASSES WILL DIFFER PRIMARILY DUE TO DIFFERENT CLASS EXPENSES. THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND CANNOT GUARANTEE COMPARABLE FUTURE ====================================================================================================================================
Principal risks of investing in the Fund Because a large percentage of the Although the Fund's return during Fund's assets may be invested in a limited certain periods was positively impacted Prices of equity securities change in number of securities, a change in the value by its investments in initial public response to many factors including the of those securities could significantly offerings (IPOs), there can be no historical and prospective earnings of the affect the value of your investment in the assurance that the Fund will have issuer, the value of its assets, general Fund. favorable IPO investment opportunities economic conditions, interest rates, in the future. investor perceptions and market liquidity. The Fund invests in synthetic instruments, the value of which may not ABOUT INDEXES USED IN THIS REPORT Investing in a fund that invests in correlate perfectly with the overall smaller companies involves risks not securities markets. Rising interest rates THE UNMANAGED STANDARD & POOR'S associated with investing in more and market price fluctuations will affect COMPOSITE INDEX OF 500 STOCKS (the S&P established companies, such as business the performance of the Fund's investments in 500 Index) is an index of common stocks risk, stock price fluctuations and synthetic instruments. Also, synthetic frequently used as a general measure of illiquidity. instruments are subject to counter party U.S. stock market performance. risk -- the risk that the other party in the Foreign securities have additional transaction will not fulfill its contractual The unmanaged STANDARD & POOR'S RISKS, including exchange rate changes, obligation to complete the transaction with COMPOSITE INDEX OF 600 STOCKS (the S&P political and economic upheaval, the the Fund. 600) is an index of common stocks relative lack of information about these frequently used as a general measure of companies, relatively low market liquidity If the seller of a repurchase the small company segment of the U.S. and the potential lack of strict financial agreement in which the Fund invests defaults stock market. and accounting controls and standards. on its obligation or declares bankruptcy, the Fund may experience delays in selling The unmanaged LIPPER SMALL-CAP The value of convertible securities in the securities underlying the repurchase CORE FUNDS INDEX represents an average which the Fund invests may be affected by agreement. of the performance of the 30 largest market interest rates, the risk that the small-capitalization core funds tracked issuer may default on interest or principal There is no guarantee that the by Lipper Inc., an independent mutual payments and the value of the underlying investment techniques and risk analyses used fund performance monitor. common stock into which these securities by the Fund's portfolio managers will may be converted. produce the desired results. The unmanaged RUSSELL 2000 INDEX represents the performance of the stocks of Continued on page 5
4 ==================================================================================================================================== PAST PERFORMANCE CANNOT GUARANTEE COMPARABLE AIM V.I. SMALL CAP EQUITY FUND FUTURE RESULTS. Continued from page 4 domestic small-capitalization company. The of funds reflects fund expenses; performance (CFA --Registered Trademark--) Russell 2000 Index is a trademark/service of a market index does not. designation is a globally recognized mark of the Frank Russell Company Russell -- standard for measuring the competence Registered Trademark-- is a trademark of the OTHER INFORMATION and integrity of investment Frank Russell Company. professionals. The returns shown in the management's In conjunction with the annual discussion of Fund performance are based on prospectus update on or about May 1, 2007, net asset values calculated for shareholder the AIM V.I Small Cap Equity Fund prospectus transactions. Generally accepted accounting will be amended to reflect that the Fund has principles require adjustments to be made to elected to use the Lipper Variable the net assets of the Fund at period end for Underlying Funds (VUF) Small-Cap Core Funds financial reporting purposes, and as such, Index as its peer group rather than the the net asset value for shareholder Lipper Small-Cap Core Funds Index. The transactions and the returns based on those Lipper VUF Small-Cap Core Funds Index, net asset values may differ from the net recently published by Lipper Inc., comprises asset values and returns reported in the the largest underlying funds in each Financial Highlights. Additionally, the variable insurance category and does not returns and net asset values shown include mortality and expense fees. throughout this report are at the Fund level only and do not include variable product The Fund is not managed to track the issuer charges. If such charges were performance of any particular index, included, the total returns would be lower. including the indexes defined here, and consequently, the performance of the Fund Industry classifications used in this may deviate significantly from the report are generally according to the Global performance of the indexes. Industry Classification Standard, which was developed by and is the exclusive property A direct investment cannot be made in and a service mark of Morgan Stanley Capital an index. Unless otherwise indicated, index International Inc. and Standard & Poor's. results include reinvested dividends, and they do not reflect sales charges. The Chartered Financial Performance of an index Analyst--Registered Trademark--
5
=========================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund data from 8/29/03, index data from 8/31/03 AIM V.I. SMALL CAP EQUITY FUND AIM V.I. SMALL CAP EQUITY FUND LIPPER SMALL-CAP DATE -SERIES I SHARES -SERIES II SHARES S&P 500 INDEX RUSSELL 2000 INDEX CORE FUNDS INDEX ---------------------------------------------------------------------------------------------------------------------------- 8/29/03 $ 10000 $ 10000 8/03 10000 10000 $ 10000 $ 10000 $ 10000 9/03 9830 9830 9894 9815 9783 10/03 10650 10650 10454 10640 10552 11/03 10990 10990 10545 11017 10932 12/03 11393 11387 11098 11241 11236 1/04 11713 11707 11302 11729 11592 2/04 11964 11958 11459 11834 11793 3/04 12074 12068 11286 11945 11921 4/04 11563 11548 11109 11336 11512 5/04 11694 11678 11261 11516 11612 6/04 12034 12018 11480 12001 12107 7/04 11183 11167 11100 11193 11469 8/04 10732 10717 11145 11135 11369 9/04 11163 11137 11265 11658 11934 10/04 11433 11418 11437 11888 12130 11/04 12224 12208 11900 12919 13088 12/04 12465 12439 12305 13301 13299 1/05 12065 12038 12005 12746 12914 2/05 12445 12419 12257 12962 13215 3/05 12185 12158 12041 12591 12883 4/05 11484 11458 11812 11870 12187 5/05 12205 12168 12188 12647 12840 6/05 12506 12469 12205 13135 13278 7/05 13066 13028 12659 13967 14067 8/05 12916 12879 12544 13708 13937 9/05 13105 13069 12645 13751 14070 10/05 12875 12829 12434 13324 13638 11/05 13565 13509 12904 13971 14261 12/05 13475 13429 12909 13907 14304 1/06 14506 14440 13250 15154 15394 2/06 14566 14501 13286 15112 15293 3/06 14976 14901 13452 15845 15966 4/06 15257 15181 13632 15843 16086 5/06 14925 14861 13240 14953 15310 6/06 14806 14730 13258 15049 15206 7/06 14406 14329 13340 14560 14689 8/06 14777 14689 13656 14991 14980 9/06 14917 14829 14008 15115 15050 10/06 15537 15439 14464 15986 15778 11/06 16028 15930 14739 16406 16238 12/06 15817 15719 14946 16461 16264 =========================================================================================================================== SOURCE: LIPPER INC.
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. SMALL CAP EQUITY FUND EXAMPLE ACTUAL EXPENSES not the Fund's actual return. The Fund's As a shareholder of the Fund, you incur The table below provides information about actual Cumulative total return at net ongoing costs, including management fees; actual account values and actual expenses. asset value after expenses for the six distribution and/or service (12b-1) fees; You may use the information in this table, months ended December 31, 2006, appear and other Fund expenses. This example is together with the amount you invested, to in the table "Cumulative Total Returns" intended to help you understand your ongoing estimate the expenses that you paid over the on page 4. costs (in dollars) of investing in the Fund period. Simply divide your account value by and to compare these costs with ongoing $1,000 (for example, an $8,600 account value The hypothetical account values costs of investing in other mutual funds. divided by $1,000 = 8.6), then multiply the and expenses may not be used to estimate The example is based on an investment of result by the number in the table under the the actual ending account balance or $1,000 invested at the beginning of the heading entitled "Actual Expenses Paid expenses you paid for the period. You period and held for the entire period July During Period" to estimate the expenses you may use this information to compare the 1, 2006, through December 31, 2006. paid on your account during this period. ongoing costs of investing in the Fund and other funds. To do so, compare this The actual and hypothetical expenses Hypothetical example for comparison purposes 5% hypothetical example with the 5% in the examples below do not represent the hypothetical examples that appear in the effect of any fees or other expenses The table below also provides information shareholder reports of the other funds. assessed in connection with a variable about hypothetical account values and product; if they did, the expenses shown hypothetical expenses based on the Fund's Please note that the expenses would be higher while the ending account actual expense ratio and an assumed rate of shown in the table are meant to values shown would be lower. return of 5% per year before expenses, which highlight your ongoing costs. Therefore, is the hypothetical information is useful in comparing ongoing costs, and will not help you determine the relative total costs of owning different funds. ====================================================================================================================================
HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ----------------------------------------------------------------------------------------------------- Series I $ 1,000.00 $ 1,068.80 $ 6.00 $ 1,019.41 $ 5.85 1.15% Series II 1,000.00 1,067.80 7.30 1,018.15 7.12 1.40 =====================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6 APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. SMALL CAP EQUITY FUND The Board of Trustees of AIM Variable provided by AIM under the Advisory Board also reviewed more recent Fund Insurance Funds (the "Board") oversees the Agreement. Based on such review, the Board performance, which did not change their management of AIM V.I. Small Cap Equity Fund concluded that the range of services to be conclusions. (the "Fund") and, as required by law, provided by AIM under the Advisory Agreement determines annually whether to approve the was appropriate and that AIM currently is - Meetings with the Fund's portfolio continuance of the Fund's advisory agreement providing services in accordance with the managers and investment personnel. With with A I M Advisors, Inc. ("AIM"). Based terms of the Advisory Agreement. respect to the Fund, the Board is upon the recommendation of the Investments meeting periodically with such Fund's Committee of the Board, at a meeting held on - The quality of services to be provided by portfolio managers and/or other June 27, 2006, the Board, including all of AIM. The Board reviewed the credentials and investment personnel and believes that the independent trustees, approved the experience of the officers and employees of such individuals are competent and able continuance of the advisory agreement (the AIM who will provide investment advisory to continue to carry out their "Advisory Agreement") between the Fund and services to the Fund. In reviewing the responsibilities under the Advisory AIM for another year, effective July 1, qualifications of AIM to provide investment Agreement. 2006. advisory services, the Board considered such issues as AIM's portfolio and product review - Overall performance of AIM. The Board The Board considered the factors process, various back office support considered the overall performance of discussed below in evaluating the fairness functions provided by AIM and AIM's equity AIM in providing investment advisory and and reasonableness of the Advisory Agreement and fixed income trading operations. Based portfolio administrative services to the at the meeting on June 27, 2006 and as part on the review of these and other factors, Fund and concluded that such performance of the Board's ongoing oversight of the the Board concluded that the quality of was satisfactory. Fund. In their deliberations, the Board and services to be provided by AIM was the independent trustees did not identify appropriate and that AIM currently is - Fees relative to those of clients of any particular factor that was controlling, providing satisfactory services in AIM with comparable investment and each trustee attributed different accordance with the terms of the Advisory strategies. The Board reviewed the weights to the various factors. Agreement. effective advisory fee rate (before waivers) for the Fund under the Advisory One responsibility of the independent Agreement. The Board noted that this Senior Officer of the Fund is to manage the - The performance of the Fund relative to rate was (i) the same as the effective process by which the Fund's proposed comparable funds. The Board reviewed the advisory fee rates (before waivers) for management fees are negotiated to ensure performance of the Fund during the past two mutual funds advised by AIM with that they are negotiated in a manner which calendar year against the performance of investment strategies comparable to is at arms' length and reasonable. To that funds advised by other advisors with those of the Fund and below the end, the Senior Officer must either investment strategies comparable to those of effective advisory fee rate (before supervise a competitive bidding process or the Fund. The Board noted that the Fund's waivers) for a third mutual fund advised prepare an independent written evaluation. performance was above the median performance by AIM with investment strategies The Senior Officer has recommended an of such comparable funds for the one year comparable to those of the Fund; and independent written evaluation in lieu of a period. Based on this review and after (ii) above the effective sub-advisory competitive bidding process and, upon the taking account of all of the other factors fee rate for one Canadian mutual fund direction of the Board, has prepared such an that the Board considered in determining sub-advised by an AIM affiliate with independent written evaluation. Such written whether to continue the Advisory Agreement investment strategies comparable to evaluation also considered certain of the for the Fund, the Board concluded that no those of the Fund. The Board noted that factors discussed below. In addition, as changes should be made to the Fund and that AIM has agreed to waive advisory fees of discussed below, the Senior Officer made a it was not necessary to change the Fund's the Fund and to limit the Fund's total recommendation to the Board in connection portfolio management team at this time. operating expenses, as discussed below. with such written evaluation. Although the independent written evaluation Based on this review, the Board of the Fund's Senior Officer (discussed concluded that the advisory fee rate for The discussion below serves as a below) only considered Fund performance the Fund under the Advisory Agreement summary of the Senior Officer's independent through the most recent calendar year, the was fair and reasonable. written evaluation and recommendation to the Board also reviewed more recent Fund Board in connection therewith, as well as a performance, which did not change their - Fees relative to those of comparable discussion of the material factors and the conclusions. funds with other advisors. The Board conclusions with respect thereto that formed reviewed the advisory fee rate for the the basis for the Board's approval of the - The performance of the Fund relative to Fund under the Advisory Agreement. The Advisory Agreement. After consideration of indices. The Board reviewed the performance Board compared effective contractual all of the factors below and based on its of the Fund during the past calendar year advisory fee rates at a common asset informed business judgment, the Board against the performance of the Lipper level at the end of the past calendar determined that the Advisory Agreement is in Variable Underlying Fund Small-Cap Core year and noted that the Fund's rate was the best interests of the Fund and its Index. The Board noted that the Fund's comparable to the median rate of the shareholders and that the compensation to performance was above the performance of funds advised by other advisors with AIM under the Advisory Agreement is fair and such Index for the one year period. Based on investment strategies comparable to reasonable and would have been obtained this review and after taking account of all those of the Fund that the Board through arm's length negotiations. of the other factors that the Board reviewed. The Board noted that AIM has considered in determining whether to agreed to waive advisory fees of the Unless otherwise stated, information continue the Advisory Agreement for the Fund and to limit the Fund's total presented below is as of June 27, 2006 and Fund, the Board concluded that no changes operating expenses, as discussed below. does not reflect any changes that may have should be made to the Fund and that it was Based on this review, the Board occurred since June 27, 2006, including but not necessary to change the Fund's portfolio concluded that the advisory fee rate for not limited to changes to the Fund's management team at this time. Although the the Fund under the Advisory Agreement performance, advisory fees, expense independent written evaluation of the Fund's was fair and reasonable. limitations and/or fee waivers. Senior Officer (discussed below) only considered Fund performance through the most - Expense limitations and fee waivers. - The nature and extent of the advisory recent calendar year, the The Board noted that AIM has services to be provided by AIM. The Board contractually agreed to waive advisory reviewed the services to be fees of the Fund through April 30, 2008 to the extent necessary so that the advisory fees payable by the Fund do not exceed a specified maximum advisory fee rate, which maximum rate includes breakpoints and is based on net asset levels. The Board considered the contractual nature of this fee waiver and noted
7 AIM V.I. SMALL CAP EQUITY FUND that it remains in effect until April 30, portion of the advisory fees it receives - AIM's financial soundness in light of 2008. The Board noted that AIM has from the Fund attributable to such the Fund's needs. The Board considered contractually agreed to waive fees and/or investment. The Board further determined whether AIM is financially sound and has limit expenses of the Fund through April 30, that the proposed securities lending program the resources necessary to perform its 2008 in an amount necessary to limit total and related procedures with respect to the obligations under the Advisory annual operating expenses to a specified lending Fund is in the best interests of the Agreement, and concluded that AIM has percentage of average daily net assets for lending Fund and its respective the financial resources necessary to each class of the Fund. The Board considered shareholders. The Board therefore concluded fulfill its obligations under the the contractual nature of this fee that the investment of cash collateral Advisory Agreement. waiver/expense limitation and noted that it received in connection with the securities remains in effect until April 30, 2008. The lending program in the money market funds - Historical relationship between the Board considered the effect these fee according to the procedures is in the best Fund and AIM. In determining whether to waivers/expense limitations would have on interests of the lending Fund and its continue the Advisory Agreement for the the Fund's estimated expenses and concluded respective shareholders. Fund, the Board also considered the that the levels of fee waivers/expense prior relationship between AIM and the limitations for the Fund were fair and - Independent written evaluation and Fund, as well as the Board's knowledge reasonable. recommendations of the Fund's Senior of AIM's operations, and concluded that Officer. The Board noted that, upon their it was beneficial to maintain the - Breakpoints and economies of scale. The direction, the Senior Officer of the Fund, current relationship, in part, because Board reviewed the structure of the Fund's who is independent of AIM and AIM's of such knowledge. The Board also advisory fee under the Advisory Agreement, affiliates, had prepared an independent reviewed the general nature of the noting that it does not include any written evaluation in order to assist the non-investment advisory services breakpoints. The Board considered whether it Board in determining the reasonableness of currently performed by AIM and its would be appropriate to add advisory fee the proposed management fees of the AIM affiliates, such as administrative, breakpoints for the Fund or whether, due to Funds, including the Fund. The Board noted transfer agency and distribution the nature of the Fund and the advisory fee that the Senior Officer's written evaluation services, and the fees received by AIM structures of comparable funds, it was had been relied upon by the Board in this and its affiliates for performing such reasonable to structure the advisory fee regard in lieu of a competitive bidding services. In addition to reviewing such without breakpoints. Based on this review, process. In determining whether to continue services, the trustees also considered the Board concluded that it was not the Advisory Agreement for the Fund, the the organizational structure employed by necessary to add advisory fee breakpoints to Board considered the Senior Officer's AIM and its affiliates to provide those the Fund's advisory fee schedule. The Board written evaluation and the recommendation services. Based on the review of these reviewed the level of the Fund's advisory made by the Senior Officer to the Board that and other factors, the Board concluded fees, and noted that such fees, as a the Board consider whether the advisory fee that AIM and its affiliates were percentage of the Fund's net assets, would waivers for certain equity AIM Funds, qualified to continue to provide remain constant under the Advisory Agreement including the Fund should be simplified. The non-investment advisory services to the because the Advisory Agreement does not Board concluded that it would be advisable Fund, including administrative, transfer include any breakpoints. The Board noted to consider this issue and reach a decision agency and distribution services, and that AIM has contractually agreed to waive prior to the expiration date of such that AIM and its affiliates currently advisory fees of the Fund through April 30, advisory fee waivers. are providing satisfactory 2008 to the extent necessary so that the non-investment advisory services. advisory fees payable by the Fund do not - Profitability of AIM and its affiliates. exceed a specified maximum advisory fee The Board reviewed information concerning - Other factors and current trends. The rate, which maximum rate includes the profitability of AIM's (and its Board considered the steps that AIM and breakpoints and is based on net asset affiliates') investment advisory and other its affiliates have taken over the last levels. The Board concluded that the Fund's activities and its financial condition. The several years, and continue to take, in fee levels under the Advisory Agreement Board considered the overall profitability order to improve the quality and therefore would not reflect economies of of AIM, as well as the profitability of AIM efficiency of the services they provide scale, although the advisory fee waiver in connection with managing the Fund. The to the Funds in the areas of investment reflects economies of scale. Board noted that AIM's operations remain performance, product line profitable, although increased expenses in diversification, distribution, fund - Investments in affiliated money market recent years have reduced AIM's operations, shareholder services and funds. The Board also took into account the profitability. Based on the review of the compliance. The Board concluded that fact that uninvested cash and cash profitability of AIM's and its affiliates' these steps taken by AIM have improved, collateral from securities lending investment advisory and other activities and and are likely to continue to improve, arrangements, if any (collectively, "cash its financial condition, the Board concluded the quality and efficiency of the balances") of the Fund may be invested in that the compensation to be paid by the Fund services AIM and its affiliates provide money market funds advised by AIM pursuant to AIM under its Advisory Agreement was not to the Fund in each of these areas, and to the terms of an SEC exemptive order. The excessive. support the Board's approval of the Board found that the Fund may realize continuance of the Advisory Agreement certain benefits upon investing cash - Benefits of soft dollars to AIM. The Board for the Fund. balances in AIM advised money market funds, considered the benefits realized by AIM as a including a higher net return, increased result of brokerage transactions executed liquidity, increased diversification or through "soft dollar" arrangements. Under decreased transaction costs. The Board also these arrangements, brokerage commissions found that the Fund will not receive reduced paid by the Fund and/or other funds advised services if it invests its cash balances in by AIM are used to pay for research and such money market funds. The Board noted execution services. This research may be that, to the extent the Fund invests used by AIM in making investment decisions uninvested cash in affiliated money market for the Fund. The Board concluded that such funds, AIM has voluntarily agreed to waive a arrangements were appropriate.
8 AIM V.I. Small Cap Equity Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ---------------------------------------------------------------------- COMMON STOCKS & OTHER EQUITY INTERESTS-96.96% AEROSPACE & DEFENSE-0.99% Curtiss-Wright Corp. 25,157 $ 932,822 ====================================================================== AIRLINES-0.35% Allegiant Travel Co.(a) 11,828 331,894 ====================================================================== APPAREL RETAIL-3.05% Cache, Inc.(a) 36,640 924,794 ---------------------------------------------------------------------- Charming Shoppes, Inc.(a) 64,147 867,909 ---------------------------------------------------------------------- Christopher & Banks Corp. 30,598 570,959 ---------------------------------------------------------------------- Gymboree Corp. (The)(a) 13,297 507,413 ====================================================================== 2,871,075 ====================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-0.52% Fossil, Inc.(a) 21,686 489,670 ====================================================================== APPLICATION SOFTWARE-3.82% Blackbaud, Inc. 24,730 642,980 ---------------------------------------------------------------------- Epicor Software Corp.(a) 62,560 845,186 ---------------------------------------------------------------------- Hyperion Solutions Corp.(a) 27,163 976,238 ---------------------------------------------------------------------- Transaction Systems Architects, Inc.(a) 25,389 826,920 ---------------------------------------------------------------------- Ultimate Software Group, Inc. (The)(a) 13,127 305,334 ====================================================================== 3,596,658 ====================================================================== ASSET MANAGEMENT & CUSTODY BANKS-0.98% Affiliated Managers Group, Inc.(a) 8,812 926,406 ====================================================================== AUTOMOTIVE RETAIL-1.01% Midas, Inc.(a) 41,337 950,751 ====================================================================== BIOTECHNOLOGY-0.39% Cubist Pharmaceuticals, Inc.(a) 20,184 365,532 ====================================================================== BUILDING PRODUCTS-1.72% Goodman Global, Inc.(a) 52,989 911,411 ---------------------------------------------------------------------- NCI Building Systems, Inc.(a) 13,724 710,217 ====================================================================== 1,621,628 ====================================================================== CASINOS & GAMING-1.28% Pinnacle Entertainment, Inc.(a) 36,313 1,203,413 ====================================================================== COMMUNICATIONS EQUIPMENT-1.56% Black Box Corp. 17,993 755,526 ---------------------------------------------------------------------- Packeteer, Inc.(a) 52,493 713,905 ====================================================================== 1,469,431 ====================================================================== COMPUTER STORAGE & PERIPHERALS-0.97% Emulex Corp.(a) 46,699 911,097 ======================================================================
SHARES VALUE ----------------------------------------------------------------------
CONSTRUCTION & ENGINEERING-1.86% Infrasource Services Inc.(a) 43,707 $ 951,501 ---------------------------------------------------------------------- URS Corp.(a) 18,600 797,010 ====================================================================== 1,748,511 ====================================================================== DATA PROCESSING & OUTSOURCED SERVICES-1.56% BISYS Group, Inc. (The)(a) 44,106 569,409 ---------------------------------------------------------------------- Wright Express Corp.(a) 28,896 900,688 ====================================================================== 1,470,097 ====================================================================== DIVERSIFIED CHEMICALS-1.21% FMC Corp. 14,888 1,139,676 ====================================================================== DIVERSIFIED METALS & MINING-1.20% Compass Minerals International, Inc. 35,888 1,132,625 ====================================================================== ELECTRICAL COMPONENTS & EQUIPMENT-0.98% Genlyte Group Inc. (The)(a) 11,817 923,026 ====================================================================== ELECTRONIC MANUFACTURING SERVICES-0.87% Park Electrochemical Corp. 31,966 819,928 ====================================================================== ENVIRONMENTAL & FACILITIES SERVICES-1.01% Waste Connections, Inc.(a) 22,777 946,384 ====================================================================== FOOD RETAIL-1.02% Ruddick Corp. 34,428 955,377 ====================================================================== GAS UTILITIES-1.29% Energen Corp. 25,808 1,211,428 ====================================================================== HEALTH CARE DISTRIBUTORS-0.94% Owens & Minor, Inc. 28,217 882,346 ====================================================================== HEALTH CARE EQUIPMENT-1.94% STERIS Corp. 34,454 867,207 ---------------------------------------------------------------------- Vital Signs, Inc. 19,114 954,171 ====================================================================== 1,821,378 ====================================================================== HEALTH CARE FACILITIES-0.64% LCA-Vision Inc. 17,640 606,110 ====================================================================== HEALTH CARE SERVICES-0.00% Amedisys, Inc.(a) 1 22 ====================================================================== HEALTH CARE SUPPLIES-2.14% DJO Inc.(a) 26,843 1,149,417 ---------------------------------------------------------------------- Haemonetics Corp.(a) 19,149 862,088 ====================================================================== 2,011,505 ======================================================================
AIM V.I. Small Cap Equity Fund
SHARES VALUE ---------------------------------------------------------------------- HEALTH CARE TECHNOLOGY-1.69% Computer Programs and Systems, Inc. 18,040 $ 613,180 ---------------------------------------------------------------------- Phase Forward Inc.(a) 65,027 974,104 ====================================================================== 1,587,284 ====================================================================== HOTELS, RESORTS & CRUISE LINES-1.12% Red Lion Hotels Corp.(a) 82,900 1,056,146 ====================================================================== HOUSEHOLD APPLIANCES-1.21% Snap-on Inc. 23,937 1,140,359 ====================================================================== HOUSEHOLD PRODUCTS-0.85% Central Garden & Pet Co.(a) 16,545 801,109 ====================================================================== HUMAN RESOURCE & EMPLOYMENT SERVICES-1.64% Heidrick & Struggles International, Inc.(a) 21,636 916,501 ---------------------------------------------------------------------- Kenexa Corp.(a) 18,959 630,576 ====================================================================== 1,547,077 ====================================================================== INDUSTRIAL MACHINERY-3.57% Chart Industries, Inc.(a) 42,269 685,181 ---------------------------------------------------------------------- Kadant Inc.(a) 36,438 888,358 ---------------------------------------------------------------------- RBC Bearings Inc.(a) 34,527 989,544 ---------------------------------------------------------------------- Valmont Industries, Inc. 14,327 795,005 ====================================================================== 3,358,088 ====================================================================== INSURANCE BROKERS-1.10% eHealth, Inc.(a) 6,539 131,499 ---------------------------------------------------------------------- Hilb Rogal and Hobbs Co. 21,455 903,685 ====================================================================== 1,035,184 ====================================================================== INTEGRATED TELECOMMUNICATION SERVICES-1.94% Alaska Communications Systems Group Inc. 34,401 522,551 ---------------------------------------------------------------------- NTELOS Holdings Corp.(a) 73,119 1,307,368 ====================================================================== 1,829,919 ====================================================================== INTERNET SOFTWARE & SERVICES-1.68% CyberSource Corp.(a) 88,747 977,992 ---------------------------------------------------------------------- DealerTrack Holdings Inc.(a) 20,387 599,785 ====================================================================== 1,577,777 ====================================================================== INVESTMENT BANKING & BROKERAGE-1.01% CMET Finance Holdings, Inc. (Acquired 12/08/03; Cost $20,000)(a)(b)(c) 200 3,422 ---------------------------------------------------------------------- Thomas Weisel Partners Group, Inc.(a) 44,799 945,259 ====================================================================== 948,681 ====================================================================== LEISURE PRODUCTS-0.37% Smith & Wesson Holding Corp.(a) 33,717 348,634 ======================================================================
SHARES VALUE ----------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES-1.82% Dionex Corp.(a) 16,046 $ 909,969 ---------------------------------------------------------------------- ICON PLC-ADR (United Kingdom)(a) 21,350 804,895 ====================================================================== 1,714,864 ====================================================================== METAL & GLASS CONTAINERS-1.09% AptarGroup, Inc. 17,395 1,027,001 ====================================================================== MULTI-UTILITIES-0.65% Avista Corp. 24,265 614,147 ====================================================================== OFFICE REIT'S-1.37% Alexandria Real Estate Equities, Inc. 10,009 1,004,904 ---------------------------------------------------------------------- Republic Property Trust 24,350 280,999 ====================================================================== 1,285,903 ====================================================================== OFFICE SERVICES & SUPPLIES-0.74% PeopleSupport Inc.(a) 33,184 698,523 ====================================================================== OIL & GAS EQUIPMENT & SERVICES-3.62% NATCO Group Inc.-Class A(a) 28,952 922,990 ---------------------------------------------------------------------- Oceaneering International, Inc.(a) 23,203 921,159 ---------------------------------------------------------------------- Oil States International, Inc.(a) 30,324 977,343 ---------------------------------------------------------------------- Seitel, Inc.(a) 163,446 584,319 ====================================================================== 3,405,811 ====================================================================== OIL & GAS EXPLORATION & PRODUCTION-2.91% Comstock Resources, Inc.(a) 32,422 1,007,027 ---------------------------------------------------------------------- Penn Virginia Corp. 14,868 1,041,355 ---------------------------------------------------------------------- Warren Resources Inc.(a) 58,464 685,198 ====================================================================== 2,733,580 ====================================================================== OIL & GAS REFINING & MARKETING-0.88% Alon USA Energy, Inc. 31,411 826,423 ====================================================================== PACKAGED FOODS & MEATS-2.13% Flowers Foods, Inc. 33,773 911,533 ---------------------------------------------------------------------- TreeHouse Foods, Inc.(a) 35,094 1,094,933 ====================================================================== 2,006,466 ====================================================================== PHARMACEUTICALS-1.75% Aspreva Pharmaceuticals Corp. (Canada)(a) 30,569 627,276 ---------------------------------------------------------------------- ViroPharma Inc.(a) 69,313 1,014,742 ====================================================================== 1,642,018 ====================================================================== PROPERTY & CASUALTY INSURANCE-4.16% Assured Guaranty Ltd. 36,352 966,963 ---------------------------------------------------------------------- FPIC Insurance Group, Inc.(a) 23,656 921,874 ---------------------------------------------------------------------- Ohio Casualty Corp. 31,188 929,714 ---------------------------------------------------------------------- Philadelphia Consolidated Holding Corp.(a) 24,542 1,093,592 ====================================================================== 3,912,143 ====================================================================== REAL ESTATE MANAGEMENT & DEVELOPMENT-0.97% Jones Lang LaSalle Inc. 9,892 911,746 ======================================================================
AIM V.I. Small Cap Equity Fund
SHARES VALUE ---------------------------------------------------------------------- REGIONAL BANKS-5.98% Alabama National BanCorp. 10,795 $ 741,940 ---------------------------------------------------------------------- Columbia Banking System, Inc. 20,744 728,529 ---------------------------------------------------------------------- First Financial Bankshares, Inc. 11,564 484,069 ---------------------------------------------------------------------- Hancock Holding Co. 13,604 718,835 ---------------------------------------------------------------------- Provident Bankshares Corp. 18,059 642,901 ---------------------------------------------------------------------- Sterling Bancshares, Inc. 54,654 711,595 ---------------------------------------------------------------------- Sterling Financial Corp. 19,209 649,456 ---------------------------------------------------------------------- United Community Banks, Inc. 29,424 950,984 ====================================================================== 5,628,309 ====================================================================== RESIDENTIAL REIT'S-0.32% Mid-America Apartment Communities, Inc. 5,181 296,560 ====================================================================== RESTAURANTS-3.41% IHOP Corp. 18,765 988,915 ---------------------------------------------------------------------- O'Charley's Inc.(a) 47,148 1,003,309 ---------------------------------------------------------------------- Papa John's International, Inc.(a) 22,855 663,024 ---------------------------------------------------------------------- Steak n Shake Co. (The)(a) 31,653 557,093 ====================================================================== 3,212,341 ====================================================================== SEMICONDUCTOR EQUIPMENT-1.45% ATMI, Inc.(a) 30,909 943,652 ---------------------------------------------------------------------- Nextest Systems Corp.(a) 37,194 419,176 ====================================================================== 1,362,828 ====================================================================== SEMICONDUCTORS-4.46% DSP Group, Inc.(a) 32,309 701,105 ---------------------------------------------------------------------- Hittite Microwave Corp.(a) 21,296 688,287 ---------------------------------------------------------------------- Micrel, Inc.(a) 61,969 668,026 ---------------------------------------------------------------------- Power Integrations, Inc.(a) 34,066 798,848 ---------------------------------------------------------------------- Semtech Corp.(a) 49,162 642,547 ---------------------------------------------------------------------- Supertex, Inc.(a) 17,816 699,278 ====================================================================== 4,198,091 ====================================================================== SPECIALIZED REIT'S-2.25% Equity Inns Inc. 15,828 252,615 ---------------------------------------------------------------------- LaSalle Hotel Properties 21,406 981,465 ----------------------------------------------------------------------
SHARES VALUE ----------------------------------------------------------------------
SPECIALIZED REIT'S-(CONTINUED) Senior Housing Properties Trust 6,192 $ 151,580 ---------------------------------------------------------------------- Universal Health Realty Income Trust 18,855 734,968 ====================================================================== 2,120,628 ====================================================================== SPECIALTY CHEMICALS-1.63% A. Schulman, Inc. 20,684 460,219 ---------------------------------------------------------------------- H.B. Fuller Co. 41,678 1,076,126 ====================================================================== 1,536,345 ====================================================================== STEEL-0.97% Carpenter Technology Corp. 8,857 908,020 ====================================================================== TECHNOLOGY DISTRIBUTORS-0.83% Agilysys, Inc. 46,593 779,967 ====================================================================== TRADING COMPANIES & DISTRIBUTORS-2.67% H&E Equipment Services, Inc.(a) 17,072 422,873 ---------------------------------------------------------------------- UAP Holding Corp. 45,176 1,137,532 ---------------------------------------------------------------------- Williams Scotsman International Inc.(a) 48,435 950,295 ====================================================================== 2,510,700 ====================================================================== TRUCKING-1.42% Landstar System, Inc. 16,330 623,479 ---------------------------------------------------------------------- Marten Transport, Ltd.(a) 38,973 714,375 ====================================================================== 1,337,854 ====================================================================== Total Common Stocks & Other Equity Interests (Cost $81,185,268) 91,239,316 ====================================================================== MONEY MARKET FUNDS-3.23% Liquid Assets Portfolio-Institutional Class(d) 1,516,665 1,516,665 ---------------------------------------------------------------------- Premier Portfolio-Institutional Class(d) 1,516,665 1,516,665 ====================================================================== Total Money Market Funds (Cost $3,033,330) 3,033,330 ====================================================================== TOTAL INVESTMENTS-100.19% (Cost $84,218,598) 94,272,646 ====================================================================== OTHER ASSETS LESS LIABILITIES-(0.19)% (175,477) ====================================================================== NET ASSETS-100.00% $94,097,169 ______________________________________________________________________ ======================================================================
Investment Abbreviations: ADR - American Depositary Receipt REIT - Real Estate Investment Trust
Notes to Schedule of Investments: (a) Non-income producing security. (b) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The value of this security at December 31, 2006 represented less than 0.01% of the Fund's Net Assets. Unless otherwise indicated, this security is not considered to be illiquid. (c) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The value of this security at December 31, 2006 represented less than 0.01% of the Fund's Net Assets. See Note 1A. (d) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Small Cap Equity Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $81,185,268) $91,239,316 ------------------------------------------------------------ Investments in affiliated money market funds (cost $3,033,330) 3,033,330 ============================================================ Total investments (cost $84,218,598) 94,272,646 ============================================================ Receivables for: Fund shares sold 204,879 ------------------------------------------------------------ Dividends 69,718 ------------------------------------------------------------ Investment for trustee deferred compensation and retirement plans 8,442 ============================================================ Total assets 94,555,685 ____________________________________________________________ ============================================================ LIABILITIES: Payables for: Investments purchased 349,241 ------------------------------------------------------------ Fund shares reacquired 2,172 ------------------------------------------------------------ Trustee deferred compensation and retirement plans 9,581 ------------------------------------------------------------ Fund expenses advanced 7,638 ------------------------------------------------------------ Accrued administrative services fees 53,243 ------------------------------------------------------------ Accrued distribution fees-Series II 529 ------------------------------------------------------------ Accrued trustees' and officer's fees and benefits 3,301 ------------------------------------------------------------ Accrued transfer agent fees 363 ------------------------------------------------------------ Accrued operating expenses 32,448 ============================================================ Total liabilities 458,516 ============================================================ Net assets applicable to shares outstanding $94,097,169 ____________________________________________________________ ============================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $83,505,938 ------------------------------------------------------------ Undistributed net investment income (loss) (111,189) ------------------------------------------------------------ Undistributed net realized gain from investment securities 648,372 ------------------------------------------------------------ Unrealized appreciation of investment securities 10,054,048 ============================================================ $94,097,169 ____________________________________________________________ ============================================================ NET ASSETS: Series I $93,243,499 ____________________________________________________________ ============================================================ Series II $ 853,670 ____________________________________________________________ ============================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 6,136,994 ____________________________________________________________ ============================================================ Series II 56,539 ____________________________________________________________ ============================================================ Series I: Net asset value per share $ 15.19 ____________________________________________________________ ============================================================ Series II: Net asset value per share $ 15.10 ____________________________________________________________ ============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends $ 589,256 ------------------------------------------------------------ Dividends from affiliated money market funds 143,035 ============================================================ Total investment income 732,291 ============================================================ EXPENSES: Advisory fees 569,320 ------------------------------------------------------------ Administrative services fees 215,952 ------------------------------------------------------------ Custodian fees 23,931 ------------------------------------------------------------ Distribution fees-Series II 1,925 ------------------------------------------------------------ Transfer agent fees 4,575 ------------------------------------------------------------ Trustees' and officer's fees and benefits 16,475 ------------------------------------------------------------ Professional services fees 44,761 ------------------------------------------------------------ Other 14,362 ============================================================ Total expenses 891,301 ============================================================ Less: Fees waived and expense offset arrangements (118,984) ============================================================ Net expenses 772,317 ============================================================ Net investment income (loss) (40,026) ============================================================ REALIZED AND UNREALIZED GAIN FROM INVESTMENT SECURITIES: Net realized gain from investment securities (includes net gains from securities sold to affiliates of $49,560) 4,835,605 ------------------------------------------------------------ Change in net unrealized appreciation of investment securities 4,648,572 ------------------------------------------------------------ Net gain from investment securities 9,484,177 ============================================================ Net increase in net assets resulting from operations $9,444,151 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Small Cap Equity Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ---------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) $ (40,026) $ (144,314) ---------------------------------------------------------------------------------------- Net realized gain from investment securities and foreign currencies 4,835,605 662,270 ---------------------------------------------------------------------------------------- Change in net unrealized appreciation of investment securities 4,648,572 2,398,286 ======================================================================================== Net increase in net assets resulting from operations 9,444,151 2,916,242 ======================================================================================== Distributions to shareholders from net realized gains: Series I (3,592,564) -- ---------------------------------------------------------------------------------------- Series II (33,971) -- ======================================================================================== Decrease in net assets resulting from distributions (3,626,535) -- ======================================================================================== Share transactions-net: Series I 44,759,517 13,921,136 ---------------------------------------------------------------------------------------- Series II 89,165 7,329 ======================================================================================== Net increase in net assets resulting from share transactions 44,848,682 13,928,465 ======================================================================================== Net increase in net assets 50,666,298 16,844,707 ======================================================================================== NET ASSETS: Beginning of year 43,430,871 26,586,164 ======================================================================================== End of year (including undistributed net investment income (loss) of $(111,189) and $(73,864), respectively) $94,097,169 $43,430,871 ________________________________________________________________________________________ ========================================================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Small Cap Equity Fund NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Small Cap Equity Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is long-term growth of capital. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses AIM V.I. Small Cap Equity Fund and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.85% of the Fund's average daily net assets. AIM V.I. Small Cap Equity Fund Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.745% -------------------------------------------------------------------- Next $250 million 0.73% -------------------------------------------------------------------- Next $500 million 0.715% -------------------------------------------------------------------- Next $1.5 billion 0.70% -------------------------------------------------------------------- Next $2.5 billion 0.685% -------------------------------------------------------------------- Next $2.5 billion 0.67% -------------------------------------------------------------------- Next $2.5 billion 0.655% -------------------------------------------------------------------- Over $10 billion 0.64% ___________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.15% and Series II shares to 1.40% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $116,879. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $165,952 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Small Cap Equity Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio-Institutional Class $1,164,526 $27,717,533 $(27,365,394) $ -- $1,516,665 $ 71,485 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio-Institutional Class -- 16,581,063 (15,064,398) -- 1,516,665 44,077 -- ---------------------------------------------------------------------------------------------------------------------------------- STIC Prime Portfolio-Institutional Class 1,164,526 12,460,323 (13,624,849) -- -- 27,473 -- ================================================================================================================================== Total Investments in Affiliates $2,329,052 $56,758,919 $(56,054,641) $ -- $3,033,330 $143,035 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $306,329, which resulted in net realized gains of $49,560, and securities purchases of $3,657,763. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $2,105. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,979 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. Small Cap Equity Fund NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 ---------------------------------------------------------------------------------- Distributions paid from: Ordinary income $ 912,136 $ -- ---------------------------------------------------------------------------------- Long-term capital gain 2,714,399 -- ================================================================================== Total distributions $3,626,535 $ -- __________________________________________________________________________________ ==================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 --------------------------------------------------------------------------- Undistributed ordinary income $ 511,175 --------------------------------------------------------------------------- Undistributed long-term gain 262,093 --------------------------------------------------------------------------- Net unrealized appreciation -- investments 9,826,286 --------------------------------------------------------------------------- Temporary book/tax differences (8,323) --------------------------------------------------------------------------- Shares of beneficial interest 83,505,938 =========================================================================== Total net assets $94,097,169 ___________________________________________________________________________ ===========================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales, the deferral of losses on certain straddles and the recognition for tax purposes of unrealized gains on passive foreign investment companies. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. The Fund utilized $492,385 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund does not have a capital loss carryforward as of December 31, 2006. NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $74,824,520 and $33,730,321, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $11,811,012 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (1,984,726) =============================================================================== Net unrealized appreciation of investment securities $ 9,826,286 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $84,446,360.
NOTE 10--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of passive foreign investment companies, on December 31, 2006, undistributed net investment income (loss) was increased by $2,701 and undistributed net realized gain was decreased by $2,701. This reclassification had no effect on the net assets of the Fund. AIM V.I. Small Cap Equity Fund NOTE 11--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2006(a) 2005 ------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------- Sold: Series I 4,127,247 $61,970,339 1,778,336 $22,484,880 ------------------------------------------------------------------------------------------------------------------- Series II 3,739 55,902 807 10,132 =================================================================================================================== Issued as reinvestment of dividends: Series I 233,132 3,592,564 -- -- ------------------------------------------------------------------------------------------------------------------- Series II 2,218 33,971 -- -- =================================================================================================================== Reacquired: Series I (1,398,963) (20,803,386) (688,338) (8,563,744) ------------------------------------------------------------------------------------------------------------------- Series II (49) (708) (224) (2,803) =================================================================================================================== 2,967,324 $44,848,682 1,090,581 $13,928,465 ___________________________________________________________________________________________________________________ ===================================================================================================================
(a) There are two entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 96% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, distribution, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these shareholders are also owned beneficially. NOTE 12--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. NOTE 13--SIGNIFICANT EVENT The Board of Trustees of the Trust unanimously approved, on December 13, 2006 a Plan of Reorganization ("Plan") pursuant to which the Fund would acquire all of the assets of AIM V.I. Small Cap Growth Fund ("Selling Fund"), a series of the Trust. Upon closing of the transaction, shareholders of Selling Fund will receive a corresponding class of shares of the Fund in exchange for their shares of Selling Fund, and Selling Fund will cease operations. The Plan requires approval of Selling Fund shareholders. The Fund will submit the Plan to the shareholders for their consideration at a meeting to be held on or about March 19, 2007. If approved by Selling Fund's shareholders, the reorganization is expected to be consummated shortly thereafter. AIM V.I. Small Cap Equity Fund NOTE 14--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ---------------------------------------------------- AUGUST 29, 2003 (DATE OPERATIONS YEAR ENDED DECEMBER 31, COMMENCED) TO -------------------------------- DECEMBER 31, 2006 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 13.46 $ 12.45 $ 11.38 $ 10.00 ------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) (0.01)(a) (0.06)(a) (0.06)(a) (0.01) ------------------------------------------------------------------------------------------------------------------ Net gains on securities (both realized and unrealized) 2.37 1.07 1.13 1.41 ================================================================================================================== Total from investment operations 2.36 1.01 1.07 1.40 ================================================================================================================== Less distributions: Dividends from net investment income -- -- (0.00) (0.01) ------------------------------------------------------------------------------------------------------------------ Distributions from net realized gains (0.63) -- -- (0.01) ================================================================================================================== Total distributions (0.63) -- (0.00) (0.02) ================================================================================================================== Net asset value, end of period $ 15.19 $ 13.46 $ 12.45 $ 11.38 __________________________________________________________________________________________________________________ ================================================================================================================== Total return(b) 17.44% 8.11% 9.41% 13.94% __________________________________________________________________________________________________________________ ================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $93,243 $42,752 $25,964 $ 2,231 __________________________________________________________________________________________________________________ ================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.15%(c) 1.22% 1.30% 1.32%(d) ------------------------------------------------------------------------------------------------------------------ Without fee waivers and/or expense reimbursements 1.33%(c) 1.57% 2.01% 12.86%(d) ================================================================================================================== Ratio of net investment income (loss) to average net assets (0.06)%(c) (0.44)% (0.56)% (0.44)%(d) __________________________________________________________________________________________________________________ ================================================================================================================== Portfolio turnover rate(e) 52% 70% 156% 26% __________________________________________________________________________________________________________________ ==================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $66,208,932. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Small Cap Equity Fund NOTE 14--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ---------------------------------------------------- AUGUST 29, 2003 (DATE OPERATIONS YEAR ENDED DECEMBER 31, COMMENCED) TO -------------------------------- DECEMBER 31, 2006 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 13.41 $ 12.43 $ 11.38 $ 10.00 ------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) (0.04)(a) (0.08)(a) (0.08)(a) (0.02) ------------------------------------------------------------------------------------------------------------------ Net gains on securities (both realized and unrealized) 2.36 1.06 1.13 1.41 ================================================================================================================== Total from investment operations 2.32 0.98 1.05 1.39 ================================================================================================================== Less distributions: Dividends from net investment income -- -- (0.00) (0.00) ------------------------------------------------------------------------------------------------------------------ Distributions from net realized gains (0.63) -- -- (0.01) ================================================================================================================== Total distributions (0.63) -- (0.00) (0.01) ================================================================================================================== Net asset value, end of period $ 15.10 $ 13.41 $ 12.43 $ 11.38 __________________________________________________________________________________________________________________ ================================================================================================================== Total return(b) 17.20% 7.88% 9.23% 13.88% __________________________________________________________________________________________________________________ ================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 854 $ 679 $ 622 $ 569 __________________________________________________________________________________________________________________ ================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.40%(c) 1.42% 1.45% 1.47%(d) ------------------------------------------------------------------------------------------------------------------ Without fee waivers and/or expense reimbursements 1.58%(c) 1.82% 2.26% 13.11%(d) ================================================================================================================== Ratio of net investment income (loss) to average net assets (0.31)%(c) (0.64)% (0.71)% (0.59)%(d) __________________________________________________________________________________________________________________ ================================================================================================================== Portfolio turnover rate(e) 52% 70% 156% 26% __________________________________________________________________________________________________________________ ==================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $769,948. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 15--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor-Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. AIM V.I. Small Cap Equity Fund NOTE 15--LEGAL PROCEEDINGS--(CONTINUED) Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Small Cap Equity Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Small Cap Equity Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Small Cap Equity Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets and financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the periods ended on or before December 31, 2004 were audited by another independent registered public accounting firm whose report, dated February 4, 2005, expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Small Cap Equity Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as a required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Dividends $2,714,399 Corporate Dividends Received Deduction* 32.00%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Small Cap Equity Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Funds, Inc. (21 portfolios) Formerly: Partner, Deloitte & Touche -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Small Cap Equity Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General N/A Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
DOMESTIC EQUITY AIM V.I. SMALL CAP GROWTH FUND Small Cap FORMERLY AIM V.I. SMALL COMPANY GROWTH FUND Annual Report to Shareholders - December 31, 2006 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at [COVER GLOBE IMAGE] the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating AIM V.I. SMALL CAP GROWTH FUND seeks to portfolio securities is available long-term capital growth. without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web site. Go to AIMinvestments.com, access UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT the About Us tab, click on Required IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. SMALL CAP GROWTH FUND PERFORMANCE SUMMARY 2. VALUATION ANALYSIS. Identifying attractively valued stocks given their growth For the year ended December 31, 2006, AIM V.I. Small Cap potential over a one- to two-year horizon. Growth Fund, excluding variable product issuer charges, had positive returns and outperformed its style-specific index, 3. TECHNICAL ANALYSIS. Identifying the the Russell 2000 --REGISTERED TRADEMARK-- Growth Index, and its "timeliness" of a stock purchase. We review peer group index, the Lipper Small Cap Growth Funds Index. It trading volume characteristics and trend underperformed the broad market, as measured by the S&P 500 analysis to make sure there are no signs of --Registered Trademark-- Index. the stock deterioration. This also serves as a risk management measure that helps us Stock selection across select sectors enabled the Fund confirm our high conviction candidates. to outperform the Russell 2000 Growth Index. The Fund underperformed the broad market, as represented by the S&P 500 We consider selling or trimming a stock Index, primarily due to the large weighting in value stocks in when: the index, as value stocks outperformed growth stocks by a wide margin during the year. - The company's fundamental business prospects deteriorate. Your Fund's long-term performance appears on pages 4-5. FUND VS. INDEXES - A stock hits its target price. TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF VARIABLE PRODUCT ISSUER CHARGES WERE - The company's technical profile INCLUDED, RETURNS WOULD BE LOWER. deteriorates. Series I Shares 14.13% MARKET CONDITIONS AND YOUR FUND Series II Shares 13.86 S&P 500 Index (Broad Market Index) 15.78 Domestic equities posted solid returns in Russell 2000 Growth Index (Style-specific Index) 13.35 2006, leaving several major market indexes Lipper Small-Cap Growth Funds Index (Peer Group Index) 10.65 near multi-year highs. Strong economic SOURCE: LIPPER INC. growth, favorable corporate earnings results ================================================================== and continued benign inflation benefited equities, offsetting high energy prices, a HOW WE INVEST by keeping the Fund's sector slowing housing market and the U.S. Federal weightings in line with the Reserve Board's (the Fed) tightening We focus on small-cap growth benchmark by staying fully campaign. companies with visible and diversified in all those sectors. long-term growth opportunities, Although mixed signals from the Fed created as demonstrated by consistent and STOCK SELECTION: We select some market volatility in May and June, the accelerating earnings growth. Our stocks based on an analysis of market began to rally when the Fed left investment philosophy involves: individual companies. Our interest rates unchanged at several meetings three-step selection process beginning in August. In addition, the price includes: of crude oil and other commodities PORTFOLIO CONSTRUCTION: We stabilized, fostering optimism that a hard align the fund with the Russell 1. FUNDAMENTAL ANALYSIS. landing for the U.S. economy could be 2000 Growth Index, the benchmark Building financial models and avoided. While small-cap stocks continued to we believe represents the conducting in-depth interviews lead the market higher, small-cap-growth asset class. We with company management. seek to control risk
==================================================================================================================== PORTFOLIO COMPOSITION TOP FIVE INDUSTRIES* TOP 10 EQUITY HOLDINGS* -------------------------------------------------------------------------------------------------------------------- By sector Information Technology 26.2% 1. Health Care Equipment 5.4% 1. THQ Inc. 1.4% Health Care 21.1 2. Oil & Gas Equipment & 2. Polycom, Inc. 1.2 Consumer Discretionary 14.7 Services 5.0 3. F5 Networks, Inc. 1.2 Industrials 13.0 3. Apparel Retail 4.8 4. General Cable Corp. 1.2 Energy 8.3 4. Application Software 4.7 5. Core Laboratories N.V. (Netherlands) 1.2 Financials 8.2 5. Communications Equipment 4.1 6. Affiliated Managers Group, Inc. 1.2 Consumer Staples 2.5 7. Varian Semiconductor Equipment Telecommunication Total Net Assets $19.73 million Associates, Inc. 1.1 Services 2.0 8. SBA Communications Corp.-Class A 1.1 Materials 1.6 Total Number of Holdings* 128 9. Medicis Pharmaceutical Corp-Class A 1.1 Utilities 0.5 10. Wright Medical Group, Inc. 1.1 Money Market Funds Plus Other Assets Less Liabilities 1.9 *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ====================================================================================================================
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AIM V.I. SMALL CAP GROWTH FUND large- and mid-cap stocks also had Solid stock selection was also THE VIEWS AND OPINIONS EXPRESSED IN double-digit returns. Additionally, the primary driver of MANAGEMENT'S DISCUSSION OF FUND value stocks outperformed growth outperformance in the consumer PERFORMANCE ARE THOSE OF A I M stocks. Positive performance was discretionary sector. Within this ADVISORS, INC. THESE VIEWS AND broad among Russell 2000 Growth sector, Fund holding TEMPUR-PEDIC OPINIONS ARE SUBJECT TO CHANGE AT Index sectors, with the best was one of the leading contributors ANY TIME BASED ON FACTORS SUCH AS returns found in utilities, to performance. Tempur-Pedic, a MARKET AND ECONOMIC CONDITIONS. consumer staples and materials. leading manufacturer of THESE VIEWS AND OPINIONS MAY NOT BE visco-elastic mattresses and RELIED UPON AS INVESTMENT ADVICE OR The Fund benefited from positive pillows, appreciated due to strong RECOMMENDATIONS, OR AS AN OFFER FOR absolute performance in all 10 growth in revenues and earnings A PARTICULAR SECURITY. THE economic sectors, with the highest during the year. Several consumer INFORMATION IS NOT A COMPLETE positive impact on performance services holdings also made key ANALYSIS OF EVERY ASPECT OF ANY coming from holdings in the contributions to performance, MARKET, COUNTRY, INDUSTRY, SECURITY industrials, information technology including quick service restaurant OR THE FUND. STATEMENTS OF FACT ARE (IT), consumer discretionary and owner JACK IN THE BOX. Many quick FROM SOURCES CONSIDERED RELIABLE, health care sectors. On a relative service restaurant operators such BUT A I M ADVISORS, INC. MAKES NO basis, the Fund outperformed the as Jack In The Box benefited as REPRESENTATION OR WARRANTY AS TO Russell 2000 Growth Index, with the higher energy prices influenced THEIR COMPLETENESS OR ACCURACY. widest margin of outperformance in many consumers to seek lower cost ALTHOUGH HISTORICAL PERFORMANCE IS the industrials, IT and consumer dining options during the year. NO GUARANTEE OF FUTURE RESULTS, discretionary sectors. THESE INSIGHTS MAY HELP YOU The Fund underperformed relative UNDERSTAND OUR INVESTMENT The Fund benefited from strong to the Russell 2000 Growth Index in MANAGEMENT PHILOSOPHY. stock selection in the industrials the financials, materials and sector, where specific areas of energy sectors. In the financials [ELLIS PHOTO] strength included the capital goods sector, underperformance was driven and transportation industries. primarily by an underweight Juliet S.Ellis Chartered Financial Within capital goods, holdings that position in real estate investment Analyst, senior portfolio manager, made significant contributions to trust (REIT) holdings, an industry is lead manager of AIM V.I. Small Fund performance included that performed very well during the Cap Growth Fund. electrical distributors WESCO year, as well as an overweight INTERNATIONAL and GENERAL CABLE. position in insurance holdings, an Ms. Ellis joined AIM in 2004. She Both companies benefited from industry that had weak performance previously served as senior acceleration in non-residential during the year. Underperformance portfolio manager of two small-cap construction activity as well as in the materials sector was driven funds for another company and was updates to utility grid equipment. largely by stock selection and responsible for the management of In the transportation industry, overweight positions in two more than $2 billion in assets. Ms. SWIFT TRANSPORTATION, one of the industries--construction Ellis began her investment career largest publicly held trucking materials and containers and in 1981 as a financial consultant. companies in the United States, packaging. Underperformance in the She is a Cum Laude and Phi Beta appreciated after reporting higher energy sector was largely due to Kappa graduate of Indiana than expected earnings. This the Fund's overweight position. University with a B.A. in economics company is led by a new management and political science. team that successfully implemented During the year, the most a strategy focused on improving significant positioning changes [HARTSFIELD PHOTO] profit margins and earnings growth. included additions in the health The stock price also rose late in care, IT and energy sectors. These Juan R. Hartsfield Chartered the year when the company's founder purchases were funded by reducing Financial Analyst, portfolio made a bid to re-acquire the firm. exposure to the industrials and manager, is manager of AIM V.I. materials sectors. All changes to Small Cap Growth Fund. Prior to In the IT sector, the Fund the Fund were based on our joining AIM in 2004, he began his benefited from stock selection in a bottom-up stock selection process investment career in 2000 as an number of different industries, of identifying high quality growth equity analyst and most recently including communications equipment, companies trading at what we served as a portfolio manager. Mr. internet software and services and believe are attractive valuations. Hartsfield earned a B.S. in semiconductors and semiconductor petroleum engineering from The equipment. Within the semiconductor IN CLOSING University of Texas and his M.B.A. industry, FORMFACTOR was one of the from the University of Michigan. leading contributors to overall Although we are pleased to have Fund performance during the year. provided positive returns for our Assisted by the Small Cap Core/ This company uses a cost effective investors for the year, we are Growth Team process to test semiconductor always striving to improve circuits, including memory chips. performance. We thank you for your The stock price appreciated after commitment to AIM V.I. Small Cap the company reported strong growth Growth Fund. in revenues and earnings due to FOR A DISCUSSION OF THE RISKS OF high demand for its services. Other INVESTING IN YOUR FUND, INDEXES holdings that made key USED IN THIS REPORT AND YOUR FUND'S contributions included CYBERSOURCE, LONG-TERM PERFORMANCE, PLEASE SEE which we subsequently sold, PAGES 4-5. POLYCOM and VARIAN SEMICONDUCTOR.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. SMALL CAP GROWTH FUND =================================== AVERAGE ANNUAL TOTAL RETURNS ADJUSTED TO REFLECT THE RULE 12B-1 VARIABLE PRODUCTS. YOU CANNOT ----------------------------------- FEES APPLICABLE TO THE SERIES II PURCHASE SHARES OF THE FUND As of 12/31/06 SHARES. DIRECTLY. PERFORMANCE FIGURES GIVEN SERIES I SHARES REPRESENT THE FUND AND ARE NOT Inception (8/22/97) 7.21% THE INCEPTION DATE OF SERIES I INTENDED TO REFLECT ACTUAL VARIABLE 5 Years 4.68 SHARES IS AUGUST 22, 1997. THE PRODUCT VALUES. THEY DO NOT REFLECT 1 Year 14.13 PERFORMANCE OF THE FUND'S SERIES I SALES CHARGES, EXPENSES AND FEES AND SERIES II SHARE CLASSES WILL ASSESSED IN CONNECTION WITH A SERIES II SHARES DIFFER PRIMARILY DUE TO DIFFERENT VARIABLE PRODUCT. SALES CHARGES, Inception 6.95% CLASS EXPENSES. EXPENSES AND FEES, WHICH ARE 5 Years 4.44 DETERMINED BY THE VARIABLE PRODUCT 1 Year 13.86 THE PERFORMANCE DATA QUOTED ISSUERS, WILL VARY AND WILL LOWER =================================== REPRESENT PAST PERFORMANCE AND THE TOTAL RETURN. CANNOT GUARANTEE COMPARABLE FUTURE =================================== RESULTS; CURRENT PERFORMANCE MAY BE PER NASD REQUIREMENTS, THE MOST CUMULATIVE TOTAL RETURNS LOWER OR HIGHER. PLEASE CONTACT RECENT MONTH-END PERFORMANCE DATA ----------------------------------- YOUR VARIABLE PRODUCT ISSUER OR AT THE FUND LEVEL, EXCLUDING 6 months ended 12/31/06 FINANCIAL ADVISOR FOR THE MOST VARIABLE PRODUCT CHARGES, IS Series I Shares 7.18% RECENT MONTH-END VARIABLE PRODUCT AVAILABLE ON THIS AIM AUTOMATED Series II Shares 7.04 PERFORMANCE. PERFORMANCE FIGURES INFORMATION LINE, 866-702-4402. AS =================================== REFLECT FUND EXPENSES, REINVESTED MENTIONED ABOVE, FOR THE MOST DISTRIBUTIONS AND CHANGES IN NET RECENT MONTH-END PERFORMANCE SERIES II SHARES' INCEPTION DATE IS ASSET VALUE. INVESTMENT RETURN AND INCLUDING VARIABLE PRODUCT CHARGES, APRIL 30, 2004. RETURNS SINCE THAT PRINCIPAL VALUE WILL FLUCTUATE SO PLEASE CONTACT YOUR VARIABLE DATE ARE HISTORICAL. ALL OTHER THAT YOU MAY HAVE A GAIN OR LOSS PRODUCT ISSUER OR FINANCIAL RETURNS ARE THE BLENDED RETURNS OF WHEN YOU SELL SHARES. ADVISOR. THE HISTORICAL PERFORMANCE OF SERIES II SHARES SINCE THEIR AIM V.I. SMALL CAP GROWTH FUND, HAD THE ADVISOR NOT WAIVED FEES INCEPTION AND THE RESTATED A SERIES PORTFOLIO OF AIM VARIABLE AND/OR REIMBURSED EXPENSES, HISTORICAL PERFORMANCE OF SERIES I INSURANCE FUNDS, IS CURRENTLY PERFORMANCE WOULD HAVE BEEN LOWER. SHARES (FOR PERIODS PRIOR TO OFFERED THROUGH INSURANCE COMPANIES INCEPTION OF SERIES II SHARES) ISSUING ================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE The prices of securities held by offerings (IPOs). There can be no FUND the Fund may decline in response to assurance that the Fund will have market risks. favorable IPO investment Prices of equity securities change opportunities in the future. in response to many factors The Fund may use enhanced Moreover, the prices of IPO including the historical and investment techniques such as securities may go up and down more prospective earnings of the issuer, derivatives. The principal risk of than the prices of companies with the value of its assets, general investments in derivatives is that longer trading histories. In economic conditions, interest the fluctuations in their values addition, companies offering rates, investor perceptions and may not correlate perfectly with securities in IPOs may have less market liquidity. the overall securities markets. experienced management or limited Derivatives are subject to counter operating histories. For additional Growth investing may be more party risk -- the risk that the information regarding the Fund's volatile than other investment other party will not complete the performance, please see the Fund's styles because growth stocks are transaction with the Fund. prospectus more sensitive to investor perceptions of an issuing company's The value of convertible To the extent the Fund holds growth potential. securities in which the Fund cash or cash equivalents rather invests may be affected by market than equity securities for risk At any given time, the Fund may interest rates, the risk that the management purposes, the Fund may be subject to sector risk, which issuer may default on interest or not achieve its investment means a certain sector may under principal payments and the value of objective. perform other sectors or the market the underlying common stock into as a whole. The Fund is not limited which these securities may be If the seller of a repurchase with respect to the sectors in converted. agreement in which the Fund invests which it can invest. defaults on its obligation or Foreign securities have declares bankruptcy, the Fund may Investing in a fund that invests additional risks, including experience delays in selling the in smaller companies involves risks exchange rate changes, political securities underlying the not associated with investing in and economic upheaval, the relative repurchase agreement. more established companies, such as lack of information about these business risk, stock price companies, relatively low market There is no guarantee that the fluctuations and illiquidity. liquidity and the potential lack of investment techniques and risk strict financial and accounting analyses used by the Fund's Investing in emerging markets controls and standards. portfolio managers will produce the involves greater risk than desired results. investing in more established The Fund's return during certain markets. The risks include the periods was positively impacted by relatively smaller size and lesser its investments in initial public liquidity of these markets, high inflation rates, adverse political Continued on page 5 developments and lack of timely information.
4
AIM V.I. Small Cap Growth Fund Past performance cannot guarantee that a logarithmic chart is more the value of the investment. In comparable future results. effective than other types of this chart, each segment represents charts in illustrating changes in a doubling, or 100% change, in the This chart, which is a value during the early years shown value of the investment. In other logarithmic chart, presents the in the chart. The vertical axis, words, the space between $5,000 and fluctuations in the value of the the one that indicates the dollar $10,000 is the same size as the Fund and its indexes. We believe value of an investment, is space between $10,000 and $20,000, constructed with each segment and so on. representing a percent change in ==================================================================================================================== Continued from page 4 ABOUT INDEXES USED IN THIS REPORT amended to reflect that the Fund transactions. Generally accepted has elected to use the Lipper accounting principles require The unmanaged STANDARD & POOR'S Variable Underlying Funds (VUF) adjustments to be made to the net COMPOSITE INDEX OF 500 STOCKS (the Small-Cap Growth Funds Index as its assets of the fund at period end S&P 500 Index) is an index of peer group rather than the Lipper for financial reporting purposes, common stocks frequently used as a Small-Cap Growth Funds Index. The and as such, the net asset value general measure of U.S. stock Lipper VUF Small-Cap Growth Funds for shareholder transactions and market performance. Index, recently published by Lipper the returns based on those net Inc., comprises the largest asset values may differ from the The unmanaged LIPPER SMALL-CAP underlying funds in each variable net asset values and returns GROWTH FUNDS INDEX represents an insurance category and does not reported in the Financial average of the performance of the include mortality and expense fees. Highlights. Additionally, the 30 largest small-capitalization returns and net asset values shown growth funds tracked by Lipper The Fund is not managed to track throughout this report are at the Inc., an independent mutual fund the performance of any particular fund level only and do not include performance monitor. index, including the indexes variable product issuer charges. If defined here, and consequently, the such charges were included, the The unmanaged RUSSELL 2000 performance of the fund may deviate total returns would be lower. GROWTH INDEX is a subset of the significantly from the performance unmanaged Russell 2000 --Registered of the indexes. Industry classifications used in Trademark-- Index, which represents this report are generally according the performance of the stocks of A direct investment cannot be to the Global Industry small-capitalization companies; the made in an index. Unless otherwise Classification Standard, which was Growth subset measures the indicated, index results include developed by and is the exclusive performance of Russell 2000 reinvested dividends, and they do property and a service mark of companies with higher price/book not reflect sales charges. Morgan Stanley Capital ratios and higher forecasted growth Performance of an index of funds International Inc. and Standard & values. The Russell 2000 Growth reflects fund expenses; performance Poor's. Index is a trademark/service mark of a market index does not. of the Frank Russell Company. The Chartered Financial Analyst Russell --Registered Trademark-- is OTHER INFORMATION --Registered Trademark-- (CFA a trademark of the Frank Russell --Registered Trademark--) Company. The returns shown in the designation is a globally Management's Discussion of Fund recognized standard for measuring In conjunction with the annual Performance are based on net asset the competence and integrity of prospectus update on or about May values calculated for shareholder investment professionals. 1, 2007, the AIM V.I Small Cap Growth Fund prospectus will be
5 RESULTS OF A $10,000 INVESTMENT Fund data from 8/22/97, index data from 8/31/97
[MOUNTAIN CHART] AIM V.I. SMALL CAP GROWTH FUND DATE -SERIES I SHARES S&P 500 INDEX RUSSELL 2000 GROWTH INDEX LIPPER SMALL-CAP GROWTH FUNDS INDEX -------------------------------------------------------------------------------------------------------------------------- 8/22/97 $10000 8/97 10090 $10000 $10000 $10000 9/97 10820 10547 10798 10842 10/97 10110 10195 10149 10287 11/97 9809 10667 9907 10055 12/97 9910 10850 9913 9921 1/98 9770 10970 9781 9774 2/98 10710 11761 10644 10564 3/98 11249 12363 11091 11042 4/98 11299 12489 11159 11122 5/98 10499 12275 10348 10335 6/98 10929 12773 10454 10638 7/98 10120 12638 9581 9837 8/98 7969 10812 7369 7689 9/98 9039 11505 8116 8100 10/98 9449 12440 8540 8419 11/98 10489 13193 9202 9104 12/98 11532 13953 10035 10017 1/99 11682 14536 10486 10259 2/99 10551 14085 9527 9272 3/99 11232 14648 9866 9691 4/99 11612 15215 10738 10069 5/99 11673 14856 10755 10124 6/99 13054 15679 11321 11072 7/99 14164 15191 10971 11032 8/99 13854 15116 10561 10878 9/99 14895 14702 10764 11272 10/99 15556 15632 11040 11929 11/99 17948 15950 12208 13434 12/99 22032 16888 14359 16143 1/00 20961 16040 14226 15975 2/00 26465 15736 17535 20656 3/00 25153 17275 15692 19035 4/00 21548 16755 14108 16682 5/00 19107 16412 12872 15318 6/00 23740 16816 14535 18015 7/00 21699 16553 13290 16843 8/00 24721 17581 14687 18655 9/00 23391 16653 13958 17731 10/00 21770 16582 12825 16401 11/00 17259 15276 10496 13608 12/00 18732 15351 11138 14811 1/01 18659 15895 12040 15262 2/01 16099 14447 10390 13309 3/01 14627 13532 9445 12016 4/01 16846 14583 10601 13313 5/01 17011 14681 10847 13674 6/01 17229 14323 11143 14019 7/01 16057 14182 10192 13237 8/01 14678 13295 9556 12454 9/01 12159 12222 8014 10510 10/01 13341 12455 8785 11280 11/01 14419 13410 9518 12154 12/01 15258 13528 10111 12891 1/02 14584 13330 9751 12501 2/02 13267 13073 9120 11744 3/02 14086 13565 9912 12704 4/02 13764 12743 9698 12369 5/02 13257 12649 9131 11873 6/02 12272 11749 8357 10991 7/02 10603 10833 7072 9432 8/02 10572 10904 7069 9418 9/02 9992 9720 6558 8847 10/02 10613 10575 6890 9225 11/02 11235 11197 7573 9997 12/02 10509 10539 7051 9329 1/03 10188 10264 6859 9083 2/03 9991 10109 6676 8800 3/03 10095 10207 6778 8981 4/03 10685 11048 7419 9724 5/03 11691 11629 8255 10715 6/03 11846 11778 8414 11078 7/03 12593 11985 9050 11726 8/03 13256 12219 9536 12348 ========================================================================================================================== SOURCE: LIPPER INC.
========================================================================================================================== [MOUNTAIN CHART] 9/03 12811 12089 9295 12045 10/03 13796 12773 10098 13138 11/03 14262 12885 10427 13487 12/03 14024 13560 10474 13507 1/04 14739 13809 11024 14139 2/04 14678 14001 11007 14085 3/04 14594 13790 11058 13988 4/04 13909 13574 10503 13305 5/04 14158 13760 10712 13582 6/04 14583 14027 11069 13969 7/04 13381 13563 10075 12737 8/04 13030 13617 9858 12324 9/04 13703 13765 10403 13028 10/04 14169 13975 10656 13394 11/04 15091 14540 11557 14331 12/04 15973 15035 11972 14964 1/05 15289 14669 11433 14398 2/05 15465 14977 11590 14682 3/05 15040 14712 11155 14189 4/05 14190 14433 10445 13396 5/05 14968 14892 11181 14284 6/05 15786 14913 11543 14783 7/05 16781 15468 12350 15685 8/05 16615 15327 12176 15414 9/05 16346 15451 12272 15498 10/05 15973 15193 11819 14973 11/05 16823 15767 12488 15776 12/05 16802 15773 12469 15763 1/06 18130 16190 13672 17047 2/06 18255 16234 13599 16981 3/06 18835 16436 14260 17688 4/06 18960 16657 14219 17748 5/06 17934 16178 13218 16643 6/06 17893 16199 13226 16505 7/06 17147 16299 12539 15605 8/06 17488 16686 12907 15919 9/06 17570 17116 12994 16127 10/06 18545 17674 13836 16856 11/06 19291 18009 14167 17424 12/06 19180 18262 14133 17442 ==========================================================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. SMALL CAP GROWTH FUND EXAMPLE ACTUAL EXPENSES expenses, which is not the Fund's actual return. The Fund's actual As a shareholder of the Fund, you The table below provides cumulative total returns at net incur ongoing costs, including information about actual account asset value after expenses for the management fees; distribution values and actual expenses. You may six months ended December 31, 2006, and/or service (12b-1) fees; and use the information in this table, appear in the table "Cumulative other Fund expenses. This example together with the amount you Total Returns" on page 4. is intended to help you understand invested, to estimate the expenses your ongoing costs (in dollars) of that you paid over the period. The hypothetical account values investing in the Fund and to Simply divide your account value by and expenses may not be used to compare these costs with ongoing $1,000 (for example, an $8,600 estimate the actual ending account costs of investing in other mutual account value divided by $1,000 = balance or expenses you paid for funds. The example is based on an 8.6), then multiply the result by the period. You may use this investment of $1,000 invested at the number in the table under the information to compare the ongoing the beginning of the period and heading entitled "Actual Expenses costs of investing in the Fund and held for the entire period July 1, Paid During Period" to estimate the other funds. To do so, compare this 2006, through December 31, 2006. expenses you paid on your account 5% hypothetical example with the 5% during this period. hypothetical examples that appear The actual and hypothetical in the shareholder reports of the expenses in the examples below do other funds. not represent the effect of any HYPOTHETICAL EXAMPLE FOR COMPARISON fees or other expenses assessed in PURPOSES Please note that the expenses connection with a variable product; shown in the table are meant to if they did, the expenses shown The table below also provides highlight your ongoing costs. would be higher while the ending information about hypothetical Therefore, the hypothetical account values shown would be account values and hypothetical information is useful in comparing lower. expenses based on the Fund's actual ongoing costs, and will not help expense ratio and an assumed rate you determine the relative total of return of 5% per year before costs of owning different funds.
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ------------------------------------------------------------------------------------------------------------------- Series I $1,000.00 $1,071.80 $ 6.32 $1,019.11 $ 6.16 1.21% Series II 1,000.00 1,070.40 7.62 1,017.85 7.43 1.46 ===================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. SMALL CAP GROWTH FUND The Board of Trustees of AIM - The nature and extent of the early results but need more time to Variable Insurance Funds (the advisory services to be provided by be evaluated before a conclusion "Board") oversees the management of AIM. The Board reviewed the can be made that the changes have AIM V.I. Small Cap Growth Fund services to be provided by AIM addressed the Fund's under-performance. (formerly named "AIM V.I. Small under the Advisory Agreement. Based Based on this review and after taking Company Growth Fund") (the "Fund") on such review, the Board concluded account of all of the other factors and, as required by law, determines that the range of services to be that the Board considered in determining annually whether to approve the provided by AIM under the Advisory whether to continue the Advisory continuance of the Fund's advisory Agreement was appropriate and that Agreement for the Fund, the Board agreement with A I M Advisors, Inc. AIM currently is providing services concluded that no changes should be ("AIM"). Based upon the in accordance with the terms of the made to the Fund and that it was recommendation of the Investments Advisory Agreement. not necessary to change the Fund's Committee of the Board, at a portfolio management team at this meeting held on June 27, 2006, the - The quality of services to be time. Although the independent Board, including all of the provided by AIM. The Board reviewed written evaluation of the Fund's independent trustees, approved the the credentials and experience of Senior Officer (discussed below) continuance of the advisory the officers and employees of AIM only considered Fund performance agreement (the "Advisory who will provide investment through the most recent calendar Agreement") between the Fund and advisory services to the Fund. In year, the Board also reviewed more AIM for another year, effective reviewing the qualifications of AIM recent Fund performance, which did July 1, 2006. to provide investment advisory not change their conclusions. services, the Board considered such The Board considered the factors issues as AIM's portfolio and - Meetings with the Fund's portfolio discussed below in evaluating the product review process, various managers and investment personnel. fairness and reasonableness of the back office support functions With respect to the Fund, the Board Advisory Agreement at the meeting provided by AIM and AIM's equity is meeting periodically with such on June 27, 2006 and as part of the and fixed income trading Fund's portfolio managers and/or Board's ongoing oversight of the operations. Based on the review of other investment personnel and Fund. In their deliberations, the these and other factors, the Board believes that such individuals are Board and the independent trustees concluded that the quality of competent and able to continue to did not identify any particular services to be provided by AIM was carry out their responsibilities factor that was controlling, and appropriate and that AIM currently under the Advisory Agreement. each trustee attributed different is providing satisfactory services weights to the various factors. in accordance with the terms of the - Overall performance of AIM. The Advisory Agreement. Board considered the overall One responsibility of the performance of AIM in providing independent Senior Officer of the - The performance of the Fund investment advisory and portfolio Fund is to manage the process by relative to comparable funds. The administrative services to the Fund which the Fund's proposed Board reviewed the performance of and concluded that such performance management fees are negotiated to the Fund during the past one, three was satisfactory. ensure that they are negotiated in and five calendar years against the a manner which is at arms' length performance of funds advised by - Fees relative to those of clients and reasonable. To that end, the other advisors with investment of AIM with comparable investment Senior Officer must either strategies comparable to those of strategies. The Board reviewed the supervise a competitive bidding the Fund. The Board noted that the effective advisory fee rate (before process or prepare an independent Fund's performance in such periods waivers) for the Fund under the written evaluation. The Senior was below the median performance of Advisory Agreement. The Board noted Officer has recommended an such comparable funds. The Board that this rate was (i) above the independent written evaluation in also noted that AIM began serving effective advisory fee rate (before lieu of a competitive bidding as investment advisor to the Fund waivers) for a mutual fund advised process and, upon the direction of in April 2004. The Board noted that by AIM with investment strategies the Board, has prepared such an AIM has recently made changes to comparable to those of the Fund; independent written evaluation. the Fund's portfolio management and (ii) above the effective Such written evaluation also team, which appear to be producing sub-advisory fee rates for four considered certain of the factors encouraging early results but need variable insurance funds discussed below. In addition, as more time to be evaluated before a sub-advised by an AIM affiliate and discussed below, the Senior Officer conclusion can be made that the offered to insurance company made a recommendation to the Board changes have addressed the Fund's separate accounts with investment in connection with such written under-performance. Based on this strategies comparable to those of evaluation. review and after taking account of the Fund, although the total all of the other factors that the advisory fees for such variable The discussion below serves as a Board considered in determining insurance funds were above those summary of the Senior Officer's whether to continue the Advisory for the Fund. The Board noted that independent written evaluation and Agreement for the Fund, the Board AIM has agreed to waive advisory recommendation to the Board in concluded that no changes should be fees of the Fund and to limit the connection therewith, as well as a made to the Fund and that it was Fund's total operating expenses, as discussion of the material factors not necessary to change the Fund's discussed below. Based on this and the conclusions with respect portfolio management team at this review, the Board concluded that thereto that formed the basis for time. Although the independent the advisory fee rate for the Fund the Board's approval of the written evaluation of the Fund's under the Advisory Agreement was Advisory Agreement. After Senior Officer (discussed below) fair and reasonable. consideration of all of the factors only considered Fund performance below and based on its informed through the most recent calendar - Fees relative to those of business judgment, the Board year, the Board also reviewed more comparable funds with other determined that the Advisory recent Fund performance, which did advisors. The Board reviewed the Agreement is in the best interests not change their conclusions. advisory fee rate for the Fund of the Fund and its shareholders under the Advisory Agreement. The and that the compensation to AIM - The performance of the Fund Board compared effective under the Advisory Agreement is relative to indices. The Board contractual advisory fee rates at a fair and reasonable and would have reviewed the performance of the common asset level at the end of been obtained through arm's length Fund during the past one, three and the past calendar year and noted negotiations. five calendar years against the that the Fund's rate was below the performance of the Lipper Variable median rate of the funds advised by Unless otherwise stated, Underlying Fund Small-Cap Growth other advisors with investment information presented below is as Index. The Board noted that the strategies comparable to those of of June 27, 2006 and does not Fund's performance in such periods the Fund that the Board reviewed. reflect any changes that may have was below the performance of such The Board noted that AIM has agreed occurred since June 27, 2006, Index. The Board also noted that to waive advisory fees of the Fund including but not limited to AIM began serving as investment and to limit the Fund's total changes to the Fund's performance, advisor to the Fund in April 2004. operating expenses, as discussed advisory fees, expense limitations The Board noted that AIM has below. Based on this review, the and/or fee waivers. recently made changes to the Fund's Board concluded that the advisory portfolio management team, which fee rate for the Fund under the appear to be producing encouraging
7
AIM V.I. SMALL CAP GROWTH FUND Advisory Agreement was fair and advised by AIM pursuant to the Advisory Agreement was not reasonable. terms of an SEC exemptive order. excessive. The Board found that the Fund may - Expense limitations and fee realize certain benefits upon - Benefits of soft dollars to AIM. waivers. The Board noted that AIM investing cash balances in AIM The Board considered the benefits has contractually agreed to waive advised money market funds, realized by AIM as a result of advisory fees of the Fund through including a higher net return, brokerage transactions executed April 30, 2008 to the extent increased liquidity, increased through "soft dollar" arrangements. necessary so that the advisory fees diversification or decreased Under these arrangements, brokerage payable by the Fund do not exceed a transaction costs. The Board also commissions paid by the Fund and/or specified maximum advisory fee found that the Fund will not other funds advised by AIM are used rate, which maximum rate includes receive reduced services if it to pay for research and execution breakpoints and is based on net invests its cash balances in such services. This research may be used asset levels. The Board considered money market funds. The Board noted by AIM in making investment the contractual nature of this fee that, to the extent the Fund decisions for the Fund. The Board waiver and noted that it remains in invests uninvested cash in concluded that such arrangements effect until April 30, 2008. The affiliated money market funds, AIM were appropriate. Board noted that AIM has has voluntarily agreed to waive a contractually agreed to waive fees portion of the advisory fees it - AIM's financial soundness in light and/or limit expenses of the Fund receives from the Fund attributable of the Fund's needs. The Board through April 30, 2008 in an amount to such investment. The Board considered whether AIM is necessary to limit total annual further determined that the financially sound and has the operating expenses to a specified proposed securities lending program resources necessary to perform its percentage of average daily net and related procedures with respect obligations under the Advisory assets for each class of the Fund. to the lending Fund is in the best Agreement, and concluded that AIM The Board considered the interests of the lending Fund and has the financial resources contractual nature of this fee its respective shareholders. The necessary to fulfill its waiver/expense limitation and noted Board therefore concluded that the obligations under the Advisory that it remains in effect until investment of cash collateral Agreement. April 30, 2008. The Board received in connection with the considered the effect these fee securities lending program in the - Historical relationship between waivers/expense limitations would money market funds according to the the Fund and AIM. In determining have on the Fund's estimated procedures is in the best interests whether to continue the Advisory expenses and concluded that the of the lending Fund and its Agreement for the Fund, the Board levels of fee waivers/expense respective shareholders. also considered the prior limitations for the Fund were fair relationship between AIM and the and reasonable. - Independent written evaluation and Fund, as well as the Board's recommendations of the Fund's knowledge of AIM's operations, and - Breakpoints and economies of Senior Officer. The Board noted concluded that it was beneficial to scale. The Board reviewed the that, upon their direction, the maintain the current relationship, structure of the Fund's advisory Senior Officer of the Fund, who is in part, because of such knowledge. fee under the Advisory Agreement, independent of AIM and AIM's The Board also reviewed the general noting that it does not include any affiliates, had prepared an nature of the non-investment breakpoints. The Board considered independent written evaluation in advisory services currently whether it would be appropriate to order to assist the Board in performed by AIM and its add advisory fee breakpoints for determining the reasonableness of affiliates, such as administrative, the Fund or whether, due to the the proposed management fees of the transfer agency and distribution nature of the Fund and the advisory AIM Funds, including the Fund. The services, and the fees received by fee structures of comparable funds, Board noted that the Senior AIM and its affiliates for it was reasonable to structure the Officer's written evaluation had performing such services. In advisory fee without breakpoints. been relied upon by the Board in addition to reviewing such Based on this review, the Board this regard in lieu of a services, the trustees also concluded that it was not necessary competitive bidding process. In considered the organizational to add advi sory fee breakpoints to determining whether to continue the structure employed by AIM and its the Fund's advisory fee schedule. Advisory Agreement for the Fund, affiliates to provide those The Board reviewed the level of the the Board considered the Senior services. Based on the review of Fund's advisory fees, and noted Officer's written evaluation and these and other factors, the Board that such fees, as a percentage of the recommendation made by the concluded that AIM and its the Fund's net assets, would remain Senior Officer to the Board that affiliates were qualified to constant under the Advisory the Board consider whether the continue to provide non-investment Agreement because the Advisory advisory fee waivers for certain advisory services to the Fund, Agreement does not include any equity AIM Funds, including the including administrative, transfer breakpoints. The Board noted that Fund, should be simplified. The agency and distribution services, AIM has contractually agreed to Board concluded that it would be and that AIM and its affiliates waive advisory fees of the Fund advisable to consider this issue currently are providing through April 30, 2008 to the and reach a decision prior to the satisfactory non-investment extent necessary so that the expiration date of such advisory advisory services. advisory fees payable by the Fund fee waivers. do not exceed a specified maximum - Other factors and current trends. advisory fee rate, which maximum - Profitability of AIM and its The Board considered the steps that rate includes breakpoints and is affiliates. The Board reviewed AIM and its affiliates have taken based on net asset levels. The information concerning the over the last several years, and Board concluded that the Fund's fee profitability of AIM's (and its continue to take, in order to levels under the Advisory Agreement affiliates') investment advisory improve the quality and efficiency therefore would not reflect and other activities and its of the services they provide to the economies of scale, although the financial condition. The Board Funds in the areas of investment advisory fee waiver reflects considered the overall performance, product line economies of scale. profitability of AIM, as well as diversification, distribution, fund the profitability of AIM in operations, shareholder services - Investments in affiliated money connection with managing the Fund. and compliance. The Board concluded market funds. The Board also took The Board noted that AIM's that these steps taken by AIM have into account the fact that operations remain profitable, improved, and are likely to uninvested cash and cash collateral although increased expenses in continue to improve, the quality from securities lending recent years have reduced AIM's and efficiency of the services AIM arrangements, if any (collectively, profitability. Based on the review and its affiliates provide to the "cash balances") of the Fund may be of the profitability of AIM's and Fund in each of these areas, and invested in money market funds its affiliates' investment advisory support the Board's approval of the and other activities and its continuance of the Advisory financial condition, the Board Agreement for the Fund. concluded that the compensation to be paid by the Fund to AIM under its
8 AIM V.I. Small Cap Growth Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE -------------------------------------------------------------------- COMMON STOCKS & OTHER EQUITY INTERESTS-98.07% AEROSPACE & DEFENSE-1.24% Ceradyne, Inc.(a) 2,698 $ 152,437 -------------------------------------------------------------------- United Industrial Corp. 1,805 91,604 ==================================================================== 244,041 ==================================================================== AIR FREIGHT & LOGISTICS-1.33% Forward Air Corp. 4,429 128,131 -------------------------------------------------------------------- Hub Group, Inc.-Class A(a) 4,895 134,857 ==================================================================== 262,988 ==================================================================== APPAREL RETAIL-4.78% bebe stores, inc. 6,368 126,023 -------------------------------------------------------------------- Charlotte Russe Holding Inc.(a) 3,016 92,742 -------------------------------------------------------------------- Children's Place Retail Stores, Inc. (The)(a) 2,378 151,051 -------------------------------------------------------------------- DSW Inc.-Class A(a) 5,141 198,288 -------------------------------------------------------------------- Hot Topic, Inc.(a) 14,456 192,843 -------------------------------------------------------------------- Zumiez Inc.(a) 6,132 181,139 ==================================================================== 942,086 ==================================================================== APPAREL, ACCESSORIES & LUXURY GOODS-0.73% Warnaco Group, Inc. (The)(a) 5,668 143,854 ==================================================================== APPLICATION SOFTWARE-4.66% ANSYS, Inc.(a) 3,466 150,736 -------------------------------------------------------------------- Blackboard Inc.(a) 6,017 180,751 -------------------------------------------------------------------- Epicor Software Corp.(a) 3,052 41,232 -------------------------------------------------------------------- Informatica Corp.(a) 16,498 201,441 -------------------------------------------------------------------- Kronos Inc.(a) 4,024 147,842 -------------------------------------------------------------------- MicroStrategy Inc.-Class A(a) 1,733 197,579 ==================================================================== 919,581 ==================================================================== ASSET MANAGEMENT & CUSTODY BANKS-1.15% Affiliated Managers Group, Inc.(a) 2,150 226,030 ==================================================================== BIOTECHNOLOGY-2.78% Alkermes, Inc.(a) 6,195 82,827 -------------------------------------------------------------------- CV Therapeutics, Inc.(a) 4,515 63,030 -------------------------------------------------------------------- Human Genome Sciences, Inc.(a) 7,005 87,142 -------------------------------------------------------------------- Myriad Genetics, Inc.(a) 4,450 139,285 -------------------------------------------------------------------- United Therapeutics Corp.(a) 3,230 175,615 ==================================================================== 547,899 ==================================================================== CATALOG RETAIL-0.71% Coldwater Creek Inc.(a) 5,720 140,254 ==================================================================== COMMUNICATIONS EQUIPMENT-4.11% F5 Networks, Inc.(a) 3,126 231,981 -------------------------------------------------------------------- NETGEAR, Inc.(a) 7,079 185,824 --------------------------------------------------------------------
SHARES VALUE --------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT-(CONTINUED) NICE Systems Ltd.-ADR (Israel)(a) 5,130 $ 157,901 -------------------------------------------------------------------- Polycom, Inc.(a) 7,576 234,174 ==================================================================== 809,880 ==================================================================== COMPUTER STORAGE & PERIPHERALS-0.96% Emulex Corp.(a) 9,680 188,857 ==================================================================== CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS-0.85% Bucyrus International, Inc.-Class A 3,244 167,909 ==================================================================== CONSTRUCTION MATERIALS-0.74% Eagle Materials Inc. 3,389 146,506 ==================================================================== DATA PROCESSING & OUTSOURCED SERVICES-1.53% Euronet Worldwide, Inc.(a) 6,355 188,680 -------------------------------------------------------------------- Global Payments Inc. 2,437 112,833 ==================================================================== 301,513 ==================================================================== DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES-2.05% Advisory Board Co. (The)(a) 1,789 95,783 -------------------------------------------------------------------- CoStar Group Inc.(a) 2,766 148,147 -------------------------------------------------------------------- Pike Electric Corp.(a) 9,796 159,969 ==================================================================== 403,899 ==================================================================== DRUG RETAIL-0.79% Longs Drug Stores Corp. 3,663 155,238 ==================================================================== ELECTRIC UTILITIES-0.51% ITC Holdings Corp. 2,518 100,468 ==================================================================== ELECTRICAL COMPONENTS & EQUIPMENT-4.03% Acuity Brands, Inc. 3,830 199,313 -------------------------------------------------------------------- General Cable Corp.(a) 5,299 231,619 -------------------------------------------------------------------- Regal-Beloit Corp. 3,507 184,153 -------------------------------------------------------------------- Thomas & Betts Corp.(a) 3,825 180,846 ==================================================================== 795,931 ==================================================================== ELECTRONIC EQUIPMENT MANUFACTURERS-2.37% Aeroflex Inc.(a) 13,195 154,645 -------------------------------------------------------------------- Cogent Inc.(a) 5,592 61,568 -------------------------------------------------------------------- Coherent, Inc.(a) 4,876 153,935 -------------------------------------------------------------------- Orbotech, Ltd. (Israel)(a) 3,815 97,054 ==================================================================== 467,202 ==================================================================== ELECTRONIC MANUFACTURING SERVICES-1.01% Trimble Navigation Ltd.(a) 3,915 198,608 ====================================================================
AIM V.I. Small Cap Growth Fund
SHARES VALUE -------------------------------------------------------------------- FOOD DISTRIBUTORS-0.76% Performance Food Group Co.(a) 5,432 $ 150,140 ==================================================================== HEALTH CARE EQUIPMENT-5.39% American Medical Systems Holdings, Inc.(a) 8,669 160,550 -------------------------------------------------------------------- Home Diagnostics Inc.(a) 5,028 53,297 -------------------------------------------------------------------- Integra LifeSciences Holdings(a) 3,856 164,227 -------------------------------------------------------------------- Kyphon Inc.(a) 2,891 116,796 -------------------------------------------------------------------- Mentor Corp. 3,120 152,474 -------------------------------------------------------------------- NuVasive, Inc.(a) 7,339 169,531 -------------------------------------------------------------------- Palomar Medical Technologies, Inc.(a) 754 38,205 -------------------------------------------------------------------- Wright Medical Group, Inc.(a) 8,924 207,751 ==================================================================== 1,062,831 ==================================================================== HEALTH CARE FACILITIES-2.43% Genesis HealthCare Corp.(a) 3,386 159,921 -------------------------------------------------------------------- LifePoint Hospitals, Inc.(a) 4,264 143,697 -------------------------------------------------------------------- VCA Antech, Inc.(a) 5,438 175,049 ==================================================================== 478,667 ==================================================================== HEALTH CARE SERVICES-1.57% inVentiv Health Inc.(a) 4,458 157,591 -------------------------------------------------------------------- Pediatrix Medical Group, Inc.(a) 3,098 151,492 ==================================================================== 309,083 ==================================================================== HEALTH CARE SUPPLIES-0.73% Gen-Probe Inc.(a) 2,749 143,965 ==================================================================== HEALTH CARE TECHNOLOGY-1.75% Allscripts Healthcare Solutions, Inc.(a) 6,797 183,451 -------------------------------------------------------------------- Eclipsys Corp.(a) 7,900 162,424 ==================================================================== 345,875 ==================================================================== HOME ENTERTAINMENT SOFTWARE-1.41% THQ Inc.(a) 8,574 278,826 ==================================================================== HOME FURNISHINGS-1.04% Tempur-Pedic International Inc.(a) 10,043 205,480 ==================================================================== HOTELS, RESORTS & CRUISE LINES-1.12% Choice Hotels International, Inc. 2,967 124,911 -------------------------------------------------------------------- Four Seasons Hotels Inc. (Canada) 1,169 95,846 ==================================================================== 220,757 ==================================================================== HOUSEHOLD PRODUCTS-0.94% Church & Dwight Co., Inc. 4,352 185,613 ==================================================================== HUMAN RESOURCE & EMPLOYMENT SERVICES-0.96% Korn/Ferry International(a) 8,216 188,639 ==================================================================== INDUSTRIAL MACHINERY-0.62% Actuant Corp.-Class A 2,571 122,508 ==================================================================== INSURANCE BROKERS-0.72% National Financial Partners Corp. 3,225 141,803 ====================================================================
SHARES VALUE --------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES-0.83% NeuStar, Inc.-Class A(a) 5,066 $ 164,341 ==================================================================== INTERNET RETAIL-0.32% Shutterfly, Inc.(a) 4,457 64,181 ==================================================================== INTERNET SOFTWARE & SERVICES-2.14% aQuantive, Inc.(a) 6,791 167,466 -------------------------------------------------------------------- DealerTrack Holdings Inc.(a) 4,022 118,327 -------------------------------------------------------------------- ValueClick, Inc.(a) 5,739 135,613 ==================================================================== 421,406 ==================================================================== INVESTMENT BANKING & BROKERAGE-0.91% Greenhill & Co., Inc. 2,433 179,555 ==================================================================== IT CONSULTING & OTHER SERVICES-0.72% MPS Group, Inc.(a) 9,974 141,431 ==================================================================== LEISURE PRODUCTS-0.74% Marvel Entertainment, Inc.(a) 5,412 145,637 ==================================================================== LIFE SCIENCES TOOLS & SERVICES-2.89% Millipore Corp.(a) 2,199 146,453 -------------------------------------------------------------------- Nektar Therapeutics(a) 5,726 87,093 -------------------------------------------------------------------- PAREXEL International Corp.(a) 4,735 137,173 -------------------------------------------------------------------- Varian Inc.(a) 4,473 200,346 ==================================================================== 571,065 ==================================================================== MANAGED HEALTH CARE-0.67% Magellan Health Services, Inc.(a) 3,059 132,210 ==================================================================== MULTI-LINE INSURANCE-0.94% HCC Insurance Holdings, Inc. 5,812 186,507 ==================================================================== OFFICE REIT'S-0.71% BioMed Realty Trust, Inc. 4,885 139,711 ==================================================================== OIL & GAS DRILLING-0.85% Unit Corp.(a) 3,482 168,703 ==================================================================== OIL & GAS EQUIPMENT & SERVICES-4.99% Core Laboratories N.V. (Netherlands)(a) 2,834 229,554 -------------------------------------------------------------------- Dril-Quip, Inc.(a) 3,558 139,331 -------------------------------------------------------------------- FMC Technologies, Inc.(a) 2,147 132,320 -------------------------------------------------------------------- Hydril(a) 2,519 189,404 -------------------------------------------------------------------- Input/Output, Inc.(a) 9,255 126,146 -------------------------------------------------------------------- Superior Energy Services, Inc.(a) 5,108 166,929 ==================================================================== 983,684 ==================================================================== OIL & GAS EXPLORATION & PRODUCTION-2.46% Bill Barrett Corp.(a) 6,054 164,729 -------------------------------------------------------------------- Range Resources Corp. 5,786 158,884 -------------------------------------------------------------------- Whiting Petroleum Corp.(a) 3,492 162,727 ==================================================================== 486,340 ====================================================================
AIM V.I. Small Cap Growth Fund
SHARES VALUE -------------------------------------------------------------------- PHARMACEUTICALS-2.87% Medicines Co. (The)(a) 5,212 $ 165,325 -------------------------------------------------------------------- Medicis Pharmaceutical Corp.-Class A 6,031 211,869 -------------------------------------------------------------------- Santarus Inc.(a) 8,063 63,133 -------------------------------------------------------------------- Sciele Pharma, Inc.(a) 5,235 125,640 ==================================================================== 565,967 ==================================================================== PROPERTY & CASUALTY INSURANCE-0.74% ProAssurance Corp.(a) 2,910 145,267 ==================================================================== REGIONAL BANKS-3.02% East West Bancorp, Inc. 2,241 79,376 -------------------------------------------------------------------- PrivateBancorp, Inc. 2,644 110,070 -------------------------------------------------------------------- SVB Financial Group(a) 3,226 150,396 -------------------------------------------------------------------- Texas Capital Bancshares, Inc.(a) 5,066 100,712 -------------------------------------------------------------------- UCBH Holdings, Inc. 5,513 96,809 -------------------------------------------------------------------- Virginia Commerce Bancorp, Inc.(a) 2,981 59,262 ==================================================================== 596,625 ==================================================================== RESTAURANTS-3.40% Applebee's International, Inc. 7,125 175,774 -------------------------------------------------------------------- Jack in the Box Inc.(a) 3,380 206,315 -------------------------------------------------------------------- P.F. Chang's China Bistro, Inc.(a) 3,341 128,227 -------------------------------------------------------------------- RARE Hospitality International, Inc.(a) 4,861 160,073 ==================================================================== 670,389 ==================================================================== SEMICONDUCTOR EQUIPMENT-2.93% FormFactor Inc.(a) 4,059 151,198 -------------------------------------------------------------------- Tessera Technologies Inc.(a) 5,037 203,192 -------------------------------------------------------------------- Varian Semiconductor Equipment Associates, Inc.(a) 4,898 222,957 ==================================================================== 577,347 ==================================================================== SEMICONDUCTORS-3.56% Cirrus Logic, Inc.(a) 17,724 121,941 -------------------------------------------------------------------- Microsemi Corp.(a) 7,062 138,768 -------------------------------------------------------------------- Power Integrations, Inc.(a) 6,032 141,450 --------------------------------------------------------------------
SHARES VALUE --------------------------------------------------------------------
SEMICONDUCTORS-(CONTINUED) Silicon Laboratories Inc.(a) 4,353 $ 150,832 -------------------------------------------------------------------- SiRF Technology Holdings, Inc.(a) 5,859 149,522 ==================================================================== 702,513 ==================================================================== SPECIALIZED CONSUMER SERVICES-0.94% Jackson Hewitt Tax Service Inc. 5,474 185,952 ==================================================================== SPECIALTY STORES-0.89% Dick's Sporting Goods, Inc.(a) 3,590 175,874 ==================================================================== STEEL-0.91% Carpenter Technology Corp. 1,759 180,333 ==================================================================== SYSTEMS SOFTWARE-0.80% MICROS Systems, Inc.(a) 2,997 157,942 ==================================================================== TRADING COMPANIES & DISTRIBUTORS-1.27% TransDigm Group, Inc.(a) 4,642 123,060 -------------------------------------------------------------------- WESCO International, Inc.(a) 2,172 127,735 ==================================================================== 250,795 ==================================================================== TRUCKING-0.68% Swift Transportation Co., Inc.(a) 5,118 134,450 ==================================================================== WIRELESS TELECOMMUNICATION SERVICES-1.12% SBA Communications Corp.-Class A(a) 8,020 220,550 ==================================================================== Total Common Stocks & Other Equity Interests (Cost $17,612,181) 19,345,706 ==================================================================== MONEY MARKET FUNDS-1.34% Liquid Assets Portfolio-Institutional Class(b) 132,413 132,413 -------------------------------------------------------------------- Premier Portfolio-Institutional Class(b) 132,414 132,414 ==================================================================== Total Money Market Funds (Cost $264,827) 264,827 ==================================================================== TOTAL INVESTMENTS-99.41% (Cost $17,877,008) 19,610,533 ==================================================================== OTHER ASSETS LESS LIABILITIES-0.59% 115,563 ==================================================================== NET ASSETS-100.00% $19,726,096 ____________________________________________________________________ ====================================================================
Investment Abbreviations: ADR - American Depositary Receipt REIT - Real Estate Investment Trust
Notes to Schedule of Investments: (a) Non-income producing security. (b) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Small Cap Growth Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $17,612,181) $19,345,706 ------------------------------------------------------------ Investments in affiliated money market funds (cost $264,827) 264,827 ============================================================ Total investments (cost $17,877,008) 19,610,533 ============================================================ Receivables for: Investments sold 141,652 ------------------------------------------------------------ Fund shares sold 20,623 ------------------------------------------------------------ Dividends 8,853 ------------------------------------------------------------ Investment for trustee deferred compensation and retirement plans 10,346 ============================================================ Total assets 19,792,007 ____________________________________________________________ ============================================================ LIABILITIES: Payables for: Fund shares reacquired 2,957 ------------------------------------------------------------ Trustee deferred compensation and retirement plans 11,753 ------------------------------------------------------------ Fund expenses advanced 5,967 ------------------------------------------------------------ Accrued administrative services fees 12,056 ------------------------------------------------------------ Accrued distribution fees-Series II 76 ------------------------------------------------------------ Accrued trustees' and officer's fees and benefits 3,264 ------------------------------------------------------------ Accrued transfer agent fees 735 ------------------------------------------------------------ Accrued operating expenses 29,103 ============================================================ Total liabilities 65,911 ============================================================ Net assets applicable to shares outstanding $19,726,096 ____________________________________________________________ ============================================================ NET ASSETS CONSIST OF: Shares of beneficial interest $15,012,899 ------------------------------------------------------------ Undistributed net investment income (loss) (8,713) ------------------------------------------------------------ Undistributed net realized gain from investment securities 2,988,385 ------------------------------------------------------------ Unrealized appreciation of investment securities 1,733,525 ============================================================ 19,726,096 ____________________________________________________________ ============================================================ NET ASSETS: Series I $19,599,610 ____________________________________________________________ ============================================================ Series II $ 126,486 ____________________________________________________________ ============================================================ SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 1,059,657 ____________________________________________________________ ============================================================ Series II 6,874 ____________________________________________________________ ============================================================ Series I: Net asset value per share $ 18.50 ____________________________________________________________ ============================================================ Series II: Net asset value per share $ 18.40 ____________________________________________________________ ============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $547) $ 66,506 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $3,534) 47,191 ============================================================ Total investment income 113,697 ============================================================ EXPENSES: Advisory fees 205,848 ------------------------------------------------------------ Administrative services fees 118,228 ------------------------------------------------------------ Custodian fees 16,962 ------------------------------------------------------------ Distribution fees-Series II 235 ------------------------------------------------------------ Transfer agent fees 8,712 ------------------------------------------------------------ Trustees' and officer's fees and benefits 15,628 ------------------------------------------------------------ Professional services fees 44,542 ------------------------------------------------------------ Other 12,372 ============================================================ Total expenses 422,527 ============================================================ Less: Fees waived and expense offset arrangements (93,427) ============================================================ Net expenses 329,100 ============================================================ Net investment income (loss) (215,403) ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES: Net realized gain from investment securities (includes net gains from securities sold to affiliates of $632,437) 3,616,920 ------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities (442,945) ============================================================ Net gain from investment securities 3,173,975 ============================================================ Net increase in net assets resulting from operations $2,958,572 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Small Cap Growth Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) $ (215,403) $ (297,030) ------------------------------------------------------------------------------------------ Net realized gain from investment securities, futures contracts and options contracts 3,616,920 4,994,360 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities and options contracts (442,945) (2,857,252) ========================================================================================== Net increase in net assets resulting from operations 2,958,572 1,840,078 ========================================================================================== Share transactions-net: Series l (14,488,518) (18,504,692) ------------------------------------------------------------------------------------------ Series ll 103,617 1,095 ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (14,384,901) (18,503,597) ========================================================================================== Net increase (decrease) in net assets (11,426,329) (16,663,519) ========================================================================================== NET ASSETS: Beginning of year 31,152,425 47,815,944 ========================================================================================== End of year (including undistributed net investment income (loss) of $(8,713) and $(5,973), respectively) $ 19,726,096 $ 31,152,425 __________________________________________________________________________________________ ==========================================================================================
NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Small Cap Growth Fund, formerly AIM V.I. Small Company Growth Fund, (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to seek long-term capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the AIM V.I. Small Cap Growth Fund approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. J. FUTURES CONTRACTS -- The Fund may purchase or sell futures contracts. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities as collateral for the account of the broker (the Fund's agent in acquiring the futures position). During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contracts at the end of each day's trading. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contracts are closed, the Fund recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Fund's basis in the contract. If the Fund were unable to liquidate a futures contract and/or enter AIM V.I. Small Cap Growth Fund into an offsetting closing transaction, the Fund would continue to be subject to market risk with respect to the value of the contracts and continue to be required to maintain the margin deposits on the futures contracts. Risks may exceed amounts recognized in the Statement of Assets and Liabilities. K. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. Through April 30, 2008, AIM has contractually agreed to waive advisory fees to the extent necessary so that the advisory fees payable by the Fund (based on the Fund's average daily net assets) do not exceed the annual rate of:
AVERAGE NET ASSETS RATE -------------------------------------------------------------------- First $250 million 0.745% -------------------------------------------------------------------- Next $250 million 0.73% -------------------------------------------------------------------- Next $500 million 0.715% -------------------------------------------------------------------- Next $1.5 billion 0.70% -------------------------------------------------------------------- Next $2.5 billion 0.685% -------------------------------------------------------------------- Next $2.5 billion 0.67% -------------------------------------------------------------------- Next $2.5 billion 0.655% -------------------------------------------------------------------- Over $10 billion 0.64% ____________________________________________________________________ ====================================================================
AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.20% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund will also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $92,451. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $68,228 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Small Cap Growth Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $ 2,892,223 $ (2,759,810) $ -- $132,413 $ 8,507 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 1,615,213 15,135,578 (16,618,377) -- 132,414 35,150 -- ================================================================================================================================== Subtotal $1,615,213 $18,027,801 $(19,378,187) $ -- $264,827 $43,657 $ -- ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class $ 233,040 $13,402,831 $(13,635,871) $ -- $ -- $ 3,534 $ -- ================================================================================================================================== Total Investments in Affiliates $1,848,253 $31,430,632 $(33,014,058) $ -- $264,827 $47,191 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $10,228,970, which resulted in net realized gains of $632,437, and securities purchases of $422,578. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $976. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $3,878 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. AIM V.I. Small Cap Growth Fund The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, there were no securities on loan to brokers. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $3,534 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: There were no ordinary income or long-term capital gain distributions paid during the years ended December 31, 2006 and 2005. TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 --------------------------------------------------------------------------- Undistributed ordinary income $ 1,633,466 --------------------------------------------------------------------------- Undistributed long-term gain 1,493,409 --------------------------------------------------------------------------- Unrealized appreciation - investments 1,595,035 --------------------------------------------------------------------------- Temporary book/tax differences (8,713) --------------------------------------------------------------------------- Shares of beneficial interest 15,012,899 =========================================================================== Total net assets $19,726,096 ___________________________________________________________________________ ===========================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. The Fund utilized $372,789 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund does not have a capital loss carryforward as of December 31, 2006. AIM V.I. Small Cap Growth Fund NOTE 10--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $25,946,951 and $38,942,741, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------ Aggregate unrealized appreciation of investment securities $2,432,269 ------------------------------------------------------------------------------ Aggregate unrealized (depreciation) of investment securities (837,234) ============================================================================== Net unrealized appreciation of investment securities $1,595,035 ______________________________________________________________________________ ============================================================================== Cost of investments for tax purposes is $18,015,498.
NOTE 11--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of net operating losses, on December 31, 2006, undistributed net investment income (loss) was increased by $212,663 and undistributed net realized gain was decreased by $212,663. This reclassification had no effect on the net assets of the Fund. NOTE 12--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(A) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 358,747 $ 6,241,274 513,619 $ 7,854,216 ---------------------------------------------------------------------------------------------------------------------- Series II 6,535 112,043 68 1,095 ====================================================================================================================== Reacquired: Series I (1,219,978) (20,729,792) (1,694,646) (26,358,908) ---------------------------------------------------------------------------------------------------------------------- Series II (474) (8,426) -- -- ====================================================================================================================== (855,170) $(14,384,901) (1,180,959) $(18,503,597) ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are five entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 78% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 13--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. NOTE 14--SIGNIFICANT EVENT The Board of Trustees of the Trust unanimously approved, on December 13, 2006, a Plan of Reorganization pursuant to which the Fund would transfer all of its assets to AIM V.I. Small Cap Equity Fund ("Buying Fund"), a series of the Trust ("the Reorganization"). Upon closing of the Reorganization, shareholders of the Fund will receive a corresponding class of shares of Buying Fund in exchange for their shares of the Fund, and the Fund will cease operations. The Plan of Reorganization requires approval of the Fund's shareholders. The Fund will submit the Plan of Reorganization to the shareholders for their consideration at a meeting to be held on March 19, 2007. If approved by the Fund's shareholders, the Reorganization is expected to be completed on or about May 1, 2007. AIM V.I. Small Cap Growth Fund NOTE 15--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 16.21 $ 15.41 $ 13.52 $ 10.14 $ 14.72 -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.14)(a) (0.11)(a) (0.14) (0.08) (0.00)(b) -------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 2.43 0.91 2.03 3.46 (4.58) ==================================================================================================================== Total from investment operations 2.29 0.80 1.89 3.38 (4.58) ==================================================================================================================== Net asset value, end of period $ 18.50 $ 16.21 $ 15.41 $ 13.52 $ 10.14 ____________________________________________________________________________________________________________________ ==================================================================================================================== Total return(c) 14.13% 5.19% 13.98% 33.33% (31.11)% ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $19,600 $31,139 $47,804 $49,598 $32,990 ____________________________________________________________________________________________________________________ ==================================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.20%(d) 1.25% 1.28% 1.25% 1.25% -------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.54%(d) 1.39% 1.36% 1.30% 1.31% ==================================================================================================================== Ratio of net investment income (loss) to average net assets (0.78)%(d) (0.70)% (0.96)% (0.75)% (0.87)% ____________________________________________________________________________________________________________________ ==================================================================================================================== Portfolio turnover rate 97% 203% 198% 133% 95% ____________________________________________________________________________________________________________________ ====================================================================================================================
(a) Calculated using average shares outstanding. (b) The net investment income (loss) per share was calculated after permanent book tax differences, such as net operating losses, were reclassified from accumulated net investment income (loss) to paid in capital. Had net investment income (loss) per share been calculated using the current method, which is before reclassification of net operating losses, net investment income (loss) per share would have been $(0.09) for the year ended December 31, 2002. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $27,352,338.
{SERIES II ------------------------------------- APRIL 30, 2004 YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO ------------------- DECEMBER 31, 2006 2005 2004 --------------------------------------------------------------------------------------------------- Net asset value, beginning of period $16.16 $15.40 $13.42 --------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.18)(a) (0.14)(a) (0.10) --------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 2.42 0.90 2.08 =================================================================================================== Total from investment operations 2.24 0.76 1.98 =================================================================================================== Net asset value, end of period $18.40 $16.16 $15.40 ___________________________________________________________________________________________________ =================================================================================================== Total return(b) 13.86% 4.93% 14.75% ___________________________________________________________________________________________________ =================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 126 $ 13 $ 11 ___________________________________________________________________________________________________ =================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.45%(c) 1.45% 1.45%(d) --------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.79%(c) 1.64% 1.61%(d) =================================================================================================== Ratio of net investment income (loss) to average net assets (1.03)%(c) (0.90)% (1.13)%(d) ___________________________________________________________________________________________________ =================================================================================================== Portfolio turnover rate(e) 97% 203% 198% ___________________________________________________________________________________________________ ===================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $94,051. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Small Cap Growth Fund NOTE 16--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor - Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Small Cap Growth Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Small Cap Growth Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Small Cap Growth Fund, formerly known as AIM V.I. Small Company Growth Fund, (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. AS DESCRIBED IN NOTE 14, THE BOARD OF TRUSTEES HAS APPROVED A PLAN OF REORGANIZATION UNDER WHICH THE FUND WILL MERGE WITH AIM V.I. SMALL CAP EQUITY FUND. THIS MERGER IS EXPECTED TO TAKE PLACE FOLLOWING THE APPROVAL BY THE FUND'S SHAREHOLDERS, AT WHICH TIME THE FUND WILL CEASE TO OPERATE. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Small Cap Growth Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Small Cap Growth Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. TECHNOLOGY FUND Annual Report to Shareholders - December 31, 2006 Sectors The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, [COVER GLOBE IMAGE] D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at AIM V.I. TECHNOLOGY FUND seeks capital growth. 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT IS AS OF site. Go to AIMinvestments.com, access DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================================= THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE [AIM INVESTMENTS LOGO] INFORMATION, INCLUDING SALES CHARGES AND EXPENSES. INVESTORS SHOULD READ --Registered Trademark-- EACH CAREFULLY BEFORE INVESTING. ========================================================================= NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AIM V.I. Technology Fund ====================================================================================== - Companies with defensible business PERFORMANCE SUMMARY models. The information technology (IT) sector produced positive returns for the year ended We use a bottom-up investment December 31, 2006, but trailed the broad market. For the year, and excluding variable approach, focusing on company product issuer charges, AIM V.I. Technology Fund underperformed its broad market index fundamentals and growth prospects in but outperformed its peer group index and style-specific indexes. The Fund industries such as hardware, software, underperformed the S&P 500 --Registered Trademark-- Index because information semiconductors, telecommunications technology was one of the weakest sectors of the broad market. The Fund outperformed equipment and services and the Goldman Sachs Technology Composite Index mainly due to strong stock selection in service-related companies in the IT the internet software and services and semiconductors and semiconductor equipment sector. industries. We use our proprietary Your Fund's long-term performance appears on pages 4-5. quantitative sector model to rank companies based on several factors such FUND VS. INDEXES as earnings growth, cash flow sustainability, quality of financial TOTAL RETURNS, 12/31/05-12/31/06, EXCLUDING VARIABLE PRODUCT ISSUER CHARGES. IF metrics and valuation. The model serves VARIABLE PRODUCT ISSUER CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. both as a source of ideas and as a confirmation tool of our fundamental Series I Shares 10.48% analysis. Series II Shares 10.22 S&P 500 Index (Broad Market Index) 15.78 We then apply our valuation Goldman Sachs Technology Composite Index (Style-Specific Index) 8.37 analysis, comparing a stock's current Lipper Science & Technology Funds Index (Peer Group Index) 6.73 valuation to its historical valuations as well as to the valuations of its Source: AIM Management Group Inc., Factset Research Systems Inc., Lipper Inc. competitors. ====================================================================================== The Fund's portfolio normally consists of approximately 65-85 stocks HOW WE INVEST demand, a new product cycle or greater and is constructed to take advantage of visibility among investors and the both long- and short-term opportunities. We seek attractively valued, public. Within each industry, we look We typically invest 60-80% of the Fund's well-managed companies in the for: assets in core holdings--companies that information technology sector with the demonstrate both the fundamental and potential to generate sustainable - Companies addressing growing markets quantitative stock selection earnings and free cash flow growth that with unique product offerings. requirements. The tactical portion of is not yet anticipated by the market. We the portfolio typically represents begin by identifying industries in the - Companies with strong and experienced 20-40% of the Fund's assets. sector we believe may benefit over the management teams. next 12 to 24 months from strong We manage risk through fundamentals, such as increased - Companies that are profitable and that diversification within the sector and by have, over time, grown their market allocating a portion of assets to core share. holdings, which generally have more favorable return and valuation ====================================================================================== characteristics. PORTFOLIO COMPOSITION TOP 10 EQUITY HOLDINGS* We may reduce or eliminate exposure to a stock when: By industry 1. American Movil S.A. de C.V.- Semiconductors 20.0% Series L-ADR (Mexico) 3.2% - We identify a more attractive Communications Equipment 13.7 2. Hewlett-Packard Co. 3.1 investment opportunity. Systems Software 9.7 3. Adobe Systems Inc. 3.0 Computer Hardware 8.3 4. Accenture Ltd.-Class A 2.9 - A company's fundamentals change. Wireless Telecommunication 5. Microsoft Corp. 2.9 Services 8.1 6. Google Inc.-Class A 2.9 - A catalyst does not materialize in the Computer Storage & Peripherals 7.2 7. Cisco Systems, Inc. 2.8 case of tactical holdings. Application Software 7.0 8. Verifone Holdings, Inc. 2.7 Internet Software & Services 6.6 9. Digital River, Inc. 2.6 - A stock's price target has been met. IT Consulting & Other Services 5.0 10. Apple Computer, Inc. 2.6 Data Processing & Outsourced Early in 2006, several changes Services 3.0 Total Net Assets $173.45 million were made to our investment process. 10 Other Industries, Each With These changes included refining our Less than 3% of Total Net Assets 10.0 Total Number of Holdings* 72 stock selection process by incorporating Money Market Funds a proprietary quantitative sector model, Plus Other Assets Less Liabilities 1.4 as well as reducing the number of portfolio holdings and concentrating on The Fund's holdings are subject to change, and there is no assurance that the Fund those in which we have greater will continue to hold any particular security. conviction. *Excluding money market fund holdings. ======================================================================================
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MARKET CONDITIONS AND YOUR FUND AIM V.I. TECHNOLOGY FUND Stocks that enhanced Fund The views and opinions expressed in performance included AKAMAI TECHNOLOGIES management's discussion of Fund The year started off on a positive note and FREESCALE SEMICONDUCTOR. Akamai performance are those of AIM Advisors, as the markets were encouraged by strong provides services to help accelerate and Inc. These views and opinions are economic data. However, tensions in the secure the end-user experience for subject to change at any time based on Middle East escalated with the internet applications such as e-commerce factors such as market and economic Israel-Lebanon conflict, residential and video. Akamai reported favorable conditions. These views and opinions housing markets showed signs of cooling financial results throughout the year may not he relied upon as investment and rising energy prices heightened with increased sales and profits. advice or recommendations, or as an inflation concerns. These factors led to offer for a particular security. The a slight sell-off in the markets mid way Freescale, a global leader of information is not a complete analysis through the year as investors became embedded semiconductors for cars, mobile of every aspect of any market, concerned about an economic downturn. phones and networks, also contributed country, industry, security or the positively to Fund performance. Fund. Statements of fact are from However, the markets staged a Freescale's management was able to sources considered reliable, but AIM rally beginning in August after the U.S. expand its customer base while improving Advisors, Inc. makes no representation Federal Reserve Board held interest margins. In December, a consortium of or warranty as to their completeness rates steady after 17 consecutive private equity firms bought the company or accuracy. Although historical increases. Also contributing to the at a 30% premium to its September 8th performance is no guarantee of future rally was a series of solid economic stock price. results, these insights may help you reports that indicated the economy, understand our investment management while slowing, continued to expand and Detractors from Fund performance philosophy. inflation remained within manageable included internet service provider levels. YAHOO! and software developer RED HAT. Michelle Espelien Shares of Yahoo! declined after the Fenton Against this backdrop, company delayed the release of its new [FENTON Chartered Financial telecommunication services and energy search platform and lowered its guidance PHOTO] Analyst,portfolio were the best-performing sectors of the on advertising-related sales. GOOGLE'S manager, is manager of S&P 500 Index. Health care and entrance into areas other than search AIM V.I. Technology information technology were the weakest functions, such as e-mail and instant Fund. She began her investment career sectors of the broad market. messaging, also created uncertainty in 1995 and joined the Fund's advisor around Yahoo!'s competitive positioning. in 1998. Ms. Fenton earned her B.S. in ======================================== We sold the position due to these finance from Montana State University. developments. THE IT SECTOR STAGED Assisted by the Technology Team A RALLY DURING THE THIRD During the fourth quarter, ORACLE, QUARTER AS OIL PRICES a long time partner and reseller of Red Effective May 1, 2006, William R. DECLINED FROM RECORD Hat's Linux operating system, announced Keithler retired from AIM. On the same HIGHS AND THE FED KEPT it would begin offering its own version date, Michelle Espelien Fenton, assisted INTEREST RATES UNCHANGED of Linux, competing directly with Red by the Technology Team, assumed FOR THE FIRST TIME IN MORE Hat. This increased competition hurt management of the Fund. THAN TWO YEARS. Red Hat's stock price and prompted us to sell the stock. ======================================== Changes in the Fund's holdings Technology stocks were battered during the year were primarily a result during the second quarter of 2006 amid of our refined investment process and fears of a recession and inflation shifting of responsibilities among our pressures. The IT sector staged a rally management team. during the third quarter as oil prices declined from record highs and the Fed IN CLOSING kept interest rates unchanged for the first time in more than two years. As always, we thank you for your Relative to the Fund's style-specific continued investment and welcome any new FOR A DISCUSSION OF THE RISKS OF index, our stock selection and investors to AIM V.I. Technology Fund. INVESTING IN YOUR FUND, INDEXES USED IN underweight position in software THIS REPORT AND YOUR FUND'S LONG-TERM detracted from performance. On the other PERFORMANCE, PLEASE SEE PAGES 4-5. hand, our stock selection in internet software and services and semiconductors and semiconductor equipment were positive relative contributors.
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YOUR FUND'S LONG-TERM PERFORMANCE AIM V.I. Technology Fund ======================================== SERIES I SHARES (FOR PERIODS PRIOR TO INSURANCE COMPANIES ISSUING VARIABLE AVERAGE ANNUAL TOTAL RETURNS INCEPTION OF SERIES II SHARES) ADJUSTED PRODUCTS. YOU CANNOT PURCHASE SHARES OF TO REFLECT THE RULE 12B-1 FEES THE FUND DIRECTLY. PERFORMANCE FIGURES AS OF 12/31/06 APPLICABLE TO SERIES II SHARES. THE GIVEN REPRESENT THE FUND AND ARE NOT SERIES 1 SHARES INCEPTION DATE OF SERIES I SHARES IS MAY INTENDED TO REFLECT ACTUAL VARIABLE Inception (5/20/97) 3.67% 20, 1997. THE PERFORMANCE OF THE FUND'S PRODUCT VALUES. THEY DO NOT REFLECT 5 Years -1.82 SERIES I AND SERIES II SHARE CLASSES SALES CHARGES, EXPENSES AND FEES 1 Year 10.48 WILL DIFFER PRIMARILY DUE TO DIFFERENT ASSESSED IN CONNECTION WITH A VARIABLE CLASS EXPENSES. PRODUCT. SALES CHARGES, EXPENSES AND SERIES II SHARES FEES, WHICH ARE DETERMINED BY THE Inception 3.39% THE PERFORMANCE DATA QUOTED VARIABLE PRODUCT ISSUERS, WILL VARY AND 5 Years -2.09 REPRESENT PAST PERFORMANCE AND CANNOT WILL LOWER THE TOTAL RETURN. 1 Year 10.22 GUARANTEE COMPARABLE FUTURE RESULTS; ======================================== CURRENT PERFORMANCE MAY BE LOWER OR PER NASD REQUIREMENTS, THE MOST HIGHER. PLEASE CONTACT YOUR VARIABLE RECENT MONTH-END PERFORMANCE DATA AT THE ======================================== PRODUCT ISSUER OR FINANCIAL ADVISOR FOR FUND LEVEL, EXCLUDING VARIABLE PRODUCT THE MOST RECENT MONTH-END VARIABLE CHARGES, IS AVAILABLE ON THIS AIM CUMULATIVE TOTAL RETURNS PRODUCT PERFORMANCE. PERFORMANCE FIGURES AUTOMATED INFORMATION LINE, REFLECT FUND EXPENSES, REINVESTED 866-702-4402. AS MENTIONED ABOVE, FOR 6 months ended 12/31/06 DISTRIBUTIONS AND CHANGES IN NET ASSET THE MOST RECENT MONTH-END PERFORMANCE Series 1 Shares 10.83% VALUE. INVESTMENT RETURN AND PRINCIPAL INCLUDING VARIABLE PRODUCT CHARGES, Series II Shares 10.75 VALUE WILL FLUCTUATE SO THAT YOU MAY PLEASE CONTACT YOUR VARIABLE PRODUCT ======================================== HAVE A GAIN OR LOSS WHEN YOU SELL ISSUER OR FINANCIAL ADVISOR. SHARES. SERIES II SHARES' INCEPTION DATE IS APRIL 30, 2004. RETURNS SINCE THAT DATE AIM V.I. TECHNOLOGY FUND, A SERIES ARE HISTORICAL. ALL OTHER RETURNS ARE PORTFOLIO OF AIM VARIABLE INSURANCE THE BLENDED RETURNS OF THE HISTORICAL FUNDS, IS CURRENTLY OFFERED THROUGH PERFORMANCE OF SERIES II SHARES SINCE THEIR INCEPTION AND THE RESTATED HISTORICAL PERFORMANCE OF ==================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND Foreign securities have additional Investing in a fund that invests The Fund's investments may be risks, including exchange rate changes, in smaller companies involves risks not bought and sold relatively frequently. A political and economic upheaval, the associated with investing in more high turnover rate may affect the Fund's relative lack of information about these established companies, such as business performance because it results in higher companies, relatively low market risk, stock price fluctuations and brokerage commissions. liquidity and the potential lack of illiquidity. strict financial and accounting controls Many of the products and services and standards. The Fund may use enhanced offered by information investment techniques such as technology-related companies are subject Investing in emerging markets derivatives. The principal risk of to rapid obsolescence, which may lower involves greater risk than investing in investments in derivatives is that the the value of the securities of the comp- more established markets. The risks fluctuations in their values may not anies in this sector. include the relatively smaller size and correlate perfectly with the overall lesser liquidity of these markets, high securities markets. Derivatives are ABOUT INDEXES USED IN THIS REPORT inflation rates, adverse political subject to counter party risk--the risk developments and lack of timely that the other party will not complete The GOLDMAN SACHS TECHNOLOGY COMPOSITE information. the transaction with the Fund. INDEX is a modified capitalization- weighted index composed of companies If the seller of a repurchase The prices of securities held by involved in the technology industry. agreement in which the Fund invests the Fund may decline in response to The index is rebalanced semiannually. defaults on its obligation or declares market risks. bankruptcy, the Fund may experience The unmanaged LIPPER SCIENCE AND delays in selling the securities The prices of initial public TECHNOLOGY FUNDS INDEX represents an underlying the repurchase agreement. offering (IPO) securities may go up and average of the performance of the 30 down more than prices of equity largest science and technology funds There is no guarantee that the securities of companies with longer tracked by Lipper Inc., an independent investment techniques and risk analyses trading histories. In addition, mutual fund performance monitor. used by the Fund's portfolio managers companies offering securities in IPOs will produce the desired results. may have less experienced management or limited operating histories. There can be no assurance that the Fund will have favorable IPO investment opportunities. Continued on page 5
4
AIM V.I. TECHNOLOGY FUND Past performance cannot guarantee value of an investment, is constructed comparable future results. with each segment representing a percent change in the value of the investment. This chart, which is a logarithmic In this chart, each segment represents a chart, presents the fluctuations in the doubling, or 100% change, in the value value of the Fund and its indexes. We of the investment. In other words, the believe that a logarithmic chart is more space between $5,000 and $10,000 is the effective than other types of charts in same size as the space between $10,000 illustrating changes in value during the and $20,000, and so on. early years shown in the chart. The vertical axis, the one that indicates the dollar ==================================================================================================================================== Continued from page 4 The unmanaged STANDARD & POOR'S including the indexes defined here, and transactions and the returns based on COMPOSITE INDEX OF 500 STOCKS (the S&P consequently, the performance of the those net asset values may differ from 500 Index) is an index of common stocks Fund may deviate significantly from the the net asset values and returns frequently used as a general measure of performance of the indexes. reported in the Financial Highlights. U.S. stock market performance. Additionally, the returns and net asset A direct investment cannot be made values shown throughout this report are In conjunction with the annual in an index. Unless otherwise indicated, at the Fund level only and do not prospectus update on or about May 1, index results include reinvested include variable product issuer charges. 2007, the AIM V.I. Technology Fund dividends, and they do not reflect sales If such charges were included, the total prospectus will be amended to reflect charges. Performance of an index of returns would be lower. that the Fund has elected to use the funds reflects fund expenses; Lipper Variable Underlying Funds (VUF) performance of a market index does not. Industry classifications used in Science & Technology Funds Category this report are generally according to Average as its peer group index rather OTHER INFORMATION the Global Industry Classification than the Lipper Science & Technology Standard, which was developed by and is Funds Index. The Lipper VUF Science & The returns shown in the management's the exclusive property and a service Technology Funds Category Average, discussion of Fund performance are based mark of Morgan Stanley Capital recently published by Lipper Inc., on net asset values calculated for International Inc. and Standard & comprises the underlying funds in each shareholder transactions. Generally Poor's. variable insurance category and does not accepted accounting principles require include mortality and expense fees. adjustments to be made to the net assets The Chartered Financial Analyst of the Fund at period end for financial --Registered Trademark-- (CFA The Fund is not managed to track reporting purposes, and as such, the net --Registered Trademark--) designation is the performance of any particular index, asset values for shareholder a globally recognized standard for measuring the competence and integrity of investment professionals.
5 ================================================================================ [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund data from 5/20/97, index data from 5/31/97
DATE AIM V.I. TECHNOLOGY FUND-SERIES 1 SHARES S&P 500 INDEX LIPPER SCIENCE & TECHNOLOGY FUNDS INDEX 5/20/97 $10000 5/97 10000 $10000 $10000 6/97 10000 10445 10093 7/97 11870 11275 11508 8/97 11970 10644 11580 9/97 12510 11227 12071 10/97 11799 10852 10795 11/97 11699 11354 10703 12/97 11479 11549 10202 1/98 11529 11677 10382 2/98 12569 12518 11618 3/98 13059 13159 11712 4/98 13300 13294 12215 5/98 12590 13066 11320 6/98 13680 13596 11983 7/98 12650 13452 11871 8/98 10299 11509 9642 9/98 11100 12247 10780 10/98 11569 13241 11603 11/98 12450 14043 12903 12/98 14429 14852 14990 1/99 16865 15473 16932 2/99 15165 14992 15165 3/99 17600 15592 16710 4/99 18104 16196 16919 5/99 17953 15813 16895 6/99 20499 16689 19090 7/99 20198 16170 19084 8/99 21747 16090 20134 9/99 22421 15649 20407 10/99 25733 16639 22557 11/99 30120 16977 25902 12/99 37367 17976 32067 1/00 37337 17073 31731 2/00 49796 16750 40278 3/00 47087 18388 39052 4/00 41804 17835 34493 5/00 37043 17469 30331 6/00 43214 17899 34928 7/00 41382 17620 33081 8/00 48317 18713 38101 9/00 44998 17726 34194 10/00 40669 17650 30444 11/00 28387 16260 22595 12/00 28620 16340 22359 1/01 30990 16919 24626 2/01 21256 15377 18209 3/01 16807 14404 15541 4/01 21225 15522 18575 5/01 19793 15626 17709 6/01 19419 15246 17416 7/01 17906 15096 16021 8/01 15182 14152 14020 9/01 11227 13009 11011 10/01 13235 13257 12679 11/01 15555 14274 14525 12/01 15505 14399 14595 1/02 15454 14189 14340 2/02 13083 13916 12425 3/02 14536 14439 13556 4/02 12618 13564 11943 5/02 11922 13464 11318 6/02 10207 12506 9827 7/02 8997 11531 8778 8/02 8614 11607 8570 9/02 7161 10346 7379 10/02 8261 11256 8495 11/02 9552 11918 9792 12/02 8240 11218 8555 1/03 8221 10925 8505 2/03 8322 10761 8539 3/03 8150 10865 8533 4/03 8917 11759 9331 5/03 9926 12378 10406 ================================================================================
Source: Lipper Inc. ================================================================================ [MOUNTAIN CHART] 6/03 9824 12536 10479 7/03 10258 12758 11042 8/03 11074 13006 11849 9/03 10661 12868 11533 10/03 11862 13596 12693 11/03 12074 13715 12885 12/03 11971 14434 12946 1/04 12445 14699 13582 2/04 12233 14903 13368 3/04 11911 14678 13085 4/04 11184 14448 12184 5/04 11719 14646 12791 6/04 11920 14931 13014 7/04 10720 14437 11593 8/04 10326 14495 11126 9/04 10811 14652 11644 10/04 11517 14875 12302 11/04 12172 15477 12988 12/04 12525 16004 13478 1/05 11818 15614 12670 2/05 11889 15942 12703 3/05 11516 15660 12364 4/05 11022 15363 11868 5/05 11960 15851 12923 6/05 11738 15874 12773 7/05 12313 16464 13543 8/05 12192 16314 13458 9/05 12333 16446 13718 10/05 12111 16172 13421 11/05 12867 16783 14164 12/05 12796 16789 14202 1/06 13573 17233 15076 2/06 13442 17280 14829 3/06 13916 17495 15198 4/06 14108 17730 15196 5/06 12919 17220 14045 6/06 12757 17243 13789 7/06 12163 17349 13125 8/06 12858 17761 13856 9/06 13544 18219 14305 10/06 13775 18812 14686 11/06 14280 19169 15317 12/06 14140 19438 15159 ================================================================================
CALCULATING YOUR ONGOING FUND EXPENSES AIM V.I. TECHNOLOGY FUND EXAMPLE ACTUAL EXPENSES actual return. The Fund's actual cumulative total returns at net asset As a shareholder of the Fund, you incur The table below provides information value after expenses for the six months ongoing costs, including management about actual account values and actual ended December 31, 2006, appear in the fees; distribution and/or service expenses. You may use the information in table "Cumulative Total Returns" on page (12b-l) fees; and other Fund expenses. this table, together with the amount you 4. This example is intended to help you invested, to estimate the expenses that understand your ongoing costs (in you paid over the period. Simply divide The hypothetical account values dollars) of investing in the Fund and to your account value by $1,000 (for and expenses may not be used to estimate compare these costs with ongoing costs example, an $8,600 account value divided the actual ending account balance or of investing in other mutual funds. The by $1,000 = 8.6), then multiply the expenses you paid for the period. You example is based on an investment of result by the number in the table under may use this information to compare the $1,000 invested at the beginning of the the heading entitled "Actual Expenses ongoing costs of investing in the Fund period and held for the entire period Paid During Period" to estimate the and other funds. To do so. compare this July 1, 2006, through December 31, 2006. expenses you paid on your account during 5% hypothetical example with the 5% this period. hypothetical examples that appear in the The actual and hypothetical shareholder reports of the other funds. expenses in the examples below do not HYPOTHETICAL EXAMPLE FOR COMPARISON represent the effect of any fees or PURPOSES Please note that the expenses other expenses assessed in connection shown in the table are meant to with a variable product; if they did, The table below also provides highlight your ongoing costs. Therefore, the expenses shown would be higher while information about hypothetical account the hypothetical information is useful the ending account values shown would be values and hypothetical expenses based in comparing ongoing costs, and will not lower. on the Fund's actual expense ratio and help you determine the relative total an assumed rate of return of 5% per year costs of owning different funds. before expenses, which is not the Fund's ==================================================================================================================================== HYPOTHETICAL ACTUAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO Series I $ 1,000.00 $1,108.30 $5.95 $1,019.56 $5.70 1.12% Series II 1,000.00 1,107.50 7.28 1,018.30 6.97 1.37 (1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. ====================================================================================================================================
6
APPROVAL OF INVESTMENT ADVISORY AGREEMENT AIM V.I. TECHNOLOGY FUND The Board of Trustees of AIM Variable services to be provided by AIM under the more time to be evaluated before a Insurance Funds (the "Board") oversees Advisory Agreement was appropriate and conclusion can be made that the changes the management of AIM V.I. Technology that AIM currently is providing services have addressed the Fund's Fund (the "Fund") and, as required by in accordance with the terms of the under-performance. Based on this review law, determines annually whether to Advisory Agreement. and after taking account of all of the approve the continuance of the Fund's other factors that the Board considered advisory agreement with AIM Advisors, - The quality of services to be provided in determining whether to continue the Inc. ("AIM"). Based upon the by AIM. The Board reviewed the Advisory Agreement for the Fund, the recommendation of the Investments credentials and experience of the Board concluded that no changes should Committee of the Board, at a meeting officers and employees of AIM who will be made to the Fund and that it was not held on June 27, 2006, the Board, provide investment advisory services to necessary to change the Fund's portfolio including all of the independent the Fund. In reviewing the management team at this time. However, trustees, approved the continuance of qualifications of AIM to provide due to the Fund's under-performance, the the advisory agreement (the "Advisory investment advisory services, the Board Board also concluded that it would be Agreement") between the Fund and AIM for considered such issues as AIM's appropriate for the Board to continue to another year, effective July 1, 2006. portfolio and product review process, closely monitor and review the various back office support functions performance of the Fund. Although the The Board considered the factors provided by AIM and AIM's equity and independent written evaluation of the discussed below in evaluating the fixed income trading operations. Based Fund's Senior Officer (discussed below) fairness and reasonableness of the on the review of these and other only considered Fund performance through Advisory Agreement at the meeting on factors, the Board concluded that the the most recent calendar year, the Board June 27, 2006 and as part of the Board's quality of services to be provided by also reviewed more recent Fund ongoing oversight of the Fund. In their AIM was appropriate and that AIM performance, which did not change their deliberations, the Board and the currently is providing satisfactory conclusions. independent trustees did not identify services in accordance with the terms of any particular factor that was the Advisory Agreement. - Meetings with the Fund's portfolio controlling, and each trustee attributed managers and investment personnel. With different weights to the various - The performance of the Fund relative to respect to the Fund, the Board is factors. comparable funds. The Board reviewed the meeting periodically with such Fund's performance of the Fund during the past portfolio managers and/or other One responsibility of the one, three and five calendar years investment personnel and believes that independent Senior Officer of the Fund against the performance of funds advised such individuals are competent and able is to manage the process by which the by other advisors with investment to continue to carry out their Fund's proposed management fees are strategies comparable to those of the responsibilities under the Advisory negotiated to ensure that they are Fund. The Board noted that the Fund's Agreement. negotiated in a manner which is at arms' performance in such periods was below length and reasonable. To that end, the the median performance of such - Overall performance of AIM. The Board Senior Officer must either supervise a comparable funds. The Board also noted considered the overall performance of competitive bidding process or prepare that AIM began serving as investment AIM in providing investment advisory an independent written evaluation. The advisor to the Fund in April 2004. The and portfolio administrative services to Senior Officer has recommended an Board noted that AIM has recently made the Fund and concluded that such independent written evaluation in lieu changes to the Fund's portfolio manage- performance was satisfactory. of a competitive bidding process and, ment team, which need more time to be upon the direction of the Board, has evaluated before a conclusion can be - Fees relative to those of clients of prepared such an independent written made that the changes have addressed the AIM with comparable investment evaluation. Such written evaluation also Fund's under-performance. Based on this strategies. The Board reviewed the considered certain of the factors review and after taking account of all effective advisory fee rate (before discussed below. In addition, as of the other factors that the Board waivers) for the Fund under the Advisory discussed below, the Senior Officer made considered in determining whether to Agreement. The Board noted that this a recommendation to the Board in continue the Advisory Agreement for the rate was (i) above the effective connection with such written evaluation. Fund, the Board concluded that no advisory fee rate (before waivers) for changes should be made to the Fund and one mutual fund advised by AIM with The discussion below serves as a that it was not necessary to change the investment strategies comparable to summary of the Senior Officer's Fund's portfolio management team at this those of the Fund; (ii) the same as the independent written evaluation and time. However, due to the Fund's effective advisory fee rates (before recommendation to the Board in under-performance, the Board also waivers) for three variable insurance connection therewith, as well as a concluded that it would be appropriate funds advised by AIM and offered to discussion of the material factors and for the Board to continue to closely insurance company separate accounts the conclusions with respect thereto monitor and review the performance of with investment strategies comparable that formed the basis for the Board's the Fund. Although the independent to those of the Fund; and (iii) above approval of the Advisory Agreement. written evaluation of the Fund's Senior the effective sub-advisory fee rates After consideration of all of the Officer (discussed below) only for two offshore funds advised and factors below and based on its informed considered Fund performance through the sub-advised by AIM affiliates with business judgment, the Board determined most recent calendar year, the Board investment strategies comparable to that the Advisory Agreement is in the also reviewed more recent Fund those of the Fund, although the total best interests of the Fund and its performance, which did not change their advisory fees for one such offshore fund shareholders and that the compensation conclusions. were above those for the Fund and the to AIM under the Advisory Agreement is total advisory fees for the other fair and reasonable and would have been - The performance of the Fund relative to offshore fund were comparable to those obtained through arm's length indices. The Board reviewed the for the Fund. The Board noted that AIM negotiations. performance of the Fund during the past has agreed to waive advisory fees of the one, three and five calendar years Fund and to limit the Fund's total Unless otherwise stated, against the performance of the Lipper operating expenses, as discussed below. information presented below is as of Science & Technology Fund Index. The Based on this review, the Board June 27, 2006 and does not reflect any Board noted that the Fund's performance concluded that the advisory fee rate for changes that may have occurred since in such periods was below the the Fund under the Advisory Agreement June 27, 2006, including but not limited performance of such Index. The Board was fair and reasonable. to changes to the Fund's performance, also noted that AIM began serving as advisory fees, expense limitations investment advisor to the Fund in April - Fees relative to those of comparable and/or fee waivers. 2004. The Board noted that AIM has funds with other advisors. The Board recently made changes to the Fund's reviewed the advisory fee rate for the - The nature and extent of the advisory portfolio management team, which need Fund under the Advisory Agreement, The services to be provided by AIM. The Board reviewed the services to be provided by AIM under the Advisory Agreement. Based on such review, the Board concluded that the range of
(continued) 7
AIM V.I. Technology Fund Board compared effective contractual - Investments in affiliated money market condition, the Board concluded that the advisory fee rates at a common asset funds. The Board also took into account compensation to be paid by the Fund to level at the end of the past calendar the fact that uninvested cash and cash AIM under its Advisory Agreement was not year and noted that the Fund's rate was collateral from securities lending excessive. comparable to the median rate of the arrangements, if any (collectively, funds advised by other advisors with "cash balances") of the Fund may be - Benefits of soft dollars to AIM. The investment strategies comparable to invested in money market funds advised Board considered the benefits realized those of the Fund that the Board by AIM pursuant to the terms of an SEC by AIM as a result of broker age reviewed. The Board noted that AIM has exemptive order. The Board found that transactions executed through "soft agreed to waive advisory fees of the the Fund may realize certain benefits dollar" arrangements. Under these Fund and to limit the Fund's total upon investing cash balances in AIM arrangements, brokerage commissions paid operating expenses, as discussed below. advised money market funds, including a by the Fund and/or other funds advised Based on this review, the Board higher net return, increased liquidity, by AIM are used to pay for research and concluded that the advisory fee rate for increased diversification or decreased execution services. This research may the Fund under the Advisory Agreement transaction costs. The Board also found be used by AIM in making investment was fair and reasonable. that the Fund will not receive reduced decisions for the Fund. The Board services if it invests its cash concluded that such arrangements were - Expense limitations and fee waivers. balances in such money market funds. appropriate. The Board noted that AIM has The Board noted that, to the extent the contractually agreed to waive advisory Fund invests uninvested cash in - AIM'S financial soundness in light of fees of the Fund through April 30, 2008 affiliated money market funds, AIM has the Fund's needs. The Board considered to the extent necessary so that the voluntarily agreed to waive a portion whether AIM is financially sound and advisory fees payable by the Fund do not of the advisory fees it receives from has the resources necessary to perform exceed a specified maximum advisory fee the Fund attributable to such its obligations under the Advisory rate, which maximum rate includes investment. The Board further determined Agreement, and concluded that AIM has breakpoints and is based on net asset that the proposed securities lending pro the financial resources necessary to levels. The Board considered the gram and related procedures with respect fulfill its obligations under the contractual nature of this fee waiver to the lending Fund is in the best Advisory Agreement. and noted that it remains in effect interests of the lending Fund and its until April 30, 2008. The Board noted respective shareholders. The Board - Historical relationship between the that AIM has contractually agreed to therefore concluded that the investment Fund and AIM. In determining whether to waive fees and/or limit expenses of the of cash collateral received in continue the Advisory Agreement for the Fund through April 30, 2008 in an amount connection with the securities lending Fund, the Board also considered the necessary to limit total annual program in the money market funds prior relationship between AIM and the operating expenses to a specified according to the procedures is in the Fund, as well as the Board's knowledge percentage of average daily net assets best interests of the lending Fund and of AIM'S operations, and concluded that for each class of the Fund. The Board its respective shareholders. it was beneficial to maintain the cur- considered the contractual nature of rent relationship, in part, because of this fee waiver/expense limitation and - Independent written evaluation and such knowledge. The Board also reviewed noted that it remains in effect until recommendations of the Fund's Senior the general nature of the non-investment April 30, 2008. The Board considered Officer. The Board noted that, upon advisory services currently performed by the effect these fee waivers/expense their direction, the Senior Officer of AIM and its affiliates, such as limitations would have on the Fund's the Fund, who is independent of AIM and administrative, transfer agency and estimated expenses and concluded that AIM'S affiliates, had prepared an distribution services, and the fees the levels of fee waivers/expense limi- independent written evaluation in order received by AIM and its affiliates for tations for the Fund were fair and to assist the Board in determining the performing such services. In addition to reasonable. reason ableness of the proposed reviewing such services, the trustees management fees of the AIM Funds, also considered the organizational - Breakpoints and economies of scale. including the Fund. The Board noted that structure employed by AIM and its The Board reviewed the structure of the the Senior Officer's written evaluation affiliates to provide those services Fund's advisory fee under the Advisory had been relied upon by the Board in Based on the review of these and other Agreement, noting that it does not this regard in lieu of a competitive factors, the Board concluded that AIM include any breakpoints. The Board bidding process. In determining whether and its affiliates were qualified to considered whether it would be to continue the Advisory Agreement for continue to provide non-investment appropriate to add advisory fee the Fund, the Board considered the advisory services to the Fund, including breakpoints for the Fund or whether, due Senior Officer's written evaluation and administrative, transfer agency and to the nature of the Fund and the the recommendation made by the Senior distribution services, and that AIM and advisory fee structures of comparable Officer to the Board that the Board its affiliates currently are providing funds, it was reasonable to structure consider whether the advisory fee satisfactory non-investment advisory the advisory fee without breakpoints. waivers for certain equity AIM Funds, services. Based on this review, the Board including the Fund, should be concluded that it was not necessary to simplified. The Board concluded that it - Other factors and current trends. The add advisory fee breakpoints to the would be advisable to consider this Board considered the steps that AIM and Fund's advisory fee schedule. The Board issue and reach a decision prior to the its affiliates have taken over the last reviewed the level of the Fund's adviso- expiration date of such advisory fee several years, and continue to take, in ry fees, and noted that such fees, as a waivers. order to improve the quality and percentage of the Fund's net assets, efficiency of the services they provide would remain constant under the Advisory - Profitability of AIM and its to the Funds in the areas of investment Agreement because the Advisory Agreement affiliates. The Board reviewed performance, product line does not include any breakpoints. The information concerning the profitability diversification, distribution, fund Board noted that AIM has contractually of AIM'S (and its affiliates') operations, shareholder services and agreed to waive advisory fees of the investment advisory and other activities compliance. The Board concluded that Fund through April 30, 2008 to the and its financial condition. The Board these steps taken by AIM have improved, extent necessary so that the advisory considered the overall profitability of and are likely to continue to improve, fees payable by the Fund do not exceed a AIM, as well as the profitability of AIM the quality and efficiency of the servi- specified maximum advisory fee rate, in connection with managing the Fund. ces AIM and its affiliates provide to which maximum rate includes breakpoints The Board noted that AIM'S operations the Fund in each of these areas, and and is based on net asset levels. The remain profitable, although increased support the Board's approval of the Board concluded that the Fund's fee expenses in recent years have reduced continuance of the Advisory Agreement levels under the Advisory Agreement AIM'S profitability. Based on the review for the Fund. therefore would not reflect economies of of the profitability of AIM's and its scale, although the advisory fee waiver affiliates' investment advisory and reflects economies of scale. other activities and its financial
8 AIM V.I. Technology Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE -------------------------------------------------------------------------- COMMON STOCKS AND OTHER EQUITY INTERESTS-80.34% ADVERTISING-0.68% Omnicom Group Inc. 11,210 $ 1,171,893 ========================================================================== APPLICATION SOFTWARE-6.97% Adobe Systems Inc.(a) 126,165 5,187,905 -------------------------------------------------------------------------- Amdocs Ltd.(a) 88,054 3,412,093 -------------------------------------------------------------------------- BEA Systems, Inc.(a) 35,335 444,514 -------------------------------------------------------------------------- Citrix Systems, Inc.(a) 32,003 865,681 -------------------------------------------------------------------------- TIBCO Software Inc.(a) 231,087 2,181,461 ========================================================================== 12,091,654 ========================================================================== BROADCASTING & CABLE TV-0.84% Comcast Corp.-Class A(a) 34,387 1,455,602 ========================================================================== COMMUNICATIONS EQUIPMENT-9.38% Avocent Corp.(a) 45,514 1,540,649 -------------------------------------------------------------------------- Cisco Systems, Inc.(a) 180,236 4,925,850 -------------------------------------------------------------------------- F5 Networks, Inc.(a) 35,852 2,660,577 -------------------------------------------------------------------------- Harris Corp. 31,299 1,435,372 -------------------------------------------------------------------------- Juniper Networks, Inc.(a) 100,234 1,898,432 -------------------------------------------------------------------------- Motorola, Inc. 81,372 1,673,008 -------------------------------------------------------------------------- Polycom, Inc.(a) 68,883 2,129,174 ========================================================================== 16,263,062 ========================================================================== COMPUTER HARDWARE-8.30% Apple Computer, Inc.(a) 52,352 4,441,544 -------------------------------------------------------------------------- Dell Inc.(a) 41,234 1,034,561 -------------------------------------------------------------------------- Hewlett-Packard Co. 128,898 5,309,308 -------------------------------------------------------------------------- International Business Machines Corp. 37,200 3,613,980 ========================================================================== 14,399,393 ========================================================================== COMPUTER STORAGE & PERIPHERALS-7.20% Brocade Communications Systems, Inc.(a) 56,655 465,137 -------------------------------------------------------------------------- EMC Corp.(a) 246,373 3,252,124 -------------------------------------------------------------------------- McDATA Corp.-Class A(a) 149,423 829,298 -------------------------------------------------------------------------- Network Appliance, Inc.(a) 68,208 2,679,210 -------------------------------------------------------------------------- QLogic Corp.(a) 120,068 2,631,891 -------------------------------------------------------------------------- Seagate Technology 99,425 2,634,762 ========================================================================== 12,492,422 ========================================================================== DATA PROCESSING & OUTSOURCED SERVICES-2.97% Alliance Data Systems Corp.(a) 8,689 542,802 -------------------------------------------------------------------------- VeriFone Holdings, Inc.(a) 130,393 4,615,912 ========================================================================== 5,158,714 ========================================================================== ELECTRONIC EQUIPMENT MANUFACTURERS-2.03% Amphenol Corp.-Class A 41,289 2,563,221 -------------------------------------------------------------------------- Itron, Inc.(a) 18,385 953,079 ========================================================================== 3,516,300 ========================================================================== HOME ENTERTAINMENT SOFTWARE-0.76% Activision, Inc.(a) 76,757 1,323,291 ==========================================================================
SHARES VALUE --------------------------------------------------------------------------
HUMAN RESOURCE & EMPLOYMENT SERVICES-0.72% Monster Worldwide Inc.(a) 26,835 $ 1,251,584 ========================================================================== INTERNET RETAIL-0.44% IAC/InterActiveCorp.(a) 20,517 762,412 ========================================================================== INTERNET SOFTWARE & SERVICES-6.57% Akamai Technologies, Inc.(a) 35,224 1,871,099 -------------------------------------------------------------------------- Digital River, Inc.(a) 81,504 4,547,108 -------------------------------------------------------------------------- Google Inc.-Class A(a) 10,804 4,975,026 ========================================================================== 11,393,233 ========================================================================== IT CONSULTING & OTHER SERVICES-5.04% Accenture Ltd.-Class A 138,298 5,107,345 -------------------------------------------------------------------------- Acxiom Corp. 39,252 1,006,814 -------------------------------------------------------------------------- Cognizant Technology Solutions Corp.-Class A(a) 34,146 2,634,705 ========================================================================== 8,748,864 ========================================================================== OTHER DIVERSIFIED FINANCIAL SERVICES-0.86% BlueStream Ventures L.P. (Acquired 08/03/00-11/28/06; Cost $2,913,405)(a)(b)(c)(d) 3,037,500 1,488,952 ========================================================================== SEMICONDUCTOR EQUIPMENT-0.52% FormFactor Inc.(a) 24,140 899,215 ========================================================================== SEMICONDUCTORS-15.12% Broadcom Corp.-Class A(a) 78,088 2,523,023 -------------------------------------------------------------------------- Integrated Device Technology, Inc.(a) 187,509 2,902,639 -------------------------------------------------------------------------- Intel Corp. 169,914 3,440,759 -------------------------------------------------------------------------- Intersil Corp.-Class A 110,340 2,639,333 -------------------------------------------------------------------------- Marvell Technology Group Ltd.(a) 53,613 1,028,833 -------------------------------------------------------------------------- National Semiconductor Corp. 121,312 2,753,782 -------------------------------------------------------------------------- Netlogic Microsystems Inc.(a) 28,708 622,677 -------------------------------------------------------------------------- NVIDIA Corp.(a) 80,584 2,982,414 -------------------------------------------------------------------------- Silicon Image, Inc.(a) 139,320 1,772,150 -------------------------------------------------------------------------- SiRF Technology Holdings, Inc.(a) 77,803 1,985,533 -------------------------------------------------------------------------- Texas Instruments Inc. 45,921 1,322,525 -------------------------------------------------------------------------- Xilinx, Inc. 94,915 2,259,926 ========================================================================== 26,233,594 ========================================================================== SYSTEMS SOFTWARE-9.59% Macrovision Corp.(a) 30,772 869,617 -------------------------------------------------------------------------- McAfee Inc.(a) 30,035 852,393 -------------------------------------------------------------------------- Microsoft Corp. 168,241 5,023,676 -------------------------------------------------------------------------- Oracle Corp.(a) 221,028 3,788,420 -------------------------------------------------------------------------- Sybase, Inc.(a) 107,450 2,654,015 -------------------------------------------------------------------------- Symantec Corp.(a) 164,917 3,438,520 ========================================================================== 16,626,641 ==========================================================================
AIM V.I. Technology Fund
SHARES VALUE -------------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES-2.35% American Tower Corp.-Class A(a) 51,419 $ 1,916,900 -------------------------------------------------------------------------- NII Holdings Inc.(a) 33,631 2,167,182 ========================================================================== 4,084,082 ========================================================================== Total Common Stocks and Other Equity Interests (Cost $121,839,762) 139,360,908 ========================================================================== FOREIGN COMMON STOCKS & OTHER EQUITY INTERESTS-18.24% CANADA-0.98% Research In Motion Ltd. (Communications Equipment)(a) 13,277 1,696,535 ========================================================================== FINLAND-1.30% Nokia Oyj-ADR (Communications Equipment) 110,742 2,250,278 ========================================================================== FRANCE-2.40% Silicon-On-Insulator Technologies (Semiconductors)(a)(e)(f) 118,019 4,167,251 ========================================================================== HONG KONG-0.44% Hutchison Telecommunications International Ltd. (Wireless Telecommunication Services)(a)(f) 301,000 766,746 ========================================================================== ISRAEL-0.13% Allot Communications Ltd. (Systems Software)(a) 19,094 223,591 ========================================================================== JAPAN-0.81% Canon Inc. (Office Electronics)(e)(f) 24,900 1,410,219 ========================================================================== LUXEMBOURG-0.94% Millicom International Cellular S.A. (Wireless Telecommunication Services)(a)(e) 26,499 1,633,398 ========================================================================== MEXICO-3.22% America Movil S.A. de C.V.-Series L-ADR (Wireless Telecommunication Services) 123,611 5,589,689 ========================================================================== NETHERLANDS-0.50% ASML Holding N.V.-New York Shares (Semiconductor Equipment)(a) 35,339 870,400 ==========================================================================
SHARES VALUE --------------------------------------------------------------------------
RUSSIA-1.11% Vimpel-Communications-ADR (Wireless Telecommunication Services)(a) 24,316 $ 1,919,748 ========================================================================== SWEDEN-2.07% Telefonaktiebolaget LM Ericsson-ADR (Communications Equipment) 89,356 3,594,792 ========================================================================== SWITZERLAND-2.43% STMicroelectronics N.V.-New York Shares (Semiconductors) 228,762 4,209,221 ========================================================================== TAIWAN-1.91% Hon Hai Precision Industry Co., Ltd. (Electronic Manufacturing Services)(f) 463,041 3,306,097 ========================================================================== Total Foreign Common Stocks & Other Equity Interests (Cost $23,956,832) 31,637,965 ========================================================================== MONEY MARKET FUNDS-1.78% Liquid Assets Portfolio-Institutional Class(g) 1,538,853 1,538,853 -------------------------------------------------------------------------- Premier Portfolio-Institutional Class(g) 1,538,853 1,538,853 ========================================================================== Total Money Market Funds (Cost $3,077,706) 3,077,706 ========================================================================== TOTAL INVESTMENTS (excluding investments purchased with cash collateral from securities loaned)-100.36% (Cost $148,874,300) 174,076,579 ========================================================================== INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED MONEY MARKET FUNDS-3.07% Premier Portfolio-Institutional Class(g)(h) 5,333,168 5,333,168 ========================================================================== Total Money Market Funds (purchased with cash collateral from securities loaned) (Cost $5,333,168) 5,333,168 ========================================================================== TOTAL INVESTMENTS-103.43% (Cost $154,207,468) 179,409,747 ========================================================================== OTHER ASSETS LESS LIABILITIES-(3.43)% (5,955,124) ========================================================================== NET ASSETS-100.00% $173,454,623 __________________________________________________________________________ ==========================================================================
Investment Abbreviations: ADR - American Depositary Receipt
Notes to Schedule of Investments: (a) Non-income producing security. (b) Security fair valued in good faith in accordance with the procedures established by the Board of Trustees. The value of this security at December 31, 2006 represented 0.86% of the Fund's Net Assets. See Note 1A. (c) The Fund has a remaining commitment of $337,500 to purchase additional interests in BlueStream Ventures L.P., which is subject to the terms of the limited partnership agreement. (d) Security not registered under the Securities Act of 1933, as amended (e.g., the security was purchased in a Rule 144A transaction or a Regulation D transaction). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The Fund has no rights to demand registration of these securities. The value of this security at December 31, 2006 represented 0.86% of the Fund's Net Assets. Security considered to be illiquid. The Fund is limited to investing 15% of net assets in illiquid securities at the time of purchase. (e) All or a portion of this security was out on loan at December 31, 2006. (f) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $9,650,313, which represented 5.56% of the Fund's Net Assets. See Note 1A. (g) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. (h) The security has been segregated to satisfy the commitment to return the cash collateral received in securities lending transactions upon the borrower's return of the securities loaned. See Note 8. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Technology Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments at value (cost $145,796,594)* $ 170,998,873 ------------------------------------------------------------- Investments in affiliated money market funds (cost $8,410,874) 8,410,874 ============================================================= Total investments (cost $154,207,468) 179,409,747 ============================================================= Foreign currencies, at value (cost $582,285) 588,435 ------------------------------------------------------------- Receivables for: Investments sold 393,161 ------------------------------------------------------------- Fund shares sold 44,538 ------------------------------------------------------------- Dividends 49,394 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 44,451 ------------------------------------------------------------- Other assets 2,915 ============================================================= Total assets 180,532,641 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Investments purchased 1,273,148 ------------------------------------------------------------- Fund shares reacquired 246,104 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 54,209 ------------------------------------------------------------- Collateral upon return of securities loaned 5,333,168 ------------------------------------------------------------- Accrued administrative services fees 117,167 ------------------------------------------------------------- Accrued distribution fees--Series II 85 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,753 ------------------------------------------------------------- Accrued transfer agent fees 5,570 ------------------------------------------------------------- Accrued operating expenses 44,814 ============================================================= Total liabilities 7,078,018 ============================================================= Net assets applicable to shares outstanding $ 173,454,623 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $ 638,457,778 ------------------------------------------------------------- Undistributed net investment income (loss) (59,795) ------------------------------------------------------------- Undistributed net realized gain (loss) from investment securities, foreign currencies and option contracts (490,151,773) ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 25,208,413 ============================================================= $ 173,454,623 _____________________________________________________________ ============================================================= NET ASSETS: Series I $ 173,321,116 _____________________________________________________________ ============================================================= Series II $ 133,507 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 12,361,859 _____________________________________________________________ ============================================================= Series II 9,597 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 14.02 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 13.91 _____________________________________________________________ =============================================================
* At December 31, 2006, securities with an aggregate value of $5,114,853 were on loan to brokers. STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $51,170) $ 766,179 ------------------------------------------------------------ Dividends from affiliated money market funds (includes securities lending income of $33,706) 275,632 ============================================================ Total investment income 1,041,811 ============================================================ EXPENSES: Advisory fees 1,365,254 ------------------------------------------------------------ Administrative services fees 499,415 ------------------------------------------------------------ Custodian fees 55,201 ------------------------------------------------------------ Distribution fees--Series II 360 ------------------------------------------------------------ Transfer agent fees 30,947 ------------------------------------------------------------ Trustees' and officer's fees and benefits 19,493 ------------------------------------------------------------ Other 61,926 ============================================================ Total expenses 2,032,596 ============================================================ Less: Fees waived and expense offset arrangements (6,127) ============================================================ Net expenses 2,026,469 ============================================================ Net investment income (loss) (984,658) ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES, FOREIGN CURRENCIES AND OPTION CONTRACTS: Net realized gain (loss) from: Investment securities (includes net gains (losses) from securities sold to affiliates of $(35,425)) 21,825,915 ------------------------------------------------------------ Foreign currencies (24,585) ------------------------------------------------------------ Option contracts written 82,750 ============================================================ 21,884,080 ============================================================ Change in net unrealized appreciation (depreciation) of: Investment securities (3,853,234) ------------------------------------------------------------ Foreign currencies 3,557 ------------------------------------------------------------ Option contracts written 85,597 ============================================================ (3,764,080) ============================================================ Net gain from investment securities, foreign currencies and option contracts 18,120,000 ============================================================ Net increase in net assets resulting from operations $17,135,342 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Technology Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) $ (984,658) $ (1,077,606) ------------------------------------------------------------------------------------------ Net realized gain from investment securities, foreign currencies and option contracts 21,884,080 7,137,416 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities, foreign currencies and option contracts (3,764,080) (2,919,636) ========================================================================================== Net increase in net assets resulting from operations 17,135,342 3,140,174 ========================================================================================== Share transactions-net: Series I (34,499,934) (13,115,433) ------------------------------------------------------------------------------------------ Series II (22,638) (26,030) ========================================================================================== Net increase (decrease) in net assets resulting from share transactions (34,522,572) (13,141,463) ========================================================================================== Net increase (decrease) in net assets (17,387,230) (10,001,289) ========================================================================================== NET ASSETS: Beginning of year 190,841,853 200,843,142 ========================================================================================== End of year (including undistributed net investment income (loss) of $(59,795) and $(42,432), respectively) $173,454,623 $190,841,853 __________________________________________________________________________________________ ==========================================================================================
NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Technology Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to seek capital growth. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If AIM V.I. Technology Fund between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books AIM V.I. Technology Fund and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. K. COVERED CALL OPTIONS -- The Fund may write call options. A call option gives the purchaser of such option the right to buy, and the writer (the Fund) the obligation to sell, the underlying security at the stated exercise price during the option period. Written call options are recorded as a liability in the Statement of Assets and Liabilities. The amount of the liability is subsequently "marked-to-market" to reflect the current market value of the option written. If a written call option expires on the stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written option is exercised, the Fund realizes a gain or a loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. Realized gains and losses on these contracts are included in the Statement of Operations. A risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. L. PUT OPTIONS PURCHASED -- The Fund may purchase put options including options on securities indexes and/or futures contracts. By purchasing a put option, the Fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the Fund pays an option premium. The option's underlying instrument may be a security, securities index, or a futures contract. Put options may be used by the Fund to hedge securities it owns by locking in a minimum price at which the Fund can sell. If security prices fall, the put option could be exercised to offset all or a portion of the Fund's resulting losses. At the same time, because the maximum the Fund has at risk is the cost of the option, purchasing put options does not eliminate the potential for the Fund to profit from an increase in the value of the securities hedged. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. A risk in buying an option is that the Fund pays a premium whether or not the option is exercised. In addition, there can be no assurance that a liquid secondary market will exist for any option purchased or sold. M. COLLATERAL -- To the extent the Fund has pledged or segregated a security as collateral and that security is subsequently sold, it is the Fund's practice to replace such collateral no later than the next business day. This practice does not apply to securities pledged as collateral for securities lending transactions. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.75% of the Fund's average daily net assets. AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. AIM did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds (excluding investments made in affiliated money market funds with cash collateral from securities loaned by the fund). Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $1,278. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance AIM V.I. Technology Fund companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $449,415 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances and cash collateral from securities lending transactions in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The tables below show the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006. INVESTMENTS OF DAILY AVAILABLE CASH BALANCES:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $22,316,665 $(20,777,812) $ -- $1,538,853 $ 45,331 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 6,911,034 69,428,347 (74,800,528) -- 1,538,853 196,595 -- ================================================================================================================================== Subtotal $6,911,034 $91,745,012 $(95,578,340) $ -- $3,077,706 $241,926 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
INVESTMENTS OF CASH COLLATERAL FROM SECURITIES LENDING TRANSACTIONS:
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME* GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class $1,989,759 $105,804,234 $(102,460,825) $ -- $5,333,168 $ 33,706 $ -- ================================================================================================================================== Total Investments in Affiliates $8,900,793 $197,549,246 $(198,039,165) $ -- $8,410,874 $275,632 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
* Net of compensation to counterparties. NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $492,336, which resulted in net realized gains (losses) of $(35,425), and securities purchases of $2,085,540. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one time custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $4,849. AIM V.I. Technology Fund NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,436 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the SEC, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. NOTE 8--PORTFOLIO SECURITIES LOANED The Fund may lend portfolio securities having a market value up to one-third of the Fund's total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At December 31, 2006, securities with an aggregate value of $5,114,853 were on loan to brokers. The loans were secured by cash collateral of $5,333,168 received by the Fund and subsequently invested in an affiliated money market fund. For the year ended December 31, 2006, the Fund received dividends on cash collateral investments of $33,706 for securities lending transactions, which are net of compensation to counterparties. NOTE 9--OPTION CONTRACTS WRITTEN
TRANSACTIONS DURING THE PERIOD ------------------------------------------------------------------------------------ CALL OPTION CONTRACTS ---------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ------------------------------------------------------------------------------------ Beginning of period 165 $ 39,473 ------------------------------------------------------------------------------------ Written 1,859 169,790 ------------------------------------------------------------------------------------ Closed (66) (15,971) ------------------------------------------------------------------------------------ Exercised (1,469) (119,786) ------------------------------------------------------------------------------------ Expired (489) (73,506) ==================================================================================== End of period -- $ -- ____________________________________________________________________________________ ====================================================================================
AIM V.I. Technology Fund NOTE 10--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: There were no ordinary income or long-term capital gain distributions paid during the years ended December 31, 2006 and 2005. TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ----------------------------------------------------------------------------- Net unrealized appreciation-investments $ 26,203,151 ----------------------------------------------------------------------------- Temporary book/tax differences (42,575) ----------------------------------------------------------------------------- Capital loss carryover (491,146,511) ----------------------------------------------------------------------------- Post-October currency loss deferral (17,220) ----------------------------------------------------------------------------- Shares of beneficial interest 638,457,778 ============================================================================= Total net assets $ 173,454,623 _____________________________________________________________________________ =============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales and certain straddles and the treatment of partnerships. The tax-basis net unrealized appreciation on investments amount includes appreciation (depreciation) on foreign currencies of $6,133. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $487,453,426 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $21,010,598 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2007 $ 47,350,013 ----------------------------------------------------------------------------- December 31, 2008 256,455,919 ----------------------------------------------------------------------------- December 31, 2009 153,547,080 ----------------------------------------------------------------------------- December 31, 2010 33,793,499 ============================================================================= Total capital loss carryforward $491,146,511 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. To the extent that unrealized gains as of April 30, 2004, the date of the reorganization of AIM V.I. New Technology Fund and INVESCO VIF-Telecommunications Fund into the Fund, are realized on securities held in each fund at such date, the capital loss carryforward may be further limited for up to five years from the date of the reorganization. NOTE 11--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $206,663,450 and $236,876,292, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $ 28,311,268 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities (2,114,250) =============================================================================== Net unrealized appreciation of investment securities $ 26,197,018 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $153,212,729.
NOTE 12--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of foreign currency transactions, net operating losses and partnerships, on December 31, 2006, undistributed net investment income (loss) was increased by $967,295, undistributed net realized gain (loss) was increased by $80,924 and shares of beneficial interest decreased by $1,048,219. This reclassification had no effect on the net assets of the Fund. AIM V.I. Technology Fund NOTE 13--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006(A) 2005 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Sold: Series I 1,867,275 $ 24,826,913 4,018,565 $ 48,024,772 ---------------------------------------------------------------------------------------------------------------------- Series II 870 10,943 11,967 142,892 ====================================================================================================================== Reacquired: Series I (4,533,608) (59,326,847) (5,144,542) (61,140,205) ---------------------------------------------------------------------------------------------------------------------- Series II (2,551) (33,581) (14,093) (168,922) ====================================================================================================================== (2,668,014) $(34,522,572) (1,128,103) $(13,141,463) ______________________________________________________________________________________________________________________ ======================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 69% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM, and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 14--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ended December 31, 2007. NOTE 15--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I ----------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.69 $ 12.42 $ 11.87 $ 8.17 $ 15.37 ------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.08) (0.07) (0.04)(a) (0.08) (0.00)(b) ------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 1.41 0.34 0.59 3.78 (7.20) ========================================================================================================================= Total from investment operations 1.33 0.27 0.55 3.70 (7.20) ========================================================================================================================= Net asset value, end of period $ 14.02 $ 12.69 $ 12.42 $ 11.87 $ 8.17 _________________________________________________________________________________________________________________________ ========================================================================================================================= Total return(c) 10.48% 2.17% 4.63% 45.29% (46.84)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $173,321 $190,700 $200,556 $171,546 $105,508 _________________________________________________________________________________________________________________________ ========================================================================================================================= Ratio of expenses to average net assets 1.12%(d) 1.12% 1.15% 1.10% 1.11% ========================================================================================================================= Ratio of net investment income (loss) to average net assets (0.54)%(d) (0.60)% (0.39)%(a) (0.85)% (0.96)% _________________________________________________________________________________________________________________________ ========================================================================================================================= Portfolio turnover rate 116% 114% 137% 89% 92% _________________________________________________________________________________________________________________________ =========================================================================================================================
(a) Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.09) and (0.82)%, respectively. (b) The net investment income (loss) per share was calculated after permanent book tax differences, such as net operating losses, which were reclassified from accumulated net investment income (loss) to paid in capital. Had net investment income (loss) per share been calculated using the current method, which is before reclassification of net operating losses, net investment income (loss) per share would have been $(0.12) for the year ended December 31, 2002. (c) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (d) Ratios are based on average daily net assets of $181,889,717. AIM V.I. Technology Fund NOTE 15--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ------------------------------------------ APRIL 30, 2004 YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO --------------------- DECEMBER 31, 2006 2005 2004 -------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.62 $ 12.39 $11.09 -------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.12) (0.11) (0.05)(a) -------------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 1.41 0.34 1.35 ======================================================================================================== Total from investment operations 1.29 0.23 1.30 ======================================================================================================== Net asset value, end of period $ 13.91 $ 12.62 $12.39 ________________________________________________________________________________________________________ ======================================================================================================== Total return(b) 10.22% 1.86% 11.72% ________________________________________________________________________________________________________ ======================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $ 134 $ 142 $ 166 ________________________________________________________________________________________________________ ======================================================================================================== Ratio of expenses to average net assets 1.37%(c) 1.37% 1.40%(d) ======================================================================================================== Ratio of net investment income (loss) to average net assets (0.79)%(c) (0.85)% (0.64)%(a)(d) ________________________________________________________________________________________________________ ======================================================================================================== Portfolio turnover rate(e) 116% 114% 137% ________________________________________________________________________________________________________ ========================================================================================================
(a) Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets include a special cash dividend received of $3.00 per share owned of Microsoft Corp. on December 2, 2004. Net investment income (loss) per share and the ratio of net investment income (loss) to average net assets excluding the special dividend are $(0.10) and (1.07)%, respectively. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $144,092. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. AIM V.I. Technology Fund NOTE 16--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor-Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Technology Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Technology Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Technology Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Technology Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Technology Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
SECTOR EQUITY AIM V.I. UTILITIES FUND Annual Report to Shareholders - December 31, 2006 Sectors The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund's semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund's Form N-Q [COVER GLOBE IMAGE] filings are available on the SEC Web site, sec.gov. Copies of the Fund's Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202-942-8090 or 800-732-0330, or by electronic request at the following E-mail address: publicinfo@sec.gov. The SEC file numbers for the Fund are 811-07452 and 033-57340. The Fund's most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ("variable products") that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating AIM V.I. UTILITIES FUND seeks to portfolio securities is available capital growth and income. without charge, upon request, from our Client Services department at 800-410-4246 or on the AIM Web site, AIMinvestments.com. On the home page, scroll down and click on AIM Funds Proxy Policy. The information is also available on the SEC Web site, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2006, is available at our Web UNLESS OTHERWISE STATED, INFORMATION PRESENTED IN THIS REPORT site. Go to AIMinvestments.com, access IS AS OF DECEMBER 31, 2006, AND IS BASED ON TOTAL NET ASSETS. the About Us tab, click on Required Notices and then click on Proxy Voting Activity. Next, select the Fund from the drop-down menu. The information is also available on the SEC Web site, sec.gov. ========================================================== THIS REPORT MUST BE ACCOMPANIED OR PRECEDED BY A CURRENTLY EFFECTIVE FUND PROSPECTUS AND VARIABLE PRODUCT PROSPECTUS, WHICH CONTAIN MORE COMPLETE INFORMATION, INCLUDING SALES [AIM INVESTMENTS LOGO] CHARGES AND EXPENSES. INVESTORS SHOULD READ EACH CAREFULLY --Registered Trademark-- BEFORE INVESTING. ========================================================== NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Management's discussion of Fund performance AIM V.I. UTILITIES FUND =================================================================================== An investor preference for dividend-paying equities boosted the performance of - Owning both regulated and unregulated utilities stocks, helping the Fund post positive returns for the year ended utilities -- unregulated companies December 31, 2006. The Fund, excluding variable product issuer charges, provide greater growth potential, while outperformed its broad market index, the S&P 500 --Registered Trademark-- Index, regulated firms provide more stable as utilities was one of the better performing sectors during the year. Utilities dividends and principal. stocks benefited from an increase in merger and acquisition activity, as well as investor preference for their generally more defensive character and their - Generally avoiding excessive tendency to pay dividends. concentration of assets in a small number of stocks. Your Fund's long-term performance appears on pages 4-5. - Maintaining a reasonable cash position FUND VS. INDEXES to avoid having to sell stocks during market downturns. Total returns, 12/31/05 - 12/31/06, excluding variable product issuer charges. If variable product issuer charges were included, returns would be lower. We may sell a stock for any of the following reasons: Series I Shares 25.46% Series II Shares 25.25 - Earnings growth is threatened because S&P 500 Index (Broad Market Index) 15.78 of deterioration in the firm's Lipper Utility Funds Index (Peer Group Index) 26.89 fundamentals or change in the operating environment. SOURCE: LIPPER INC. - Valuation becomes too high. =================================================================================== - Corporate strategy changes. HOW WE INVEST MARKET CONDITIONS AND YOUR FUND We invest primarily in natural gas, state markets, and that are attractively electricity and telecommunication valued relative to the rest of the The year started off on a positive note services companies, selecting stocks market. We also monitor and may adjust as the markets were encouraged by strong based on our quantitative and industry and position weights according economic data. However, tensions in the fundamental analysis of individual to prevailing economic trends such as Middle East escalated with the companies. Our quantitative analysis gross domestic product (GDP) growth and Israel-Lebanon conflict, residential focuses on positive cash flows and interest rate changes. housing markets showed signs of cooling predictable earnings. Our fundamental and rising energy prices heightened analysis seeks strong balance sheets, We control risk by: inflation concerns. These factors led to competent management and sustainable a slight sell-off in the markets mid way dividends and distributions. - Diversifying across most industries through the year as investors became and sub-industries within the utilities concerned about an economic downturn. We look for companies that could sector. However, the markets staged a rally potentially benefit from industry beginning in August after the Fed held trends, such as increased demand for interest rates steady after 17 certain products and deregulation of consecutive increases. Also contributing =================================================================================== to the rally was a series of solid economic reports that indicated the PORTFOLIO COMPOSITION TOP 10 EQUITY HOLDINGS* economy, while slowing, continued to ----------------------------------------------------------------------------------- expand, and inflation remained within By industry 1. AT&T Inc. 5.2% manageable levels. Electric Utilities 29.8% 2. TXU Corp. 5.2 Multi-Utilities 26.7 3. Duke Energy Corp. 4.9 Against this backdrop, Integrated Telecommunication 4. Exelon Corp. 4.7 telecommunication services, energy and Services 11.2 5. NRG Energy, Inc. 4.4 utilities were the best-performing Independent Power Producers & 6. Sempra Energy 4.3 sectors of the S&P 500 Index. Investor Energy Traders 11.0 7. Entergy Corp. 4.2 preference for utilities stocks, based Gas Utilities 8.3 8. Verizon Communications Inc. 4.2 on their generally more defensive Oil & Gas Storage & 9. FPL Group, Inc. 4.0 character and tendency to pay dividends, Transportation 6.4 10. Edison International 4.0 increased during the year, bolstered by Water Utilities 1.6 evidence of a slowing economy, low Money Market Funds Plus Total Net Assets $141.54 million interest rates and lower energy costs. Other Assets Less Liabilities 5.0 Utilities stocks tend to be sensitive to Total Number of Holdings* 33 interest rate *Excluding money market fund holdings. The Fund's holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. ===================================================================================================================================
2 AIM V.I. UTILITIES FUND movements because they generally pay lower financial results. We continued to dividends and are particularly own the stock, as we believe the company John S. Segner attractive when interest rates are low. is making progress and acquiring new [SEGNER Senior portfolio manager An increase in merger and acquisition water systems. PHOTO] is lead manager of AIM V.I. activity, particularly in the integrated Utilities Fund. Mr. Segner telecommunication services industry, During the year, the reduced has more than 20 years of also helped to strengthen stocks within federal income tax rate for qualified experience in the energy and investment the utilities sector. For the year, our dividends, which has made utilities industries. Before joining the Fund's advisor holdings in electric utilities, stocks attractive to investors, was in 1997, he was managing director and multi-utilities and integrated extended. However, we remained modestly principal with an investment management telecommunication services companies had concerned about interest rate and company that focused exclusively on the most positive impact on Fund inflationary trends. We continued to publicly-traded energy stocks. Prior to that, performance. maintain our focus on holding what we he held positions with several energy believed were the favorably priced companies. Mr. Segner holds a B.S. in civil A number of the Fund's integrated stocks of strong companies with engineering from the University of telecommunications holdings performed reasonable growth prospects and Alabama and an M.B.A. with a well during the year; our largest attractive dividend yields. concentration in finance from The holding, AT&T, in particular was a University of Texas at Austin. notable contributor. The company IN CLOSING provides various landline Assisted by the Energy/Gold/Utilities Team telecommunication services, as well as Over the past 12 months, the Fund has satellite television services and experienced strong double-digit returns. wireless voice and data communication It would be imprudent for us to suggest services in the United States. Recently, that such a level of performance is the company completed its acquisition of sustainable over the long term. BellSouth, thus consolidating its ownership and management of joint As always, we thank you for your venture Cingular Wireless. With the continued investment and welcome any new merger complete, we believe AT&T may be investors to AIM V.I. Utilities Fund. able to expand its broadband, wireless and television services while preserving THE VIEWS AND OPINIONS EXPRESSED IN its core phone business. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ARE THOSE OF A I M ADVISORS, Electric utility provider FPL INC. THESE VIEWS AND OPINIONS ARE GROUP also contributed positively to SUBJECT TO CHANGE AT ANY TIME BASED ON performance over the year. A FACTORS SUCH AS MARKET AND ECONOMIC Florida-based company, FPL is one of the CONDITIONS. THESE VIEWS AND OPINIONS MAY largest and fastest growing domestic NOT BE RELIED UPON AS INVESTMENT ADVICE utilities. FPL operates in a variety of OR RECOMMENDATIONS, OR AS AN OFFER FOR A growing non-regulated businesses and is PARTICULAR SECURITY. THE INFORMATION IS aggressively growing that part of the NOT A COMPLETE ANALYSIS OF EVERY ASPECT business. OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT Detractors to Fund performance ARE FROM SOURCES CONSIDERED RELIABLE, were minimal. Our exposure to water BUT A I M ADVISORS, INC. MAKES NO utilities was the only detractor from REPRESENTATION OR WARRANTY AS TO THEIR performance. In fact, only one holding, COMPLETENESS OR ACCURACY. ALTHOUGH AQUA AMERICA, was down for the year. HISTORICAL PERFORMANCE IS NO GUARANTEE Aqua America is a holding company for OF FUTURE RESULTS, THESE INSIGHTS MAY regulated utilities providing water or HELP YOU UNDERSTAND OUR INVESTMENT wastewater services primarily in the MANAGEMENT PHILOSOPHY. United States. Shares of the stock declined after the company reported FOR A DISCUSSION OF THE RISKS OF INVESTING IN YOUR FUND, INDEXES USED IN THIS REPORT AND YOUR FUND'S LONG-TERM PERFORMANCE, PLEASE SEE PAGES 4-5.
3 AIM V.I. UTILITIES FUND YOUR FUND'S LONG-TERM PERFORMANCE ======================================== AVERAGE ANNUAL TOTAL RETURNS SHARES (FOR PERIODS PRIOR TO INCEPTION ASSESSED IN CONNECTION WITH A VARIABLE OF SERIES II SHARES) ADJUSTED TO REFLECT PRODUCT. SALES CHARGES, EXPENSES AND As of 12/31/06 THE RULE 12b-1 FEES APPLICABLE TO SERIES FEES, WHICH ARE DETERMINED BY THE SERIES I SHARES II SHARES. THE PERFORMANCE OF THE FUND'S VARIABLE PRODUCT ISSUERS, WILL VARY AND Inception (12/30/94) 8.75% SERIES I AND SERIES II SHARE CLASSES WILL LOWER THE TOTAL RETURN. 10 Years 8.33 WILL DIFFER PRIMARILY DUE TO DIFFERENT 5 Years 11.13 CLASS EXPENSES. THE PERFORMANCE DATA PER NASD REQUIREMENTS, THE MOST 1 Year 25.46 QUOTED REPRESENT PAST PERFORMANCE AND RECENT MONTH-END PERFORMANCE DATA AT THE CANNOT GUARANTEE COMPARABLE FUTURE FUND LEVEL, EXCLUDING VARIABLE PRODUCT Series II Shares RESULTS; CURRENT PERFORMANCE MAY BE CHARGES, IS AVAILABLE ON THIS AIM 10 Years 8.07% LOWER OR HIGHER. PLEASE CONTACT YOUR AUTOMATED INFORMATION LINE, 5 Years 10.87 VARIABLE PRODUCT ISSUER OR FINANCIAL 866-702-4402. AS MENTIONED ABOVE, FOR 1 Year 25.25 ADVISOR FOR THE MOST RECENT MONTH-END THE MOST RECENT MONTH-END PERFORMANCE ======================================== VARIABLE PRODUCT PERFORMANCE. INCLUDING VARIABLE PRODUCT CHARGES, PERFORMANCE FIGURES REFLECT FUND PLEASE CONTACT YOUR VARIABLE PRODUCT CUMULATIVE TOTAL RETURNS EXPENSES, REINVESTED DISTRIBUTIONS AND ISSUER OR FINANCIAL ADVISOR. CHANGES IN NET ASSET VALUE. INVESTMENT 6 months ended 12/31/06 RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT YOU MAY HAVE A GAIN OR Series I Shares 16.51% LOSS WHEN YOU SELL SHARES. Series II Shares 16.40 ======================================== AIM V.I. UTILITIES FUND, A SERIES SERIES II SHARES' INCEPTION DATE IS PORTFOLIO OF AIM VARIABLE INSURANCE APRIL 30, 2004. RETURNS SINCE THAT DATE FUNDS, IS CURRENTLY OFFERED THROUGH ARE HISTORICAL. ALL OTHER RETURNS ARE INSURANCE COMPANIES ISSUING VARIABLE THE BLENDED RETURNS OF THE HISTORICAL PRODUCTS. YOU CANNOT PURCHASE SHARES OF PERFORMANCE OF SERIES II SHARES SINCE THE FUND DIRECTLY. PERFORMANCE FIGURES THEIR INCEPTION AND THE RESTATED GIVEN REPRESENT THE FUND AND ARE NOT HISTORICAL PERFORMANCE OF SERIES I INTENDED TO REFLECT ACTUAL VARIABLE PRODUCT VALUES. THEY DO NOT REFLECT SALES CHARGES, EXPENSES AND FEES =================================================================================================================================== PRINCIPAL RISKS OF INVESTING IN THE FUND Investing in emerging markets In conjunction with the annual involves greater risk than investing in prospectus update on or about May 1, The prices of securities held by the more established markets. The risks 2007, the AIM V.I Utilities Fund Fund may decline in response to market include the relatively smaller size and prospectus will be amended to reflect risks. lesser liquidity of these markets, high that the Fund has elected to use the inflation rates, adverse political Lipper VUF Utilities Funds Index as its Investing in a fund that invests developments and lack of timely peer group rather than the Lipper in smaller companies involves risks not information. Utilities Funds Index. The Lipper associated with investing in more Variable Underlying Funds (VUF) established companies, such as business If the seller of a repurchase Utilities Funds Index, recently risk, stock price fluctuations and agreement in which the Fund invests published by Lipper Inc., comprises the illiquidity. defaults on its obligation or declares underlying funds in each variable bankruptcy, the Fund may experience insurance category and does not include Foreign securities have additional delays in selling the securities mortality and expense fees. risks, including exchange rate changes, underlying there purchase agreement. political and economic upheaval, the The Fund is not managed to track relative lack of information about these There is no guarantee that the the performance of any particular index, companies, relatively low market investment techniques and risk analyses including the indexes defined here, and liquidity and the potential lack of used by the Fund's portfolio managers consequently, the performance of the strict financial and accounting controls will produce the desired results. Fund may deviate significantly from the and standards. performance of the indexes. ABOUT INDEXES USED IN THIS REPORT The Fund may use enhanced A direct investment cannot be made investment techniques such as The unmanaged STANDARD & POOR'S in an index. Unless otherwise indicated, derivatives. The principal risk of COMPOSITE INDEX OF 500 STOCKS (the S&P index results include reinvested investments in derivatives is that the 500 Index) is an index of common stocks dividends, and they do not reflect sales fluctuations in their values may not frequently used as a general measure of charges. Performance of an index of correlate perfectly with the overall U.S. stock market performance. funds reflects fund expenses; securities markets. Derivatives are performance of a market index does not. subject to counter party risk -- the The unmanaged LIPPER UTILITY FUNDS risk that the other party will not INDEX represents an average of the 10 complete the transaction with the Fund. largest utility funds tracked by Lipper Inc., an independent mutual fund performance monitor. Continued on page 5
4 AIM V.I. UTILITIES FUND Past performance cannot guarantee comparable future results. This chart, which is a logarithmic representing a percent change in the chart, presents the fluctuations in the value of the investment. In this chart, value of the Fund and its indexes. We each segment represents a doubling, or believe that a logarithmic chart is more 100% change, in the value of the effective than other types of charts in investment. In other words, the space illustrating changes in value during the between $5,000 and $10,000 is the same early years shown in the chart. The size as the space between $10,000 and vertical axis, the one that indicates $20,000, and so on. the dollar value of an investment, is constructed with each segment =================================================================================================================================== Continued from page 4 OTHER INFORMATION Industry classifications used in this report are generally according to The returns shown in management's the Global Industry Classification discussion of Fund performance are based Standard, which was developed by and is on net asset values calculated for the exclusive property and a service shareholder transactions. Generally mark of Morgan Stanley Capital accepted accounting principles require International Inc. and Standard & adjustments to be made to the net assets Poor's. of the Fund at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the net asset values and returns reported in the Financial Highlights. Additionally, the returns and net asset values shown throughout this report are at the Fund level only and do not include variable product issuer charges. If such charges were included, the total returns would be lower.
5
================================================================================================================================== [MOUNTAIN CHART] RESULTS OF A $10,000 INVESTMENT Fund data from 12/30/94, index data from 12/31/94 Date AIM V.I. Utilities Fund-Series I Shares S&P 500 Index Lipper Utility Funds Index ---------------------------------------------------------------------------------------------------------------------------------- 12/30/94 $10000 12/94 10000 $10000 $10000 1/95 10040 10259 10360 2/95 10090 10659 10456 3/95 10090 10973 10447 4/95 10100 11295 10676 5/95 10120 11746 11101 6/95 10110 12019 11131 7/95 10110 12417 11273 8/95 10131 12448 11404 9/95 10180 12973 11900 10/95 10240 12927 11998 11/95 10601 13493 12231 12/95 10909 13753 12711 1/96 10969 14221 12936 2/96 10889 14353 12726 3/96 11050 14491 12662 4/96 11453 14705 12688 5/96 11644 15083 12758 6/96 11815 15141 13122 7/96 11362 14472 12526 8/96 11514 14778 12705 9/96 11634 15609 12826 10/96 11977 16039 13268 11/96 12329 17251 13776 12/96 12302 16909 13897 1/97 12405 17965 14161 2/97 12343 18106 14188 3/97 11942 17363 13761 4/97 12024 18399 13886 5/97 12590 19524 14539 6/97 13095 20392 14984 7/97 13280 22014 15359 8/97 12961 20782 14880 9/97 13754 21919 15739 10/97 13754 21188 15604 11/97 14547 22168 16617 12/97 15182 22548 17470 1/98 15372 22798 17382 2/98 16015 24441 17893 3/98 17185 25691 19202 4/98 16795 25955 18801 5/98 16711 25509 18541 6/98 17059 26544 18906 7/98 17016 26264 18650 8/98 15214 22469 17437 9/98 16258 23910 18712 10/98 17102 25852 19151 11/98 17671 27418 19637 12/98 19051 28997 20684 1/99 19522 30209 20590 2/99 19276 29270 19935 3/99 19480 30441 19914 4/99 20445 31620 21240 5/99 20960 30874 21784 6/99 21270 32583 22085 7/99 21227 31570 22026 8/99 20264 31414 21380 9/99 20436 30554 21335 10/99 21153 32486 22460 11/99 21432 33147 22613 12/99 22699 35096 23690 1/00 23997 33333 24127 2/00 25092 32703 24197 3/00 25925 35900 25372 4/00 24333 34820 24359 5/00 23498 34106 24106 6/00 23672 34946 24078 7/00 23163 34400 23968 8/00 24593 36536 25659 9/00 25166 34608 26485 10/00 24257 34461 25790 11/00 22166 31746 24440 12/00 23895 31902 25721 =================================================================================================================================== Source: Lipper Inc.
=================================================================================================================================== [MOUNTAIN CHART] 1/01 23417 33033 25068 2/01 22759 30023 24548 3/01 21999 28122 24024 4/01 23541 30306 25352 5/01 22077 30509 24798 6/01 19955 29767 23249 7/01 18798 29473 22522 8/01 17640 27630 21719 9/01 15643 25399 20392 10/01 15892 25884 19927 11/01 16065 27869 19823 12/01 16147 28113 20231 1/02 14954 27703 19154 2/02 14438 27169 18618 3/02 15343 28191 19792 4/02 14930 26482 19024 5/02 14335 26288 18418 6/02 13681 24416 17233 7/02 12545 22513 15391 8/02 12729 22661 15727 9/02 11822 20200 14295 10/02 12373 21976 14920 11/02 12591 23268 15496 12/02 12864 21902 15638 1/03 12427 21330 15168 2/03 12081 21009 14658 3/03 12289 21212 14983 4/03 12866 22959 16004 5/03 13995 24167 17327 6/03 14076 24476 17562 7/03 13430 24908 16934 8/03 13569 25393 17000 9/03 13938 25124 17339 10/03 14099 26544 17755 11/03 14273 26778 17942 12/03 15113 28181 19012 1/04 15230 28698 19413 2/04 15568 29097 19820 3/04 15498 28658 19818 4/04 15120 28209 19350 5/04 15251 28595 19422 6/04 15515 29151 19817 7/04 15779 28186 19994 8/04 16162 28299 20516 9/04 16557 28606 20981 10/04 17214 29043 21832 11/04 18255 30217 22852 12/04 18673 31245 23555 1/05 18662 30484 23559 2/05 19237 31125 24154 3/05 19248 30574 24192 4/05 19393 29995 24390 5/05 19703 30948 24804 6/05 20611 30993 25946 7/05 21388 32145 26744 8/05 22058 31852 27183 9/05 23026 32109 28071 10/05 21543 31574 26646 11/05 21520 32767 26901 12/05 21817 32778 27089 1/06 22685 33646 28191 2/06 22832 33737 28417 3/06 22294 34157 28068 4/06 22697 34616 28563 5/06 22942 33620 28581 6/06 23493 33665 29154 7/06 24569 33873 30389 8/06 25242 34677 31091 9/06 24863 35570 31047 10/06 26014 36729 32586 11/06 26993 37426 33788 12/06 27370 37951 34373 ===================================================================================================================================
AIM V.I. UTILITIES FUND CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE ACTUAL EXPENSES cumulative total returns at net asset value after expenses for the six months As a shareholder of the Fund, you incur The table below provides information ended December 31, 2006, appear in the ongoing costs, including management about actual account values and actual table "Cumulative Total Returns" on page 4. fees; distribution and/or service expenses. You may use the information in (12b-1) fees; and other Fund expenses. this table, together with the amount you The hypothetical account values This example is intended to help you invested, to estimate the expenses that and expenses may not be used to estimate understand your ongoing costs (in you paid over the period. Simply divide the actual ending account balance or dollars) of investing in the Fund and to your account value by $1,000 (for expenses you paid for the period. You compare these costs with ongoing costs example, an $8,600 account value divided may use this information to compare the of investing in other mutual funds. The by $1,000 = 8.6), then multiply the ongoing costs of investing in the Fund example is based on an investment of result by the number in the table under and other funds. To do so, compare this $1,000 invested at the beginning of the the heading entitled "Actual Expenses 5% hypothetical example with the 5% period and held for the entire period Paid During Period" to estimate the hypothetical examples that appear in the July 1, 2006, through December 31, 2006. expenses you paid on your account during shareholder reports of the other funds. this period. The actual and hypothetical Please note that the expenses expenses in the examples below do not HYPOTHETICAL EXAMPLE FOR COMPARISON shown in the table are meant to represent the effect of any fees or PURPOSES highlight your ongoing costs. Therefore, other expenses assessed in connection the hypothetical information is useful with a variable product; if they did, The table below also provides in comparing ongoing costs, and will not the expenses shown would be higher while information about hypothetical account help you determine the relative total the ending account values shown would be values and hypothetical expenses based costs of owning different funds. lower. on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The Fund's actual ===================================================================================================================================
ACTUAL HYPOTHETICAL (5% ANNUAL RETURN BEFORE EXPENSES) BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED SHARE ACCOUNT VALUE ACCOUNT VALUE PAID DURING ACCOUNT VALUE PAID DURING EXPENSE CLASS (7/1/06) (12/31/06)(1) PERIOD(2) (12/31/06) PERIOD(2) RATIO ----------------------------------------------------------------------------------------------------------------------------------- Series I $ 1,000.00 $ 1,165.10 $ 5.08 $ 1,020.52 $ 4.74 0.93% Series II 1,000.00 1,164.00 6.44 1,019.26 6.01 1.18 ===================================================================================================================================
(1) The actual ending account value is based on the actual total return of the Fund for the period July 1, 2006, through December 31, 2006, after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The Fund's actual cumulative total returns at net asset value after expenses for the six months ended December 31, 2006, appear in the table "Cumulative Total Returns" on page 4. (2) Expenses are equal to the Fund's annualized expense ratio as indicated above multiplied by the average account value over the period, multiplied by 184/365 to reflect the most recent fiscal half year. 6 AIM V.I. UTILITIES FUND APPROVAL OF INVESTMENT ADVISORY AGREEMENT The Board of Trustees of AIM Variable - The nature and extent of the advisory taking account of all of the other Insurance Funds (the "Board") oversees services to be provided by AIM. The factors that the Board considered in the management of AIM V.I. Utilities Board reviewed the services to be determining whether to continue the Fund (the "Fund") and, as required by provided by AIM under the Advisory Advisory Agreement for the Fund, the law, determines annually whether to Agreement. Based on such review, the Board concluded that no changes should approve the continuance of the Fund's Board concluded that the range of be made to the Fund and that it was not advisory agreement with A I M Advisors, services to be provided by AIM under the necessary to change the Fund's portfolio Inc. ("AIM"). Based upon the Advisory Agreement was appropriate and management team at this time. Although recommendation of the Investments that AIM currently is providing services the independent written evaluation of Committee of the Board, at a meeting in accordance with the terms of the the Fund's Senior Officer (discussed held on June 27, 2006, the Board, Advisory Agreement. below) only considered Fund performance including all of the independent through the most recent calendar year, trustees, approved the continuance of - The quality of services to be provided the Board also reviewed more recent Fund the advisory agreement (the "Advisory by AIM. The Board reviewed the performance, which did not change their Agreement") between the Fund and AIM for credentials and experience of the conclusions. another year, effective July 1, 2006. officers and employees of AIM who will provide investment advisory services to - Meetings with the Fund's portfolio The Board considered the factors the Fund. In reviewing the managers and investment personnel. With discussed below in evaluating the qualifications of AIM to provide respect to the Fund, the Board is fairness and reasonableness of the investment advisory services, the Board meeting periodically with such Fund's Advisory Agreement at the meeting on considered such issues as AIM's portfolio managers and/or other June 27, 2006 and as part of the Board's portfolio and product review process, investment personnel and believes that ongoing oversight of the Fund. In their various back office support functions such individuals are competent and able deliberations, the Board and the provided by AIM and AIM's equity and to continue to carry out their independent trustees did not identify fixed income trading operations. Based responsibilities under the Advisory any particular factor that was on the review of these and other Agreement. controlling, and each trustee attributed factors, the Board concluded that the different weights to the various quality of services to be provided by - Overall performance of AIM. The Board factors. AIM was appropriate and that AIM considered the overall performance of currently is providing satisfactory AIM in providing investment advisory and One responsibility of the services in accordance with the terms of portfolio administrative services to the independent Senior Officer of the Fund the Advisory Agreement. Fund and concluded that such performance is to manage the process by which the was satisfactory. Fund's proposed management fees are - The performance of the Fund relative negotiated to ensure that they are to comparable funds. The Board reviewed - Fees relative to those of clients of negotiated in a manner which is at arms' the performance of the Fund during the AIM with comparable investment length and reasonable. To that end, the past one, three and five calendar years strategies. The Board reviewed the Senior Officer must either supervise a against the performance of funds advised effective advisory fee rate (before competitive bidding process or prepare by other advisors with investment waivers) for the Fund under the Advisory an independent written evaluation. The strategies comparable to those of the Agreement. The Board noted that this Senior Officer has recommended an Fund. The Board noted that the Fund's rate was below the effective advisory independent written evaluation in lieu performance was above the median fee rate (before waivers) for one mutual of a competitive bidding process and, performance of such comparable funds for fund advised by AIM with investment upon the direction of the Board, has the one year period and below such strategies comparable to those of the prepared such an independent written median performance for the three and Fund. The Board noted that AIM has evaluation. Such written evaluation also five year periods. The Board also noted agreed to limit the Fund's total considered certain of the factors that AIM began serving as investment operating expenses, as discussed below. discussed below. In addition, as advisor to the Fund in April 2004. Based Based on this review, the Board discussed below, the Senior Officer made on this review and after taking account concluded that the advisory fee rate for a recommendation to the Board in of all of the other factors that the the Fund under the Advisory Agreement connection with such written evaluation. Board considered in determining whether was fair and reasonable. to continue the Advisory Agreement for The discussion below serves as a the Fund, the Board concluded that no - Fees relative to those of comparable summary of the Senior Officer's changes should be made to the Fund and funds with other advisors. The Board independent written evaluation and that it was not necessary to change the reviewed the advisory fee rate for the recommendation to the Board in Fund's portfolio management team at this Fund under the Advisory Agreement. The connection therewith, as well as a time. Although the independent written Board compared effective contractual discussion of the material factors and evaluation of the Fund's Senior Officer advisory fee rates at a common asset the conclusions with respect thereto (discussed below) only considered Fund level at the end of the past calendar that formed the basis for the Board's performance through the most recent year and noted that the Fund's rate was approval of the Advisory Agreement. calendar year, the Board also reviewed below the median rate of the funds After consideration of all of the more recent Fund performance, which did advised by other advisors with factors below and based on its informed not change their conclusions. investment strategies comparable to business judgment, the Board determined those of the Fund that the Board that the Advisory Agreement is in the - The performance of the Fund relative reviewed. The Board noted that AIM has best interests of the Fund and its to indices. The Board reviewed the agreed to limit the Fund's total shareholders and that the compensation performance of the Fund during the past operating expenses, as discussed below. to AIM under the Advisory Agreement is one, three and five calendar years Based on this review, the Board fair and reasonable and would have been against the performance of the Lipper concluded that the advisory fee rate for obtained through arm's length Variable Underlying Fund Utility Index. the Fund under the Advisory Agreement negotiations. The Board noted that the Fund's was fair and reasonable. performance was above the performance of Unless otherwise stated, such Index for the one year period, information presented below is as of comparable to such Index for the three June 27, 2006 and does not reflect any year period, and below such Index for changes that may have occurred since the five year period. The Board also June 27, 2006, including but not limited noted that AIM began serving as to changes to the Fund's performance, investment advisor to the Fund in April advisory fees, expense limitations 2004. Based on this review and after and/or fee waivers. (continued)
7 AIM V.I. UTILITIES FUND - Expense limitations and fee waivers. money market funds, AIM has voluntarily concluded that such arrangements were The Board noted that AIM has agreed to waive a portion of the appropriate. contractually agreed to waive fees advisory fees it receives from the Fund and/or limit expenses of the Fund attributable to such investment. The - AIM's financial soundness in light of through April 30, 2008 in an amount Board further determined that the the Fund's needs. The Board considered necessary to limit total annual proposed securities lending program and whether AIM is financially sound and has operating expenses to a specified related procedures with respect to the the resources necessary to perform its percentage of average daily net assets lending Fund is in the best interests of obligations under the Advisory for each class of the Fund. The Board the lending Fund and its respective Agreement, and concluded that AIM has considered the contractual nature of shareholders. The Board therefore the financial resources necessary to this fee waiver/expense limitation and concluded that the investment of cash fulfill its obligations under the noted that it remains in effect until collateral received in connection with Advisory Agreement. April 30, 2008. The Board considered the the securities lending program in the effect this fee waiver/expense money market funds according to the - Historical relationship between the limitation would have on the Fund's procedures is in the best interests of Fund and AIM. In determining whether to estimated expenses and concluded that the lending Fund and its respective continue the Advisory Agreement for the the levels of fee waivers/expense shareholders. Fund, the Board also considered the limitations for the Fund were fair and prior relationship between AIM and the reasonable. - Independent written evaluation and Fund, as well as the Board's knowledge recommendations of the Fund's Senior of AIM's operations, and concluded that - Breakpoints and economies of scale. Officer. The Board noted that, upon it was beneficial to maintain the The Board reviewed the structure of the their direction, the Senior Officer of current relationship, in part, because Fund's advisory fee under the Advisory the Fund, who is independent of AIM and of such knowledge. The Board also Agreement, noting that it does not AIM's affiliates, had prepared an reviewed the general nature of the include any breakpoints. The Board independent written evaluation in order non-investment advisory services considered whether it would be to assist the Board in determining the currently performed by AIM and its appropriate to add advisory fee reasonableness of the proposed affiliates, such as administrative, breakpoints for the Fund or whether, due management fees of the AIM Funds, transfer agency and distribution to the nature of the Fund and the including the Fund. The Board noted that services, and the fees received by AIM advisory fee structures of comparable the Senior Officer's written evaluation and its affiliates for performing such funds, it was reasonable to structure had been relied upon by the Board in services. In addition to reviewing such the advisory fee without breakpoints. this regard in lieu of a competitive services, the trustees also considered Based on this review, the Board bidding process. In determining whether the organizational structure employed by concluded that it was not necessary to to continue the Advisory Agreement for AIM and its affiliates to provide those add advisory fee breakpoints to the the Fund, the Board considered the services. Based on the review of these Fund's advisory fee schedule. The Board Senior Officer's written evaluation. and other factors, the Board concluded reviewed the level of the Fund's that AIM and its affiliates were advisory fees, and noted that such fees, - Profitability of AIM and its qualified to continue to provide as a percentage of the Fund's net affiliates. The Board reviewed non-investment advisory services to the assets, would remain constant under the information concerning the profitability Fund, including administrative, transfer Advisory Agreement because the Advisory of AIM's (and its affiliates') agency and distribution services, and Agreement does not include any investment advisory and other activities that AIM and its affiliates currently breakpoints. The Board concluded that and its financial condition. The Board are providing satisfactory the Fund's fee levels under the Advisory considered the overall profitability of non-investment advisory services. Agreement therefore would not reflect AIM, as well as the profitability of AIM economies of scale, although the in connection with managing the Fund. - Other factors and current trends. The advisory fee waiver reflects economies The Board noted that AIM's operations Board considered the steps that AIM and of scale. remain profitable, although increased its affiliates have taken over the last expenses in recent years have reduced several years, and continue to take, in - Investments in affiliated money market AIM's profitability. Based on the review order to improve the quality and funds. The Board also took into account of the profitability of AIM's and its efficiency of the services they provide the fact that uninvested cash and cash affiliates' investment advisory and to the Funds in the areas of investment collateral from securities lending other activities and its financial performance, product line arrangements, if any (collectively, condition, the Board concluded that the diversification, distribution, fund "cash balances") of the Fund may be compensation to be paid by the Fund to operations, shareholder services and invested in money market funds advised AIM under its Advisory Agreement was not compliance. The Board concluded that by AIM pursuant to the terms of an SEC excessive. these steps taken by AIM have improved, exemptive order. The Board found that and are likely to continue to improve, the Fund may realize certain benefits - Benefits of soft dollars to AIM. The the quality and efficiency of the upon investing cash balances in AIM Board considered the benefits realized services AIM and its affiliates provide advised money market funds, including a by AIM as a result of brokerage to the Fund in each of these areas, and higher net return, increased liquidity, transactions executed through "soft support the Board's approval of the increased diversification or decreased dollar" arrangements. Under these continuance of the Advisory Agreement transaction costs. The Board also found arrangements, brokerage commissions paid for the Fund. that the Fund will not receive reduced by the Fund and/or other funds advised services if it invests its cash balances by AIM are used to pay for research and in such money market funds. The Board execution services. This research may be noted that, to the extent the Fund used by AIM in making investment invests uninvested cash in affiliated decisions for the Fund. The Board
8 AIM V.I. Utilities Fund SCHEDULE OF INVESTMENTS December 31, 2006
SHARES VALUE ----------------------------------------------------------------------- COMMON STOCKS-94.97% ELECTRIC UTILITIES-29.80% E.ON A.G. (Germany)(a) 25,000 $ 3,392,336 ----------------------------------------------------------------------- Edison International 125,000 5,685,000 ----------------------------------------------------------------------- Enel S.p.A. (Italy)(a) 198,000 2,038,958 ----------------------------------------------------------------------- Entergy Corp. 64,000 5,908,480 ----------------------------------------------------------------------- Exelon Corp. 107,000 6,622,230 ----------------------------------------------------------------------- FirstEnergy Corp. 73,000 4,401,900 ----------------------------------------------------------------------- FPL Group, Inc. 105,000 5,714,100 ----------------------------------------------------------------------- PPL Corp. 117,000 4,193,280 ----------------------------------------------------------------------- Southern Co. 95,000 3,501,700 ----------------------------------------------------------------------- Westar Energy, Inc. 28,000 726,880 ======================================================================= 42,184,864 ======================================================================= GAS UTILITIES-8.26% AGL Resources Inc. 81,000 3,151,710 ----------------------------------------------------------------------- Equitable Resources, Inc. 91,000 3,799,250 ----------------------------------------------------------------------- Questar Corp. 57,000 4,733,850 ======================================================================= 11,684,810 ======================================================================= INDEPENDENT POWER PRODUCERS & ENERGY TRADERS-10.98% Constellation Energy Group 30,000 2,066,100 ----------------------------------------------------------------------- NRG Energy, Inc.(b) 110,000 6,161,100 ----------------------------------------------------------------------- TXU Corp. 135,000 7,318,350 ======================================================================= 15,545,550 ======================================================================= INTEGRATED TELECOMMUNICATION SERVICES-11.24% Alaska Communications Systems Group Inc. 173,000 2,627,870 ----------------------------------------------------------------------- AT&T Inc. 207,000 7,400,250 ----------------------------------------------------------------------- Verizon Communications Inc. 158,000 5,883,920 ======================================================================= 15,912,040 =======================================================================
SHARES VALUE -----------------------------------------------------------------------
MULTI-UTILITIES-26.72% Ameren Corp. 63,000 $ 3,384,990 ----------------------------------------------------------------------- Dominion Resources, Inc. 52,000 4,359,680 ----------------------------------------------------------------------- Duke Energy Corp. 210,000 6,974,100 ----------------------------------------------------------------------- National Grid PLC (United Kingdom)(a) 118,000 1,710,116 ----------------------------------------------------------------------- OGE Energy Corp. 30,000 1,200,000 ----------------------------------------------------------------------- PG&E Corp. 111,000 5,253,630 ----------------------------------------------------------------------- PNM Resources Inc. 29,842 928,086 ----------------------------------------------------------------------- Public Service Enterprise Group Inc. 23,000 1,526,740 ----------------------------------------------------------------------- SCANA Corp. 28,000 1,137,360 ----------------------------------------------------------------------- Sempra Energy 109,000 6,108,360 ----------------------------------------------------------------------- Veolia Environnement (France)(a) 68,000 5,242,117 ======================================================================= 37,825,179 ======================================================================= OIL & GAS STORAGE & TRANSPORTATION-6.39% El Paso Corp. 226,000 3,453,280 ----------------------------------------------------------------------- Williams Cos., Inc. (The) 214,000 5,589,680 ======================================================================= 9,042,960 ======================================================================= WATER UTILITIES-1.58% Aqua America Inc. 98,000 2,232,440 ======================================================================= Total Common Stocks (Cost $94,616,530) 134,427,843 ======================================================================= MONEY MARKET FUNDS-5.04% Liquid Assets Portfolio-Institutional Class(c) 3,563,271 3,563,271 ----------------------------------------------------------------------- Premier Portfolio-Institutional Class(c) 3,563,271 3,563,271 ======================================================================= Total Money Market Funds (Cost $7,126,542) 7,126,542 ======================================================================= TOTAL INVESTMENTS-100.01% (Cost $101,743,072) 141,554,385 ======================================================================= OTHER ASSETS LESS LIABILITIES-(0.01)% (13,049) ======================================================================= NET ASSETS-100.00% $141,541,336 _______________________________________________________________________ =======================================================================
Notes to Schedule of Investments: (a) In accordance with the procedures established by the Board of Trustees, the foreign security is fair valued using adjusted closing market prices. The aggregate value of these securities at December 31, 2006 was $12,383,527, which represented 8.75% of the Fund's Net Assets. See Note 1A. (b) Non-income producing security. (c) The money market fund and the Fund are affiliated by having the same investment advisor. See Note 3. See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Utilities Fund STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 ASSETS: Investments, at value (cost $94,616,530) $134,427,843 ------------------------------------------------------------- Investments in affiliated money market funds (cost $7,126,542) 7,126,542 ============================================================= Total investments (cost $101,743,072) 141,554,385 ============================================================= Receivables for: Investments sold 17,252 ------------------------------------------------------------- Fund shares sold 20,997 ------------------------------------------------------------- Dividends 378,274 ------------------------------------------------------------- Investment for trustee deferred compensation and retirement plans 52,420 ------------------------------------------------------------- Other assets 3,641 ============================================================= Total assets 142,026,969 _____________________________________________________________ ============================================================= LIABILITIES: Payables for: Fund shares reacquired 276,026 ------------------------------------------------------------- Trustee deferred compensation and retirement plans 59,057 ------------------------------------------------------------- Fund expenses advanced 5,530 ------------------------------------------------------------- Accrued administrative services fees 111,653 ------------------------------------------------------------- Accrued distribution fees -- Series II 1,470 ------------------------------------------------------------- Accrued trustees' and officer's fees and benefits 3,636 ------------------------------------------------------------- Accrued transfer agent fees 1,526 ------------------------------------------------------------- Accrued operating expenses 26,735 ============================================================= Total liabilities 485,633 ============================================================= Net assets applicable to shares outstanding $141,541,336 _____________________________________________________________ ============================================================= NET ASSETS CONSIST OF: Shares of beneficial interest $ 94,315,500 ------------------------------------------------------------- Undistributed net investment income 2,828,242 ------------------------------------------------------------- Undistributed net realized gain from investment securities and foreign currencies 4,583,579 ------------------------------------------------------------- Unrealized appreciation of investment securities and foreign currencies 39,814,015 ============================================================= $141,541,336 _____________________________________________________________ ============================================================= NET ASSETS: Series I $139,079,690 _____________________________________________________________ ============================================================= Series II $ 2,461,646 _____________________________________________________________ ============================================================= SHARES OUTSTANDING, $0.001 PAR VALUE PER SHARE, UNLIMITED NUMBER OF SHARES AUTHORIZED: Series I 6,549,957 _____________________________________________________________ ============================================================= Series II 116,581 _____________________________________________________________ ============================================================= Series I: Net asset value per share $ 21.23 _____________________________________________________________ ============================================================= Series II: Net asset value per share $ 21.12 _____________________________________________________________ =============================================================
STATEMENT OF OPERATIONS For the year ended December 31, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $88,409) $ 3,862,928 ------------------------------------------------------------ Dividends from affiliated money market funds 169,732 ============================================================ Total investment income 4,032,660 ============================================================ EXPENSES: Advisory fees 726,202 ------------------------------------------------------------ Administrative services fees 322,038 ------------------------------------------------------------ Custodian fees 17,159 ------------------------------------------------------------ Distribution fees -- Series II 4,225 ------------------------------------------------------------ Transfer agent fees 18,163 ------------------------------------------------------------ Trustees' and officer's fees and benefits 18,289 ------------------------------------------------------------ Other 55,084 ============================================================ Total expenses 1,161,160 ============================================================ Less: Fees waived and expense offset arrangements (31,861) ============================================================ Net expenses 1,129,299 ============================================================ Net investment income 2,903,361 ============================================================ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENT SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) from: Investment securities (includes net gains from securities sold to affiliates of $1,408) 8,839,326 ------------------------------------------------------------ Foreign currencies (29,301) ============================================================ 8,810,025 ============================================================ Change in net unrealized appreciation of: Investment securities 16,332,103 ------------------------------------------------------------ Foreign currencies 6,419 ============================================================ 16,338,522 ============================================================ Net gain from investment securities and foreign currencies 25,148,547 ============================================================ Net increase in net assets resulting from operations $28,051,908 ____________________________________________________________ ============================================================
See accompanying Notes to Financial Statements which are an integral part of the financial statements. AIM V.I. Utilities Fund STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2006 and 2005
2006 2005 ------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 2,903,361 $ 4,326,573 ------------------------------------------------------------------------------------------ Net realized gain from investment securities and foreign currencies 8,810,025 33,099,707 ------------------------------------------------------------------------------------------ Change in net unrealized appreciation (depreciation) of investment securities and foreign currencies 16,338,522 (3,902,530) ========================================================================================== Net increase in net assets resulting from operations 28,051,908 33,523,750 ========================================================================================== Distributions to shareholders from net investment income: Series I (4,313,053) (2,617,447) ------------------------------------------------------------------------------------------ Series II (75,912) (17,260) ========================================================================================== Total distributions from net investment income (4,388,965) (2,634,707) ========================================================================================== Distributions to shareholders from net realized gains: Series I (2,662,863) -- ------------------------------------------------------------------------------------------ Series II (47,944) -- ========================================================================================== Total distributions from net realized gains (2,710,807) -- ========================================================================================== Decrease in net assets resulting from distributions (7,099,772) (2,634,707) ========================================================================================== Share transactions-net: Series I 4,313,312 (76,258,358) ------------------------------------------------------------------------------------------ Series II 1,371,296 118,284 ========================================================================================== Net increase (decrease) in net assets resulting from share transactions 5,684,608 (76,140,074) ========================================================================================== Net increase (decrease) in net assets 26,636,744 (45,251,031) ========================================================================================== NET ASSETS: Beginning of year 114,904,592 160,155,623 ========================================================================================== End of year (including undistributed net investment income of $2,828,242 and $4,337,557, respectively) $141,541,336 $114,904,592 __________________________________________________________________________________________ ==========================================================================================
NOTES TO FINANCIAL STATEMENTS December 31, 2006 NOTE 1--SIGNIFICANT ACCOUNTING POLICIES AIM V.I. Utilities Fund (the "Fund") is a series portfolio of AIM Variable Insurance Funds (the "Trust"). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end series management investment company consisting of twenty-one separate portfolios. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ("variable products"). Matters affecting each portfolio or class will be voted on exclusively by the shareholders of such portfolio or class. Current Securities and Exchange Commission ("SEC") guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each portfolio or class. The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. The Fund's investment objective is to seek capital growth and current income. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITY VALUATIONS -- Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on the prices furnished by independent pricing services, in which case the securities may be considered fair valued, or by market makers. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and the ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ("NYSE"). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, AIM V.I. Utilities Fund coupon rate, maturity, individual trading characteristics and other market data. Short-term obligations having 60 days or less to maturity and commercial paper are recorded at amortized cost which approximates value. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, ADRs and domestic and foreign index futures. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources and are valued at the last bid price in the case of equity securities and in the case of debt obligations, the mean between the last bid and asked prices. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust's officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security's fair value. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the realized and unrealized net gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund's net asset value and, accordingly, they reduce the Fund's total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the advisor. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. COUNTRY DETERMINATION -- For the purposes of making investment selection decisions and presentation in the Schedule of Investments, AIM may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer's securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America unless otherwise noted. D. DISTRIBUTIONS -- Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. FEDERAL INCOME TAXES -- The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund's taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. F. EXPENSES -- Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, each Trustee, officer, employee or other agent of the Trust (including the Trust's investment manager) is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. FOREIGN CURRENCY TRANSLATIONS -- Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. AIM V.I. Utilities Fund The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (i) sales of foreign currencies, (ii) currency gains or losses realized between the trade and settlement dates on securities transactions, and (iii) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Taxes are accrued based on the Fund's current interpretation of tax regulations and rates that exist in the foreign markets in which the Fund invests. J. FOREIGN CURRENCY CONTRACTS -- A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Fund may enter into a foreign currency contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies. The Fund may also enter into a foreign currency contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of that security. Fluctuations in the value of these contracts are recorded as unrealized appreciation (depreciation) until the contracts are closed. When these contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund could be exposed to risk, which may be in excess of the amount reflected in the Statement of Assets and Liabilities, if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably. NOTE 2--ADVISORY FEES AND OTHER FEES PAID TO AFFILIATES The Trust has entered into a master investment advisory agreement with A I M Advisors, Inc. ("AIM"). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.60% of the Fund's average daily net assets. AIM has contractually agreed to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual operating expenses (excluding certain items discussed below) of Series I shares to 0.93% and Series II shares to 1.18% of average daily net assets, through at least April 30, 2008. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the net annual operating expenses to exceed the numbers reflected above: (i) interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary items; (v) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vi) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, in addition to the expense reimbursement arrangement with AMVESCAP PLC ("AMVESCAP") described more fully below, the expense offset arrangements from which the Fund may benefit are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. In addition, the Fund may also benefit from a one time credit to be used to offset future custodian expenses. These credits are used to pay certain expenses incurred by the Fund. Further, AIM has voluntarily agreed to waive advisory fees of the Fund in the amount of 25% of the advisory fee AIM receives from the affiliated money market funds on investments by the Fund in such affiliated money market funds. Voluntary fee waivers or reimbursements may be modified or discontinued at any time upon consultation with the Board of Trustees without further notice to investors. For the year ended December 31, 2006, AIM waived advisory fees of $29,683. At the request of the Trustees of the Trust, AMVESCAP agreed to reimburse expenses incurred by the Fund in connection with market timing matters in the AIM Funds, which may include legal, audit, shareholder reporting, communications and trustee expenses. For the year ended December 31, 2006, AMVESCAP did not reimburse any such expenses. The Trust has entered into a master administrative services agreement with AIM pursuant to which the Fund has agreed to pay AIM a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse AIM for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants' accounts. The Fund may reimburse AIM for up to 0.25% of average daily assets invested by each insurance company providing administrative services to the Fund. Pursuant to such agreement, for the year ended December 31, 2006, AIM was paid $50,000 for accounting and fund administrative services and reimbursed $272,038 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with AIM Investment Services, Inc. ("AIS") pursuant to which the Fund has agreed to pay AIS a fee for providing transfer agency and shareholder services to the Fund and reimburse AIS for certain expenses incurred by AIS in the course of providing such services. For the year ended December 31, 2006, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with AIM Distributors, Inc. ("ADI") to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund's Series II shares (the "Plan"). The Fund, pursuant to the Plan, pays ADI compensation at the annual rate of 0.25% of the Fund's average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2006, expenses incurred under the Plan are shown in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of AIM, AIS and/or ADI. AIM V.I. Utilities Fund NOTE 3--INVESTMENTS IN AFFILIATES The Fund is permitted, pursuant to procedures approved by the Board of Trustees, to invest daily available cash balances in affiliated money market funds. The Fund and the money market funds below have the same investment advisor and therefore, are considered to be affiliated. The table below shows the transactions in and earnings from investments in affiliated money market funds for the year ended December 31, 2006.
CHANGE IN UNREALIZED VALUE PURCHASES PROCEEDS APPRECIATION VALUE DIVIDEND REALIZED FUND 12/31/05 AT COST FROM SALES (DEPRECIATION) 12/31/06 INCOME GAIN (LOSS) ---------------------------------------------------------------------------------------------------------------------------------- Liquid Assets Portfolio- Institutional Class $ -- $15,909,195 $(12,345,924) $ -- $3,563,271 $ 60,254 $ -- ---------------------------------------------------------------------------------------------------------------------------------- Premier Portfolio- Institutional Class 5,216,837 34,587,309 (36,240,875) -- 3,563,271 109,478 -- ================================================================================================================================== Total Investments in Affiliates $5,216,837 $50,496,504 $(48,586,799) $ -- $7,126,542 $169,732 $ -- __________________________________________________________________________________________________________________________________ ==================================================================================================================================
NOTE 4--SECURITY TRANSACTIONS WITH AFFILIATED FUNDS The Fund is permitted to purchase or sell securities from or to certain other AIM Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Fund from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment advisor (or affiliated investment advisors), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the year ended December 31, 2006, the Fund engaged in securities sales of $39,151, which resulted in net realized gains of $1,408. NOTE 5--EXPENSE OFFSET ARRANGEMENTS The expense offset arrangements are comprised of (i) custodian credits which result from periodic overnight cash balances at the custodian and (ii) a one custodian fee credit to be used to offset future custodian fees. For the year ended December 31, 2006, the Fund received credits from these arrangements, which resulted in the reduction of the Fund's total expenses of $2,178. NOTE 6--TRUSTEES' AND OFFICER'S FEES AND BENEFITS "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to pay remuneration to each Trustee and Officer of the Fund who is not an "interested person" of AIM. Trustees have the option to defer compensation payable by the Fund, and "Trustees' and Officer's Fees and Benefits" also include amounts accrued by the Fund to fund such deferred compensation amounts. Those Trustees who defer compensation have the option to select various AIM Funds in which their deferral accounts shall be deemed to be invested. Finally, current Trustees are eligible to participate in a retirement plan that provides for benefits to be paid upon retirement to Trustees over a period of time based on the number of years of service. The Fund may have certain former Trustees who also participate in a retirement plan and receive benefits under such plan. "Trustees' and Officer's Fees and Benefits" include amounts accrued by the Fund to fund such retirement benefits. Obligations under the deferred compensation and retirement plans represent unsecured claims against the general assets of the Fund. During the year ended December 31, 2006, the Fund paid legal fees of $4,186 for services rendered by Kramer, Levin, Naftalis & Frankel LLP as counsel to the Independent Trustees. A member of that firm is a Trustee of the Trust. NOTE 7--BORROWINGS Pursuant to an exemptive order from the Securities and Exchange Commission, the Fund may participate in an interfund lending facility that AIM has established for temporary borrowings by the AIM Funds. An interfund loan will be made under this facility only if the loan rate (an average of the rate available on bank loans and the rate available on investments in overnight repurchase agreements) is favorable to both the lending fund and the borrowing fund. A loan will be secured by collateral if the Fund's aggregate borrowings from all sources exceeds 10% of the Fund's total assets. To the extent that the loan is required to be secured by collateral, the collateral is marked to market daily to ensure that the market value is at least 102% of the outstanding principal value of the loan. The Fund is a participant in an uncommitted unsecured revolving credit facility with State Street Bank and Trust Company ("SSB"). The Fund may borrow up to the lesser of (i) $125,000,000, or (ii) the limits set by its prospectus for borrowings. The Fund and other funds advised by AIM which are parties to the credit facility can borrow on a first come, first served basis. Principal on each loan outstanding shall bear interest at the bid rate quoted by SSB at the time of the request for the loan. During the year ended December 31, 2006, the Fund did not borrow or lend under the interfund lending facility or borrow under the uncommitted unsecured revolving credit facility. Additionally, the Fund is permitted to temporarily carry a negative or overdrawn balance in its account with SSB, the custodian bank. To compensate the custodian bank for such overdrafts, the overdrawn Fund may either (i) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (ii) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and AIM, not to exceed the contractually agreed upon rate. AIM V.I. Utilities Fund NOTE 8--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS DISTRIBUTIONS TO SHAREHOLDERS: The tax character of distributions paid during the years ended December 31, 2006 and 2005 was as follows:
2006 2005 -------------------------------------------------------------------------------------- Distributions paid from: Ordinary income $4,388,965 $2,634,707 -------------------------------------------------------------------------------------- Long-term capital gain 2,710,807 -- ====================================================================================== Total distributions $7,099,772 $2,634,707 ______________________________________________________________________________________ ======================================================================================
TAX COMPONENTS OF NET ASSETS: As of December 31, 2006, the components of net assets on a tax basis were as follows:
2006 ---------------------------------------------------------------------------- Undistributed ordinary income $ 3,758,297 ---------------------------------------------------------------------------- Undistributed long-term gain 6,592,190 ---------------------------------------------------------------------------- Unrealized appreciation -- investments 39,684,042 ---------------------------------------------------------------------------- Temporary book/tax differences (49,765) ---------------------------------------------------------------------------- Capital loss carryforward (2,758,928) ---------------------------------------------------------------------------- Shares of beneficial interest 94,315,500 ============================================================================ Total net assets $141,541,336 ____________________________________________________________________________ ============================================================================
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation (depreciation) difference is attributable primarily to losses on wash sales. The tax-basis net unrealized appreciation on investments amount includes appreciation on foreign currencies of $2,702. The temporary book/tax differences are a result of timing differences between book and tax recognition of income and/or expenses. The Fund's temporary book/tax differences are the result of the trustee deferral of compensation and retirement plan benefits. Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Fund to utilize. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions. Under these limitation rules, the Fund is limited as of December 31, 2006 to utilizing $919,643 of capital loss carryforward in the fiscal year ended December 31, 2007. The Fund utilized $919,643 of capital loss carryforward in the current period to offset net realized capital gain for federal income tax purposes. The Fund has a capital loss carryforward as of December 31, 2006 which expires as follows:
CAPITAL LOSS EXPIRATION CARRYFORWARD* ----------------------------------------------------------------------------- December 31, 2009 2,758,928 _____________________________________________________________________________ =============================================================================
* Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code. NOTE 9--INVESTMENT SECURITIES The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Fund during the year ended December 31, 2006 was $44,520,375 and $46,708,646, respectively.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ON A TAX BASIS ------------------------------------------------------------------------------- Aggregate unrealized appreciation of investment securities $39,681,340 ------------------------------------------------------------------------------- Aggregate unrealized (depreciation) of investment securities -- =============================================================================== Net unrealized appreciation of investment securities $39,681,340 _______________________________________________________________________________ =============================================================================== Cost of investments for tax purposes is $101,873,045.
NOTE 10--RECLASSIFICATION OF PERMANENT DIFFERENCES Primarily as a result of differing book/tax treatment of defaulted bond and foreign currency transactions, on December 31, 2006, undistributed net investment income was decreased by $23,711 and undistributed net realized gain was increased by $23,711. This reclassification had no effect on the net assets of the Fund. AIM V.I. Utilities Fund NOTE 11--SHARE INFORMATION
CHANGES IN SHARES OUTSTANDING ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006(A) 2005 -------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------------------------------------ Sold: Series I 2,859,050 $ 55,911,823 6,323,063 $ 104,776,537 ------------------------------------------------------------------------------------------------------------------------ Series II 71,923 1,371,458 42,862 681,910 ======================================================================================================================== Issued as reinvestment of dividends: Series I 329,053 6,975,916 144,530 2,617,447 ------------------------------------------------------------------------------------------------------------------------ Series II 5,876 123,856 956 17,260 ======================================================================================================================== Reacquired: Series I (3,038,761) (58,574,427) (10,289,904) (183,652,342) ------------------------------------------------------------------------------------------------------------------------ Series II (6,299) (124,018) (37,379) (580,886) ======================================================================================================================== 220,842 $ 5,684,608 (3,815,872) $ (76,140,074) ________________________________________________________________________________________________________________________ ========================================================================================================================
(a) There are four entities that are each record owners of more than 5% of the outstanding shares of the Fund and in the aggregate they own 57% of the outstanding shares of the Fund. The Fund and the Fund's principal underwriter or advisor, are parties to participation agreements with these entities whereby these entities sell units of interest in separate accounts funding variable products that are invested in the Fund. The Fund, AIM and/or AIM affiliates may make payments to these entities, which are considered to be related to the Fund, for providing services to the Fund, AIM and/or AIM affiliates including but not limited to services such as, securities brokerage, third party record keeping and account servicing and administrative services. The Trust has no knowledge as to whether all or any portion of the shares owned of record by these entities are also owned beneficially. NOTE 12--NEW ACCOUNTING STANDARD In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions for FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48, if any, on the Fund's financial statements and currently intends for the Fund to adopt FIN 48 provisions during the fiscal year ending December 31, 2007. NOTE 13--FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for a share of the Fund outstanding throughout the periods indicated.
SERIES I --------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 17.83 $ 15.61 $ 12.95 $ 11.16 $ 14.08 ----------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.47(a) 0.42(a) 0.42(a) 0.33(a) 0.19 ----------------------------------------------------------------------------------------------------------------------- Net gains (losses) on securities (both realized and unrealized) 4.06 2.21 2.57 1.60 (3.05) ======================================================================================================================= Total from investment operations 4.53 2.63 2.99 1.93 (2.86) ======================================================================================================================= Less distributions: Dividends from net investment income (0.70) (0.41) (0.33) (0.14) (0.06) ----------------------------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.43) -- -- -- -- ======================================================================================================================= Total distributions (1.13) (0.41) (0.33) (0.14) (0.06) ======================================================================================================================= Net asset value, end of period $ 21.23 $ 17.83 $ 15.61 $ 12.95 $ 11.16 _______________________________________________________________________________________________________________________ ======================================================================================================================= Total return(b) 25.46% 16.83% 23.65% 17.38% (20.32)% _______________________________________________________________________________________________________________________ ======================================================================================================================= Ratios/supplemental data: Net assets, end of period (000s omitted) $139,080 $114,104 $159,554 $62,510 $31,204 _______________________________________________________________________________________________________________________ ======================================================================================================================= Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 0.93%(c) 0.93% 1.01% 1.08% 1.15% ----------------------------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 0.96%(c) 0.96% 1.01% 1.08% 1.15% ======================================================================================================================= Ratio of net investment income to average net assets 2.40%(c) 2.49% 3.09% 2.84% 2.59% _______________________________________________________________________________________________________________________ ======================================================================================================================= Portfolio turnover rate 38% 49% 52% 58% 102% _______________________________________________________________________________________________________________________ =======================================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $119,343,568. AIM V.I. Utilities Fund NOTE 13--FINANCIAL HIGHLIGHTS--(CONTINUED)
SERIES II ------------------------------------- APRIL 30, 2004 YEAR ENDED (DATE SALES DECEMBER 31, COMMENCED) TO ------------------- DECEMBER 31, 2006 2005 2004 --------------------------------------------------------------------------------------------------- Net asset value, beginning of period $17.76 $15.57 $12.63 --------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) 0.42 0.38 0.26 --------------------------------------------------------------------------------------------------- Net gains on securities (both realized and unrealized) 4.06 2.20 2.68 =================================================================================================== Total from investment operations 4.48 2.58 2.94 =================================================================================================== Less distributions: Dividends from net investment income (0.69) (0.39) -- --------------------------------------------------------------------------------------------------- Distributions from net realized gains (0.43) -- -- =================================================================================================== Total distributions (1.12) (0.39) -- =================================================================================================== Net asset value, end of period $21.12 $17.76 $15.57 ___________________________________________________________________________________________________ =================================================================================================== Total return(b) 25.25% 16.55% 23.28% ___________________________________________________________________________________________________ =================================================================================================== Ratios/supplemental data: Net assets, end of period (000s omitted) $2,462 $ 801 $ 602 ___________________________________________________________________________________________________ =================================================================================================== Ratio of expenses to average net assets: With fee waivers and/or expense reimbursements 1.18%(c) 1.18% 1.28%(d) --------------------------------------------------------------------------------------------------- Without fee waivers and/or expense reimbursements 1.21%(c) 1.21% 1.28%(d) =================================================================================================== Ratio of net investment income to average net assets 2.15%(c) 2.24% 2.82%(d) ___________________________________________________________________________________________________ =================================================================================================== Portfolio turnover rate(e) 38% 49% 52% ___________________________________________________________________________________________________ ===================================================================================================
(a) Calculated using average shares outstanding. (b) Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Total returns are not annualized for periods less than one year and do not reflect charges assessed in connection with a variable product, which if included would reduce total returns. (c) Ratios are based on average daily net assets of $1,690,117. (d) Annualized. (e) Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year. NOTE 14--LEGAL PROCEEDINGS Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note. SETTLED ENFORCEMENT ACTIONS AND INVESTIGATIONS RELATED TO MARKET TIMING On October 8, 2004, INVESCO Funds Group, Inc. ("IFG") (the former investment advisor to certain AIM Funds), AIM and A I M Distributors, Inc. ("ADI") (the distributor of the retail AIM Funds) reached final settlements with certain regulators, including the Securities and Exchange Commission ("SEC"), the New York Attorney General and the Colorado Attorney General, to resolve civil enforcement actions and/or investigations related to market timing and related activity in the AIM Funds, including those formerly advised by IFG. As part of the settlements, a $325 million fair fund ($110 million of which is civil penalties) has been created to compensate shareholders harmed by market timing and related activity in funds formerly advised by IFG. Additionally, AIM and ADI created a $50 million fair fund ($30 million of which is civil penalties) to compensate shareholders harmed by market timing and related activity in funds advised by AIM, which was done pursuant to the terms of the settlement. These two fair funds may increase as a result of contributions from third parties who reach final settlements with the SEC or other regulators to resolve allegations of market timing and/or late trading that also may have harmed applicable AIM Funds. These two fair funds will be distributed in accordance with a methodology to be determined by AIM's independent distribution consultant, in consultation with AIM and the independent trustees of the AIM Funds and acceptable to the staff of the SEC. Management of AIM and the Fund are unable to estimate the impact, if any, that the distribution of these two fair funds may have on the Fund or whether such distribution will have an impact on the Fund's financial statements in the future. At the request of the trustees of the AIM Funds, AMVESCAP PLC ("AMVESCAP"), the parent company of IFG and AIM, has agreed to reimburse expenses incurred by the AIM Funds related to market timing matters. PENDING LITIGATION AND REGULATORY INQUIRIES On August 30, 2005, the West Virginia Office of the State Auditor--Securities Commission ("WVASC") issued a Summary Order to Cease and Desist and Notice of Right to Hearing to AIM and ADI (Order No. 05-1318). The WVASC makes findings of fact that AIM and ADI entered into certain arrangements permitting market timing of the AIM Funds and failed to disclose these arrangements in the prospectuses for such Funds, and conclusions of law to the effect that AIM and ADI violated the West Virginia securities laws. The WVASC orders AIM and ADI to cease any further violations and seeks to impose monetary AIM V.I. Utilities Fund NOTE 14--LEGAL PROCEEDINGS--(CONTINUED) sanctions, including restitution to affected investors, disgorgement of fees, reimbursement of investigatory, administrative and legal costs and an "administrative assessment," to be determined by the Commissioner. Initial research indicates that these damages could be limited or capped by statute. Civil lawsuits, including purported class action and shareholder derivative suits, have been filed against certain of the AIM Funds, IFG, AIM, ADI and/or related entities and individuals, depending on the lawsuit, alleging: - that the defendants permitted improper market timing and related activity in the AIM Funds; - that certain AIM Funds inadequately employed fair value pricing; and - that the defendants improperly used the assets of the AIM Funds to pay brokers to aggressively promote the sale of the AIM Funds over other mutual funds and that the defendants concealed such payments from investors by disguising them as brokerage commissions. These lawsuits allege as theories of recovery, depending on the lawsuit, violations of various provisions of the Federal and state securities laws and ERISA, negligence, breach of fiduciary duty and/or breach of contract. These lawsuits seek remedies that include, depending on the lawsuit, damages, restitution, injunctive relief, imposition of a constructive trust, removal of certain directors and/or employees, various corrective measures under ERISA, rescission of certain AIM Funds' advisory agreements and/or distribution plans and recovery of all fees paid, an accounting of all fund-related fees, commissions and soft dollar payments, restitution of all commissions and fees paid, and prospective relief in the form of reduced fees. All lawsuits based on allegations of market timing, late trading and related issues have been transferred to the United States District Court for the District of Maryland (the "MDL Court"). Pursuant to an Order of the MDL Court, plaintiffs in these lawsuits consolidated their claims for pre-trial purposes into three amended complaints against various AIM- and IFG-related parties: (i) a Consolidated Amended Class Action Complaint purportedly brought on behalf of shareholders of the AIM Funds; (ii) a Consolidated Amended Fund Derivative Complaint purportedly brought on behalf of the AIM Funds and fund registrants; and (iii) an Amended Class Action Complaint for Violations of the Employee Retirement Income Securities Act ("ERISA") purportedly brought on behalf of participants in AMVESCAP's 401(k) plan. Based on orders issued by the MDL Court, all claims asserted against the AIM Funds that have been transferred to the MDL Court have been dismissed, although certain Funds remain nominal defendants in the Consolidated Amended Fund Derivative Complaint. On September 15, 2006, the MDL Court granted the AMVESCAP defendants' motion to dismiss the Amended Class Action Complaint for Violations of ERISA and dismissed such Complaint. The plaintiff has commenced an appeal from that decision. IFG, AIM, ADI and/or related entities and individuals have received inquiries from numerous regulators in the form of subpoenas or other oral or written requests for information and/or documents related to one or more of the following issues, among others, some of which concern one or more AIM Funds: market timing activity, late trading, fair value pricing, excessive or improper advisory and/or distribution fees, mutual fund sales practices, including revenue sharing and directed-brokerage arrangements, investments in securities of other registered investment companies, contractual plans, issues related to Section 529 college savings plans and procedures for locating lost security holders. IFG, AIM and ADI have advised the Fund that they are providing full cooperation with respect to these inquiries. Regulatory actions and/or additional civil lawsuits related to these or other issues may be filed against the AIM Funds, IFG, AIM and/or related entities and individuals in the future. At the present time, management of AIM and the Fund are unable to estimate the impact, if any, that the outcome of the Pending Litigation and Regulatory Inquiries described above may have on AIM, ADI or the Fund. AIM V.I. Utilities Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of AIM Variable Insurance Funds and Shareholders of AIM V.I. Utilities Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of AIM V.I. Utilities Fund (one of the funds constituting AIM Variable Insurance Funds, hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 14, 2007 Houston, Texas AIM V.I. Utilities Fund TAX INFORMATION Form 1099-DIV, Form 1042-S and other year-end tax information provide shareholders with actual calendar year amounts that should be included in their tax returns. Shareholders should consult their tax advisors. The following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2006: FEDERAL AND STATE INCOME TAX Long-Term Capital Gain Distributions $2,710,807 Corporate Dividends Received Deduction* 99.82%
* The above percentage is based on ordinary income dividends paid to shareholders during the Fund's fiscal year. AIM V.I. Utilities Fund TRUSTEES AND OFFICERS The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
TRUSTEE AND/ NAME, YEAR OF BIRTH AND OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) POSITION(S) HELD WITH THE TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------- INTERESTED PERSONS ------------------------------------------------------------------------------------------------------------------------------- Robert H. Graham(1) -- 1946 1993 Director and Chairman, A I M Management None Trustee and Vice Chair Group Inc. (financial services holding company); Director and Vice Chairman, AMVESCAP PLC; Chairman, AMVESCAP PLC -- AIM Division (parent of AIM and a global investment management firm) and Trustee and Vice Chair of The AIM Family of Funds--Registered Trademark-- Formerly: President and Chief Executive Officer, A I M Management Group Inc.; Director, Chairman and President, A I M Advisors, Inc. (registered investment advisor); Director and Chairman, A I M Capital Management, Inc. (registered investment advisor), A I M Distributors, Inc. (registered broker dealer), AIM Investment Services, Inc., (registered transfer agent), and Fund Management Company (registered broker dealer); Chief Executive Officer, AMVESCAP PLC -- Managed Products; and President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- ------------------------------------------------------------------------------------------------------------------------------- Philip A. Taylor(2) -- 1954 2006 Director, Chief Executive Officer and None Trustee, President and President, A I M Management Group Inc., Principal AIM Mutual Fund Dealer Inc. (registered Executive Officer broker dealer), AIM Funds Management Inc. (registered investment advisor) and 1371 Preferred Inc. (holding company); Director and President, A I M Advisors, Inc., INVESCO Funds Group, Inc. (registered investment advisor and register transfer agent) and AIM GP Canada Inc. (general partner for a limited partnership); Director, A I M Capital Management, Inc. and A I M Distributors, Inc.; Director and Chairman, AIM Investment Services, Inc., Fund Management Company and INVESCO Distributors, Inc. (registered broker dealer); Director, President and Chairman, AVZ Callco Inc. (holding company); AMVESCAP Inc. (holding company) and AIM Canada Holdings Inc. (holding company); Director and Chief Executive Officer, AIM Trimark Corporate Class Inc. (formerly AIM Trimark Global Fund Inc.) (corporate mutual fund company) and AIM Trimark Canada Fund Inc. (corporate mutual fund company); Trustee, President and Principal Executive Officer of The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); Trustee and Executive Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); and Manager, Powershares Capital Management LLC Formerly: President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only); Chairman, AIM Canada Holdings, Inc.; Executive Vice President and Chief Operations Officer, AIM Funds Management Inc.; President, AIM Trimark Global Fund Inc. and AIM Trimark Canada Fund Inc.; and Director, Trimark Trust (federally regulated Canadian Trust Company) ------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------- Bruce L. Crockett -- 1944 1993 Chairman, Crockett Technology Associates ACE Limited (insurance company); Trustee and Chair (technology consulting company) and Captaris, Inc. (unified messaging provider) ------------------------------------------------------------------------------------------------------------------------------- Bob R. Baker -- 1936 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Frank S. Bayley -- 1939 2001 Retired Badgley Funds, Inc. (registered Trustee investment company Formerly: Partner, law firm of Baker & (2 portfolios)) McKenzie ------------------------------------------------------------------------------------------------------------------------------- James T. Bunch -- 1942 2004 Founder, Green, Manning & Bunch Ltd., None Trustee (investment banking firm); and Director, Policy Studies, Inc. and Van Gilder Insurance Corporation ------------------------------------------------------------------------------------------------------------------------------- Albert R. Dowden -- 1941 2000 Director of a number of public and None Trustee private business corporations, including the Boss Group Ltd. (private investment and management); Cortland Trust, Inc. (Chairman) (registered investment company (3 portfolios)); Annuity and Life Re (Holdings), Ltd. (insurance company); CompuDyne Corporation (provider of products and services to the public security market); and Homeowners of America Holding Corporation (property casualty company) Formerly: Director, President and Chief Executive Officer, Volvo Group North America, Inc.; Senior Vice President, AB Volvo; and Director of various affiliated Volvo companies; and Director, Magellan Insurance Company ------------------------------------------------------------------------------------------------------------------------------- Jack M. Fields -- 1952 1997 Chief Executive Officer, Twenty First Administaff, and Discovery Global Trustee Century Group, Inc. (government affairs Education Fund company); and Owner, Dos Angelos Ranch, (non-profit) L.P. Formerly: Chief Executive Officer, Texana Timber LP (sustainable forestry company) ------------------------------------------------------------------------------------------------------------------------------- Carl Frischling -- 1937 1993 Partner, law firm of Kramer Levin Cortland Trust, Inc. (registered Trustee Naftalis and Frankel LLP investment company (3 portfolios)) ------------------------------------------------------------------------------------------------------------------------------- Prema Mathai-Davis -- 1950 1998 Formerly: Chief Executive Officer, YWCA None Trustee of the USA ------------------------------------------------------------------------------------------------------------------------------- Lewis F. Pennock -- 1942 1993 Partner, law firm of Pennock & Cooper None Trustee ------------------------------------------------------------------------------------------------------------------------------- Ruth H. Quigley -- 1935 2001 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Larry Soll -- 1942 2004 Retired None Trustee ------------------------------------------------------------------------------------------------------------------------------- Raymond Stickel, Jr. -- 1944 2005 Retired Director, Mainstay VP Series Trustee Formerly: Partner, Deloitte & Touche Funds, Inc. (21 portfolios) -------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Graham is considered an interested person of the Trust because he is a director of AMVESCAP PLC, parent of the advisor to the Trust. (2) Mr. Taylor is considered an interested person of the Trust because he is an officer and a director of the advisor to, and a director of the principal underwriter of, the Trust. TRUSTEES AND OFFICERS--(CONTINUED) AIM V.I. Utilities Fund The address of each trustee and officer of AIM Variable Insurance Funds (the "Trust"), is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. Each trustee oversees 109 portfolios in the AIM Funds complex. The trustees serve for the life of the Trust, subject to their earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the Trust's organizational documents. Column two below includes length of time served with predecessor entities, if any.
NAME, YEAR OF BIRTH AND TRUSTEE AND/ POSITION(S) HELD WITH THE OR OFFICER PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIP(S) TRUST SINCE DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------ OTHER OFFICERS ------------------------------------------------------------------------------------------------------------------------------ Russell C. Burk -- 1958 2005 Senior Vice President and Senior Officer N/A Senior Vice President and of The AIM Family of Funds--Registered Senior Officer Trademark-- Formerly: Director of Compliance and Assistant General Counsel, ICON Advisers, Inc.; Financial Consultant, Merrill Lynch; General Counsel and Director of Compliance, ALPS Mutual Funds, Inc. ------------------------------------------------------------------------------------------------------------------------------ John M. Zerr -- 1962 2006 Director, Senior Vice President, N/A Senior Vice President, Chief Secretary and General Counsel, A I M Legal Officer and Secretary Management Group Inc. and A I M Advisors, Inc.; Director, Vice President and Secretary, INVESCO Distributors, Inc.; Vice President and Secretary, A I M Capital Management, Inc., AIM Investment Services, Inc., and Fund Management Company; Senior Vice President and Secretary, A I M Distributors, Inc.; Director and Vice President, INVESCO Funds Group Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; and Manager, Powershares Capital Management LLC Formerly: Chief Operating Officer, Senior Vice President, General Counsel, and Secretary, Liberty Ridge Capital, Inc. (an investment adviser); Vice President and Secretary, PBHG Funds (an investment company); Vice President and Secretary, PBHG Insurance Series Fund (an investment company); General Counsel and Secretary, Pilgrim Baxter Value Investors (an investment adviser); Chief Operating Officer, General Counsel and Secretary, Old Mutual Investment Partners (a broker-dealer); General Counsel and Secretary, Old Mutual Fund Services (an administrator); General Counsel and Secretary, Old Mutual Shareholder Services (a shareholder servicing center); Executive Vice President, General Counsel and Secretary, Old Mutual Capital, Inc. (an investment adviser); and Vice President and Secretary, Old Mutual Advisors Funds (an investment company) ------------------------------------------------------------------------------------------------------------------------------ Lisa O. Brinkley -- 1959 2004 Global Compliance Director, AMVESCAP N/A Vice President PLC; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, A I M Management Group Inc. (financial services holding company); Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc. and A I M Distributors, Inc.; Vice President, AIM Investment Services, Inc. and Fund Management Company; Senior Vice President and Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; and Senior Vice President and Compliance Director, Delaware Investments Family of Funds ------------------------------------------------------------------------------------------------------------------------------ Kevin M. Carome -- 1956 2003 Senior Vice President and General Vice President Counsel, AMVESCAP PLC; Director, INVESCO Funds Group, Inc.; and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Director, Vice President and N/A General Counsel, Fund Management Company; Director, Senior Vice President, Secretary and General Counsel, A I M Management Group Inc. and A I M Advisors, Inc.; Director and Vice President, INVESCO Distributors, Inc.; Senior Vice President, A I M Distributors, Inc.; Vice President, A I M Capital Management, Inc. and AIM Investment Services, Inc.; Senior Vice President, Chief Legal Officer and Secretary of The AIM Family of Funds--Registered Trademark--; Chief Executive Officer and President, INVESCO Funds Group, Inc.; and Senior Vice President, and General Counsel, Liberty Financial Companies, Inc. and Senior Vice President and General Counsel Liberty Funds Group, LLC ------------------------------------------------------------------------------------------------------------------------------ Sidney M. Dilgren -- 1961 2004 Vice President and Fund Treasurer, A I M N/A Vice President, Principal Advisors, Inc.; and Vice President, Financial Officer and Treasurer and Principal Officer of The Treasurer AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Investment Services, Inc.; and Vice President, A I M Distributors, Inc. ------------------------------------------------------------------------------------------------------------------------------ J. Philip Ferguson -- 1945 2005 Senior Vice President and Chief N/A Vice President Investment Officer, A I M Advisors Inc.; Director, Chairman, Chief Executive Officer, President and Chief Investment Officer, A I M Capital Management, Inc.; Executive Vice President, A I M Management Group Inc. and Vice President of The AIM Family of Funds--Registered Trademark-- Formerly: Senior Vice President, AIM Private Asset Management, Inc.; and Chief Equity Officer, Senior Vice President and Senior Investment Officer, A I M Capital Management, Inc. ------------------------------------------------------------------------------------------------------------------------------ Karen Dunn Kelley -- 1960 1993 Director of Cash Management, Managing N/A Vice President Director and Chief Cash Management Officer, A I M Capital Management, Inc; Director and President, Fund Management Company; and Vice President, A I M Advisors, Inc. and The AIM Family of Funds--Registered Trademark-- (other than AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust); and President and Principal Executive Officer, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust Only) Formerly: Vice President, The AIM Family of Funds--Registered Trademark-- (AIM Treasurer's Series Trust, Short-Term Investments Trust and Tax-Free Investments Trust only) ------------------------------------------------------------------------------------------------------------------------------ Lance A. Rejsek -- 1967 2005 Anti-Money Laundering Compliance N/A Anti-Money Laundering Officer, A I M Advisors, Inc., A I M Compliance Officer Capital Management, Inc., A I M Distributors, Inc., AIM Investment Services, Inc., AIM Private Asset Management, Inc., Fund Management Company and The AIM Family of Funds--Registered Trademark-- Formerly: Manager of the Fraud Prevention Department, AIM Investment Services, Inc. ------------------------------------------------------------------------------------------------------------------------------ Todd L. Spillane -- 1958 2006 Senior Vice President, A I M Management N/A Chief Compliance Officer Group Inc.; Senior Vice President and Chief Compliance Officer, A I M Advisors, Inc.; Chief Compliance Officer of The AIM Family of Funds--Registered Trademark--; Vice President and Chief Compliance Officer, A I M Capital Management, Inc.; and Vice President, A I M Distributors, Inc., AIM Investment Services, Inc. and Fund Management Company Formerly: Global Head of Product Development, AIG-Global Investment Group, Inc.; Chief Compliance Officer and Deputy General Counsel, AIG-SunAmerica Asset Management; and Chief Compliance Officer, Chief Operating Officer and Deputy General Counsel, American General Investment Management ------------------------------------------------------------------------------------------------------------------------------
The Statement of Additional Information of the Trust includes additional information about the Fund's Trustees and is available upon request, without charge, by calling 1.800.410.4246. OFFICE OF THE FUND INVESTMENT ADVISOR DISTRIBUTOR AUDITORS 11 Greenway Plaza A I M Advisors, Inc. A I M Distributors, PricewaterhouseCoopers Suite 100 11 Greenway Plaza Inc. LLP Houston, TX 77046-1173 Suite 100 11 Greenway Plaza 1201 Louisiana Street Houston, TX 77046-1173 Suite 100 Suite 2900 Houston, TX 77046-1173 Houston, TX 77002-5678 COUNSEL TO THE FUND COUNSEL TO THE TRANSFER AGENT CUSTODIAN Ballard Spahr INDEPENDENT TRUSTEES AIM Investment State Street Bank and Andrews & Ingersoll, LLP Kramer, Levin, Naftalis Services, Inc. Trust Company 1735 Market Street, 51st & Frankel LLP P.O. Box 4739 225 Franklin Street Floor 1177 Avenue of the Houston, TX 77210-4739 Boston, MA 02110-2801 Philadelphia, PA 19103-7599 Americas New York, NY 10036-2714
ITEM 2. CODE OF ETHICS. As of the end of the period covered by this report, the Registrant had adopted a code of ethics (the "Code") that applies to the Registrant's principal executive officer ("PEO") and principal financial officer ("PFO"). The Code was amended in September, 2006, to (i) remove individuals listed in Exhibit A and any references to Exhibit A thus allowing for future flexibility and (ii) remove ambiguities found in the second paragraph of Section III. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the PEO or PFO during the period covered by this report. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Board of Trustees has determined that the Registrant has at least one audit committee financial expert serving on its Audit Committee. The Audit Committee financial expert is Raymond Stickel, Jr. Mr. Stickel is "independent" within the meaning of that term as used in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. FEES BILLED BY PWC TO THE REGISTRANT PWC billed the Registrant aggregate fees for services rendered to the Registrant for the last two fiscal years as follows:
Percentage of Fees Billed Applicable Percentage of Fees to Non-Audit Billed Applicable to Fees Billed by PWC Services Provided Non-Audit Services for Services for fiscal year end Fees Billed by PWC Provided for fiscal Rendered to the 2006 Pursuant to for Services year end 2005 Registrant for Waiver of Rendered to the Pursuant to Waiver fiscal Pre-Approval Registrant for of Pre-Approval year end 2006 Requirement(1) fiscal year end 2005 Requirement(1) ------------------ ------------------- -------------------- -------------------- Audit Fees $545,011 N/A $579,732 N/A Audit-Related Fees $ 0 0% $ 0 0% Tax Fees(2) $108,107 0% $108,332 0% All Other Fees $ 0 0% $ 0 0% -------- -------- Total Fees $653,118 0% $687,627 0%
PWC billed the Registrant aggregate non-audit fees of $108,107 for the fiscal year ended 2006, and $108,332 for the fiscal year ended 2005, for non-audit services rendered to the Registrant. ---------- (1) With respect to the provision of non-audit services, the pre-approval requirement is waived pursuant to a de minimis exception if (i) such services were not recognized as non-audit services by the Registrant at the time of engagement, (ii) the aggregate amount of all such services provided is no more than 5% of the aggregate audit and non-audit fees paid by the Registrant during a fiscal year; and (iii) such services are promptly approved by the Registrant's Audit Committee prior to the completion of the audit by the Audit Committee. (2) Tax Fees for the fiscal year end December 31, 2006 includes fees billed for reviewing tax returns and consultation services. Tax fees for fiscal year end December 31, 2005 includes fees billed for reviewing tax returns. FEES BILLED BY PWC RELATED TO AIM AND AIM AFFILIATES PWC billed A I M Advisors, Inc. ("AIM"), the Registrant's adviser, and any entity controlling, controlled by or under common control with AIM that provides ongoing services to the Registrant ("AIM Affiliates") aggregate fees for pre-approved non-audit services rendered to AIM and AIM Affiliates for the last two fiscal years as follows:
Fees Billed by PWC Fees Billed by PWC for Non-Audit for Non-Audit Services Rendered to Percentage of Fees Services Rendered to Percentage of Fees AIM and AIM Billed Applicable to AIM and AIM Billed Applicable to Affiliates for Non-Audit Services Affiliates for Non-Audit Services fiscal year end 2006 Provided for fiscal fiscal year end 2005 Provided for fiscal That Were Required year end 2006 That Were Required year end 2005 to be Pre-Approved Pursuant to Waiver to be Pre-Approved Pursuant to Waiver of by the Registrant's of Pre-Approval by the Registrant's Pre-Approval Audit Committee Requirement(1) Audit Committee Requirement(1) -------------------- -------------------- -------------------- --------------------- Audit-Related Fees $0 0% $0 0% Tax Fees $0 0% $0 0% All Other Fees $0 0% $0 0% --- --- Total Fees(2) $0 0% $0 0%
---------- (1) With respect to the provision of non-audit services, the pre-approval requirement is waived pursuant to a de minimis exception if (i) such services were not recognized as non-audit services by the Registrant at the time of engagement, (ii) the aggregate amount of all such services provided is no more than 5% of the aggregate audit and non-audit fees paid by the Registrant, AIM and AIM Affiliates during a fiscal year; and (iii) such services are promptly approved by the Registrant's Audit Committee prior to the completion of the audit by the Audit Committee. (2) Including the fees for services not required to be pre-approved by the registrant's audit committee, PWC billed AIM and AIM Affiliates aggregate non-audit fees of $0 for the fiscal year ended 2006, and PWC billed AIM and AIM Affiliates aggregate non-audit fees of $0 for the fiscal year ended 2005, for non-audit services rendered to AIM and AIM Affiliates. The Audit Committee also has considered whether the provision of non-audit services that were rendered to AIM and AIM Affiliates that were not required to be pre-approved pursuant to SEC regulations, if any, is compatible with maintaining the principal accountant's independence. PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES POLICIES AND PROCEDURES As adopted by the Audit Committees of the AIM Funds (the "Funds") Last Amended September 18, 2006 STATEMENT OF PRINCIPLES Under the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission ("SEC") ("Rules"), the Audit Committees of the Funds' (the "Audit Committee") Board of Trustees (the "Board") are responsible for the appointment, compensation and oversight of the work of independent accountants (an "Auditor"). As part of this responsibility and to assure that the Auditor's independence is not impaired, the Audit Committees pre-approve the audit and non-audit services provided to the Funds by each Auditor, as well as all non-audit services provided by the Auditor to the Funds' investment adviser and to affiliates of the adviser that provide ongoing services to the Funds ("Service Affiliates") if the services directly impact the Funds' operations or financial reporting. The SEC Rules also specify the types of services that an Auditor may not provide to its audit client. The following policies and procedures comply with the requirements for pre-approval and provide a mechanism by which management of the Funds may request and secure pre-approval of audit and non-audit services in an orderly manner with minimal disruption to normal business operations. Proposed services either may be pre-approved without consideration of specific case-by-case services by the Audit Committees ("general pre-approval") or require the specific pre-approval of the Audit Committees ("specific pre-approval"). As set forth in these policies and procedures, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committees. Additionally, any fees exceeding 110% of estimated pre-approved fee levels provided at the time the service was pre-approved will also require specific approval by the Audit Committees before payment is made. The Audit Committees will also consider the impact of additional fees on the Auditor's independence when determining whether to approve any additional fees for previously pre-approved services. The Audit Committees will annually review and generally pre-approve the services that may be provided by each Auditor without obtaining specific pre-approval from the Audit Committee. The term of any general pre-approval runs from the date of such pre-approval through September 30th of the following year, unless the Audit Committees consider a different period and state otherwise. The Audit Committees will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. The purpose of these policies and procedures is to set forth the guidelines to assist the Audit Committees in fulfilling their responsibilities. DELEGATION The Audit Committees may from time to time delegate pre-approval authority to one or more of its members who are Independent Trustees. All decisions to pre-approve a service by a delegated member shall be reported to the Audit Committee at its next quarterly meeting. AUDIT SERVICES The annual audit services engagement terms will be subject to specific pre-approval of the Audit Committees. Audit services include the annual financial statement audit and other procedures such as tax provision work that is required to be performed by the independent auditor to be able to form an opinion on the Funds' financial statements. The Audit Committee will obtain, review and consider sufficient information concerning the proposed Auditor to make a reasonable evaluation of the Auditor's qualifications and independence. In addition to the annual Audit services engagement, the Audit Committees may grant either general or specific pre-approval of other audit services, which are those services that only the independent auditor reasonably can provide. Other Audit services may include services such as issuing consents for the inclusion of audited financial statements with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. NON-AUDIT SERVICES The Audit Committees may provide either general or specific pre-approval of any non-audit services to the Funds and its Service Affiliates if the Audit Committees believe that the provision of the service will not impair the independence of the Auditor, is consistent with the SEC's Rules on auditor independence, and otherwise conforms to the Audit Committee's general principles and policies as set forth herein. AUDIT-RELATED SERVICES "Audit-related services" are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements or that are traditionally performed by the independent auditor. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; and agreed-upon procedures related to mergers, compliance with ratings agency requirements and interfund lending activities. TAX SERVICES "Tax services" include, but are not limited to, the review and signing of the Funds' federal tax returns, the review of required distributions by the Funds and consultations regarding tax matters such as the tax treatment of new investments or the impact of new regulations. The Audit Committee will scrutinize carefully the retention of the Auditor in connection with a transaction initially recommended by the Auditor, the major business purpose of which may be tax avoidance or the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee will consult with the Funds' Treasurer (or his or her designee) and may consult with outside counsel or advisors as necessary to ensure the consistency of Tax services rendered by the Auditor with the foregoing policy. No Auditor shall represent any Fund or any Service Affiliate before a tax court, district court or federal court of claims. Under rules adopted by the Public Company Accounting Oversight Board and approved by the SEC, in connection with seeking Audit Committee pre-approval of permissible Tax services, the Auditor shall: 1. Describe in writing to the Audit Committees, which writing may be in the form of the proposed engagement letter: a. The scope of the service, the fee structure for the engagement, and any side letter or amendment to the engagement letter, or any other agreement between the Auditor and the Fund, relating to the service; and b. Any compensation arrangement or other agreement, such as a referral agreement, a referral fee or fee-sharing arrangement, between the Auditor and any person (other than the Fund) with respect to the promoting, marketing, or recommending of a transaction covered by the service; 2. Discuss with the Audit Committees the potential effects of the services on the independence of the Auditor; and 3. Document the substance of its discussion with the Audit Committees. ALL OTHER AUDITOR SERVICES The Audit Committees may pre-approve non-audit services classified as "All other services" that are not categorically prohibited by the SEC, as listed in Exhibit 1 to this policy. PRE-APPROVAL FEE LEVELS OR ESTABLISHED AMOUNTS Pre-approval of estimated fees or established amounts for services to be provided by the Auditor under general or specific pre-approval policies will be set periodically by the Audit Committees. Any proposed fees exceeding 110% of the maximum estimated pre-approved fees or established amounts for pre-approved audit and non-audit services will be reported to the Audit Committees at the quarterly Audit Committees meeting and will require specific approval by the Audit Committees before payment is made. The Audit Committee will always factor in the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services and in determining whether to approve any additional fees exceeding 110% of the maximum pre-approved fees or established amounts for previously pre-approved services. PROCEDURES On an annual basis, AIM will submit to the Audit Committees for general pre-approval, a list of non-audit services that the Funds or Service Affiliates of the Funds may request from the Auditor. The list will describe the non-audit services in reasonable detail and will include an estimated range of fees and such other information as the Audit Committee may request. Each request for services to be provided by the Auditor under the general pre-approval of the Audit Committees will be submitted to the Funds' Treasurer (or his or her designee) and must include a detailed description of the services to be rendered. The Treasurer or his or her designee will ensure that such services are included within the list of services that have received the general pre-approval of the Audit Committees. The Audit Committees will be informed at the next quarterly scheduled Audit Committees meeting of any such services for which the Auditor rendered an invoice and whether such services and fees had been pre-approved and if so, by what means. Each request to provide services that require specific approval by the Audit Committees shall be submitted to the Audit Committees jointly by the Fund's Treasurer or his or her designee and the Auditor, and must include a joint statement that, in their view, such request is consistent with the policies and procedures and the SEC Rules. Each request to provide tax services under either the general or specific pre-approval of the Audit Committees will describe in writing: (i) the scope of the service, the fee structure for the engagement, and any side letter or amendment to the engagement letter, or any other agreement between the Auditor and the audit client, relating to the service; and (ii) any compensation arrangement or other agreement between the Auditor and any person (other than the audit client) with respect to the promoting, marketing, or recommending of a transaction covered by the service. The Auditor will discuss with the Audit Committees the potential effects of the services on the Auditor's independence and will document the substance of the discussion. Non-audit services pursuant to the de minimis exception provided by the SEC Rules will be promptly brought to the attention of the Audit Committees for approval, including documentation that each of the conditions for this exception, as set forth in the SEC Rules, has been satisfied. On at least an annual basis, the Auditor will prepare a summary of all the services provided to any entity in the investment company complex as defined in section 2-01(f)(14) of Regulation S-X in sufficient detail as to the nature of the engagement and the fees associated with those services. The Audit Committees have designated the Funds' Treasurer to monitor the performance of all services provided by the Auditor and to ensure such services are in compliance with these policies and procedures. The Funds' Treasurer will report to the Audit Committee on a periodic basis as to the results of such monitoring. Both the Funds' Treasurer and management of AIM will immediately report to the chairman of the Audit Committee any breach of these policies and procedures that comes to the attention of the Funds' Treasurer or senior management of AIM. EXHIBIT 1 TO PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES POLICIES AND PROCEDURES CONDITIONALLY PROHIBITED NON-AUDIT SERVICES (NOT PROHIBITED IF THE FUND CAN REASONABLY CONCLUDE THAT THE RESULTS OF THE SERVICE WOULD NOT BE SUBJECT TO AUDIT PROCEDURES IN CONNECTION WITH THE AUDIT OF THE FUND'S FINANCIAL STATEMENTS) - Bookkeeping or other services related to the accounting records or financial statements of the audit client - Financial information systems design and implementation - Appraisal or valuation services, fairness opinions, or contribution-in-kind reports - Actuarial services - Internal audit outsourcing services CATEGORICALLY PROHIBITED NON-AUDIT SERVICES - Management functions - Human resources - Broker-dealer, investment adviser, or investment banking services - Legal services - Expert services unrelated to the audit - Any service or product provided for a contingent fee or a commission - Services related to marketing, planning, or opining in favor of the tax treatment of confidential transactions or aggressive tax position transactions, a significant purpose of which is tax avoidance - Tax services for persons in financial reporting oversight roles at the Fund - Any other service that the Public Company Oversight Board determines by regulation is impermissible. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Investments in securities of unaffiliated issuers is included as part of the reports to stockholders filed under Item 1 of this Form. 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 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. None ITEM 11. CONTROLS AND PROCEDURES. (a) As of December 14, 2006, an evaluation was performed under the supervision and with the participation of the officers of the Registrant, including the PEO and PFO, to assess the effectiveness of the Registrant's disclosure controls and procedures, as that term is defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act"), as amended. Based on that evaluation, the Registrant's officers, including the PEO and PFO, concluded that, as of December 14, 2006, the Registrant's disclosure controls and procedures were reasonably designed to ensure: (1) that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission; and (2) that material information relating to the Registrant is made known to the PEO and PFO as appropriate to allow timely decisions regarding required disclosure. (b) There have been no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. 12(a)(1) Code of Ethics. 12(a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. 12(a)(3) Not applicable. 12(b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Registrant: AIM Variable Insurance Funds By: /s/ PHILIP A. TAYLOR --------------------------------- Philip A. Taylor Principal Executive Officer Date: February 23, 2007 Pursuant to the requirements of the Securities and Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ PHILIP A. TAYLOR --------------------------------- Philip A. Taylor Principal Executive Officer Date: February 23, 2007 By: /s/ SIDNEY M. DILGREN --------------------------------- Sidney M. Dilgren Principal Financial Officer Date: February 23, 2007 EXHIBIT INDEX 12(a)(1) Code of Ethics. 12(a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. 12(a)(3) Not applicable. 12(b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940.