<Page>
[SM&R MUTUAL FUNDS LOGO]
ANNUAL REPORT
[GRAPHIC]
2003
FOR THE FISCAL YEAR ENDING AUGUST 31
<Page>
[GRAPHIC]
The financial statements and discussions contained herein are
included for the general information of our shareholders. This
report is not authorized for distribution to prospective investors
unless preceded or accompanied by an effective prospectus.
....new growth in 2003
The economy has demonstrated new MOMENTUM this past year and investor confidence
is being rejuvenated!
<Page>
REJUVENATION
Securities Management and Research, Inc.
[SM&R MUTUAL FUNDS LOGO]
A new cycle of...
PROSPERITY?
The closing paragraph of our message to investors in the 2002 Annual Report read
as follows:
IN TIME, . . . NEW MOMENTUM WILL BE EVIDENT FROM THE ECONOMY, WHICH IN TURN WILL
SPUR AN IMPROVING CORPORATE PROFITS PICTURE WHICH WILL IN TURN PROVIDE THE STOCK
MARKET WITH THE TRACTION SO DESPERATELY NEEDED TO BEGIN AN ASCENT ONCE MORE. OUR
STOCK MARKET INVESTMENTS WILL BEGIN TO BEAR FRUIT AGAIN. THE EXACT TIMING OF
THESE DEVELOPMENTS JUST CAN'T BE KNOWN AT THIS POINT. BUT WITH HISTORY AS OUR
GUIDE, WE MUST ONLY BE RE-ASSURED OF THESE FUTURE REALITIES. AGAIN, THE BET IS
ON THE HOME TEAM.
After these words were written last autumn, the market proceeded to decline even
more, eventually putting in a low during October. As the calendar turned to
2003, the market once again was facing strong headwinds, as the winds of war
weighed heavily on the market's mood. As we stared down the barrel of another
imminent show-down in Iraq, it appeared possible that we could also be staring
down the barrel of a loathsome fourth consecutive year of declining markets.
But gurgling beneath the surface of the headlines was an incipient economic
resurgence. Led by a resilient consumer, armed with historically low interest
rates, the economic black cloud we had been living under began to brighten.
Additionally, the successful ousting of Saddam Hussein and his band of thugs
bred a confidence that began to play out in the equity markets. The first
quarter closed with equity and bond markets in the black. The second quarter
closed with the equity markets solidly in the black, and the story continues as
of this writing.
While the biggest economic story thus far over the past year is likely to be the
resurgence of the stock market, an equally important event may be the topping of
the fixed income market in June of this year. The benchmark 10-year Treasury
note hit a yield of 3.11%, which brings with it an inversely high price. This
development, along with an improving economy, likely indicates that the
three-year out-performance of bonds - from 2000 thru 2002 - is probably over for
now. While dramatically increasing interest rates seem unlikely, the prospects
for an improving economy do not likely bode well for interest rates to fall
precipitously from here, thereby producing rising bond values.
[SIDENOTE]
SM&R MUTUAL FUNDS
SM&R ALGER TECHNOLOGY
SM&R ALGER AGGRESSIVE GROWTH
SM&R ALGER SMALL-CAP
SM&R ALGER GROWTH
SM&R GROWTH
SM&R EQUITY INCOME
SM&R BALANCED
SM&R GOVERNMENT BOND
SM&R TAX FREE
SM&R PRIMARY
SM&R MONEY MARKET
<Page>
3
REMEMBER THE LESSONS OF 2000 THROUGH 2002
WHAT IS THE BIGGER PICTURE?...
Investors looking to make new investments today may be tempted by the generally
strong fixed income returns of the previous three and five year periods, but
please proceed with caution, as valuations are likely stretched. But, if you are
making fixed income investments as part of a larger, longer-term asset
allocation strategy, including other asset categories, you will likely be fine.
The prospect of making a wholesale bet on bonds based on the previous three
years of strong performance may end with ultimate disappointment. The
all-important keys are, identify your time frame, understand your honest risk
tolerance level, and spread your investments around so that you will be prepared
to withstand whatever Mr. Market throws your way. Diversification usually leads
to a financial destiny that you will be happy with, if you show patience.
HOW HAVE CORPORATE DIVIDENDS AFFECTED INVESTOR CONFIDENCE IN 2003?...
Oftentimes in the midst of a struggling economy, government policy makers step
in and attempt to add fuel to the economic flame via stimulus packages. In 2003,
government definitely came down on the side of investors as the Jobs and Growth
Tax Act of 2003 brought about a major reduction in the taxation of corporate
dividends. The policy of taxing corporations on their earnings, only to tax
investors a second time when those same earnings are distributed as dividends
has long seemed somewhat illogical and counter-intuitive given our system of
capital formation and ownership in this country. To encourage both the payment
of dividends, as well as the ownership of dividend paying stocks, the new tax
rate for stock dividends is now 15%, versus the top marginal rate of the
taxpayer owning the shares. Encouraging the payment of dividends also serves as
a means of restoring investor confidence, since investors receive the cash which
could be errantly allocated to capital-hungry corporate "experiments," a 1990's
trend.
For decades, corporate dividends were considered to be a key ingredient to
attracting investors to owning shares, and consequently nearly half of the
long-term return of the diversified stock market stemmed from those dividends,
with capital appreciation comprising the balance of the total return picture.
But the 1990's ushered in a new era, where companies tended to either plow
earnings back into operations in hopes of faster future growth, or underwent
huge stock buyback programs, thereby reducing shares outstanding or at least
avoiding the further dilution caused by massive exercising of stock options, a
trend so prevalent over the decade. This taxation change, however, should work
to turn the tide back to emphasizing dividend payments a bit more.
TWO VETERAN MONEY MANAGERS WORKING ON YOUR BEHALF
[SM&R AND ALGER LOGO]
SM&R Funds managed by SM&R
SM&R Alger Funds are sub-advised
by Fred Alger Management, Inc.
<Page>
4
[SM&R MUTUAL FUNDS LOGO]
The beginning stages of an economic and market recovery always seem to bring
about more questions than answers, i.e. is this just a strong bear market rally,
ultimately destined to lead to further disappointment, is the economy really
going to recover, etc.? The answer to these questions, of course, can only be
determined over time.
Facts that we can be sure of, though, include:
- - OUR ECONOMY HAS A PERFECT RECORD WHEN IT COMES TO RECOVERING FROM
RECESSIONS...
- - OUR CAPITALISTIC SYSTEM HAS A LONG HISTORY OF PAYING THE NECESSARY PRICE TO
RIGHT THE WRONGS OF OVERCAPACITY AND ELIMINATING UNPRODUCTIVE MARKET
CAPITALIZATION, WHICH ULTIMATELY LEADS TO NEW INNOVATION AND OPPORTUNITY...
- - LONG TERM PESSIMISM REGARDING OUR ECONOMY AND MARKETS HAS NOT BEEN A
PROFITABLE ENDEAVOR OVER THE PAST 50 YEARS...
So what does this mean for you and your family? How do you move forward?
Understand that the beginning of the renewal process is the most difficult part,
because of the uncertainties outlined above. Your most recent experiences are
always the ones central in your mind, and you are naturally looking to avoid the
results you may have experienced over the past few years, i.e. capital losses.
But there always, eventually, is a new day, a time to begin once more.
Remember the lessons of 2000 thru 2002, which taught us once and for all that
diversification is a wise thing. The superior equity market returns of the
1990's led so many of us off course, as we wanted to take part in the outsized
returns of the day. We ratcheted up our risk tolerance levels to capitalize on
those returns. Well, those returns were an anomaly, as many have learned. Stocks
are ideally suited for growth, with a secondary objective for income, while
bonds are designed virtually exclusively for income, with some capital
protection ability for highly rated issues over their lifetime. Employ both
asset classes, especially as you move closer to an important long-term goal,
like retirement or college.
A focus on equity funds that pay dividends might be a reasonable strategy.
Dividends are more than just an accounting entry; they are a cash payment, a
true return on your invested capital. Investing in funds that focus on dividends
can be a tremendous strategy for the core portion of your holdings, since these
tend to be the strong companies. And, you get a lower tax rate on those
dividends to boot. Dividends were long a mainstay when it came to investing in
corporate America, and they appear to be back. It may be wise to take part.
While time will tell whether or not this past year presented the end to the
great bear market of 2000 through 2002, our recent progress seems to be
undeniable. This time next year we'll probably have the definitive answer. But
again, it seems that a bet on the home team is the way to go.
A description of the policies and procedures that the Company uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by calling 800-231-4639, or on the SM&R Web site,
www.smrinvest.com.
[GRAPHIC]
PREPARING FOR THE UNIQUE NEEDS OF YOUR FAMILY
<Page>
5
SM&R ALGER TECHNOLOGY FUND
MANAGER COMMENTARY
INVESTMENT OBJECTIVE
The SM&R Alger Technology Fund seeks to achieve long-term capital appreciation.
The Fund normally invests at least 80% of its total assets in the equity
securities of companies principally engaged in offering, using, or developing
products, processes, or services that will provide or benefit significantly from
technological advances or improvements. During the recent fiscal year, the
management of the Fund remained unchanged: a research intensive, bottom-up
approach focusing on rapidly growing stocks. Management's growth stock
philosophy and the inherent technology focus of the Fund were of benefit during
a period in which growth outperformed value and technology stocks performed very
well.
MARKET REVIEW
The twelve months ending August 31, 2003 was a solid period for equity
securities across all market capitalizations and styles. While weak consumer
confidence and disappointing job growth pushed stock prices lower in September
of 2002, the fourth quarter of the year provided great relief from all the
selling. Fueled in part by solid earnings from bellwethers like Citigroup, IBM
and General Motors and a Republican sweep in the midterm elections, markets
trended higher during October and November. Investor optimism was further
encouraged by a larger-than-expected 50 basis point rate cut on November 6th.
The positive momentum, however, came to a sudden end during the final month of
the year. With escalating tensions in Iraq and North Korea, continued political
turmoil in Venezuela and the highest unemployment rate in eight years,
investors, once again, reversed course and began to unload their equity
positions. December saw the collapse of most equity indices, with growth stocks
leading the downturn.
The 2003 New Year brought with it an end to the positive momentum experienced
throughout most of the fourth quarter of 2002. With the U.S. trade deficit
reaching record highs, industrial production on the decline and the impending
war in Iraq trumping positive economic news, equity markets trended downward
during the first two months of the year. Fortunately, with the outbreak of war
in March, markets reversed course and recouped some of the losses experienced in
January and February. Preferring war to the pre-combat uncertainty, investors
pushed most indices higher during the final month of the quarter. Mid and
Large-Cap Growth Stocks lead the upturn. Despite substantial market volatility
throughout the period, the Fed decided against any further rate cuts during the
first quarter of 2003.
The second quarter of 2003 sustained the positive momentum experienced at the
end of the first quarter, with most equity indices trending substantially higher
during the three-month period. Reassured by the swift and decisive allied
victory in Iraq, better-than-expected first quarter profits and rising consumer
confidence, investors found good reason to get back into the Market in April and
May. Stocks of all market capitalizations and styles advanced during the first
two months of the quarter. Markets continued to stay out of the red in June.
With a larger-than-expected jump in the index of leading economic indicators as
well as a 25 basis point rate cute on June 25th, investors pushed stocks
slightly higher during the final month of the quarter. Fortunately, the buying
continued well into the summer. Upbeat earnings reports from tech giants such as
Microsoft and Ericsson and news of higher-than-expected second quarter GDP
growth helped to move most equity indices higher during July and August.
<Page>
6
Securities Management Research, Inc.
PERFORMANCE.
The Fund's Class A shares returned 55.09%, before sales charge, during the
fiscal year ended August 31, 2003, versus a 38.26% return for the Lipper Science
& Technology Fund Index. Throughout the twelve-month period, the Fund benefited
from an overweighting in the strong consumer discretionary sector and solid
security selection within the information technology sector.
MARKET & ECONOMIC OUTLOOK
The U.S. economy appears to be headed for a very robust 2nd half of 2003, and
that looks to continue into 2004. Global growth is accelerating as well. The
long-stagnant Japanese economy has been showing unexpected signs of life and
China's economic growth has hardly missed a beat. Some commentators have begun
to refer to a "global synergy" that will see growth spurring growth. In the
United States, attention will inevitably begin to turn to the election of 2004,
and to the national security concerns posed by North Korea and Iraq. But absent
something truly dramatic, these concerns can and, we believe, will not have much
bearing on economic activity. This is the period we have been anticipating.
Consumers have been carrying the lion's share of the economy; now, companies are
adding that missing element. It is a potent recipe, and it means higher, faster,
more sustainable growth than we have seen in over two years.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their earnings rapidly and consistently.
Best Regards,
/s/ Dan Chung
/s/ Nam Hoang
Dan Chung, CFA, Portfolio Manager
Nam Hoang, CFA, Assistant Portfolio Manager
SM&R Alger Technology Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
TECHNOLOGY FUND, CLASS A, AT OFFERING PRICE, AND LIPPER SCIENCE AND TECHNOLOGY
FUND INDEX AND THE S&P 500
SM&R ALGER TECHNOLOGY FUND
<Table>
<Caption>
ALGER TECHNOLOGY S&P 500 LIPPER SCIENCE AND TECHNOLOGY INDEX
9/1/2000 $ 9,497 $ 10,000 $ 10,000
9/30/2000 $ 9,117 $ 9,472 $ 8,975
12/31/2000 $ 4,919 $ 8,731 $ 5,868
8/31/2001 $ 3,077 $ 7,561 $ 3,680
9/30/2001 $ 2,393 $ 6,951 $ 2,890
12/31/2001 $ 3,182 $ 7,693 $ 3,831
8/30/2002 $ 1,586 $ 6,201 $ 2,249
9/30/2002 $ 1,349 $ 5,527 $ 1,937
12/31/2002 $ 1,586 $ 5,993 $ 2,245
8/30/2003 $ 2,460 $ 6,949 $ 3,110
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 09/01/00
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -------------------------
A 47.16% (37.34)%
B 49.15% (36.50)%
</Table>
SM&R Alger Technology Fund performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A and B will vary due to differences in expenses
and sales charge structure. Average annual returns are based on the maximum
sales charge and reinvestment of all dividends and capital gains. The maximum
initial sales charge for Class A shares reflect the current maximum initial
sales charges of 5.00%. Class B shares reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year declining to 1% in
the fifth year, and is eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their origial cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
7
SM&R ALGER TECHNOLOGY FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
BUSINESS SERVICES -- 1.24%
webMethods, Incorporated * 950 $ 8,569
COMMUNICATION EQUIPMENT -- 19.19%
Advanced Fibre Communications,
Incorporated* 300 6,981
Brocade Communications Systems,
Incorporated* 2,950 16,638
CIENA Corporation* 2,400 15,600
Cisco Systems, Incorporated* 1,125 21,544
Comverse Technology, Incorporated* 1,075 17,727
Corning Incorporated* 1,600 13,200
Gemstar-TV Guide International,
Incorporated* 1,400 6,748
NETGEAR, Incorporated* 350 6,891
Nokia Corporation ADR 580 9,448
SeaChange International, Incorporated* 950 9,719
Tellabs, Incorporated* 1,200 7,836
132,332
COMMUNICATIONS -- 2.03%
Tekelec* 800 13,984
COMPUTER RELATED & BUSINESS SERVICES -- 1.73%
Hewlett-Packard Company 600 11,952
COMPUTER SOFTWARE -- 1.72%
Legato Systems, Incorporated* 1,050 11,886
COMPUTER TECHNOLOGY -- 1.35%
SINA Corporation* 300 9,324
COMPUTERS & PERIPHERALS -- 4.17%
Dell Computer Corporation* 530 $ 17,294
Seagate Technology 300 6,903
Sun Microsystems, Incorporated* 1,175 4,535
28,732
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.08%
Sanmina-SCI Corporation* 1,600 14,368
FINANCIAL SERVICES -- 1.47%
E*TRADE Group, Incorporated* 1,100 10,153
INTERNET & CATALOG RETAIL -- 5.75%
Amazon.com, Incorporated* 125 5,805
eBay Incorporated* 160 8,885
Netflix Incorporated* 750 24,998
39,688
INTERNET SOFTWARE & SERVICES -- 8.69%
iPass Incorporated* 200 4,200
Keane, Incorporated* 900 13,257
Netegrity, Incorporated* 600 5,802
ValueClick, Incorporated* 900 8,325
WebMD Corporation* 1,550 15,965
Yahoo! Incorporated* 370 12,358
59,907
LEISURE EQUIPMENT & PRODUCTS -- 1.09%
Leapfrog Enterprises, Incorporated (Class A)* 200 7,500
MACHINERY -- 2.39%
Broadcom Corporation (Class A)* 600 16,488
</Table>
<Page>
8
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
MEDIA -- 1.97%
Spanish Broadcasting System,
Incorporated (Class A)* 1,750 $ 13,562
SEMICONDUCTOR EQUIPMENT & PRODUCT -- 4.64%
Applied Mico Circuits Corporation* 1,100 6,391
Rambus Incorporated* 450 7,497
Skyworks Solutions, Incorporated* 1,600 18,144
32,032
SEMICONDUCTORS -- 15.09%
Altera Corporation* 375 8,415
Analog Devices, Incorporated* 200 8,200
Applied Materials, Incorporated* 1,000 21,600
Intel Corporation 540 15,455
RF Micro Devices, Incorporated* 1,800 15,876
Teradyne, Incorporated* 1,000 17,830
Texas Instruments Incorporated 700 16,695
104,071
SOFTWARE -- 14.00%
Amdocs Limited* 450 10,071
BEA Systems, Incorporated* 1,050 14,228
Microsoft Corporation 1,020 27,050
PeopleSoft, Incorporated* 700 12,670
Synopsys, Incorporated* 300 20,463
VERITAS Software Corporation* 350 12,068
96,550
SPECIALTY RETAIL -- 1.26%
TJX Companies, Incorporated (The) 400 $ 8,664
TOTAL COMMON STOCK -- 89.86%
(Cost $505,489) 619,762
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 78,593 78,593
TOTAL CASH EQUIVALENTS -- 11.39%
(Cost $78,593) 78,593
TOTAL INVESTMENTS -- 101.25%
(Cost $584,082) 698,355
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.25)%
(8,636)
NET ASSETS -- 100.00% $ 689,719
=============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Technology Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
<Page>
9
SM&R ALGER TECHNOLOGY FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $584,082) $ 698,355
Receivable for:
Capital stock sold 125
Dividends 11
Expense reimbursement 3,439
TOTAL ASSETS 701,930
LIABILITIES
Accrued:
Investment advisory fee 730
Service fee 135
Distribution fee 913
Other liabilities 10,433
TOTAL LIABILITIES 12,211
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 689,719
NET ASSETS:
Class A $ 449,337
Class B $ 240,382
TOTAL NET ASSETS $ 689,719
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 173,506
Class B:
Authorized 100,000,000
Outstanding 90,911
Class A:
Net asset value and redemption price per share $ 2.59
Offering price per share: (Net Assets value of $2.59/95%) $ 2.73
Class B:
Net asset value and offering price per share $ 2.64
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 865
Interest 275
TOTAL INVESTMENT INCOME 1,140
EXPENSES
Investment advisory fees 6,010
Service fees 1,113
Professional fees 4,530
Custody and transaction fees 13,194
Directors' fees 9,024
Qualification fees 17,117
Shareholder reporting expenses 1,396
Distribution fees 2,617
Insurance expense 499
Other expenses 9
TOTAL EXPENSES 55,509
LESS EXPENSES REIMBURSED (45,131)
NET EXPENSES 10,378
INVESTMENT LOSS -- NET (9,238)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 66,153
Change in unrealized appreciation of investments for the year 170,622
NET GAIN ON INVESTMENTS 236,775
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 227,537
</Table>
See notes to financial statements.
<Page>
10
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
----------------------------
Investment loss--net $ (9,238) $ (32,896)
Net realized gain (loss) on investments 66,153 (214,084)
Change in unrealized appreciation 170,622 862
Net increase (decrease) in net assets resulting
from operations 227,537 (246,118)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 152,839 53,340
Class B 27,815 161,747
TOTAL NET CAPITAL SHARE TRANSACTIONS 180,654 215,087
TOTAL INCREASE (DECREASE) 408,191 (31,031)
NET ASSETS
Beginning of year 281,528 312,559
End of year $ 689,719 $ 281,528
</Table>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS
INDICATED.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES
-------------------------------------- ------------------------------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
2003(1) 2002(4) 2001 2003(1) 2002(4) 2001
-------------------------------------- ------------------------------------------
Net Asset Value, Beginning of Year $ 1.67 $ 3.24 $ 10.00 $ 1.68 $ 3.25 $ 10.00
Investment income (loss) -- net (0.04) (0.20) (0.37) (0.05) (0.19) (0.24)
Net realized and unrealized gain
(loss) on investments 0.96 (1.37) (6.39) 1.01 (1.38) (6.51)
-------------------------------------- ------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.92 (1.57) (6.76) 0.96 (1.57) (6.75)
-------------------------------------- ------------------------------------------
Net Asset Value, End of Year $ 2.59 $ 1.67 $ 3.24 $ 2.64 $ 1.68 $ 3.25
====================================== ==========================================
TOTAL RETURN (2) 55.09% (48.46)% (67.60)% 57.14% (48.31)% (67.50)%
====================================== ==========================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 449,337 $ 150,553 $ 230,327 $ 240,382 $ 130,975 $ 82,232
Ratio of expenses with reimbursement to
average net assets (3) 2.10% 8.51% 10.97% 2.75% 9.42% 14.71%
Ratio of expenses without reimbursement to
average net assets 11.46% 12.19% 10.97% 14.16% 14.23% 14.71%
Ratio of net investment loss
to average net assets (1.84)% (8.30)% (10.32)% (2.48)% (9.22)% (14.21)%
Portfolio turnover rate 291.66% 301.01% 440.50% 291.66% 301.01% 440.50%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 2.10% for Class A and 2.75% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
11
SM&R ALGER AGGRESSIVE GROWTH FUND
MANAGER COMMENTARY
INVESTMENT OBJECTIVE
The SM&R Alger Aggressive Growth Fund seeks to achieve long-term capital
appreciation. The Fund normally invests at least 85% of its total assets in the
equity securities of companies listed on U.S. exchanges or in the
over-the-counter market. During the recent fiscal year, the management of the
Fund remained unchanged: a research intensive, bottom-up approach focusing on
rapidly growing stocks. Management's growth stock philosophy was of benefit
during a period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2003 was a solid period for equity
securities across all market capitalizations and styles. While weak consumer
confidence and disappointing job growth pushed stock prices lower in September
of 2002, the fourth quarter of the year provided great relief from all the
selling. Fueled in part by solid earnings from bellwethers like Citigroup, IBM
and General Motors and a Republican sweep in the midterm elections, markets
trended higher during October and November. Investor optimism was further
encouraged by a larger-than-expected 50 basis point rate cut on November 6th.
The positive momentum, however, came to a sudden end during the final month of
the year. With escalating tensions in Iraq and North Korea, continued political
turmoil in Venezuela and the highest unemployment rate in eight years,
investors, once again, reversed course and began to unload their equity
positions. December saw the collapse of most equity indices, with growth stocks
leading the downturn.
The 2003 New Year brought with it an end to the positive momentum experienced
throughout most of the fourth quarter of 2002. With the U.S. trade deficit
reaching record highs, industrial production on the decline and the impending
war in Iraq trumping positive economic news, equity markets trended downward
during the first two months of the year. Fortunately, with the outbreak of war
in March, markets reversed course and recouped some of the losses experienced in
January and February. Preferring war to the pre-combat uncertainty, investors
pushed most indices higher during the final month of the quarter. Mid and
Large-Cap Growth Stocks lead the upturn. Despite substantial market volatility
throughout the period, the Fed decided against any further rate cuts during the
first quarter of 2003.
The second quarter of 2003 sustained the positive momentum experienced at the
end of the first quarter, with most equity indices trending substantially higher
during the three-month period. Reassured by the swift and decisive allied
victory in Iraq, better-than-expected first quarter profits and rising consumer
confidence, investors found good reason to get back into the Market in April and
May. Stocks of all market capitalizations and styles advanced during the first
two months of the quarter. Markets continued to stay out of the red in June.
With a larger-than-expected jump in the index of leading economic indicators as
well as a 25 basis point rate cute on June 25th, investors pushed stocks
slightly higher during the final month of the quarter. Fortunately, the buying
continued well into the summer. Upbeat earnings reports from tech giants such as
Microsoft and Ericsson and news of higher-than-expected second quarter GDP
growth helped to move most equity indices higher during July and August.
<Page>
12
PERFORMANCE
The Fund's Class A shares returned 16.98%, before sales charge, during the
fiscal year ended August 31, 2003, versus a 12.07% return for the S&P 500 Index.
The Lipper Multi-Cap Growth Index returned 21.15% over the same time period. The
Fund benefited from solid security selection in the healthcare and financials
sectors and an overweighting in the strong consumer discretionary sector in
beating the S&P 500 benchmark.
MARKET & ECONOMIC OUTLOOK
The U.S. economy appears to be headed for a very robust 2nd half of 2003, and
that looks to continue into 2004. Global growth is accelerating as well. The
long-stagnant Japanese economy has been showing unexpected signs of life and
China's economic growth has hardly missed a beat. Some commentators have begun
to refer to a "global synergy" that will see growth spurring growth. In the
United States, attention will inevitably begin to turn to the election of 2004,
and to the national security concerns posed by North Korea and Iraq. But absent
something truly dramatic, these concerns can and, we believe, will not have much
bearing on economic activity. This is the period we have been anticipating.
Consumers have been carrying the lion's share of the economy; now, companies are
adding that missing element. It is a potent recipe, and it means higher, faster,
more sustainable growth than we have seen in over two years.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe
Best Regards,
/s/ David Hyun
David Hyun, CFA, Portfolio Manager
SM&R Alger Aggressive Growth Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
AGGRESSIVE GROWTH FUND, CLASS A, AT OFFERING PRICE, AND LIPPER MULTI-CAP GROWTH
INDEX AND THE S&P 500
SM&R ALGER AGGRESSIVE GROWTH FUND
<Table>
<Caption>
ALGERAGG GROWTH S&P 500 LIPPER MULTI-CAP GROWTH INDEX
9/1/2000 $ 9,497 $ 10,000 $ 10,000
9/30/2000 $ 9,136 $ 9,472 $ 9,237
12/31/2000 $ 6,809 $ 8,731 $ 7,528
8/31/2001 $ 5,613 $ 7,561 $ 5,579
9/30/2001 $ 5,128 $ 6,951 $ 5,018
12/31/2001 $ 5,727 $ 7,693 $ 5,731
8/30/2002 $ 4,027 $ 6,201 $ 3,390
9/30/2002 $ 3,837 $ 5,527 $ 3,127
12/31/2002 $ 3,751 $ 5,993 $ 3,312
8/30/2003 $ 4,711 $ 6,949 $ 4,107
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 09/10/00
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- ----------------------------------------
A 11.21% (22.19)%
B 10.43% (22.12)%
</Table>
SM&R Alger Aggressive Growth Fund performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A and B will vary due to differences in expenses
and sales charge structure. Average annual returns are based on the maximum
sales charge and reinvestment of all dividends and capital gains. The maximum
initial sales charge for Class A shares reflect the current maximum initial
sales charges of 5.00%. Class B shares reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year declining to 1% in
the fifth year, and is eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
13
SM&R ALGER AGGRESSIVE GROWTH FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2002
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 1.95%
United Technologies Corporation 350 $ 28,088
BIO TECHNOLOGY -- 6.17%
Amgen Incorporated* 450 29,655
Genetech, Incorporated* 400 31,760
ImClone Systems Incorporated* 200 8,406
Invitrogen Corporation* 150 8,650
QLT Incorporated* 750 10,185
88,656
CAPITAL MARKETS -- 0.59%
T. Rowe Price Group Incorporated 200 8,500
COMMERCIAL BANKS -- 2.40%
Mellon Financial Corporation 1,100 34,485
COMMERCIAL SERVICES & SUPPLIES -- 1.11%
Apollo Group, Incorporated (Class A)* 250 16,017
COMMUNICATION EQUIPMENT -- 6.83%
CIENA Corporation* 3,600 23,400
Cisco Systems, Incorporated* 2,050 39,258
Comverse Technology, Incorporated* 1,350 22,261
Corning Incorporated* 1,600 13,200
98,119
COMPUTER RELATED & BUSINESS SERVICES -- 1.95%
EMC Corporation* 2,200 28,050
COMPUTERS & PERIPHERALS -- 0.79%
Dell Computer Corporation* 350 11,420
CONSUMER FINANCE -- 1.58%
Capital One Financial Corporation 425 22,695
DIVERSIFIED FINANCIALS -- 2.26%
Citigroup, Incorporated 750 32,513
ENERGY EQUIPMENT & SERVICES -- 4.05%
Halliburton Company 650 $ 15,717
Smith International, Incorporated* 600 23,454
Transocean Incorporated* 900 19,008
58,179
FINANCIAL SERVICES -- 1.64%
Bank of New York Company, Incorporated (The) 800 23,536
FOOD & STAPLES RETAILING -- 2.61%
Wal-Mart Stores, Incorporated 635 37,573
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.30%
Alcon, Incorporated 150 7,837
Boston Scientific Corporation* 540 32,454
Varian Medical Systems, Incorporated* 200 11,170
Zimmer Holdings, Incorporated* 200 10,348
61,809
HEALTH CARE FACILITIES -- 1.72%
Medtronic, Incorporated 500 24,790
HEALTH CARE PROVIDER & SERVICES -- 1.55%
Health Management Associates, Incorporated (Class A) 1,000 22,280
INDUSTRIAL CONGLOMERATES -- 3.50%
General Electric Company 1,700 50,269
INSURANCE -- 1.04%
American International Group, Incorporated 250 14,893
INTERNET & CATALOG RETAIL -- 3.09%
eBay Incorporated* 400 22,212
InterActiveCorp* 600 22,206
44,418
</Table>
<Page>
14
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 2.05%
Paychex, Incorporated 400 $ 14,400
Yahoo! Incorporated* 450 15,030
29,430
LEISURE & ENTERTAINMENT -- 1.03%
International Game Technology* 575 14,858
MACHINERY -- 2.96%
Broadcom Corporation (Class A)* 1,550 42,594
MEDIA -- 6.88%
AOL Time Warner Incorporated* 2,500 40,900
General Motors Corporation (Class H)* 1,050 15,687
Monster Worldwide Incorporated* 500 13,660
Walt Disney Company (The) 1,400 28,700
98,947
MEDICAL SERVICES -- 2.78%
Gilead Sciences, Incorporated* 600 40,020
PHARMACEUTICALS -- 7.96%
Allergan, Incorporated 200 15,892
Barr Laboratories, Incorporated* 525 35,527
Mylan Laboratories Incorporated 500 18,200
Pfizer, Incorporated 710 21,243
Teva Pharmaceutical Industries LTD ADR 400 23,485
114,347
RETAILING -- 2.05%
Gap, Incorporated (The) 1,400 29,246
SEMICONDUCTORS -- 7.82%
Intel Corporation 800 22,896
Intersil Corporation (Class A)* 500 14,565
Micron Technology, Incorporated* 2,100 30,156
National Semiconductor Corporation* 550 16,027
Novellus Systems, Incorporated* 300 11,988
Texas Instruments Incorporated 700 16,695
112,327
SOFTWARE -- 10.20%
BEA Systems, Incorporated* 2,800 $ 37,940
Microsoft Corporation 2,550 67,626
Oracle Corporation* 700 8,946
PeopleSoft, Incorporated* 1,200 21,720
VERITAS Software Corporation* 300 10,344
146,576
SPECIALTY RETAIL -- 3.21%
Abercrombie & Fitch Company (Class A)* 600 18,264
Home Depot, Incorporated (The) 500 16,080
Pacific Sunwear of California, Incorporated* 350 11,830
46,174
WIRELESS TELECOMMUNICATION SERVICES -- 1.41%
Nextel Communications, Incorporated (Class A)* 1,050 20,244
TOTAL COMMON STOCK -- 97.48%
(Cost $1,218,310) 1,401,053
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 55,815 55,815
TOTAL CASH EQUIVALENTS -- 3.88%
(Cost $55,815) 55,815
TOTAL INVESTMENTS -- 101.36%
(Cost $1,274,125) 1,456,868
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.36)%
(19,508)
NET ASSETS -- 100.00% $ 1,437,360
============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Aggressive Growth Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
<Page>
15
SM&R ALGER AGGRESSIVE GROWTH FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $1,274,125) $ 1,456,868
Receivable for:
Capital stock sold 100
Dividends 529
Expense reimbursement 4,757
TOTAL ASSETS 1,462,254
LIABILITIES
Investment securities purchased 7,885
Capital stock reacquired 2,654
Accrued:
Investment advisory fee 1,239
Service fee 295
Distribution fee 1,066
Other liabilities 11,755
TOTAL LIABILITIES 24,894
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 1,437,360
NET ASSETS:
Class A $ 994,871
Class B $ 442,489
TOTAL NET ASSETS $ 1,437,360
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 200,513
Class B:
Authorized 100,000,000
Outstanding 90,924
Class A:
Net asset value and redemption price per share $ 4.96
Offering price per share:
(Net Assets value of $4.96/95%) $ 5.22
Class B:
Net asset value and offering price per share $ 4.87
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 5,930
Interest 812
TOTAL INVESTMENT INCOME 6,742
EXPENSES
Investment advisory fees 12,220
Service fees 2,910
Professional fees 4,530
Custody and transaction fees 14,152
Directors' fees 9,024
Qualification fees 17,776
Shareholder reporting expenses 2,583
Distribution fees 6,366
Insurance expenses 1,056
Other expenses 9
TOTAL EXPENSES 70,626
LESS EXPENSES REIMBURSED (46,885)
NET EXPENSES 23,741
INVESTMENT LOSS -- NET (16,999)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (52,512)
Change in unrealized appreciation
of investments for the year 275,926
NET GAIN ON INVESTMENTS 223,414
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 206,415
</Table>
See notes to financial statements.
<Page>
16
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
-------------------------------
Investment loss--net $ (16,999) $ (42,549)
Net realized loss
on investments (52,512) (274,138)
Change in unrealized
appreciation (depreciation) 275,926 (39,028)
Net increase (decrease)
in net assets resulting
from operations 206,415 (355,715)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 181,817 408,251
Class B 53,892 224,656
Total net capital
share transactions 235,709 632,907
TOTAL INCREASE 442,124 277,192
NET ASSETS
Beginning of year 995,236 718,044
End of year $ 1,437,360 $ 995,236
</Table>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
2003(1) 2002(4) 2001 2003(1) 2002(4) 2001
------------------------------------ ------------------------------------
Net Asset Value,
Beginning of Year $ 4.24 $ 5.91 $ 10.00 $ 4.19 $ 5.89 $ 10.00
Investment income
(loss) -- net (0.06) (0.17) (0.25) (0.08) (0.21) (0.18)
Net realized and unrealized
gain (loss) on investments 0.78 (1.50) (3.84) 0.76 (1.49) (3.93)
------------------------------------ ------------------------------------
TOTAL FROM
INVESTMENT OPERATIONS 0.72 (1.67) (4.09) 0.68 (1.70) (4.11)
------------------------------------ ------------------------------------
Net Asset Value, End of Year $ 4.96 $ 4.24 $ 5.91 $ 4.87 $ 4.19 $ 5.89
==================================== ====================================
TOTAL RETURN (2) 16.98% (28.26)% (40.90)% 16.23% (28.86)% (41.10)%
==================================== ====================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 994,871 $ 666,982 $ 487,497 $ 442,489 $ 328,254 $ 230,547
Ratio of expenses with
reimbursement to
average net assets (3) 1.85% 4.48% 6.85% 2.50% 5.56% 7.25%
Ratio of expenses without
reimbursement to
average net assets 5.52% 6.01% 6.85% 7.36% 7.78% 7.25%
Ratio of net investment loss
to average net assets (1.27)% (3.99)% (5.59)% (1.91)% (5.08)% (6.12)%
Portfolio turnover rate 179.56% 177.62% 70.58% 179.56% 177.62% 70.58%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.85% for Class A and 2.50% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
17
SM&R ALGER SMALL-CAP FUND
MANAGER COMMENTARY
INVESTMENT OBJECTIVE
The SM&R Alger Small-Cap Fund seeks to achieve long-term capital appreciation.
The Fund normally invests at least 80% of its total assets in the equity
securities of small-capitalization companies listed on U.S. exchanges or in the
over-the-counter market. A small capitalization company is one that has a market
capitalization within the range of companies in the Russell 2000 Growth Index or
the S&P SmallCap 600 Index. During the recent fiscal year, the management of the
Fund remained unchanged: a research intensive, bottom-up approach focusing on
rapidly growing stocks. Management's growth stock philosophy was of benefit
during a period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2003 was a solid period for equity
securities across all market capitalizations and styles. While weak consumer
confidence and disappointing job growth pushed stock prices lower in September
of 2002, the fourth quarter of the year provided great relief from all the
selling. Fueled in part by solid earnings from bellwethers like Citigroup, IBM
and General Motors and a Republican sweep in the midterm elections, markets
trended higher during October and November. Investor optimism was further
encouraged by a larger-than-expected 50 basis point rate cut on November 6th.
The positive momentum, however, came to a sudden end during the final month of
the year. With escalating tensions in Iraq and North Korea, continued political
turmoil in Venezuela and the highest unemployment rate in eight years,
investors, once again, reversed course and began to unload their equity
positions. December saw the collapse of most equity indices, with growth stocks
leading the downturn.
The 2003 New Year brought with it an end to the positive momentum experienced
throughout most of the fourth quarter of 2002. With the U.S. trade deficit
reaching record highs, industrial production on the decline and the impending
war in Iraq trumping positive economic news, equity markets trended downward
during the first two months of the year. Fortunately, with the outbreak of war
in March, markets reversed course and recouped some of the losses experienced in
January and February. Preferring war to the pre-combat uncertainty, investors
pushed most indices higher during the final month of the quarter. Mid and
Large-Cap Growth Stocks lead the upturn. Despite substantial market volatility
throughout the period, the Fed decided against any further rate cuts during the
first quarter of 2003.
The second quarter of 2003 sustained the positive momentum experienced at the
end of the first quarter, with most equity indices trending substantially higher
during the three-month period. Reassured by the swift and decisive allied
victory in Iraq, better-than-expected first quarter profits and rising consumer
confidence, investors found good reason to get back into the Market in April and
May. Stocks of all market capitalizations and styles advanced during the first
two months of the quarter. Markets continued to stay out of the red in June.
With a larger-than-expected jump in the index of leading economic indicators as
well as a 25 basis point rate cute on June 25th, investors pushed stocks
slightly higher during the final month of the quarter. Fortunately, the buying
continued well into the summer. Upbeat earnings reports from tech giants such as
Microsoft and Ericsson and news of higher-than-expected second quarter GDP
growth helped to move most equity indices higher during July and August.
<Page>
18
PERFORMANCE.
The Fund's Class A shares returned 26.10%, before sales charge, during the
fiscal year ended August 31, 2003, versus a 31.11% return for the Lipper
Small-Cap Growth Index. The Fund benefited from strong security selection in the
consumer discretionary sector, but was hurt by poor performing information
technology stocks.
MARKET & ECONOMIC OUTLOOK
The U.S. economy appears to be headed for a very robust 2nd half of 2003, and
that looks to continue into 2004. Global growth is accelerating as well. The
long-stagnant Japanese economy has been showing unexpected signs of life and
China's economic growth has hardly missed a beat. Some commentators have begun
to refer to a "global synergy" that will see growth spurring growth. In the
United States, attention will inevitably begin to turn to the election of 2004,
and to the national security concerns posed by North Korea and Iraq. But absent
something truly dramatic, these concerns can and, we believe, will not have much
bearing on economic activity. This is the period we have been anticipating.
Consumers have been carrying the lion's share of the economy; now, companies are
adding that missing element. It is a potent recipe, and it means higher, faster,
more sustainable growth than we have seen in over two years.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their earnings rapidly and
Best Regards,
/s/Jill Greenwald
Jill Greenwald, CFA, Portfolio Manager
SM&R Alger Small-Cap Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
SMALL-CAP FUND, CLASS A, AT OFFERING PRICE, AND LIPPER SMALL-CAP GROWTH INDEX
AND THE S&P 500
SM&R ALGER SMALL CAP FUND
<Table>
<Caption>
ALGER SM-CAP S&P 500 LIPPER SMALL-CAP GROWTH INDEX
9/1/2000 $ 9,497 $ 10,000 $ 10,000
9/30/2000 $ 9,488 $ 9,472 $ 9,505
12/31/2000 $ 7,864 $ 8,731 $ 7,940
8/31/2001 $ 5,261 $ 7,561 $ 6,676
9/30/2001 $ 4,616 $ 6,951 $ 5,634
12/31/2001 $ 5,508 $ 7,693 $ 6,928
8/30/2002 $ 4,112 $ 6,201 $ 5,049
9/30/2002 $ 3,808 $ 5,527 $ 4,743
12/31/2002 $ 3,998 $ 5,993 $ 5,001
8/30/2003 $ 5,185 $ 6,949 $ 6,619
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 09/01/00
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -----------------------------------
A 19.74% (19.66)%
B 20.22% (19.05)%
</Table>
SM&R Alger Small-Cap Fund performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A and B will vary due to differences in expenses
and sales charge structure. Average annual returns are based on the maximum
sales charge and reinvestment of all dividends and capital gains. The maximum
initial sales charge for Class A shares reflect the current maximum initial
sales charges of 5.00%. Class B shares reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year declining to 1% in
the fifth year, and is eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
19
SM&R ALGER SMALL-CAP FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 1.01%
Alliant Techsystems Incorporated* 230 $ 11,716
AIR FREIGHT & LOGISTICS -- 1.52%
Pacer International, Incorporated* 890 17,711
BEVERAGES -- 1.06%
Constellation Brands, Incorporated (Class A)* 430 12,363
BIO TECHNOLOGY -- 3.86%
Alkermes, Incorporated* 1,300 14,963
Gen-Probe Incorporated* 150 9,486
QLT Incorporated* 800 10,864
Telik, Incorporated* 500 9,590
44,903
BROADCASTING -- 0.70%
Radio One, Incorporated (Class A)* 490 8,163
BUSINESS SERVICES -- 1.59%
Rent-A-Center, Incorporated* 230 18,485
CAPITAL MARKETS -- 1.15%
Jefferies Group, Incorporated 450 13,365
COMMERCIAL BANKS -- 4.84%
BankAtlantic Bancorp, Incorporated 850 12,597
First Niagra Financial Group, Incorporated 550 8,267
Southwest Bancorporation of Texas,
Incorporated 250 9,240
UCBH Holdings, Incorporated 650 20,793
Westcorp 150 5,337
56,234
COMMERCIAL SERVICES & SUPPLIES -- 3.38%
Corinthian Colleges, Incorporated* 310 $ 17,840
Education Management Corporation* 350 21,406
39,246
COMMUNICATION EQUIPMENT -- 5.96%
Advanced Fibre Communications,
Incorporated* 550 12,799
Comverse Technology, Incorporated* 1,150 18,963
Enterasys Networks, Incorporated* 2,350 13,559
NetScreen Technologies, Incorporated* 500 11,965
Power Integrations, Incorporated* 370 11,907
69,193
COMMUNICATIONS -- 1.13%
Tekelec* 750 13,110
COMPUTER RELATED & BUSINESS SERVICES -- 1.72%
Maxtor Corporation* 1,750 20,003
COMPUTER SOFTWARE -- 2.42%
Borland Software Corporation* 425 4,033
Hyperion Solutions Corporation* 250 8,245
Legato Systems, Incorporated* 1,400 15,848
28,126
COMPUTER TECHNOLOGY -- 1.47%
SINA Corporation* 300 9,324
Verity, Incorporated* 650 7,748
17,072
</Table>
<Page>
20
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.07%
Avid Technology, Incorporated* 250 $ 12,412
DIVERSIFIED FINANCIALS -- 2.96%
Affiliated Managers Group, Incorporated* 300 20,340
CapitalSource Incorporated* 100 1,760
Doral Financial Corporation 300 12,315
34,415
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.47%
Benchmark Electronics, Incorporated* 380 16,864
FLIR Systems, Incorporated* 450 11,817
28,681
ELECTRONICS -- 1.15%
OmniVision Technologies, Incorporated* 300 13,317
ENERGY EQUIPMENT & SERVICES -- 1.09%
Cooper Cameron Corporation* 260 12,626
FOODS & BEVERAGES -- 1.04%
American Italian Pasta Company (Class A)* 290 12,099
HEALTH CARE -- 1.33%
ALARIS Medical Systems, Incorporated* 900 15,435
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.63%
VISX, Incorporated* 650 13,013
Wilson Greatbatch Technologies, Incorporated* 150 5,936
18,949
HEALTH CARE FACILITIES -- 0.96%
Cytyc Corporation* 850 $ 11,118
HEALTH CARE PROVIDER & SERVICES -- 5.18%
Kindred Healthcare, Incorporated* 200 6,550
LifePoint Hospitals, Incorporated* 650 18,726
Mid Atlantic Medical Services, Incorporated* 360 17,662
VCA Antech, Incorporated* 750 17,280
60,218
HOTELS, RESTAURANTS & LEISURE -- 4.89%
Alliance Gaming Corporation* 820 18,475
Applebee's International, Incorporated 357 11,474
P.F. Chang's China Bistro, Incorporated* 200 9,300
Station Casinos, Incorporated* 590 17,552
56,801
INFORMATION TECHNOLOGY SERVICES -- 3.60%
Alliance Data Systems Corporation* 450 13,320
BISYS Group, Incorporated (The)* 810 14,864
ManTech International Corporation (Class A)* 600 13,698
41,882
INSURANCE -- 1.79%
Arch Capital Group LTD* 320 10,880
W.R. Berkley Corporation 300 9,924
20,804
</Table>
<Page>
21
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 3.78%
Digital Insight Corporation* 650 $ 15,567
Netegrity, Incorporated* 900 8,703
Overture Services, Incorporated* 400 9,972
ValueClick, Incorporated* 1,050 9,713
43,955
LEISURE EQUIPMENT & PRODUCTS -- 1.78%
Leapfrog Enterprises, Incorporated
(Class A)* 550 20,625
MACHINERY -- 2.54%
Actuant Corporation (Class A)* 300 15,447
Pentair, Incorporated 330 14,124
29,571
MEDIA -- 2.58%
Media General, Incorporated (Class A) 225 13,637
Monster Worldwide Incorporated* 600 16,392
30,029
MEDICAL DEVICES -- 1.32%
Wright Medical Group, Incorporated* 620 15,283
MEDICAL SERVICES -- 0.84%
Fisher Scientific International Incorporated* 250 9,805
OIL & GAS -- 2.32%
Noble Energy, Incorporated 240 9,502
Pogo Producing Company 380 17,465
26,967
PHARMACEUTICALS -- 5.56%
Angiotech Pharmaceuticals, Incorporated* 350 $ 15,050
Pharmaceuticals Resources, Incorporated* 295 16,502
SICOR Incorporated * 850 16,872
Taro Pharmaceutical Industries LTD* 300 16,197
64,621
RAILROADS -- 1.75%
Hunt (J.B.) Transport Services, Incorporated* 410 20,377
RETAILING -- 0.37%
Autobytel Incorporated* 500 4,255
SEMICONDUCTORS -- 6.10%
Fairchild Semiconductor Corporation
(Class A)* 750 13,275
Integrated Circuit Systems, Incorporated* 340 11,737
International Rectifier Corporation* 390 16,220
Photronics, Incorporated* 500 12,145
Varian Semiconductor Equipment
Associates, Incorporated* 430 17,445
70,822
SOFTWARE -- 3.59%
Business Objects S.A. ADR* 530 14,326
Documentum, Incorporated* 450 9,234
Fair Isaac Corporation 310 18,166
41,726
</Table>
<Page>
22
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 3.44%
Aeropostale, Incorporated* 200 $ 5,614
AnnTaylor Stores Corporation* 585 19,890
PETCO Animal Supplies, Incorporated* 450 14,445
39,949
TEXTILES, APPAREL & LUXURY GOODS -- 0.86%
Quicksilver, Incorporated* 550 9,983
TOTAL COMMON STOCK -- 97.80%
(Cost $889,735) 1,136,415
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 13,764 13,764
TOTAL CASH EQUIVALENTS -- 1.19%
(Cost $13,764) 13,764
TOTAL INVESTMENTS -- 98.99%
(Cost $903,499) 1,150,179
CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.01%
11,776
NET ASSETS -- 100.00% $ 1,161,955
============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Small-Cap Fund are affiliated
by having the same investment adviser.
See notes to financial statements.
<Page>
23
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $903,499) $ 1,150,179
Receivable for:
Investment security sold 36,969
Capital stock sold 50
Dividends 228
Expense reimbursement 4,693
TOTAL ASSETS 1,192,119
LIABILITIES
Investment securities purchased 15,718
Accrued:
Investment advisory fee 931
Service fee 233
Distribution fee 2,373
Other liabilities 10,909
TOTAL LIABILITIES 30,164
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 1,161,955
NET ASSETS:
Class A $ 789,625
Class B $ 372,330
Total Net Assets $ 1,161,955
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 144,496
Class B:
Authorized 100,000,000
Outstanding 68,129
Class A:
Net asset value and redemption price per share $ 5.46
Offering price per share: (Net Assets value of $5.46/95%) $ 5.75
Class B:
Net asset value and offering price per share $ 5.47
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 1,716
Interest 473
TOTAL INVESTMENT INCOME 2,189
EXPENSES
Investment advisory fees 8,580
Service fees 2,145
Professional fees 4,530
Custody and transaction fees 16,033
Directors' fees 9,024
Qualification fees 17,218
Shareholder reporting expenses 1,712
Distribution fees 4,709
Insurance expenses 763
Other expenses 9
TOTAL EXPENSES 64,723
LESS EXPENSES REIMBURSED (46,781)
NET EXPENSES 17,942
INVESTMENT LOSS--NET (15,753)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (44,898)
Change in unrealized appreciation
of investments for the year 297,253
NET GAIN ON INVESTMENTS 252,355
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 236,602
</Table>
See notes to financial statements.
<Page>
24
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
---------------------------
Investment loss--net $ (15,753) $ (38,217)
Net realized loss on investments (44,898) (99,481)
Change in unrealized appreciation (depreciation) 297,253 (20,128)
Net increase (decrease) in net assets resulting
from operations 236,602 (157,826)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 192,711 239,983
Class B 88,975 94,722
Total net capital share transactions 281,686 334,705
TOTAL INCREASE 518,288 176,879
NET ASSETS
Beginning of year 643,667 466,788
End of year $ 1,161,955 $ 643,667
</Table>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
2003(1) 2002(1)(4) 2001 2003(1) 2002(1)(4) 2001
-------------------------------------- --------------------------------------
Net Asset Value, Beginning of Year $ 4.33 $ 5.54 $ 10.00 $ 4.32 $ 5.65 $ 10.00
Investment income (loss)--net (0.07) (0.32) (0.55) (0.10) (0.41) (0.37)
Net realized and unrealized gain (loss)
on investments 1.20 (0.89) (3.91) 1.25 (0.92) (3.98)
-------------------------------------- --------------------------------------
Total from Investment Operations 1.13 (1.21) (4.46) 1.15 (1.33) (4.35)
-------------------------------------- --------------------------------------
Net Asset Value, End of Year $ 5.46 $ 4.33 $ 5.54 $ 5.47 $ 4.32 $ 5.65
-------------------------------------- --------------------------------------
Total Return (2) 26.10% (21.84)% (44.60)% 26.62% (23.54)% (43.50)%
====================================== ======================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 790 $ 437 $ 295 $ 372 $ 207 $ 172
Ratio of expenses with reimbursement to
average net assets (3) 1.90% 6.60% 11.53% 2.55% 8.05% 11.97%
Ratio of expenses without reimbursement
to average net assets 6.89% 9.68% 11.53% 9.05% 11.65% 11.97%
Ratio of net investment loss to average
net assets (1.64)% (6.33)% (10.61)% (2.29)% (7.77)% (11.25)%
Portfolio turnover rate 131.48% 176.50% 138.73% 131.48% 176.50% 138.73%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.90% for Class A and 2.55% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
25
SM&R ALGER GROWTH FUND
MANAGER COMMENTARY
INVESTMENT OBJECTIVE
The SM&R Alger Growth Fund seeks to achieve long-term capital appreciation. The
Fund normally invests at least 65% of its total assets in the equity securities
of large companies listed on U.S. exchanges or in the over-the-counter market.
The Fund considers a large company to have a market capitalization of $10
billion or greater. During the recent fiscal year, the management of the Fund
remained unchanged: a research intensive, bottom-up approach focusing on rapidly
growing stocks. Management's growth stock philosophy was of benefit during a
period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2003 was a solid period for equity
securities across all market capitalizations and styles. While weak consumer
confidence and disappointing job growth pushed stock prices lower in September
of 2002, the fourth quarter of the year provided great relief from all the
selling. Fueled in part by solid earnings from bellwethers like Citigroup, IBM
and General Motors and a Republican sweep in the midterm elections, markets
trended higher during October and November. Investor optimism was further
encouraged by a larger-than-expected 50 basis point rate cut on November 6th.
The positive momentum, however, came to a sudden end during the final month of
the year. With escalating tensions in Iraq and North Korea, continued political
turmoil in Venezuela and the highest unemployment rate in eight years,
investors, once again, reversed course and began to unload their equity
positions. December saw the collapse of most equity indices, with growth stocks
leading the downturn.
The 2003 New Year brought with it an end to the positive momentum experienced
throughout most of the fourth quarter of 2002. With the U.S. trade deficit
reaching record highs, industrial production on the decline and the impending
war in Iraq trumping positive economic news, equity markets trended downward
during the first two months of the year. Fortunately, with the outbreak of war
in March, markets reversed course and recouped some of the losses experienced in
January and February. Preferring war to the pre-combat uncertainty, investors
pushed most indices higher during the final month of the quarter. Mid and
Large-Cap Growth Stocks lead the upturn. Despite substantial market volatility
throughout the period, the Fed decided against any further rate cuts during the
first quarter of 2003.
The second quarter of 2003 sustained the positive momentum experienced at the
end of the first quarter, with most equity indices trending substantially higher
during the three-month period. Reassured by the swift and decisive allied
victory in Iraq, better-than-expected first quarter profits and rising consumer
confidence, investors found good reason to get back into the Market in April and
May. Stocks of all market capitalizations and styles advanced during the first
two months of the quarter. Markets continued to stay out of the red in June.
With a larger-than-expected jump in the index of leading economic indicators as
well as a 25 basis point rate cute on June 25th, investors pushed stocks
slightly higher during the final month of the quarter. Fortunately, the buying
continued well into the summer. Upbeat earnings reports from tech giants such as
Microsoft and Ericsson and news of higher-than-expected second quarter GDP
growth helped to move most equity indices higher during July and August.
<Page>
26
PERFORMANCE.
The Fund's Class A shares returned 13.54%, before sales charge, during the
fiscal year ended August 31, 2003, versus a 12.07% return for the S&P 500 Index.
The Lipper Large-Cap Growth Index returned 11.03% over the same time period. The
Fund benefited from an overweighting in the strong information technology sector
and solid security selection in the consumer discretionary and consumer staples
sectors in beating the S&P 500 benchmark.
MARKET & ECONOMIC OUTLOOK
The U.S. economy appears to be headed for a very robust 2nd half of 2003, and
that looks to continue into 2004. Global growth is accelerating as well. The
long-stagnant Japanese economy has been showing unexpected signs of life and
China's economic growth has hardly missed a beat. Some commentators have begun
to refer to a "global synergy" that will see growth spurring growth. In the
United States, attention will inevitably begin to turn to the election of 2004,
and to the national security concerns posed by North Korea and Iraq. But absent
something truly dramatic, these concerns can and, we believe, will not have much
bearing on economic activity. This is the period we have been anticipating.
Consumers have been carrying the lion's share of the economy; now, companies are
adding that missing element. It is a potent recipe, and it means higher, faster,
more sustainable growth than we have seen in over two years.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their
Best Regards,
/s/ Dan Chung
/s/ Dave Hyun
Dan Chung, CFA, Portfolio Manager
Dave Hyun, CFA, Portfolio Co-Manager
SM&R Alger Growth Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
SM&R ALGER GROWTH FUND, CLASS A, AT OFFERING PRICE, AND LIPPER LARGE-CAP
GROWTH INDEX AND THE S&P 500
SM&R ALGER GROWTH FUND
<Table>
<Caption>
ALGER GROWTH S&P 500 LIPPER LARGE-CAP GROWTH INDEX
9/1/2000 $ 9,497 $ 10,000 $ 10,000
9/30/2000 $ 8,737 $ 9,472 $ 9,237
12/31/2000 $ 7,265 $ 8,731 $ 7,528
8/31/2001 $ 6,059 $ 7,561 $ 5,579
9/30/2001 $ 5,603 $ 6,951 $ 5,018
12/31/2001 $ 6,126 $ 7,693 $ 5,731
8/30/2002 $ 4,350 $ 6,201 $ 4,372
9/30/2002 $ 3,970 $ 5,527 $ 3,949
12/31/2002 $ 4,065 $ 5,993 $ 4,120
8/30/2003 $ 4,938 $ 6,949 $ 4,855
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 09/01/00
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- --------------------------------------------
A 7.88% (20.96)%
B 6.95% (21.02)%
</Table>
SM&R Alger Growth Fund performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A and B will var due to differences in expenses
and sales charge structure. Average annual returns are based on the maximum
sales charge and reinvestment of all dividends and capital gains. The maximum
initial sales charge for Class A shares reflect the current maximum initial
sales charges of 5.00%. Class B shares reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first declining to 1% in the
fifth year, and is eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
27
SM&R ALGER GROWTH FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
BIO TECHNOLOGY -- 3.10%
Amgen Incorporated* 595 $ 39,211
Genetech, Incorporated* 250 19,850
59,061
CAPITAL MARKETS -- 0.67%
T. Rowe Price Group Incorporated 300 12,750
COMMERCIAL BANKS -- 1.93%
Mellon Financial Corporation 1,175 36,836
COMMUNICATIONS -- 1.37%
Vodafone Group PLC ADR 1,425 26,078
COMMUNICATION EQUIPMENT -- 5.91%
Cisco Systems, Incorporated* 2,800 53,620
Corning Incorporated* 1,200 9,900
Lucent Technologies Incorporated* 4,200 8,022
Nokia Corporation ADR 2,525 41,132
112,674
COMPUTER RELATED & BUSINESS SERVICES -- 2.73%
EMC Corporation* 1,350 17,212
Hewlett-Packard Company 1,750 34,860
52,072
COMPUTERS & PERIPHERALS -- 3.49%
Dell Computer Corporation* 1,155 37,688
Seagate Technology 400 9,204
Sun Microsystems, Incorporated* 5,105 19,705
66,597
CONSUMER FINANCE -- 1.51%
American Express Company 400 18,020
Capital One Financial Corporation 200 10,680
28,700
DIVERSIFIED FINANCIALS -- 4.06%
Affiliated Managers Group, Incorporated* 300 20,340
Citigroup, Incorporated 1,115 48,335
Goldman Sachs Group, Incorporated (The) 100 8,849
77,524
ENERGY EQUIPMENT & SERVICES -- 2.06%
B J Services Company* 1,050 $ 39,239
FOOD & STAPLES RETAILING -- 2.87%
Wal-Mart Stores, Incorporated 925 54,732
FREIGHT -- 0.99%
United Parcel Service, Incorporated (Class B) 300 18,828
HEALTH CARE EQUIPMENT & SUPPLIES -- 3.36%
Alcon, Incorporated 350 18,288
Boston Scientific Corporation* 575 34,558
Varian Medical Systems, Incorporated* 200 11,170
64,016
HEALTH CARE FACILITIES -- 1.82%
Medtronic, Incorporated 700 34,706
HEALTH CARE PROVIDER & SERVICES -- 1.49%
Aetna Incorporated 500 28,500
HOTELS, RESTAURANTS & LEISURE -- 1.45%
Carnival Corporation 800 27,672
INDUSTRIAL CONGLOMERATES -- 4.89%
General Electric Company 1,450 42,877
Tyco International LTD 2,450 50,421
93,298
INSURANCE -- 2.74%
American International Group, Incorporated 575 34,253
Travelers Property Casualty Corporation
(Class A) 1,175 18,083
52,336
INTERNET & CATALOG RETAIL -- 3.59%
Amazon.com, Incorporated* 350 16,254
eBay Incorporated* 640 35,539
Netflix Incorporated* 500 16,665
68,458
INTERNET SOFTWARE & SERVICES -- 2.19%
Yahoo! Incorporated* 1,250 41,750
</Table>
<Page>
28
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
MEDIA -- 5.53%
General Motors Corporation (Class H)* 2,800 $ 41,832
Viacom Incorporated (Class B) 435 19,575
Walt Disney Company (The) 2,150 44,075
105,482
MEDICAL SERVICES -- 0.87%
Gilead Sciences, Incorporated* 250 16,675
OIL & GAS -- 2.73%
Devon Energy Corporation 1,005 52,009
PHARMACEUTICALS -- 10.50%
Abbott Laboratories 575 23,172
AstraZeneca PLC ADR 350 13,877
Barr Laboratories, Incorporated* 250 16,917
Bristol-Myers Squibb Company 1,050 26,638
Forest Laboratories, Incorporated* 400 18,800
Johnson & Johnson 550 27,269
Pfizer, Incorporated 430 12,866
Teva Pharmaceutical Industries LTD ADR 300 17,614
Watson Pharmaceuticals, Incorporated* 450 18,495
Wyeth 575 24,639
200,287
RETAILING -- 1.70%
Gap, Incorporated (The) 1,550 32,379
SEMICONDUCTORS -- 10.26%
Altera Corporation* 400 8,976
Analog Devices, Incorporated* 550 22,550
Intel Corporation 2,200 62,964
Linear Technology Corporation 150 6,183
Taiwan Semiconductor Manufacturing
Company LTD* 1,849 21,781
Teradyne, Incorporation* 1,100 19,613
Texas Instruments Incorporated 700 16,695
Xilinx, Incorporated* 1,200 37,008
195,770
SOFTWARE -- 8.31%
Microsoft Corporation 3,110 $ 82,477
PeopleSoft, Incorporated* 800 14,480
Synopsys, Incorporated* 600 40,926
VERITAS Software Corporation* 600 20,688
158,571
SPECIALTY RETAIL -- 5.75%
Best Buy Company, Incorporated* 700 36,407
Home Depot, Incorporated (The) 1,400 45,024
TJX Companies, Incorporated (The) 1,300 28,158
109,589
WIRELESS TELECOMMUNICATION SERVICES -- 1.01%
Nextel Communications, Incorporated
(Class A)* 1,000 19,280
TOTAL COMMON STOCK -- 98.88%
(Cost $1,638,508) 1,885,869
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 37,688 37,688
TOTAL CASH EQUIVALENTS -- 1.98%
(Cost $37,688) 37,688
TOTAL INVESTMENTS -- 100.86%
(Cost $1,676,196) 1,923,557
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.86)%
(16,322)
NET ASSETS -- 100.00% $ 1,907,235
============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Growth Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
<Page>
29
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
<Caption>
ASSETS
Investment in securities, at value (Cost $1,676,196) $ 1,923,557
Receivable for:
Capital stock sold 322
Dividends 753
Expense reimbursement 4,089
TOTAL ASSETS 1,928,721
LIABILITIES
Investment securities purchased 5,310
Accrued:
Investment advisory fee 1,334
Service fee 393
Distribution fee 2,954
Other liabilities 11,495
TOTAL LIABILITIES 21,486
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 1,907,235
NET ASSETS:
Class A $ 1,071,035
Class B $ 836,200
TOTAL NET ASSETS $ 1,907,235
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 206,017
Class B:
Authorized 100,000,000
Outstanding 164,547
Class A:
Net asset value and redemption price per share $ 5.20
Offering price per share: (Net Assets value of $5.20/95%) $ 5.47
Class B:
Net asset value and offering price per share $ 5.08
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
<Caption>
INVESTMENT INCOME
Dividends $ 12,386
Interest 487
TOTAL INVESTMENT INCOME 12,873
EXPENSES
Investment advisory fees 13,101
Service fees 3,853
Professional fees 4,530
Custody and transaction fees 16,070
Directors' fees 9,024
Qualification fees 17,216
Shareholder reporting expenses 3,755
Distribution fees 9,903
Insurance expenses 1,128
Other expenses 9
TOTAL EXPENSES 78,589
LESS EXPENSES REIMBURSED (47,990)
NET EXPENSES 30,599
INVESTMENT LOSS-- NET (17,726)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (213,882)
Change in unrealized appreciation
of investments for the year 458,138
NET GAIN ON INVESTMENTS 244,256
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 226,530
</Table>
See notes to financial statements.
<Page>
30
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
---------------------------
Investment loss--net $ (17,726) $ (41,129)
Net realized loss on investments (213,882) (370,274)
Change in unrealized appreciation (depreciation) 458,138 (85,833)
Net increase (decrease)in net assets resulting
from operations 226,530 (497,236)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 241,983 338,635
Class B 86,350 445,353
TOTAL NET CAPITALSHARE TRANSACTIONS 328,333 783,988
TOTAL INCREASE 554,863 286,752
NET ASSETS
Beginning of year 1,352,372 1,065,620
End of year $ 1,907,235 $ 1,352,372
</Table>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
2003(1) 2002(4) 2001 2003(1) 2002(4) 2001
------------------------------------ ------------------------------------
Net Asset Value,
Beginning of Year $ 4.58 $ 6.38 $ 10.00 $ 4.51 $ 6.31 $ 10.00
Investment income
(loss)--net (0.04) (0.12) (0.21) (0.07) (0.15) (0.13)
Net realized and unrealized
gain (loss) on investments 0.66 (1.68) (3.41) 0.64 (1.65) (3.56)
------------------------------------ ------------------------------------
Total from
Investment Operations 0.62 (1.80) (3.62) 0.57 (1.80) (3.69)
------------------------------------ ------------------------------------
Net Asset Value, End of Year $ 5.20 $ 4.58 $ 6.38 $ 5.08 $ 4.51 $ 6.31
==================================== ====================================
Total Return (2) 13.54% (28.21) (36.20)% 12.64% (28.53) (36.90)%
==================================== ====================================
</Table>
<Table>
<Caption>
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 1,071,035 $ 698,670 $ 608,836 $ 836,200 $ 653,702 $ 456,784
Ratio of expenses with
reimbursement to
average net assets (3) 1.70% 3.54% 5.52% 2.35% 4.13% 5.84%
Ratio of expenses without
reimbursement to
average net assets 4.76% 4.65% 5.52% 5.53% 5.30% 5.84%
Ratio of net investment loss
to average net assets (0.86)% (2.64)% (4.49)% (1.51)% (3.24)% (4.91)%
Portfolio turnover rate 222.55% 180.20% 65.24% 222.55% 180.20% 65.24%
</Table>
(1) Per share information has been calculated using the average number of shares
outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.70% for Class A and 2.35% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
31
SM&R GROWTH FUND
MANAGER COMMENTARY
A MESSAGE TO OUR SHAREHOLDERS.
The SM&R Growth Fund's objective continues to be providing the opportunity for
capital appreciation over time. The Fund is guided by a strategy of investing
primarily in the stocks of well-established companies with records of consistent
and increasing earnings and cash flow growth. Thus far in 2003, the Fund's Class
T shares has produced a return of 14.2% through 8/31/03, before sales charges
(but after other expenses) versus a return of 14.1% for the Lipper Large-Cap
Core Index. Over that same time period, the U.S. equity markets have risen
strongly following a slow start to the year-with the Nasdaq returning 35.6%, the
S&P 500 returning 16.0% and the Dow Jones Industrial Average returning 14.7%.
The Fund remains nearly fully invested with a cash position of 3%.
The Fund's performance has benefited in 2003 primarily from cyclical equity
allocations in the consumer discretionary, industrials and materials sectors, as
well the surging technology sector. The portfolio's weighting within the
financials sector has been boosted to a market weight at 20% of the holdings.
This move should enable the Fund to benefit from the economic recovery by
positioning the holdings for a corporate profits recovery. Financial companies
historically do very well in an economic recovery due to rebounding lending and
investment banking revenues. In addition, we recently overhauled the portfolio's
technology holdings to boost representation by the larger, more established
companies and reduced the overall technology exposure down to a market
representative weight. For the SM&R Growth Fund, we utilize the same
conservative stock selection disciplines used in the SM&R Balanced and Equity
Income Funds. The key is identifying stocks of superior companies and purchasing
them at discounted valuations.
As the first half of 2003 closes, the financial markets have been reawakened
with guarded optimism over future economic prospects. Economic data for June
suggests that the U.S. economy is beginning to accelerate after eighteen months
into the sluggish recovery. Retail sales in the second quarter and into the
third quarter have been strong at 3% or more. Nearly $30 billion in tax relief
expected during the third quarter from lower tax rates and an increased child
tax credit will boost disposable income for consumers. The manufacturing sector
is picking up along with the growth in final sales and tight inventory
conditions. Housing starts rose 3.7% in June and the key question will be if the
recent rise in interest rates will depress the housing market as mortgage rates
inch upwards. The strength in the stock market and weakness in the bond market
along with recent economic data suggests that 4% growth in GDP is likely for the
fourth quarter of 2003.
<Page>
32
However, the recovery remains sluggish, as revealed in labor market data where
payrolls have yet to increase. The June payroll is 2.5 million below the level
when the recession began in March 2001, and nearly a million below the level
when the expansion began in November 2001. The jobless rate rose from 5.9% in
the fourth quarter of 2002 to 6.4% in June 2003 (and up from 4% in the second
quarter of 2000.) The labor market weakness has been both more severe and more
widespread than in recent expansions.
Another cautionary signal, the worsening U.S. budget deficit, has heightened
worries about future fiscal policy options. In the short-term, it is expected
that the rising federal deficit will push up interest rates and weaken the
dollar. Longer-term, there is concern over the aging population and
unprecedented government commitments to support retirees and the elderly. The
current budget deficit for 2003 is forecast at $450-500 billion. Comparatively,
the Office of Management and Budget forecasted a 2003 budget deficit of $304
billion as early as February of this year. Interest rates will reflect this
worsening condition because the deficit is the amount the Treasury will have to
borrow via Treasury auctions.
The SM&R Growth Fund is well positioned for the current recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. The Fund continues to strive to produce
7capital appreciation over time by holding a diversified collection of growing
companies with improving prospects.
Best Regards,
/s/ Andrew R Duncan
Andrew R Duncan, CFA, Portfolio Manager
SM&R Growth Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R GROWTH
FUND, CLASS T, AT OFFERIN PRICE, AND LIPPER LARGE-CAP CORE INDEX AND THE S&P
500
SM&R GROWTH FUND
<Table>
<Caption>
GROWTH S&P 500 LIPPER LARGE-CAP CORE INDEX
9/1/1993 $ 9,420 $ 10,000 $ 10,000
8/31/1994 $ 10,740 $ 10,547 $ 10,441
8/31/1995 $ 12,353 $ 12,809 $ 12,235
8/31/1996 $ 14,119 $ 15,208 $ 14,243
8/31/1997 $ 18,495 $ 21,390 $ 19,260
8/31/1998 $ 17,246 $ 23,121 $ 20,546
8/31/1999 $ 23,964 $ 32,329 $ 27,711
8/31/2000 $ 30,240 $ 37,605 $ 33,521
8/31/2001 $ 19,461 $ 28,434 $ 24,766
8/31/2002 $ 14,743 $ 23,317 $ 20,648
8/31/2003 $ 16,262 $ 26,132 $ 22,677
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/03 for Class T Shares
<Table>
10 yr 4.98%
5 yr (2.33)%
1 yr 3.83%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales through 8/31/03. Inception date of these classes is
01/01/99
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- --------------------------------------
A 4.37% (8.27)%
B 3.78% (7.91)%
</Table>
SM&R Growth Fund performance figures are historical and reflect reinvestment of
all dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will var due to differences in expenses and sales
charge structure. Average annual returns are based on the maximum sales charge
and reinvestment of all dividends and capital gains. The maximum initial sales
charge for Class A shares reflect the current maximum initial sales charges of
5.00%. Class B shares reflect the applicable contigent deferred sales charge
(CDSC), which is 5% in the first declining to 1% in the fifth year, and is
eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
33
SM&R GROWTH FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.25%
Boeing Company 28,000 $ 1,046,920
Honeywell International Incorporated 47,700 1,382,823
2,429,743
AUTOMOBILES -- 1.19%
Ford Motor Company 43,354 501,172
General Motors Corporation 14,700 604,170
Harley-Davidson, Incorporated 3,700 184,334
1,289,676
BANKS -- 8.13%
Bank of America Corporation 40,000 3,170,000
PNC Financial Services Group 30,000 1,428,000
U.S. Bancorp 91,285 2,181,711
Wells Fargo Company 40,000 2,005,600
8,785,311
BEVERAGES -- 3.11%
Anheuser-Busch Companies,
Incorporated 19,000 979,260
Coca-Cola Company 34,300 1,492,736
PepsiCo, Incorporated 20,000 890,800
3,362,796
BIOTECHNOLOGY -- 2.12%
Amgen Incorporated* 17,900 1,179,610
Genentech, Incorporated* 14,000 1,111,600
2,291,210
BUILDING PRODUCTS -- 0.58%
American Standard Companies Incorporated* 7,800 625,482
COMMERCIAL SERVICES & SUPPLIES -- 1.14%
Automatic Data Processing,
Incorporated 12,700 $ 506,857
H & R Block, Incorporated 16,400 723,240
1,230,097
COMMUNICATION EQUIPMENT -- 2.19%
Cisco Systems, Incorporated* 84,500 1,618,175
QUALCOMM Incorporated* 18,200 751,296
2,369,471
COMPUTERS & PERIPHERALS -- 4.10%
Computer Associates International,
Incorporated 7,000 179,410
Dell Computer Corporation* 31,700 1,034,371
EMC Corporation* 61,500 784,125
Hewlett-Packard Company 37,000 737,040
International Business Machines
Corporation 18,400 1,508,984
Sun Microsystems, Incorporated* 48,100 185,666
4,429,596
CONTAINERS & PACKAGING -- 1.12%
Sealed Air Corporation* 25,000 1,216,500
DIVERSIFIED FINANCIALS -- 8.41%
Citigroup, Incorporated 74,100 3,212,235
Countrywide Financial Corporation 22,000 1,492,700
J.P. Morgan Chase & Company 55,500 1,899,210
Morgan Stanley 51,000 2,488,290
9,092,435
</Table>
<Page>
34
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 2.99%
Alltel Corporation 8,300 $ 380,140
BellSouth Corporation 32,500 819,000
SBC Communications Incorporated 43,400 976,066
Verizon Communications 16,400 579,248
Vodafone Group PLC ADR 26,000 475,800
3,230,254
ELECTRIC UTILITIES -- 0.92%
Dominion Resources, Incorporated 3,800 230,204
Exelon Corporation 9,100 535,990
Southern Company (The) 7,900 224,202
990,396
ELECTRICAL EQUIPMENT & INSTRUMENTS -- 0.34%
Agilent Technologies, Incorporated* 4,800 116,736
Jabil Circuit, Incorporated* 4,000 112,600
Molex Incorporated 2,300 67,666
Waters Corporation* 2,500 76,250
373,252
ENERGY EQUIPMENT & SERVICES -- 0.60%
Schlumberger Limited 13,100 648,581
FOOD PRODUCTS -- 3.29%
ConAgra Foods, Incorporated 43,800 963,600
McCormick & Company, Incorporated 58,000 1,548,600
Sensient Technologies Corporation 50,000 1,040,000
3,552,200
FOOD & DRUG RETAILING -- 4.31
SUPERVALU Incorporated 27,800 669,980
SYSCO Corporation 14,100 443,586
Wal-Mart Stores, Incorporated 60,000 3,550,200
4,663,766
GAS -- 0.46%
El Paso Corporation 30,400 $ 223,136
Sempra Energy 9,200 273,700
496,836
HEALTH CARE EQUIPMENT & SUPPLIES -- 2.08%
Beckman Coulter, Incorporated 22,500 997,875
Medtronic, Incorporated 21,400 1,061,012
Zimmer Holdings, Incorporated* 3,740 193,508
2,252,395
HEALTH CARE PROVIDERS & SERVICES -- 1.10%
McKesson Corporation 25,300 828,322
Tenet Healthcare Corporation* 22,200 356,310
1,184,632
HOTELS, RESTAURANTS & LEISURE -- 1.52%
Fairmont Hotels & Resorts Incorporated 8,950 237,622
Starwood Hotels & Resorts Worldwide,
Incorporated 41,700 1,410,711
1,648,333
HOUSEHOLD DURABLES -- 0.55%
Stanley Works (The) 19,600 593,292
HOUSEHOLD PRODUCTS -- 2.73%
Kimberly-Clark Corporation 14,800 756,428
Newell Rubbermaid Incorporated 19,100 453,625
Procter & Gamble Company 20,000 1,745,800
2,955,853
INDUSTRIAL CONGLOMERATES -- 5.06%
3M Company 5,200 740,844
Danaher Corporation 12,200 942,450
General Electric Company 110,200 3,258,614
RPM, Incorporated 38,700 527,868
5,469,776
</Table>
<Page>
34
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY CONSULTING
& SERVICES -- 0.41%
Electronic Data Systems Corporation 10,900 $ 237,947
SunGard Data Systems Incorporated* 7,100 200,220
438,167
INSURANCE -- 4.79%
American International Group,
Incorporated 29,260 1,743,018
Brown & Brown, Incorporated 24,400 756,400
CIGNA Corporation 15,500 739,040
Prudential Financial, Incorporated 49,200 1,791,372
Travelers Property Casualty
Corporation (Class A) 3,201 49,263
Travelers Property Casualty
Corporation (Class B) 6,577 101,878
5,180,971
MACHINERY -- 2.00%
Caterpillar Incorporated 15,100 1,084,633
Ingersoll-Rand Company (Class A) 18,200 1,083,264
2,167,897
MEDIA -- 3.78%
AOL Time Warner Incorporated* 48,600 795,096
Comcast Corporation
(Special Class A)* 26,900 800,275
Omnicom Group Incorporated 3,200 249,920
Viacom Incorporated (Class B)* 19,200 864,000
Walt Disney Company (The) 67,000 1,373,500
4,082,791
METALS & MINING -- 0.11%
Fording Canadian Coal Trust 5,942 119,910
MISCELLANEOUS -- 1.09%
Nasdaq-100 Index Tracking Stock 35,400 $ 1,180,590
MULTI-LINE RETAIL -- 0.47%
Target Corporation 12,600 511,560
OFFICE ELECTRONICS -- 0.10%
Xerox Corporation* 10,100 108,878
OIL & GAS -- 4.97%
Anadarko Petroleum Corporation 10,600 461,100
BP PLC ADR 27,400 1,143,128
ChevronTexaco Corporation 14,300 1,042,041
Kinder Morgan, Incorporated 4,800 255,600
Royal Dutch Petroleum Company ADR 32,500 1,458,275
Unocal Corporation 33,000 1,010,460
5,370,604
PHARMACEUTICALS -- 6.80%
Bristol-Myers Squibb Company 17,400 441,438
Johnson & Johnson 38,500 1,908,830
Merck & Company, Incorporated 26,700 1,343,544
Pfizer, Incorporated 88,040 2,634,157
Watson Pharmaceuticals, Incorporated* 14,000 575,400
Wyeth 10,400 445,640
7,349,009
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 4.29%
Analog Devices, Incorporated* 3,900 159,900
Intel Corporation 91,800 2,627,316
KLA-Tencor Corporation* 2,900 172,144
Linear Technology Corporation 3,800 156,636
Maxim Integrated Products, Incorporated 3,400 152,694
Micron Technology, Incorporated* 6,300 90,468
Texas Instruments Incorporated 46,400 1,106,640
Thermo Electron Corporation* 3,300 75,207
Xilinx, Incorporated* 3,100 95,604
4,636,609
</Table>
<Page>
36
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
SOFTWARE -- 4.28%
Electronics Arts Incorporated* 2,400 $ 215,400
Intuit Incorporated* 3,100 140,492
Microsoft Corporation 118,000 3,129,360
Oracle Corporation* 65,700 839,646
PeopleSoft, Incorporated* 5,900 106,790
VERITAS Software Corporation* 5,650 194,812
4,626,500
SPECIALTY RETAIL -- 3.03%
Bed Bath & Beyond Incorporated* 13,900 598,117
Chico's FAS, Incorporated* 36,400 1,182,636
Home Depot, Incorporated (The) 25,900 832,944
Limited Brands 39,300 666,528
3,280,225
TRADING COMPANIES & DISTRIBUTORS -- 0.68%
W.W. Grainger, Incorporated 14,700 732,501
WIRELESS TELECOMMUNICATION SERVICES -- 0.51%
A T & T Wireless Services Incorporated* 43,977 379,082
Nextel Communications, Incorporated
(Class A)* 9,000 173,520
552,602
TOTAL COMMON STOCK -- 97.60%
(Cost $85,054,255) 105,520,697
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 296 296
TOTAL CASH EQUIVALENTS -- 0.00%
(Cost $296) 296
DIVERSIFIED FINANCIALS -- 0.39%
General Motors Acceptance
Corporation, 1.17%, 09/04/03 $ 421,000 $ 420,959
FOOD PRODUCTS -- 1.86%
Kraft Foods Incorporated,
1.20%, 09/02/03 520,000 519,982
Kraft Foods Incorporated,
1.19%, 09/05/03 841,000 840,889
Kraft Foods Incorporated,
1.20%, 09/08/03 652,000 651,848
2,012,719
TOTAL COMMERCIAL PAPER -- 2.25%
(Cost $2,433,678) 2,433,678
TOTAL INVESTMENTS -- 99.85%
(Cost $87,488,229) 107,954,671
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.15%
166,989
NET ASSETS -- 100.00% $ 108,121,660
=============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
*Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Growth Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
<Page>
37
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
<Caption>
ASSETS
Investments in securities,
at value (Cost $87,488,229) $ 107,954,671
Receivable for:
Capital stock sold 37,005
Dividends 192,035
Expense Reimbursement 1,418
Other assets 93,341
TOTAL ASSETS 108,278,470
LIABILITIES
Capital stock reacquired 13,557
Accrued:
Investment advisory fee 67,136
Service fee 22,333
Distribution fee 8,163
Other liabilities 45,621
TOTAL LIABILITIES 156,810
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 108,121,660
NET ASSETS:
Class A $ 5,038,728
Class B $ 2,700,113
Class T $ 100,382,819
Total Net Assets: $ 108,121,660
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 1,460,788
Class B:
Authorized 25,000,000
Outstanding 796,131
Class T:
Authorized 95,000,000
Outstanding 28,543,123
Class A:
Net asset value and redemption price per share $ 3.45
Offering price per share:
(Net Assets value of $3.45/95.00%) $ 3.63
Class B:
Net asset value and offering price per share $ 3.39
Class T:
Net asset value and redemption price per share $ 3.52
Offering price per share:
(Net Assets value of $3.52/94.25%) $ 3.73
</Table>
See notes to financial statements.
<Page>
38
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
<Caption>
INVESTMENT INCOME
Dividends $ 1,677,517
Interest 120,336
TOTAL INVESTMENT INCOME 1,797,853
EXPENSES
Investment advisory fees 756,941
Service fees 252,095
Professional fees 16,431
Custody and transaction fees 22,903
Directors' fees 9,024
Qualification fees 25,993
Shareholder reporting expenses 66,273
Insurance expenses 28,593
Distribution fees 30,545
Other expenses 9
TOTAL EXPENSES 1,208,807
LESS EXPENSES REIMBURSED (20,767)
NET EXPENSES 1,188,040
INVESTMENT INCOME--NET 609,813
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (7,083,270)
Change in unrealized appreciation
of investments for the year 16,105,173
NET GAIN ON INVESTMENTS 9,021,903
NET DECREASE IN
NET ASSETS RESULTING
FROM OPERATIONS $ 9,631,716
</Table>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
------------------------------
Investment income--net $ 609,813 $ 401,141
Net realized loss on investments (7,083,270) (30,520,684)
Change in unrealized
appreciation (depreciation) 16,105,173 (4,874,004)
Net increase (decrease) in net
assets resulting from operations 9,631,716 (34,993,547)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (20,780) (2,226)
Class B (2,731) --
Class T (557,596) (379,966)
TOTAL DISTRIBUTIONS
TO SHAREHOLDERS (581,107) (382,192)
CAPITAL SHARE TRANSACTIONS-- NET
Class A (627,924) 846,409
Class B (115,549) 570,791
Class T (6,971,637) (8,582,554)
TOTAL NET CAPITAL
SHARE TRANSACTIONS (7,715,110) (7,165,354)
TOTAL INCREASE
(DECREASE) 1,335,499 (42,541,093)
NET ASSETS
Beginning of year 106,786,161 149,327,254
End of year $ 108,121,660 $ 106,786,161
UNDISTRIBUTED NET INVESTMENT INCOME $ 140,744 $ 112,025
</Table>
See notes to financial statements.
<Page>
39
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
--------------------------------------------------------------------------------------------
8 MONTHS ENDED
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED DECEMBER 31,
----------------------------- ----------------- ------------------------------------------
2003 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.21 $ 4.25 $ 5.60 $ 6.77 $ 5.69 $ 5.24
Investment income -- net 0.03 0.01 0.01 0.03 0.03 0.04
Net realized and unrealized gain
(loss) on investments 0.30 (1.04) (1.35) (0.65) 1.35 0.85
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.33 (1.03) (1.34) (0.62) 1.38 0.89
Less distributions from
Investment income-- net (0.02) (0.01) (0.01) (0.03) (0.03) (0.04)
Capital gains -- -- -- (0.52) (0.27) (0.40)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.01) (0.01) (0.55) (0.30) (0.44)
--------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 3.52 $ 3.21 $ 4.25 $ 5.60 $ 6.77 $ 5.69
============================================================================================
TOTAL RETURN (1) 10.30% (24.24)% (23.99)%** (8.25)% 24.49% 18.35%
============================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 100,383 $ 98,912 $ 140,530 $ 194,150 $ 230,203 $ 203,109
Ratio of expenses to average net assets 1.15% 1.10% 1.08%* 0.81% 0.87% 0.85%
Ratio of net investment income
to average net assets 0.63% 0.34% 0.31%* 0.47% 0.44% 0.69%
Portfolio turnover rate 22.97% 41.74% 18.28% 19.68% 16.13% 27.31%
</Table>
<Page>
40
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES
---------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG. 31, ENDED AUG. 31, DEC. 31, DEC. 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.15 $ 4.18 $ 5.55 $ 6.73 $ 5.69
Investment income (loss) -- net 0.01 (0.01) -- 0.01 0.01
Net realized and unrealized gain (loss) on
investments 0.30 (1.02) (1.37) (0.66) 1.30
---------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.31 (1.03) (1.37) (0.65) 1.31
Less distributions from
Investment income -- net (0.01) -- -- (0.01) --
Capital gains -- -- -- (0.52) (0.27)
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.01) 0.00 0.00 (0.53) (0.27)
---------------------------------------------------------------------
Net Asset Value, End of Period $ 3.45 $ 3.15 $ 4.18 $ 5.55 $ 6.73
=====================================================================
Total Return (1) 10.00% (24.61)% (24.68)%** (8.76)% 23.45%
=====================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 5,039 $ 5,287 $ 5,971 $ 6,856 $ 3,776
Ratio of expenses with reimbursement to average
net assets (2) 1.36% 1.47% 1.50%* 1.30% 1.51%
Ratio of expenses without reimbursement to average
net assets 1.60% 1.55% 1.50%* 1.30% 1.51%
Ratio of net investment income (loss) to average
net assets 0.42% (0.03)% (0.13)%* (0.02)% (0.19)%
Portfolio turnover rate 22.97% 41.74% 18.28% 19.68% 16.13%
<Caption>
CLASS B SHARES
----------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG. 31, ENDED AUG. 31, DEC. 31, DEC. 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.11 $ 4.13 $ 5.47 $ 6.66 $ 5.69
Investment income (loss) -- net (0.01) (0.02) (0.02) (0.02) --
Net realized and unrealized gain (loss) on
investments 0.29 (1.00) (1.32) (0.65) 1.24
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.28 (1.02) (1.34) (0.67) 1.24
Less distributions from
Investment income -- net (0.00)*** -- -- -- --
Capital gains -- -- -- (0.52) (0.27)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.00 0.00 0.00 (0.52) (0.27)
----------------------------------------------------------------------
Net Asset Value, End of Period $ 3.39 $ 3.11 $ 4.13 $ 5.47 $ 6.66
======================================================================
Total Return (1) 9.12% (24.70)% (24.50)%** (9.17)% 22.04%
======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 2,700 $ 2,587 $ 2,826 $ 3,382 $ 1,547
Ratio of expenses with reimbursement to average
net assets (2) 1.86% 1.97% 2.00%* 1.89% 2.01%
Ratio of expenses without reimbursement to average
net assets 2.24% 2.19% 2.00%* 1.89% 2.01%
Ratio of net investment income (loss) to average
net assets (0.08)% (0.53)% (0.78)%* (0.66)% (0.69)%
Portfolio turnover rate 22.97% 41.74% 18.28% 19.68% 16.13%
</Table>
* Ratios annualized
** Returns are not annualized
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.36% for Class A and 1.86% for Class B.
See notes to financial statements.
<Page>
41
SM&R EQUITY INCOME FUND
MANAGER COMMENTARY
A MESSAGE TO OUR SHAREHOLDERS.
The SM&R Equity Income Fund's objective continues to be providing dividend
income, along with an opportunity for increased share price over time. The Fund
is guided by a strategy of investing primarily in the stocks of well-established
companies with records of consistent and increasing dividend payments. In 2003,
the Fund's Class T shares has thus far produced a return of 12.4% through
8/31/03, before sales charges (but after other expenses) versus a return of
12.4% for the Lipper Equity Income Index. Over that same time period, the U.S.
equity markets have risen strongly following a slow start to the year--with the
Nasdaq returning 35.6%, the S&P 500 returning 16.0% and the Dow Jones Industrial
Average returning 14.7%. The Fund has continued to meet the goal of maintaining
a dividend yield greater than that of the market, as represented by the Standard
& Poor's 500 stock market index. The current dividend yield on the fund is 2.4%
(before expenses) versus 1.6% for the S&P 500. The Fund remains nearly fully
invested with a cash position of 3%.
The Fund's performance has benefited in 2003 primarily from cyclical equity
allocations in the consumer discretionary, industrials and materials sectors, as
well as a small exposure to the technology sector. Due to the strong dividend
yields found in the financial sector overall, the sector continues to represent
approximately one quarter of the fund's holdings. For the SM&R Equity Income
Fund, we utilize the same conservative stock selection disciplines used in the
SM&R Balanced and Growth Funds. The key is identifying stocks of superior
companies and purchasing them at discounted valuations.
As the first half of 2003 closes, the financial markets have been reawakened
with guarded optimism over future economic prospects. Economic data for June
suggests that the U.S. economy is beginning to accelerate after eighteen months
into the sluggish recovery. Retail sales in the second quarter and into the
third quarter have been strong at 3% or more. Nearly $30 billion in tax relief
expected during the third quarter from lower tax rates and an increased child
tax credit will boost disposable income for consumers. The manufacturing sector
is picking up along with the growth in final sales and tight inventory
conditions. Housing starts rose 3.7% in June and the key question will be if the
recent rise in interest rates will depress the housing market as mortgage rates
inch upwards. The strength in the stock market and weakness in the bond market
along with recent economic data suggests that 4% growth in GDP is likely for the
fourth quarter of 2003.
<Page>
42
However, the recovery remains sluggish, as revealed in labor market data where
payrolls have yet to increase. The June payroll is 2.5 million below the level
when the recession began in March 2001, and nearly a million below the level
when the expansion began in November 2001. The jobless rate rose from 5.9% in
the fourth quarter of 2002 to 6.4% in June 2003 (and up from 4% in the second
quarter of 2000.) The labor market weakness has been both more severe and more
widespread than in recent expansions.
Another cautionary signal, the worsening U.S. budget deficit, has heightened
worries about future fiscal policy options. In the short-term, it is expected
that the rising federal deficit will push up interest rates and weaken the
dollar. Longer-term, there is concern over the aging population and
unprecedented government commitments to support retirees and the elderly. The
current budget deficit for 2003 is forecast at $450-500 billion. Comparatively,
the Office of Management and Budget forecasted a 2003 budget deficit of $304
billion as early as February of this year. Interest rates will reflect this
worsening condition because the deficit is the amount the Treasury will have to
borrow via Treasury auctions.
The SM&R Equity Income Fund is well positioned for the current recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. The Fund continues to strive to maintain a
strong dividend yield by holding a portfolio of value stocks while maintaining
low turnover-which leads to low taxes, with the potential for share price
appreciation over time.
Sincerely,
/s/ Andrew R. Duncan
Andrew R. Duncan, CFA, Portfolio Manager
SM&R Equity Income Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R EQUITY INCOME
FUND, CLASS T, AT OFFERING PRICE, AND LIPPER EQUITY INCOME INDEX AND THE S&P 500
SM&R EQUITY INCOME FUND
<Table>
<Caption>
EQUITY INCOME S&P 500 LIPPER EQUITY INC FUND INDEX
9/1/1993 $ 9,426 $ 10,000 $ 10,000
8/31/1994 $ 9,963 $ 10,547 $ 10,492
8/31/1995 $ 11,555 $ 12,809 $ 12,007
8/31/1996 $ 13,303 $ 15,208 $ 13,794
8/31/1997 $ 16,747 $ 21,390 $ 18,136
8/31/1998 $ 17,121 $ 23,121 $ 18,357
8/31/1999 $ 20,757 $ 32,329 $ 22,683
8/31/2000 $ 21,464 $ 37,605 $ 23,704
8/31/2001 $ 19,505 $ 28,434 $ 23,160
8/31/2002 $ 16,952 $ 23,317 $ 20,041
8/31/2003 $ 17,767 $ 26,132 $ 21,779
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/03 for Class T Shares
<Table>
10 YEAR 5.92%
5 YEAR (0.44)%
1 YEAR 0.69%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 01/01/99
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -----------------------------------
A 1.29% (4.15)%
B 0.55% (4.18)%
</Table>
SM&R Equity Income Fund performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A and B will vary from Class T as shown above due
to differences in expenses and sales charge structure. Average annual returns
are based on the maximum sales charge and reinvestment of all dividends and
capital gains. The maximum initial sales charge for Class A shares reflect the
current maximum initial sales charges of 5.00%. Class B shares reflect the
applicable contingent deferred sales charge (CDSC), which is 5% in the first
year declining to 1% in the fifth year, and is eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
43
SM&R EQUITY INCOME FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2002
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.15%
Lockheed Martin Corporation 22,600 $ 1,157,798
Northrop Grumman Corporation 12,000 1,145,760
2,303,558
AUTOMOBILES -- 2.03%
Ford Motor Company 88,074 1,018,135
General Motors Corporation 28,000 1,150,800
2,168,935
BANKS -- 7.85%
Bank of America Corporation 40,000 3,170,000
PNC Financial Services Group 33,400 1,589,840
U.S. Bancorp 67,500 1,613,250
Wells Fargo Company 40,500 2,030,670
8,403,760
BEVERAGES -- 3.11%
Anheuser-Busch Companies, Incorporated 18,500 953,490
Coca-Cola Company 35,600 1,549,312
PepsiCo, Incorporated 18,600 828,444
3,331,246
BIOTECHNOLOGY -- 0.89%
Amgen Incorporated* 14,400 948,960
BUILDING PRODUCTS -- 0.61%
American Standard Companies Incorporated* 8,200 657,558
CHEMICALS -- 1.37%
Dow Chemical Company (The) 20,100 $ 694,053
E.I. du Pont de Nemours and Company 17,200 769,528
1,463,581
COMMERCIAL SERVICES & SUPPLIES -- 0.81%
Banta Corporation 25,000 868,250
COMMUNICATIONS EQUIPMENT -- 0.71%
Cisco Systems, Incorporated* 39,600 758,340
COMPUTERS & PERIPHERALS -- 0.85%
International Business Machines Corporation 11,100 910,311
CONTAINERS & PACKAGING -- 0.50%
Sealed Air Corporation* 11,100 540,126
DIVERSIFIED FINANCIALS -- 7.12%
Citigroup, Incorporated 68,400 2,965,140
J.P. Morgan Chase & Company 70,850 2,424,487
Morgan Stanley 45,800 2,234,582
7,624,209
DIVERSIFIED TELECOMMUNICATION SERVICES -- 1.37%
Alltel Corporation 9,650 441,970
Verizon Communications 15,200 536,864
Vodafone Group PLC ADR 26,700 488,610
1,467,444
</Table>
<Page>
44
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 2.58%
Ameren Corporation 15,200 $ 646,000
CenterPoint Energy, Incorporated 25,600 217,344
Constellation Energy Group 26,300 957,057
DTE Energy Company 24,400 851,804
Reliant Resources, Incorporated* 20,188 93,269
2,765,474
ENERGY EQUIPMENT & SERVICES -- 0.46%
Schlumberger Limited 10,000 495,100
FOOD PRODUCTS -- 3.14%
ConAgra Foods, Incorporated 40,000 880,000
H.J. Heinz Company 19,000 614,840
McCormick & Company, Incorporated 19,500 520,650
Sara Lee Corporation 47,300 897,754
Sensient Technologies Corporation 21,500 447,200
3,360,444
FOOD & DRUG RETAILING -- 3.11%
Wal-Mart Stores, Incorporated 56,300 3,331,271
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.13%
Beckman Coulter, Incorporated 22,800 1,011,180
Zimmer Holdings, Incorporated* 3,760 194,542
1,205,722
HEALTH CARE PROVIDERS & SERVICES -- 0.65%
Health Management Associates, Incorporated (Class A) 22,700 505,756
Tenet Healthcare Corporation* 11,550 185,378
691,134
HOTELS, RESTAURANTS & LEISURE -- 1.37%
Starwood Hotels & Resorts Worldwide,
Incorporated 43,500 $ 1,471,605
HOUSEHOLD DURABLES -- 1.16%
Stanley Works (The) 17,900 541,833
Whirlpool Corporation 10,000 695,800
1,237,633
HOUSEHOLD PRODUCTS -- 2.63%
Kimberly-Clark Corporation 13,600 695,096
Newell Rubbermaid Incorporated 17,800 422,750
Procter & Gamble Company 19,500 1,702,155
2,820,001
INDUSTRIAL CONGLOMERATES -- 4.79%
3M Company 5,100 726,597
Danaher Corporation 12,500 965,625
General Electric Company 116,250 3,437,512
5,129,734
INSURANCE -- 3.81%
American International Group, Incorporated 33,100 1,971,767
CIGNA Corporation 13,600 648,448
Prudential Financial, Incorporated 34,400 1,252,504
Travelers Property Casualty Corporation (Class A) 4,424 68,085
Travelers Property Casualty Corporation (Class B) 9,089 140,789
4,081,593
</Table>
<Page>
45
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
MACHINERY -- 2.08%
Caterpillar Incorporated 15,300 $ 1,098,999
Ingersoll-Rand Company (Class A) 18,900 1,124,928
2,223,927
MEDIA -- 4.04%
AOL Time Warner Incorporated* 62,100 1,015,956
Comcast Corporation (Special Class A )* 20,000 567,200
Cox Communications, Incorporated (Class A)* 9,700 317,384
Viacom Incorporated (Class B) 23,300 1,048,500
Walt Disney Company (The) 66,900 1,371,450
4,320,490
MULTI-LINE RETAIL -- 1.38%
Federated Department Stores, Incorporated 33,700 1,472,690
OIL & GAS -- 6.88%
Anadarko Petroleum Corporation 13,600 591,600
BP PLC ADR 23,610 985,009
Chevron Texaco Corporation 16,760 1,221,301
Exxon Mobil Corporation 80,000 3,016,000
Royal Dutch Petroleum Company ADR 34,500 1,548,015
7,361,925
PAPER & FOREST PRODUCTS -- 1.71%
International Paper Company 7,300 $ 296,015
Plum Creek Timber Company, Incorporated 41,500 1,085,225
Weyerhaeuser Company 7,600 452,200
1,833,440
PHARMACEUTICALS -- 11.20%
Allergan, Incorporated 9,500 754,870
Bristol-Myers Squibb Company 37,600 953,912
Johnson & Johnson 39,200 1,943,536
Merck & Company, Incorporated 33,300 1,675,656
Pfizer, Incorporated 130,480 3,903,962
Watson Pharmaceuticals, Incorporated* 27,000 1,109,700
Wyeth 38,600 1,654,010
11,995,646
REAL ESTATE -- 6.38%
CenterPoint Properties Corporation 44,500 2,821,300
Health Care Property Investors, Incorporated 35,700 1,501,185
Public Storage, Incorporated 30,500 1,125,145
Weingarten Realty Investors 30,900 1,383,084
6,830,714
ROAD & RAIL -- 1.01%
USFreightways Corporation 34,000 1,082,900
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 2.61%
Intel Corporation 81,600 2,335,392
Texas Instruments Incorporated 19,200 457,920
2,793,312
</Table>
<Page>
46
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
SOFTWARE -- 3.29%
Microsoft Corporation 133,000 $ 3,527,160
SPECIALTY RETAIL -- 1.41%
Limited Brands 46,900 795,424
Lowe's Companies, Incorporated 13,000 713,180
1,508,604
TOBACCO -- 0.98%
Altria Group, Incorporated 14,700 605,934
R.J. Reynolds Tobacco Holdings, Incorporated 12,949 442,208
1,048,142
TRADING COMPANIES & DISTRIBUTORS -- 0.36%
W.W. Grainger, Incorporated 7,700 383,691
TOTAL COMMON STOCK -- 97.53%
(Cost $95,816,123) 104,418,630
CASH EQUIVALENTS
SM&R Money Market Fund, 0.52% (a) 638 638
TOTAL CASH EQUIVALENTS -- 0.00%
(Cost $ 638) 638
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 0.74%
General Motors Acceptance Corporation,
1.17%, 09/04/03 $ 791,000 $ 790,923
FOOD PRODUCTS -- 1.62%
Kraft Foods Incorporated, 1.20%, 09/02/03 607,000 606,980
Kraft Foods Incorporated, 1.20%, 09/08/03 1,127,000 1,126,737
1,733,717
TOTAL COMMERCIAL PAPER -- 2.36%
(Cost $2,524,640) 2,524,640
TOTAL INVESTMENTS -- 99.89%
(Cost $98,341,401) 106,943,908
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.11%
121,197
NET ASSETS -- 100.00% $ 107,065,105
=============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Equity Income Fund are affiliated
by having the same investment adviser.
See notes to financial statements.
<Page>
47
SM&R EQUITY INCOME FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investments in securities, at value (Cost $98,341,401) $ 106,943,908
Receivable for:
Capital stock sold 4,587
Dividends 244,105
Expense Reimbursement 2,228
Other assets 62,725
TOTAL ASSETS 107,257,553
LIABILITIES
Capital stock reacquired 58,213
Accrued:
Investment advisory fee 67,028
Service fee 22,298
Distribution fee 15,252
Other liabilities 29,657
TOTAL LIABILITIES 192,448
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 107,065,105
NET ASSETS:
Class A $ 5,939,805
Class B $ 6,182,464
Class T $ 94,942,836
TOTAL NET ASSETS: $ 107,065,105
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 296,609
Class B:
Authorized 25,000,000
Outstanding 317,987
Class T:
Authorized 75,000,000
Outstanding 4,617,333
Class A:
Net asset value and redemption price per share $ 20.03
Offering price per share:
(Net Assets value of $20.03/95.00%) $ 21.08
Class B:
Net asset value and offering price per share $ 19.44
Class T:
Net asset value and redemption price per share $ 20.56
Offering price per share:
(Net Assets value of $20.56/94.25%) $ 21.82
</Table>
See notes to financial statements.
<Page>
48
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 2,523,167
Interest 55,633
TOTAL INVESTMENT INCOME 2,578,800
EXPENSES
Investment advisory fees 776,786
Service fees 258,541
Professional fees 16,431
Custody and transaction fees 20,038
Directors' fees 9,024
Qualification fees 25,410
Shareholder reporting expenses 36,384
Insurance expenses 32,165
Distribution fees 55,737
Other expenses 9
TOTAL EXPENSES 1,230,525
LESS EXPENSES REIMBURSED (26,006)
NET EXPENSES 1,204,519
INVESTMENT INCOME--NET 1,374,281
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (3,231,463)
Change in unrealized appreciation of investments for the year 7,903,312
NET GAIN ON INVESTMENTS 4,671,849
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,046,130
</Table>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,374,281 $ 1,621,294
Net realized loss on investments (3,231,463) (2,141,098)
Change in unrealized appreciation (depreciation) 7,903,312 (21,190,040)
Net increase (decrease) in net assets resulting
from operations 6,046,130 (21,709,844)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (73,915) (66,630)
Class B (58,246) (50,927)
Class T (1,284,991) (1,619,324)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,417,152) (1,736,881)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 154,525 239,362
Class B 89,680 1,215,450
Class T (12,527,527) (13,872,674)
TOTAL NET CAPITAL SHARE TRANSACTIONS (12,283,322) (12,417,862)
TOTAL DECREASE (7,654,344) (35,864,587)
NET ASSETS
Beginning of year 114,719,449 150,584,036
End of year $ 107,065,105 $ 114,719,449
- ----------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $ 248,562 $ 291,433
</Table>
See notes to financial statements.
<Page>
49
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
-------------------------------------------------------------------------------------
8 MONTHS ENDED
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED DECEMBER 31,
------------------------- ----------- -----------------------------------------
2003 2002 2001 2000 1999 1998
------------------------- ----------- -----------------------------------------
Net Asset Value, Beginning of Period $ 19.51 $ 23.26 $ 25.76 $ 25.30 $ 28.02 $ 26.99
Investment income -- net 0.27 0.27 0.24 0.46 0.54 0.62
Net realized and unrealized gain
(loss) on investments 1.04 (3.74) (2.57) 1.54 (0.96) 2.50
-------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.31 (3.47) (2.33) 2.00 (0.42) 3.12
Less distributions from
Investment income -- net (0.26) (0.28) (0.17) (0.46) (0.54) (0.62)
Capital gains -- -- -- (1.08) (1.76) (1.47)
-------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.26) (0.28) (0.17) (1.54) (2.30) (2.09)
-------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 20.56 $ 19.51 $ 23.26 $ 25.76 $ 25.30 $ 28.02
=====================================================================================
TOTAL RETURN (1) 6.83% (15.03)% (9.07)%** 8.99% (1.39)% 12.11%
======================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 94,943 $ 103,396 $ 138,566 $ 160,319 $ 187,988 $ 218,980
Ratio of expenses to average net assets 1.12% 1.07% 1.06%* 1.05% 1.05% 1.01%
Ratio of net investment income to
average net assets 1.36% 1.26% 1.43%* 1.73% 1.94% 2.22%
Portfolio turnover rate 7.57% 30.99% 18.15% 22.05% 9.81% 19.29%
</Table>
<Page>
50
<Table>
<Caption>
CLASS A SHARES
--------------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG. 31, ENDED AUG. 31, DEC. 31, DEC. 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 19.04 $ 22.72 $ 25.19 $ 24.79 $ 28.02
Investment income -- net 0.22 0.18 0.16 0.36 0.58
Net realized and unrealized gain (loss) on investments 1.01 (3.63) (2.49) 1.50 (1.47)
--------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.23 (3.45) (2.33) 1.86 (0.89)
Less distributions from Investment income -- net (0.24) (0.23) (0.14) (0.38) (0.58)
Capital gains -- -- -- (1.08) (1.76)
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.24) (0.23) (0.14) (1.46) (2.34)
--------------------------------------------------------------------------
Net Asset Value, End of Period $ 20.03 $ 19.04 $ 22.72 $ 25.19 $ 24.79
==========================================================================
TOTAL RETURN (1) 6.61% (15.27)% (9.25)%** 8.61% (3.01)%
==========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 5,940 $ 5,517 $ 6,330 $ 5,671 $ 4,802
Ratio of expenses with reimbursement to
average net assets (2) 1.26% 1.44% 1.45%* 1.49% 1.51%
Ratio of expenses without reimbursement to
average net assets 1.50% 1.45% 1.45%* 1.49% 1.51%
Ratio of net investment income to average net assets 1.21% 0.88% 1.03%* 1.32% 1.53%
Portfolio turnover rate 7.57% 30.99% 18.15% 22.05% 9.81%
<Caption>
CLASS B SHARES
--------------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG. 31, ENDED AUG. 31, DEC. 31, DEC. 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 18.56 $ 22.22 $ 24.69 $ 24.38 $ 28.02
Investment income -- net 0.13 0.09 0.08 0.23 0.47
Net realized and unrealized gain (loss) on investments 0.94 (3.57) (2.47) 1.45 (1.88)
--------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.07 (3.48) (2.39) 1.68 (1.41)
Less distributions from Investment income -- net (0.19) (0.18) (0.08) (0.29) (0.47)
Capital gains -- -- -- (1.08) (1.76)
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.19) (0.18) (0.08) (1.37) (2.23)
--------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.44 $ 18.56 $ 22.22 $ 24.69 $ 24.38
==========================================================================
TOTAL RETURN (1) 5.85% (15.72)% ` (9.68)%** 7.95% (4.86)%
==========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 6,182 $ 5,806 $ 5,688 $ 5,324 $ 4,343
Ratio of expenses with reimbursement to
average net assets (2) 1.76% 1.94% 1.98%* 1.99% 2.01%
Ratio of expenses without reimbursement to
average net assets 1.99% 1.95% 1.98%* 1.99% 2.01%
Ratio of net investment income to average net assets 0.71% 0.37% 0.50%* 0.74% 1.03%
Portfolio turnover rate 7.57% 30.99% 18.15% 22.05% 9.81%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.26% for Class A and 1.76% for Class B.
See notes to financial statements.
<Page>
51
SM&R BALANCED FUND
MANAGER COMMENTARY
A MESSAGE TO OUR SHAREHOLDERS.
The SM&R Balanced Fund continues to be positioned as the lowest risk fund in the
SM&R Equity Funds group. The Fund strives to maintain the objective of providing
a balance of both growth and income through its portfolio blend of high-yielding
stocks of well-known companies, as well as bonds and money market instruments.
Throughout 2003, the fund's conservative blend of about 66% stocks, 26% bonds
and 8% money market instruments has served our shareholders well. The equity
portion of the Fund has produced a total return (capital appreciation and
dividend income) of approximately 17.8% (at net asset value) while the bond
portion of the Fund has returned approximately +6.5% (at net asset value) --both
through 8/31/03. Overall, the Fund's Class T shares has produced a total return
of 10.7% through 8/31/03, before sales charges (but after other expenses) versus
a return of 11.0% for the Lipper Balanced Fund Index.
Within the Fund, we have begun shortening the duration of our fixed income
holdings as we anticipate interest rates will rise over the next twelve to
eighteen months. Because fixed income valuations move opposite of interest
rates, shortening the duration of the Fund's holdings will help to minimize the
expected decreasing valuations of the fixed income securities while allowing the
Fund to continue to produce income. Within the equity portion of the fund, we
utilize the same conservative stock selection disciplines used in the SM&R
Equity Income and Growth Funds. The key is identifying stocks of superior
companies and purchasing them at discounted valuations. During 2003, we have
noted particular strength from our equity holdings in the technology, consumer
discretionary and industrial sectors. We continue to maintain a position of
primarily market neutral in regards to sector allocations relative to the S&P
500 Index weightings. While this may give the appearance of running contrary to
our motto of being SM&R's most conservative fund, the stability of the fixed
income portion allows us to increase the risk on the equity portion while
keeping the overall portfolio structured conservatively.
The U.S. equity markets have risen strongly following a slow start to the
year-with the Nasdaq returning 35.6%, the S&P 500 returning 16.0% and the Dow
Jones Industrial Average returning 14.7% through the same time period of
8/31/03. The Fund's strong equity position has allowed our shareholders to reap
the rewards of this equity rally, while continuing to produce an attractive
income stream of approximately 6% from the bond holdings. We believe we have
achieved our goal of providing consistently positive performance in strong up
markets while positioning the Fund for a cushion as equity markets decline. The
conservative and low risk balanced approach has enabled SM&R to provide upside
potential while protecting the downside via this uniquely positioned Fund.
As the first half of 2003 closes, the financial markets have been reawakened
with guarded optimism over future economic prospects. Economic data for June
suggests that the U.S. economy is beginning to accelerate after eighteen months
into the sluggish recovery. Retail sales in the second quarter and into the
third quarter have been strong at 3% or more. Nearly $30 billion in tax relief
expected during the third quarter from lower tax rates and an increased child
tax credit will boost disposable income for consumers. The manufacturing sector
is picking up along with the growth in final sales and tight inventory
conditions. Housing starts rose 3.7% in June and the key question will be if the
recent rise in interest rates will depress the housing market as mortgage rates
inch upwards. The strength in the stock market and weakness in the bond market
along with recent economic data suggests that 4% growth in GDP is likely for the
fourth quarter of 2003.
<Page>
52
However, the recovery remains sluggish, as revealed in labor market data where
payrolls have yet to increase. The June payroll is 2.5 million below the level
when the recession began in March 2001, and nearly a million below the level
when the expansion began in November 2001. The jobless rate rose from 5.9% in
the fourth quarter of 2002 to 6.4% in June 2003 (and up from 4% in the second
quarter of 2000.) The labor market weakness has been both more severe and more
widespread than in recent expansions.
Another cautionary signal, the worsening U.S. budget deficit, has heightened
worries about future fiscal policy options. In the short-term, it is expected
that the rising federal deficit will push up interest rates and weaken the
dollar. Longer-term, there is concern over the aging population and
unprecedented government commitments to support retirees and the elderly. The
current budget deficit for 2003 is forecast at $450-500 billion. Comparatively,
the Office of Management and Budget forecasted a 2003 budget deficit of $304
billion as early as February of this year. Interest rates will reflect this
worsening condition because the deficit is the amount the Treasury will have to
borrow via Treasury auctions.
The SM&R Balanced Fund is well positioned for the current recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. We continue to maintain faith that select
technology names have a place in nearly all portfolios but are cautious of
renewed historically high valuations and unrealistic growth expectations across
the sector. This positioning should provide upside for the equity portion of the
Fund, while the fixed income portion protects the overall portfolio value from
the potentially sustained market correction.
Sincerely,
/s/ Andrew R. Duncan
Andrew R. Duncan, CFA, Portfolio Manager
SM&R Balanced Fund
[CHART]
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R BALANCED
FUND, CLASS T, AT OFFERING PRICE, AND LIPPER BALANCED FUND INDEX AND THE S&P 500
SM&R BALANCED FUND
<Table>
<Caption>
BALANCED S&P 500 LIPPER BALANCED FUND
9/1/1993 $ 9,426 $ 10,000 $ 10,000
8/31/1994 $ 9,911 $ 10,547 $ 10,215
8/31/1995 $ 11,156 $ 12,809 $ 11,585
8/31/1996 $ 12,198 $ 15,208 $ 12,792
8/31/1997 $ 14,882 $ 21,390 $ 15,957
8/31/1998 $ 15,135 $ 23,121 $ 16,674
8/31/1999 $ 18,084 $ 32,329 $ 19,995
8/31/2000 $ 21,718 $ 37,605 $ 22,402
8/31/2001 $ 19,136 $ 28,434 $ 20,658
8/31/2002 $ 17,975 $ 23,317 $ 18,858
8/31/2003 $ 19,225 $ 26,132 $ 20,753
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/03 for Class T Shares
<Table>
10 YEAR 7.04%
5 YEAR (2.63)%
1 YEAR 11.46%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 01/01/99
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -----------------------------------
A (10.99)% (1.56)%
B (11.34)% (1.59)%
</Table>
SM&R Balanced Fund performance figures are historical and reflect reinvestment
of all dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will vary due to differences in expenses and sales
charge structure. Average annual returns are based on the maximum sales charge
and reinvestment of all dividends and capital gains. The maximum initial sales
charge for Class A shares reflect the current maximum initial sales charges of
5.00%. Class B shares reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year declining to 1% in the fifth year, and is
eliminated thereafter.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
53
SM&R BALANCED FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.59%
Honeywell International Incorporated 5,600 $ 162,344
AIR FREIGHT & COURIERS -- 0.35%
United Parcel Service,
Incorporated (Class B) 1,500 94,140
AUTOMOBILES -- 0.87%
Ford Motor Company 10,668 123,322
General Motors Corporation 2,800 115,080
238,402
BANKS -- 7.14%
Bank of America Corporation 9,000 713,250
Bank One Corporation 3,000 118,410
PNC Financial Services Group 5,800 276,080
U.S. Bancorp 13,800 329,820
Wachovia Corporation 3,400 143,310
Wells Fargo Company 7,400 371,036
1,951,906
BEVERAGES -- 1.95%
Anheuser-Busch Companies,
Incorporated 3,000 154,620
Coca-Cola Company 5,700 248,064
PepsiCo, Incorporated 2,900 129,166
531,850
BIOTECHNOLOGY -- 0.58%
Amgen Incorporated* 2,400 $ 158,160
BUILDING PRODUCTS -- 0.41%
American Standard Companies
Incorporated* 1,400 112,266
CHEMICALS -- 0.84%
Dow Chemical Company (The) 3,000 103,590
E.I. du Pont de Nemours and Company 2,800 125,272
228,862
COMMERCIAL SERVICES & SUPPLIES -- 1.06%
Banta Corporation 5,000 173,650
H & R Block, Incorporated 2,600 114,660
288,310
COMMUNICATIONS EQUIPMENT -- 1.68%
Cisco Systems, Incorporated* 22,000 421,300
QUALCOMM Incorporated 900 37,152
458,452
COMPUTERS & PERIPHERALS -- 3.11%
Dell Computer Corporation* 6,600 215,358
EMC Corporation* 19,200 244,800
Hewlett-Packard Company 1,700 33,864
International Business Machines
Corporation 3,600 295,236
Sun Microsystems, Incorporated* 15,900 61,374
850,632
</Table>
<Page>
54
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING -- 0.41%
Sealed Air Corporation* 2,300 $ 111,918
DIVERSIFIED FINANCIALS -- 4.43%
American Express Company 3,400 153,170
Citigroup, Incorporated 13,800 598,230
Countrywide Financial Corporation 2,600 176,410
Morgan Stanley 5,800 282,982
1,210,792
DIVERSIFIED TELECOMMUNICATION SERVICES -- 1.47%
Alltel Corporation 1,900 87,020
SBC Communications Incorporated 7,600 170,924
Verizon Communications 1,380 48,742
Vodafone Group PLC ADR 5,200 95,160
401,846
ELECTRIC UTILITIES -- 1.81%
Ameren Corporation 2,900 123,250
CenterPoint Energy, Incorporated 5,200 44,148
Constellation Energy Group 4,800 174,672
DTE Energy Company 3,800 132,658
Reliant Resources, Incorporated* 3,975 18,365
493,093
ENERGY EQUIPMENT & SERVICES -- 0.69%
Schlumberger Limited 3,800 $ 188,138
FOOD PRODUCTS -- 2.31%
ConAgra Foods, Incorporated 5,800 127,600
H.J. Heinz Company 2,500 80,900
McCormick & Company, Incorporated 5,400 144,180
Sara Lee Corporation 6,900 130,962
Sensient Technologies Corporation 7,100 147,680
631,322
FOOD & DRUG RETAILING -- 1.93%
Wal-Mart Stores, Incorporated 8,900 526,613
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.63%
Abbott Laboratories 4,000 161,200
Beckman Coulter, Incorporated 6,100 270,535
Zimmer Holdings, Incorporated* 260 13,452
445,187
HEALTH CARE PROVIDERS & SERVICES -- 0.40%
Health Management Associates,
Incorporated (Class A) 3,600 80,208
Tenet Healthcare Corporation* 1,750 28,087
108,295
</Table>
<Page>
55
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 0.87%
Starwood Hotels & Resorts Worldwide,
Incorporated 7,000 $ 236,810
HOUSEHOLD DURABLES -- 1.39%
Black & Decker Corporation 6,600 282,348
Stanley Works (The) 3,200 96,864
379,212
HOUSEHOLD PRODUCTS -- 1.79%
Kimberly-Clark Corporation 2,100 107,331
Newell Rubbermaid Incorporated 3,600 85,500
Procter & Gamble Company 3,400 296,786
489,617
INDUSTRIAL CONGLOMERATES -- 3.21%
3M Company 900 128,223
Danaher Corporation 1,900 146,775
General Electric Company 20,400 603,228
878,226
INFORMATION TECHNOLOGY CONSULTING
& SERVICES -- 0.09%
Electronic Data Systems Corporation 600 13,098
Sungard Data Systems Incorporated* 400 11,280
24,378
INSURANCE -- 2.30%
American International Group,
Incorporated 5,431 $ 323,525
CIGNA Corporation 1,600 76,288
Prudential Financial, Incorporated 5,500 200,255
Travelers Property Casualty
Corporation (Class A) 649 9,988
Travelers Property Casualty
Corporation (Class B) 1,223 18,944
629,000
LEISURE EQUIPMENT & PRODUCTS -- 0.44%
Brunswick Corporation 4,500 121,410
MACHINERY -- 1.19%
Caterpillar Incorporated 2,200 158,026
Ingersoll-Rand Company (Class A) 2,800 166,656
324,682
MEDIA -- 1.77%
Comcast Corporation
(Special Class A )* 2,000 56,720
Cox Communications,
Incorporated (Class A)* 1,600 52,352
Viacom Incorporated (Class B)* 3,800 171,000
Walt Disney Company (The) 9,900 202,950
483,022
</Table>
<Page>
56
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------
METALS & MINING -- 0.31%
Alcoa Incorporated 3,000 $ 85,680
MULTI-LINE RETAIL -- 0.90%
Federated Department Stores,
Incorporated* 5,600 244,720
OIL & GAS -- 3.63%
Anadarko Petroleum Corporation 1,700 73,950
BP PLC ADR 4,892 204,094
ChevronTexaco Corporation 2,500 182,175
Exxon Mobil Corporation 6,200 233,740
Royal Dutch Petroleum Company ADR 4,000 179,480
Unocal Corporation 3,900 119,418
992,857
PAPER & FOREST PRODUCTS -- 0.42%
International Paper Company 1,200 48,660
Weyerhaeuser Company 1,100 65,450
114,110
PERSONAL PRODUCTS -- 0.27%
Gillette Company (The) 2,300 74,658
PHARMACEUTICALS -- 6.87%
Allergan, Incorporated 1,600 127,136
Bristol-Myers Squibb Company 5,500 139,535
Johnson & Johnson 8,800 436,304
Merck & Company, Incorporated 5,100 256,632
Pfizer, Incorporated 20,555 615,006
Watson Pharmaceuticals, Incorporated* 4,200 172,620
Wyeth 3,000 128,550
1,875,783
ROAD & RAIL -- 0.58%
USFreightways Corporation 5,000 $ 159,250
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 2.54%
Intel Corporation 20,600 589,572
Texas Instruments Incorporated 4,400 104,940
694,512
SOFTWARE -- 2.58%
Microsoft Corporation 22,200 588,744
Oracle Corporation* 3,500 44,730
VERITAS Software Corporation* 2,100 72,408
705,882
SPECIALTY RETAIL -- 1.70%
Home Depot, Incorporated (The) 5,900 189,744
Limited Brands 7,200 122,112
Lowe's Companies, Incorporated 2,800 153,608
465,464
TRADING COMPANIES & DISTRIBUTORS -- 0.42%
W.W. Grainger, Incorporated 2,300 114,609
TOTAL COMMON STOCK -- 66.93%
(Cost $16,316,746) 18,286,410
</Table>
<Page>
57
<Table>
<Caption>
BONDS AND NOTES FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
AUTO COMPONENTS -- 1.85%
Cooper Tire & Rubber Company,
7.75%, 12/15/09 $ 450,000 $ 505,381
BANKS -- 2.03%
Royal Bank of Scotland, yankee bond,
6.40%, 04/01/09 500,000 555,441
DIVERSIFIED FINANCIALS -- 1.95%
Morgan (J.P.) & Company, Incorporated,
6.00%, 01/15/09 500,000 533,214
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.50%
Koninklijke Philips Electronics, yankee
bond, 8.375%, 09/15/06 600,000 683,736
INDUSTRIAL CONGLOMERATES -- 3.01%
Tyco International Group, yankee bond,
5.875%, 11/01/04 800,000 821,000
INSURANCE -- 1.96%
Mony Group Incorporated (The),
8.35%, 03/15/10 500,000 534,635
REAL ESTATE -- 2.06%
Weingarten Realty Investors,
7.35%, 07/20/09 500,000 563,408
TRANSPORTATION INFRASTRUCTURE -- 3.01%
Hertz Corporation,
7.40%, 03/01/11 455,000 457,792
Union Tank Car Company,
6.63%, 10/03/04 345,000 363,796
821,588
U S GOVERNMENT AGENCY SECURITIES -- 2.99%
Federal Home Loan Bank,
5.10%, 12/14/07 $ 500,000 $ 515,326
Federal Home Loan Mortgage
Corporation, 7.00%, 09/15/07 238,148 243,258
Federal Home Loan Mortgage Corporation,
Pool #298759, 8.00%, 08/01/17 6,487 7,048
Federal Home Loan Mortgage Corporation,
Pool #284839, 8.50%, 01/01/17 10,632 11,619
Federal National Mortgage Association,
Pool #048974, 8.00%, 06/01/17 36,945 40,211
817,462
U S GOVERNMENT SECURITIES -- 3.74%
U S Treasury Note, 5.875%,
02/15/04 (a) 1,000,000 1,021,523
TOTAL BONDS AND NOTES -- 25.10%
(Cost $6,372,843) 6,857,388
<Caption>
CASH EQUIVALENTS SHARES VALUE
- --------------------------------------------------------------------------------
SM&R Money Market Fund, 0.52% (a) 799 799
TOTAL CASH EQUIVALENTS -- 0.00%
(Cost $ 799) 799
</Table>
<Page>
58
<Table>
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 2.01%
General Motors Acceptance Corporation,
1.17%, 09/04/03 $ 550,000 549,946
FOOD PRODUCTS -- 5.40%
Kraft Foods Incorporated,
1.20%, 09/02/03 975,000 974,968
Kraft Foods Incorporated,
1.19%, 09/05/03 500,000 499,934
1,474,902
TOTAL COMMERCIAL PAPER -- 7.41%
(Cost $2,024,848) 2,024,848
TOTAL INVESTMENTS -- 99.44%
(Cost $24,715,236) 27,169,445
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.56%
154,072
NET ASSETS -- 100.00% $ 27,323,517
=============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Note to Schedule of Investments
(a) Long term obligations that will mature in less than one year.
(b) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Balanced Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
<Page>
59
SM&R BALANCED FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investments in securities,
at value (Cost $24,715,236) $ 27,169,445
Prepaid expenses 1,631
Receivable for:
Investments securities sold 452
Capital stock sold 12,529
Dividends 36,366
Interest 137,758
Expense Reimbursement 1,070
Other assets 15,067
TOTAL ASSETS 27,374,318
LIABILITIES
Capital stock reacquired 3,232
Accrued:
Investment advisory fee 17,229
Service fee 5,743
Distribution fee 6,683
Other liabilities 17,914
TOTAL LIABILITIES 50,801
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 27,323,517
NET ASSETS:
Class A $ 3,418,775
Class B $ 2,335,916
Class T $ 21,568,826
Total Net Assets: $ 27,323,517
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 205,311
Class B:
Authorized 25,000,000
Outstanding 138,783
Class T:
Authorized 25,000,000
Outstanding 1,255,330
Class A:
Net asset value and redemption price per share $ 16.65
Offering price per share:
(Net Assets value of $16.65/95.00%) $ 17.53
Class B:
Net asset value and offering price per share $ 16.83
Class T:
Net asset value and redemption price per share $ 17.18
Offering price per share:
(Net Assets value of $17.18/94.25%) $ 18.23
</Table>
See notes to financial statements.
<Page>
60
STATEMENT OF OPERATIONS
Year Ended August 31, 2002
<Table>
INVESTMENT INCOME
Dividends $ 343,689
Interest 515,715
TOTAL INVESTMENT INCOME 859,404
EXPENSES
Investment advisory fees 194,127
Service fees 64,709
Professional fees 12,575
Custody and transaction fees 15,475
Directors' fees 8,980
Qualification fees 23,571
Shareholder reporting expenses 6,792
Insurance expenses 8,190
Distribution fees 23,830
Other expenses 9
TOTAL EXPENSES 358,258
LESS EXPENSES REIMBURSED (22,399)
NET EXPENSES 335,859
INVESTMENT INCOME--NET 523,545
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (759,011)
Change in unrealized appreciation
of investments for the year 1,981,012
NET GAIN ON INVESTMENTS 1,222,001
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,745,546
</Table>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income--net $ 523,545 $ 689,458
Net realized gain
(loss) on investments (759,011) 303,181
Change in unrealized
appreciation (depreciation) 1,981,012 (2,776,835)
Net increase (decrease)
in net assets resulting from operations 1,745,546 (1,784,196)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (76,409) (77,849)
Class B (40,931) (45,601)
Class T (451,037) (573,591)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (568,377) (697,041)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 79,843 742,333
Class B 128,178 383,569
Class T (980,917) (1,153,675)
TOTAL NET CAPITAL SHARE TRANSACTIONS (772,896) (27,773)
TOTAL INCREASE (DECREASE) 404,273 (2,509,010)
NET ASSETS
Beginning of year 26,919,244 29,428,254
End of year $ 27,323,517 $ 26,919,244
- -----------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $ 86,180 $ 131,012
</Table>
See notes to financial statements.
<Page>
61
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
---------------------------------------------------------------------------------------
8 MONTHS ENDED
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED DECEMBER 31,
------------------------- -------------- ----------------------------------------
2003 2002 2001 2000 1999 1998
------------------------- -------------- ----------------------------------------
Net Asset Value, Beginning of Period $ 16.42 $ 17.91 $ 19.40 $ 20.67 $ 19.63 $ 18.32
Investment income -- net 0.34 0.43 0.31 0.56 0.42 0.48
Net realized and unrealized gain
(loss) on investments 0.77 (1.50) (1.58) 0.01 1.84 1.96
---------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.11 (1.07) (1.27) 0.57 2.26 2.44
Less distributions from
Investment income -- net (0.35) (0.42) (0.22) (0.55) (0.42) (0.47)
Capital gains -- -- -- (1.29) (0.80) (0.66)
---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.35) (0.42) (0.22) (1.84) (1.22) (1.13)
---------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.18 $ 16.42 $ 17.91 $ 19.40 $ 20.67 $ 19.63
=======================================================================================
TOTAL RETURN (1) 6.95% (6.07)% (6.54)%** 3.64% 11.87% 13.83%
=======================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 21,569 $ 21,631 $ 24,798 $ 28,223 $ 30,146 $ 29,367
Ratio of expenses with reimbursement
to average net assets 1.25% 1.25% 1.25%* 1.25% 1.25% 1.25%
Ratio of expenses without reimbursement
to average net assets 1.26% 1.27% 1.25%* 1.34% 1.41% 1.37%
Ratio of net investment income
to average net assets 2.08% 2.47% 2.52%* 2.63% 2.15% 2.55%
Portfolio turnover rate 23.83% 25.80% 14.77% 13.17% 18.01% 16.01%
</Table>
<Page>
62
<Table>
<Caption>
CLASS A SHARES
------------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG.31, ENDED AUG. 31, DEC. 31, DEC. 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $ 15.93 $ 17.44 $ 18.93 $ 20.30 $ 19.63
Investment income -- net 0.32 0.39 0.23 0.37 0.47
Net realized and unrealized
gain (loss) on investments 0.77 (1.47) (1.53) (0.06) 1.47
------------------------------------------------------------------------
TOTAL FROM
INVESTMENT OPERATIONS 1.09 (1.08) (1.30) 0.31 1.94
Less distributions from
Investment income -- net (0.37) (0.43) (0.19) (0.39) (0.47)
Capital gains -- -- -- (1.29) (0.80)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.37) (0.43) (0.19) (1.68) (1.27)
------------------------------------------------------------------------
Net Asset Value, End of Period $ 16.65 $ 15.93 $ 17.44 $ 18.93 $ 20.30
========================================================================
TOTAL RETURN (1) 7.02% (6.29)% (6.87)%** 3.35% 10.13%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of
period (000's omitted) $ 3,419 $ 3,183 $ 2,713 $ 2,512 $ 1,777
Ratio of expenses with
reimbursement
to average net assets (2) 1.30% 1.45% 1.50%* 1.50% 1.51%
Ratio of expenses without
reimbursement
to average net assets 1.69% 1.73% 1.50%* 1.92% 1.51%
Ratio of net investment income
to average net assets 2.02% 2.27% 1.98%* 2.40% 1.87%
Portfolio turnover rate 23.83% 25.80% 14.77% 13.17% 18.01%
<Caption>
CLASS B SHARES
------------------------------------------------------------------------
PERIOD FROM
8 MONTHS YEAR ENDED JAN. 1 TO
YEAR ENDED AUG.31, ENDED AUG. 31, DEC. 31, DEC. 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $ 16.18 $ 17.72 $ 19.26 $ 20.64 $ 19.63
Investment income -- net 0.24 0.30 0.20 0.35 0.40
Net realized and unrealized
gain (loss) on investments 0.72 (1.47) (1.59) (0.08) 1.81
------------------------------------------------------------------------
TOTAL FROM
INVESTMENT OPERATIONS 0.96 (1.17) (1.39) 0.27 2.21
Less distributions from
Investment income -- net (0.31) (0.37) (0.15) (0.36) (0.40)
Capital gains -- -- -- (1.29) (0.80)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.31) (0.37) (0.15) (1.65) (1.20)
------------------------------------------------------------------------
Net Asset Value, End of Period $ 16.83 $ 16.18 $ 17.72 $ 19.26 $ 20.64
========================================================================
TOTAL RETURN (1) 6.10% (6.69)% (7.23)%** 2.79% 11.52%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of
period (000's omitted) $ 2,336 $ 2,105 $ 1,917 $ 2,081 $ 1,119
Ratio of expenses with
reimbursement
to average net assets (2) 1.80% 1.95% 2.00%* 2.00% 2.01%
Ratio of expenses without
reimbursement
to average net assets 2.18% 2.22% 2.00%* 2.23% 2.01%
Ratio of net investment income
to average net assets 1.51% 1.77% 1.55%* 1.89% 1.36%
Portfolio turnover rate 23.83% 25.80% 14.77% 13.17% 18.01%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.30% for Class A and 1.80% for Class B.
See notes to financial statements.
<Page>
63
[GRAPHIC]
FIXED INCOME the stabilizing force for 2002/2003
REJUVENATION
<Page>
64
FIXED INCOME
TENANTS OF SM&R'S FIXED INCOME FUNDS...
1 WE'RE CONVINCED our fixed income investors are truly conservative and
as such expect investment management prudence.
2 WE INVEST in high quality fixed income instruments.
3 WE MAKE few sector and interest rate bets.
4 WE FOCUS primarily on intermediate term securities to minimize price
volatility.
5 WE GIVE primary importance to a reasonable and reliable dividend
stream, with total return being a secondary goal.
<Page>
65
SM&R GOVERNMENT BOND FUND
MANAGER COMMENTARY
INVESTMENT STRATEGY
The SM&R Government Bond Fund is focused on providing competitive levels of
current income to the conservative investor through investments in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
as well as securities of corporate issuers deemed to be of higher credit quality
and financial strength.
Over the past fiscal year ending August 31, 2003, the Fund has provided a total
return of 2.46% to Class T investors at net asset value. The year to date total
return for the eight months ended August 31, 2003 was 0.24%. The Fund has an
average maturity of 4.15 years, a market-weighted average coupon of 4.47%, and a
modified duration of 3.56 years.
During the summer of 2003, within a short two-month time frame, the 10-year
Treasury reached both its 45-year low in mid-June and a 12-month high in
mid-August. Such short-term volatility in the Treasury market is rare, but is
indicative of the mixed economic signals being interpreted by the market. While
the job market remains weak and businesses have been slow to invest capital, the
economy appears to be gaining stronger footing. Excess production capacity has
enabled businesses to respond to broad-based strengthening in demand without yet
adding jobs. Continued recovery will lead to expansion over time. Our long-term
expectation for interest rates is based on the speed at which economic recovery
progresses, the actions of the Federal Reserve, and the impact of expected large
federal budget deficits over the next three years.
The Fed has made it very clear that it is in no hurry to raise rates until the
recovery is well underway and jobs data improves. We expect the Fed to try to
hold inflation near 2% and remain accommodative until evidence of a sustainable
demand-led expansion is firm. Our expectation is that the Fed will gradually
begin to raise short-term rates in mid-2004.
<Page>
66
While inflationary forces are minimal, we expect some upward pressure on
long-term interest rates as a result of supply from the Treasury as it issues
debt to finance looming budget deficits. Additional upward pressure on long-term
rates comes in the form of hedging strategies employed by mortgage backed
securities holders, shortening overall portfolio duration as MBS product
maturities tend to lengthen as rates rise.
Generally, in a rising rate environment, the bond market does not provide
attractive nominal returns in relation to other asset classes, particularly
equities. Even as rates rise, however, bonds will remain an important component
of a well-diversified portfolio, and in current market conditions, could
continue offering attractive returns on a risk-adjusted basis. Our Fund is well
positioned for an upward trend in rates. While maturities are laddered, we have
shortened the portfolio's duration over the last year to provide price
protection of holdings.
Best Regards,
/s/ Anne M. LeMire
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Government Bond Fund
[CHART]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R GOVERNMENT BOND
FUND, CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL U.S. GOVERNMENT FUND
INDEX
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
GOVT BOND LIPPER GEN US GOVT FUND INDEX
9/1/1993 $ 9,552 $ 10,000
8/31/1994 $ 9,322 $ 9,639
8/31/1995 $ 10,426 $ 10,571
8/31/1996 $ 10,700 $ 10,855
8/31/1997 $ 11,703 $ 11,865
8/31/1998 $ 12,676 $ 13,101
8/31/1999 $ 12,772 $ 12,930
8/31/2000 $ 13,486 $ 13,849
8/31/2001 $ 15,090 $ 15,407
8/31/2002 $ 16,008 $ 16,678
8/31/2003 $ 16,402 $ 16,954
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 4.5% through 8/31/03 for Class T Shares
<Table>
10 YEAR 5.07%
5 YEAR 4.32%
1 YEAR (2.18)%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 01/01/99
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -------------------------------
A (2.34)% 3.92%
B (1.13)% 4.54%
</Table>
SM&R Government Bond Fund performance figures are historical and reflect
reinvestemnt of all dividends and capital gains distrubutions and changes in net
asset value. Returns for Class A and B will vary from Class T as shown above due
to differences in expense and sales charge structure. Average annual returns are
based on the maximum sales charge and reinvestment of all dividends and capital
gains. The current maximum initial sales charge for Class A shares is 4.75%.
Class B shares reflect the applicable contingent deferred sales charge (CDSC),
which is 3% in the first year, declines to 1% in the third year, and is
eliminated thereafter.
Past performance does not guarantee future results. Investment return and
prinicpal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemeption of fund shares.
<Page>
67
SM&R GOVERNMENT BOND FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
CORPORATE BONDS DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 1.85%
MBNA Master Credit Card Trust 02/15/12 7.000 $ 500,000 $ 569,066
METALS & MINING -- 3.05%
Carpenter Technology Corporation (a) 05/15/13 6.625 1,000,000 941,064
TOTAL CORPORATE BONDS -- 4.90%
(Cost $1,517,755) 1,510,130
</Table>
FOREIGN BONDS
<Table>
U S DOLLAR DENOMINATED FOREIGN
GOVERNMENT BONDS -- 1.75%
Province of Quebec, Canada 02/15/09 5.750 500,000 538,254
TOTAL FOREIGN BONDS -- 1.75%
(Cost $466,284) 538,254
</Table>
U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES
<Table>
U S GOVERNMENT AGENCY SECURITIES -- 54.41%
Federal Home Loan Bank (b) 08/05/04 7.380 500,000 527,330
Federal Home Loan Bank 08/15/05 3.250 600,000 613,559
Federal Home Loan Bank 10/25/05 6.230 150,000 162,813
Federal Home Loan Mortgage Corporation 01/15/05 1.875 2,000,000 2,003,902
Federal Home Loan Mortgage Corporation 08/01/05 6.750 165,000 179,513
Federal Home Loan Mortgage Corporation 09/15/05 2.875 500,000 506,575
Federal Home Loan Mortgage Corporation 03/15/07 4.875 1,600,000 1,689,715
Federal Home Loan Mortgage Corporation 03/15/07 7.000 164,413 170,237
Federal Home Loan Mortgage Corporation 09/15/07 3.500 2,000,000 2,002,638
</Table>
<Page>
68
<Table>
<Caption>
U S GOVERNMENT AGENCY & MATURITY INTEREST/STATED FACE
U S GOVERNMENT SECURITIES DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
U S GOVERNMENT AGENCY SECURITIES -- 54.41% (cont'd)
Federal Home Loan Mortgage Corporation 09/15/07 7.000 $ 238,148 $ 243,258
Federal Home Loan Mortgage Corporation 02/15/09 5.500 502,510 506,470
Federal Home Loan Mortgage Corporation 08/20/12 5.125 1,000,000 1,000,481
Federal Home Loan Mortgage Corporation 06/15/27 7.500 32,063 32,108
Federal National Mortgage Association 06/18/07 4.750 2,000,000 2,064,766
Federal National Mortgage Association 07/25/07 7.000 108,153 109,947
Federal National Mortgage Association 11/15/07 3.250 1,950,000 1,930,196
Federal National Mortgage Association 03/16/09 6.320 250,000 257,543
Federal National Mortgage Association 08/01/12 5.250 700,000 696,691
Federal National Mortgage Association 08/01/30 8.000 15,995 17,201
Government National Mortgage Association 03/20/27 6.000 2,000,000 2,042,788
Private Export Funding 01/15/10 7.200 15,000 17,317
16,775,048
U S GOVERNMENT SECURITIES -- 29.64%
U S Treasury Notes 02/28/05 1.500 690,000 688,949
U S Treasury Notes 05/15/06 6.875 1,120,000 1,252,038
U S Treasury Notes 02/15/08 3.000 2,000,000 1,978,828
U S Treasury Notes 05/15/08 2.625 2,000,000 1,937,032
U S Treasury Notes 05/15/08 5.625 500,000 549,356
U S Treasury Notes 11/15/08 4.750 500,000 529,062
U S Treasury Notes 05/15/09 5.500 1,000,000 1,096,523
U S Treasury Notes 08/15/10 5.750 1,000,000 1,105,781
9,137,569
TOTAL U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES -- 84.05%
(Cost $26,213,537) 25,912,617
</Table>
<Page>
69
SM&R GOVERNMENT BOND FUND
FINANCIALS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
U S GOVERNMENT AND AGENCY MATURITY INTEREST/STATED FACE
SHORT-TERM OBLIGATIONS DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 8.55%
Federal Home Loan Mortgage Corporation 09/02/03 1.060 $ 200,000 $ 199,994
Federal Home Loan Mortgage Corporation 09/08/03 1.040 1,638,000 1,637,669
Federal National Mortgage Association 09/10/03 1.020 500,000 499,872
Federal National Mortgage Association 10/22/03 1.050 300,000 299,554
TOTAL U S GOVERNMENT AND AGENCY
SHORT-TERM OBLIGATIONS -- 8.55%
(Cost $2,637,089) 2,637,089
<Caption>
CASH EQUIVALENTS SHARES VALUE
SM&R Money Market Fund, 0.52% (c) 83,975 83,975
TOTAL CASH EQUIVALENTS -- 0.27%
(Cost $83,975) 83,975
TOTAL INVESTMENTS -- 99.52%
(Cost $30,918,640) 30,682,065
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.48%
147,417
TOTAL NET ASSETS -- 100.00% $ 30,829,482
============
</Table>
Notes to Schedule of Investments
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration. At August 31, 2003, the market value of these securities
amounted to $941,064 or 3.05% of net assets.
(b) Long term obligations that will mature in less than one year.
(c) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003.
A complete listing of the fund's holdings are included in these financial
statements. This fund and SM&R Government Bond Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
<Page>
70
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $30,918,640) $ 30,682,065
Prepaid expenses 10,025
Receivable for:
Capital stock sold 13,368
Interest 254,614
Expense reimbursement 6,470
Other assets 2,782
TOTAL ASSETS 30,969,324
LIABILITIES
Distribution payable 1,301
Capital stock reacquired 101,012
Accrued:
Investment advisory fee 13,163
Service fee 6,582
Distribution Fee 4,097
Other liabilities 13,687
TOTAL LIABILITIES 139,842
NET ASSETS (applicable to shares outstanding) $ 30,829,482
NET ASSETS:
Class A $ 1,240,343
Class B $ 1,642,873
Class T $ 27,946,266
TOTAL NET ASSETS $ 30,829,482
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,001,150
Outstanding 115,367
Class B:
Authorized 100,000,000
Outstanding 152,923
Class T:
Authorized 23,000,000
Outstanding 2,631,761
Class A:
Net asset value and redemption price per share $ 10.75
Offering price per share:
(Net Assets value of $10.75 / 95.25%) $ 11.29
Class B:
Net asset value and offering price per share $ 10.74
Class T:
Net asset value and redemption price per share $ 10.62
Offering price per share:
(Net Assets value of $10.62/ 95.5%) $ 11.12
</Table>
See notes to financial statements.
<Page>
71
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 1,339,483
EXPENSES
Investment advisory fees 154,805
Service fees 77,403
Professional fees 11,231
Custody and transaction fees 9,716
Directors' fees 9,024
Qualification fees 21,320
Shareholder reporting expenses 2,398
Insurance expenses 7,847
Distribution fees 13,949
Other expenses 8
TOTAL EXPENSES 307,701
LESS EXPENSES REIMBURSED (74,372)
NET EXPENSES 233,329
INVESTMENT INCOME -- NET 1,106,154
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 1,246,280
Change in unrealized depreciation
of investments for the year (1,625,574)
NET LOSS ON INVESTMENTS (379,294)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 726,860
</Table>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
-------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income -- net $ 1,106,154 $ 1,333,729
Net realized gain (loss)
on investments 1,246,280 (185,626)
Change in unrealized
appreciation (depreciation) (1,625,574) 477,148
Net increase in net assets
resulting from operations 726,860 1,625,251
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income -- net
Class A (45,677) (52,795)
Class B (43,390) (19,629)
Class T (1,026,403) (1,251,921)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,115,470) (1,324,345)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 123,301 502,024
Class B 908,563 538,590
Class T 1,483,521 1,246,357
TOTAL NET CAPITAL
SHARE TRANSACTIONS 2,515,385 2,286,971
TOTAL INCREASE 2,126,775 2,587,877
NET ASSETS
Beginning of Year 28,702,707 26,114,830
End of Year $ 30,829,482 $ 28,702,707
- -----------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $ 68 $ 9,283
</Table>
See notes to financial statements.
<Page>
72
FIXED INCOME FUNDS
Securities Management and Research, Inc.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
----------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.75 $ 10.64 $ 10.05 $ 10.10 $ 10.60
Investment income--net 0.40 0.52 0.58 0.59 0.59
Net realized and unrealized gain
(loss) on investments (0.13) 0.11 0.59 (0.05) (0.50)
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.27 0.63 1.17 0.54 0.09
Less distributions from
Investment income -- net (0.40) (0.52) (0.58) (0.59) (0.59)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.52) (0.58) (0.59) (0.59)
----------------------------------------------------------------------
Net Asset Value, End of Year $ 10.62 $ 10.75 $ 10.64 $ 10.05 $ 10.10
======================================================================
TOTAL RETURN (1) 2.46% 6.08% 11.90% 5.58% 0.76%
======================================================================
RATIOS (in percentages)/Supplemental Data
Net Assets, end of year (000's omitted) $ 27,946 $ 26,807 $ 25,278 $ 22,928 $ 23,368
Ratio of expenses with reimbursement
to average net assets (2) 0.73% 0.93% 0.97% 0.98% 1.00%
Ratio of expenses without reimbursement
to average net assets 0.91% 0.95% 0.97% 0.98% 1.11%
Ratio of net investment income
to average net assets 3.60% 4.92% 5.55% 5.91% 5.58%
Portfolio turnover rate 99.26% 25.87% 14.01% 30.87% 22.86%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.73% on Class T.
See notes to financial statements.
<Page>
73
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------------------
PERIOD FROM
JAN. 1 TO
YEAR ENDED AUGUST 31, AUG. 31,
------------------------------------------------------- ----------
2003 2002 2001 2000 1999
------------------------------------------------------- ----------
Net Asset Value, Beginning of Period $ 10.88 $ 10.75 $ 10.14 $ 10.20 $ 10.62
Investment income -- net 0.40 0.48 0.53 0.57 0.30
Net realized and unrealized
gain (loss) on investments (0.13) 0.13 0.61 (0.06) (0.42)
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.27 0.61 1.14 0.51 (0.12)
Less distributions from
Investment income -- net (0.40) (0.48) (0.53) (0.57) (0.30)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.48) (0.53) (0.57) (0.30)
----------------------------------------------------------------------
Net Asset Value, End of Period $ 10.75 $ 10.88 $ 10.75 $ 10.14 $ 10.20
======================================================================
TOTAL RETURN (1) 2.51% 5.82% 11.46% 5.15% (1.17)%**
======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 1,240 $ 1,137 $ 626 $ 127 $ 69
Ratio of expenses with reimbursement
to average net assets (2) 0.73% 1.12% 1.25% 1.25% 1.25%*
Ratio of expenses without reimbursement
to average net assets 1.75% 1.80% 1.27% 1.29% 1.42%*
Ratio of net investment income
to average net assets 3.62% 4.73% 5.25% 5.68% 5.25%*
Portfolio turnover rate 99.26% 25.87% 14.01% 30.87% 22.86%
</Table>
<Page>
74
<Table>
<Caption>
CLASS B SHARES
----------------------------------------------------------------------
PERIOD FROM
JAN. 1 TO
YEAR ENDED AUGUST 31, AUG. 31,
------------------------------------------------------- ----------
2003 2002 2001 2000 1999
------------------------------------------------------- ----------
Net Asset Value, Beginning of Period $ 10.86 $ 10.74 $ 10.14 $ 10.16 $ 10.62
Investment income -- net 0.33 0.43 0.48 0.49 0.33
Net realized and unrealized
gain (loss) on investments (0. 12) 0.12 0.60 (0.02) (0.46)
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.21 0.55 1.08 0.47 (0.13)
Less distributions from
Investment income -- net (0.33) (0.43) (0.48) (0.49) (0.33)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.33) (0.43) (0.48) (0.49) (0.33)
----------------------------------------------------------------------
Net Asset Value, End of Period $ 10.74 $ 10.86 $ 10.74 $ 10.14 $ 10.16
======================================================================
TOTAL RETURN (1) 1.96% 5.27% 10.88% 4.74% (1.30)%**
======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 1,643 $ 758 $ 211 $ 78 $ 8
Ratio of expenses with reimbursement
to average net assets (2) 1.23% 1.57% 1.75% 1.75% 1.75%*
Ratio of expenses without reimbursement
to average net assets 1.95% 2.61% 1.79% 1.84% 1.77%*
Ratio of net investment income
to average net assets 2.99% 4.20% 4.69% 5.12% 4.86%*
Portfolio turnover rate 99.26% 25.87% 14.01% 30.87% 22.86%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.73% on Class A and 1.23% on Class B.
See notes to financial statements.
<Page>
75
SM&R TAX FREE FUND
MANAGER COMMENTARY
INVESTMENT STRATEGY
The SM&R Tax Free Fund is a well-diversified fund designed to produce monthly
tax-free dividends to investors seeking current income, while minimizing federal
tax liability. We invest primarily in high quality municipal securities, seeking
the highest yield while maintaining an average credit rating of AA.
Over the past fiscal year ending August 31, 2003, the Fund has provided a total
return of 2.38% to class T investors at net asset value. The year to date total
return for the eight months ended August 31, 2003 was 0.35%. The Fund has an
average maturity of 9.6 years, a market-weighted average coupon of 5.09%, and a
modified duration of 7.16 years.
Municipalities have faced the challenges of the weak economy in the form of
decreases in income taxes, slowdown in sales tax revenue, and lower allocations
of federal tax dollars. In spite of the weaker overall economic environment,
credit trends in municipals have been only modestly negative. In a 2002 study,
Moody's Investors Service calculated the number of municipal bonds going into
default as fewer than 1 in 1500. While this statistic speaks well for muni
markets in general, we continue to stress very high quality in the Fund. Quality
spreads are very narrow, and investors simply are not paid well for taking risk
within this asset class. Careful analysis of the taxing authority issuing the
debt is the key issue to maintaining the quality desired in the Fund. Important
issues include the health and growth of the local economy, the integrity, value,
and demand for projects being funded, rating and payment history of the issuer,
and the financial strength of the insurer for insured issues.
<Page>
76
Over the past 12-months, tax exempt bonds have provided relatively
attractive tax equivalent yields when compared to their taxable
counterparts for investors in many tax brackets. The key measure of
relative value in any fixed income sector is the slope of the yield
curve, which for municipals is very steep right now. We currently
favor the intermediate area of the curve, primarily laddered 8 to
12-year maturities. While our expectation is for a rising trend in
interest rates, municipal yields are normally less volatile than
taxable yields in both rising and falling rate environments.
Municipals often "outperform" on a tax equivalent basis as rates rise.
Best Regards,
/s/ Anne M. LeMire
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Tax Free Fund
[CHART]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R TAX FREE FUND,
CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL MUNICIPAL DEBT INDEX
SM&R TAX FREE FUND
<Table>
<Caption>
TAX FREE LIPPER GENERAL MUNICIPAL DEBT INDEX
9/9/1993 $ 9,551 $ 10,000
8/31/1994 $ 9,412 $ 9,923
8/31/1995 $ 10,274 $ 10,694
8/31/1996 $ 10,806 $ 11,230
8/31/1997 $ 11,737 $ 12,266
8/31/1998 $ 12,744 $ 13,321
8/31/1999 $ 12,709 $ 13,166
8/31/2000 $ 13,492 $ 13,873
8/31/2001 $ 14,785 $ 15,266
8/31/2002 $ 15,560 $ 15,982
8/31/2003 $ 15,930 $ 16,393
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 4.5% through 8/31/03 for Class T Shares
<Table>
Since Incepton 4.78%
5 YEAR 3.61%
1 YEAR (2.24)%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/03. Inception date of these classes
is 01/01/99
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -------------------------------
A (2.44)% 3.18%
B (1.17)% 3.75%
</Table>
SM&R Tax Free Fund performance figures are historical and reflect reinvestemnt
of all dividends and capital gains distrubutions and changes in net asset value.
Returns for Class A and B will vary from Class T as shown above due to
differences in expense and sales charge structure. Average annual returns are
based on the maximum sales charge and reinvestment of all dividends and capital
gains. The current maximum initial sales charge for Class A shares is 4.75%.
Class B shares reflect the applicable contingent deferred sales charge (CDSC),
which is 3% in the first year, declines to 1% in the third year, and is
eliminated thereafter.
Past performance does not guarantee future results. Investment return and
prinicpal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemeption of fund shares.
<Page>
77
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA -- 1.61%
A3/BBB California State General Obligation Bonds Unlimited 06/01/11 5.250 $ 25,000 $ 25,908
Aaa/AAA Sacramento, California Municipal Utility District Electric
Revenue Bonds, Series I 01/01/15 5.750 200,000 207,130
233,038
FLORIDA -- 10.09%
Aaa/AAA Dade County, Florida Water & Sewer System
Revenue Bonds 10/01/16 5.375 400,000 430,212
Aaa/AAA Miami-Dade County Solid Waste System
Revenue Bonds 10/01/18 4.750 400,000 402,616
Aaa/AAA Miami-Dade County, Florida Expressway Authority Toll
System Revenue Bonds 07/01/29 6.375 400,000 475,224
Aaa/AAA State of Florida- State Board of Education, Public
Education Capital Outlay Bonds, 1992 Series E 06/01/19 5.750 145,000 151,650
1,459,702
ILLINOIS -- 10.12%
Aaa/AAA Chicago, Illinois-General Obligation Bonds Unlimited 01/01/25 5.125 100,000 100,178
Aaa/AAA Chicago, Illinois-Park District General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 234,076
Aa2/AA+ Illinois Health Facilities Authority-Revenue Bonds,
Series A, (Northwestern Memorial Hospital) 08/15/24 6.000 100,000 102,927
Aa2/AA+ Illinois Health Facilities Authority-Revenue Bonds,
Series 1994A, (Northwestern Memorial Hospital) 08/15/14 6.100 200,000 211,332
Aaa/AAA Regional Transportation Authority of Illinois Revenue
Bonds, Refunding MBIA 06/01/18 5.500 200,000 213,572
Aaa/NR Rockford, Illinois-General Obligation Bonds Unlimited 12/15/18 4.500 180,000 176,477
Aa3/AAA State of Illinois-Build Illinois Bonds, Sales Tax Revenue
Bonds, Series V 06/15/17 6.375 200,000 221,722
Aaa/AAA State of Illinois-General Obligation Bonds Unlimited 03/01/19 5.000 200,000 203,758
1,464,042
</Table>
<Page>
78
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 7.87%
Aaa/AAA Louisiana Public Facilities Authority Hospital
Revenue Bonds, Series C 07/01/19 5.000 $ 400,000 $ 397,808
NR/AAA Monroe, Louisiana Sales and Use Tax Revenue Bonds 07/01/16 4.000 200,000 191,942
Aaa/AAA New Orleans, Louisiana Sewer Service
Revenue Bonds 06/01/18 5.000 300,000 307,053
Ba1/BB+ Plaquemines, Louisiana-Port, Harbour & Terminal District,
Marine Terminal Facilities Revenue Bonds 09/01/07 5.000 250,000 241,938
1,138,741
MASSACHUSETTS -- 3.48%
Aaa/AAA Massachusetts State Water Revenues Authority,
General Purpose - Series A 11/01/21 5.500 450,000 504,464
NEW MEXICO -- 0.73%
Aaa/AAA Central Consolidated School District No.22 San Juan
County, New Mexico General Obligation School
Building Bonds 08/15/09 5.300 100,000 106,584
NEW YORK -- 7.82%
A2/A New York City, New York-General Obligation
Bonds Unlimited, Series J 08/01/18 5.000 200,000 198,126
Aaa/AAA New York City, New York- General Obligation
Bonds Unlimited, Series J 02/15/07 5.000 100,000 107,604
Aa2/AA+ New York City, New York-Transitional Financial
Authority Revenue Bonds, Series C 05/01/19 5.000 250,000 254,767
Aaa/AAA New York - State Tollway Authority
Highway & Bridge Revenue Bonds, Series B 04/01/10 3.850 200,000 204,236
Aa3/AAA Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, General Purpose - Series B 01/01/27 5.200 350,000 367,360
1,132,093
</Table>
<Page>
79
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 0.72%
Aaa/AAA City of Charlotte, North Carolina-General Obligation
Public Improvement Bonds, Series 1994 02/01/08 5.700 $ 100,000 $ 103,986
OHIO -- 3.02%
Aaa/AAA Franklin County, Ohio- General Obligation Bonds Limited 12/01/08 5.100 300,000 327,021
Aaa/AAA Franklin County, Ohio- General Obligation Bonds Limited 12/01/11 5.300 100,000 109,676
436,697
OKLAHOMA -- 0.28%
Aaa/NR Oklahoma Housing Finance Agency-Single Family
Mortgage Revenue Bonds (Homeownership Loan
Program), 1994 Series A-1 (b) 09/01/07 6.250 40,000 40,380
OREGON -- 1.45%
A1/AAA City of Portland, Oregon- Sewer System Revenue
Bonds, 1994 Series A 06/01/15 6.250 200,000 209,892
PENNSYLVANIA -- 0.46%
Aa2/AA Pennsylvania State General Obligation Bonds Unlimited,
Refunding & Projects-First Series 04/15/06 5.000 65,000 66,143
RHODE ISLAND -- 0.70%
Aa2/AA+ Rhode Island Housing & Mortgage Financial Corporation,
Homeownership Opportunity, Series 20-A 04/01/17 6.150 100,000 101,095
TENNESSEE -- 1.43%
Aa2/AA Tennessee Housing Development Agency-Mortgage
Finance Program Bonds, 1994 Series B (b) 01/01/09 6.200 200,000 206,534
</Table>
<Page>
80
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 37.78%
Aaa/AAA Aransas County, Texas - Correctional Facility Improvements
General Obligation Bonds Limited 02/15/13 3.875 $ 250,000 $ 243,668
Aaa/AAA Austin, Texas - Community College District
Revenue Bonds 02/01/10 4.000 100,000 102,660
Aaa/AAA Austin, Texas - Independent School District General
Obligation Bonds Unlimited Series A 08/01/12 3.750 150,000 149,209
Aaa/AAA Baytown, Texas- Water and Sewer Revenue Bonds 02/01/14 5.950 100,000 106,564
Aaa/AAA Board of Regents of The University of Texas System-
Permanent University Fund, Refunding Bonds,
Series 1992A 07/01/13 6.250 155,000 182,303
Aaa/AAA City of Austin, Texas-Combined Utility Systems
Revenue Refunding Bonds, Series 1994 05/15/16 6.250 80,000 85,880
Aaa/AAA College Station, Texas Utility Systems
Revenue Bonds 02/01/13 4.125 200,000 199,746
Aaa/AAA College Station, Texas Utility Systems
Revenue Bonds 02/01/14 4.250 65,000 64,890
Aaa/AAA Collin County, Texas- Community College District,
Consolidated Fund, Revenue Bonds 02/01/15 5.250 400,000 425,816
Aaa/AAA Dallas-Fort Worth International Airport- Dallas-Fort
Worth Regional Airport, Joint Revenue Refunding
Bonds, Series 1994A 11/01/10 6.000 100,000 105,195
Aaa/AAA Dallas, Texas - Independent School District,
General Obligation Bonds Unlimited 02/15/09 4.200 100,000 105,502
Aaa/AAA El Paso, Texas - Public Improvement, General Obligation
Bonds Limited 08/15/17 4.000 270,000 252,172
Aaa/NR Flower Mound, Texas- Refunding and Improvement,
General Obligation Bonds Unlimited 03/01/17 5.500 200,000 215,242
Aaa/NR Galveston County, Texas- Public Improvements,
General Obligation Bonds Unlimited 02/01/10 4.300 25,000 26,092
Aaa/NR Galveston County, Texas- Public Improvements,
General Obligation Bonds Limited 02/01/11 4.375 125,000 129,501
Aa1/AA+ Harris County, Texas- Tax and Revenue Certificates
of Obligation, Series 1994 10/01/13 6.100 125,000 131,788
</Table>
<Page>
81
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 37.78% (cont'd)
Aaa/AAA Jefferson County, Texas - Public Improvement Certificates
of Obligation, Series B 08/01/16 4.125 $ 255,000 $ 246,427
Aaa/AAA League City, Texas - Public Improvements,
General Obligation Bonds Limited 02/15/13 4.750 100,000 104,308
Aaa/AAA Lubbock County, Texas - General
Obligation Bonds Limited 02/15/17 5.500 250,000 270,085
Aaa/AAA Lubbock, Texas - Municipal Drainage Utility General
Obligation Bonds Limited 02/15/14 4.000 250,000 244,970
Aaa/AAA Mission Texas Consolidated Independent School District-
General Obligation Bonds Unlimited 02/15/18 4.500 200,000 196,038
Aaa/AAA Montgomery County, Texas - Public Improvement
General Obligation Bonds Limited 03/01/12 4.000 250,000 249,945
Aaa/AAA Rockwell, Texas - Waterworks & Sewer
General Obligation Bonds Limited 08/01/11 3.700 115,000 113,589
Aaa/AAA Round Rock, Texas - Independent School District Refunding
and Improvement General Obligation Bonds Unlimited 08/01/11 4.400 250,000 257,520
Aaa/AAA San Antonio, Texas - River Authority Sewer Refunding
and Improvement - Martinez Salatrillo, Revenue Bonds 07/01/12 3.750 100,000 97,495
AAA/NR Tarrant County Health Facilities Development
Corporation- Health System Revenue Bonds,
(Harris Methodist Health System), Series 1994 (c) 09/01/14 6.000 200,000 231,044
Aa1/AA+ Texas A&M University Revenue and Financing System
Revenue Refunding Bonds, Series A 05/15/17 5.000 250,000 260,330
Aaa/AAA Texas Turnpike Authority- Dallas North Tollway System
Revenue Bonds, Series 1995 (President George
Bush Turnpike) 01/01/15 5.400 100,000 110,295
Aaa/AAA Waco, Texas - General Obligation Bonds Limited 02/01/16 4.000 250,000 238,380
Aaa/NR Weslaco, Texas Independent School District
General Obligation Bonds 02/15/13 5.650 100,000 108,057
Aaa/AAA West University Place, Texas- General Obligation
Bonds Limited, Permanent Improvement 02/01/14 5.650 100,000 109,198
NR/AAA Wylie, Texas Independent School District General
Obligation Bonds Unlimited 08/15/12 4.375 100,000 102,451
5,466,360
</Table>
<Page>
82
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
UTAH -- 0.60%
Aaa/AAA Utah Housing Finance Agency- Single Family
Mortgage Bonds, 1995 Issue A, (Federally
Insured or Guaranteed Mortgage Loans) (b) 07/01/12 7.150 $ 10,000 $ 10,216
Aaa/NR Utah State Housing Financial Agency-
Single Family Mortgage Bonds, Series F1 07/01/13 6.000 30,000 30,579
Aa2/AA Utah State Housing Financial Agency-Single Family
Revenue Bonds (b) 07/01/21 6.000 45,000 46,097
86,892
WASHINGTON -- 7.42%
Aa1/AA+ King County, Washington- Department of
Metropolitan Services, Limited Tax General
Obligation Bonds, 1994 Series A 01/01/08 5.800 200,000 207,194
Aa1/AA+ King County, Washington- Limited Tax General
Obligation and Refunding Bonds, 1993 Series A 12/01/10 6.000 100,000 101,279
Aa1/AA+ Port of Seattle, Washington-General Obligation Bonds (b) 05/01/14 5.750 100,000 102,699
Aaa/AAA Seattle, Washington-Municipal Light & Power
Revenue Bonds, Series B 06/01/24 5.000 100,000 99,481
Aa1/AA+ State of Washington- General Obligation Bonds,
Series 1994B 05/01/09 5.750 100,000 103,182
Aa1/AA+ State of Washington- General Obligation Bonds,
Series 1994B 09/01/16 6.000 100,000 104,941
Aa1/AA+ State of Washington- General Obligation Bonds Unlimited,
Series B 05/01/18 5.500 300,000 327,714
Aaa/AAA Washington State Public Power Supply System Nuclear
Project Number 1 Refunding Revenue Bonds, Series C 07/01/10 5.500 25,000 27,616
1,074,106
TOTAL MUNICIPAL BONDS -- 95.58%
(Cost $13,270,326) 13,830,749
</Table>
<Page>
83
<Table>
<Caption>
U S GOVERNMENT & AGENCY MATURITY INTEREST/STATED FACE
SHORT-TERM OBLIGATIONS DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 2.99%
Federal Home Loan Mortgage Corporation 09/19/03 1.030 $ 100,000 $ 99,949
Federal National Mortgage Association 09/02/03 1.040 100,000 99,997
Federal National Mortgage Association 09/22/03 1.000 233,000 232,864
TOTAL U S GOVERNMENT & AGENCY
SHORT-TERM OBLIGATIONS -- 2.99%
(Cost $432,810) 432,810
<Caption>
CASH EQUIVALENTS SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
SM&R Money Market Fund, 0.52% (d) 40,334 40,334
TOTAL CASH EQUIVALENTS -- 0.28%
(Cost $40,334) 40,334
TOTAL INVESTMENTS -- 98.85%
(Cost $13,743,470) 14,303,893
CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.15%
166,452
TOTAL NET ASSETS -- 100.00% $ 14,470,345
=============
</Table>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
(b) Security subject to the alternative minimum tax.
(c) Issuer has defeased these bonds, collateral for such defeasance is U.S.
Government obligations.
(d) The rate quoted is the annualized seven-day yield of the fund at August 31,
2003. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Tax Free Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
<Page>
84
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $13,743,470) $ 14,303,893
Prepaid expenses 14,392
Receivable for:
Capital stock sold 250
Interest 168,048
Expense reimbursement 4,570
Other assets 3,211
TOTAL ASSETS 14,494,364
LIABILITIES
Distribution payable 2,454
Accrued:
Investment advisory fee 6,129
Service fee 3,064
Distribution fee 1,433
Other liabilities 10,939
TOTAL LIABILITIES 24,019
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 14,470,345
NET ASSETS:
Class A $ 643,287
Class B $ 496,912
Class T $ 13,330,146
TOTAL NET ASSETS $ 14,470,345
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,101
Outstanding 60,072
Class B:
Authorized 100,000,000
Outstanding 46,414
Class T:
Authorized 21,000,000
Outstanding 1,256,291
Class A:
Net asset value and redemption price per share $ 10.71
Offering price per share:
(Net Assets value of $10.71 / 95.25%) $ 11.24
Class B:
Net asset value and offering price per share $ 10.71
Class T:
Net asset value and redemption price per share $ 10.61
Offering price per share:
(Net Assets value of $10.61 / 95.5%) $ 11.11
</Table>
See notes to financial statements.
<Page>
85
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 685,302
EXPENSES
Investment advisory fees 71,040
Service fees 35,520
Professional fees 6,631
Custody and transaction fees 6,115
Directors' fees 9,024
Qualification fees 11,647
Shareholder reporting expenses 663
Insurance expenses 4,446
Distribution fees 5,252
Other expenses 8
TOTAL EXPENSES 150,346
LESS EXPENSES REIMBURSED (41,187)
NET EXPENSES 109,159
INVESTMENT INCOME -- NET 576,143
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 29,123
Change in unrealized depreciation of investments for the year (283,272)
NET LOSS ON INVESTMENTS (254,149)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 321,994
</Table>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
- ---------------------------------------------------------------------------------------------
Investment income -- net $ 576,143 $ 543,366
Net realized gain on investments 29,123 -
Change in unrealized appreciation (depreciation) (283,272) 109,065
Net increase in net assets resulting from operations 321,994 652,431
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income -- net
Class A (22,631) (12,919)
Class B (18,736) (10,159)
Class T (541,077) (514,001)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (582,444) (537,079)
CAPITAL SHARE TRANSACTIONS -- NET
Class A 271,035 135,841
Class B (7,926) 330,031
Class T 1,098,089 663,554
TOTAL NET CAPITAL SHARE TRANSACTIONS 1,361,198 1,129,426
TOTAL INCREASE 1,100,748 1,244,778
NET ASSETS
Beginning of Year 13,369,597 12,124,819
End of Year $ 14,470,345 $ 13,369,597
- ---------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME -- $ 6,257
</Table>
See notes to financial statements.
<Page>
86
FIXED INCOME FUNDS
Securities Management and Research, Inc.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.80 $ 10.71 $ 10.25 $ 10.14 $ 10.64
Investment income--net 0.44 0.46 0.48 0.49 0.48
Net realized and unrealized gain (loss) on investments (0.18) 0.08 0.48 0.12 (0.50)
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.26 0.54 0.96 0.61 (0.02)
Less distributions from Investment income -- net (0.45) (0.45) (0.48) (0.49) (0.48)
Capital gains -- -- (0.02) (0.01) --
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.45) (0.45) (0.50) (0.50) (0.48)
----------------------------------------------------------------------
Net Asset Value, End of Year $ 10.61 $ 10.80 $ 10.71 $ 10.25 $ 10.14
======================================================================
TOTAL RETURN (1) 2.38% 5.24% 9.59% 6.16% (0.28)%
======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 13,330 $ 12,472 $ 11,700 $ 11,030 $ 11,218
Ratio of expenses with reimbursement to average
net assets (2) 0.75% 0.75% 0.75% 0.75% 0.73%
Ratio of expenses without reimbursement to average
net assets 1.03% 1.05% 1.08% 1.11% 1.23%
Ratio of net investment income to average net assets 4.08% 4.34% 4.59% 4.84% 4.53%
Portfolio turnover rate 18.23% 8.80% 0.18% 7.61% 5.09%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.75% on Class T.
See notes to financial statements.
<Page>
87
<Table>
<Caption>
CLASS A SHARES
-----------------------------------------------------------------------
PERIOD FROM
JAN. 1 TO
YEAR ENDED AUGUST 31, AUG. 31,
------------------------------------------------------- -----------
2003 2002 2001 2000 1999
------------------------------------------------------- -----------
Net Asset Value, Beginning of Period $ 10.89 $ 10.80 $ 10.33 $ 10.22 $ 10.68
Investment income -- net 0.44 0.43 0.46 0.46 0.21
Net realized and unrealized
gain (loss) on investments (0.18) 0.09 0.49 0.12 (0.46)
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.26 0.52 0.95 0.58 (0.25)
Less distributions from
Investment income -- net (0.44) (0.43) (0.46) (0.46) (0.21)
Capital gains -- -- (0.02) (0.01) --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.44) (0.43) (0.48) (0.47) (0.21)
-----------------------------------------------------------------------
Net Asset Value, End of Period $ 10.71 $ 10.89 $ 10.80 $ 10.33 $ 10.22
=======================================================================
TOTAL RETURN (1) 2.40% 4.99% 9.34% 5.86% (2.37)%**
=======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period $ 643,287 $ 384,438 $ 245,697 $ 211,755 $ 194,917
Ratio of expenses with reimbursement
to average net assets (2) 0.75% 0.93% 1.00% 1.00% 1.51%*
Ratio of expenses without reimbursement
to average net assets 1.24% 1.26% 1.33% 1.35% 2.02%*
Ratio of net investment income
to average net assets 4.09% 4.14% 4.34% 4.59% 3.69%*
Portfolio turnover rate 18.23% 8.80% 0.18% 7.61% 5.09%
</Table>
<Page>
88
<Table>
<Caption>
CLASS B SHARES
-----------------------------------------------------------------------
PERIOD FROM
JAN. 1 TO
YEAR ENDED AUGUST 31, AUG. 31,
------------------------------------------------------- -----------
2003 2002 2001 2000 1999
------------------------------------------------------- -----------
Net Asset Value, Beginning of Period $ 10.90 $ 10.79 $ 10.32 $ 10.20 $ 10.68
Investment income -- net 0.40 0.37 0.40 0.41 0.18
Net realized and unrealized
gain (loss) on investments (0.19) 0.11 0.49 0.13 (0.48)
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.21 0.48 0.89 0.54 (0.30)
Less distributions from
Investment income -- net (0.40) (0.37) (0.40) (0.41) (0.18)
Capital gains -- -- (0.02) (0.01) --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.37) (0.42) (0.42) (0.18)
-----------------------------------------------------------------------
Net Asset Value, End of Period $ 10.71 $ 10.90 $ 10.79 $ 10.32 $ 10.20
=======================================================================
TOTAL RETURN (1) 1.91% 4.57% 8.74% 5.47% (2.85)%**
=======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period $ 496,912 $ 513,273 $ 178,880 $ 115,025 $ 113,143
Ratio of expenses with reimbursement
to average net assets (2) 1.25% 1.42% 1.50% 1.50% 2.01%*
Ratio of expenses without reimbursement
to average net assets 1.74% 1.75% 1.84% 1.87% 2.52%*
Ratio of net investment income
to average net assets 3.59% 3.65% 3.82% 4.12% 3.20%*
Portfolio turnover rate 18.23% 8.80% 0.18% 7.61% 5.09%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge.
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.75% on Class A and 1.25% on Class B.
See notes to financial statements.
<Page>
89
SM&R PRIMARY FUND
MANAGER COMMENTARY
INVESTMENT OBJECTIVE
The SM&R Primary Fund seeks maximum current income consistent with capital
preservation and liquidity, principally through investments in commercial paper.
Although the Fund strives for price share stability, it is not a money market
fund and may go slightly over or under the $1 share price benchmark at times.
Beyond commercial paper, the Fund may also invest in U.S. Government
obligations, corporate debt obligations maturing in five years or less and rated
at least "A," and repurchase agreements.
Over the past fiscal year ending August 31, 2003, the Fund has provided a total
return of 1.35%. The Fund has an average maturity of 1.1 years, a market
weighted average coupon of .85% and a modified duration of .81 years.
Over the past couple of years, investing in short-term fixed income funds has
brought about the reality of anemic returns. While a total return of a bit
better than 1% is certainly less than thrilling, it is important to keep in mind
the extremely low interest rate environment we are operating in. With a Federal
Funds rate of only 1%, investment grade fixed income instruments are simply very
stingy in yield today. To place some perspective on this number, the 10-year
Treasury note, as of this writing, yields only a bit more than 4%. We are living
in low interest rate times, a fact that many fixed income investors understand
only too well.
But the fixed income market has been dicey during the summer of 2003. Over the
summer months, the 10-year Treasury, in terms of its yield, reached both its
45-year low and 12-month high within a two-month time frame. Short maturity
issues, though, representative of the securities we purchase for the Primary
Fund, have not experienced nearly the same level of volatility. Such extreme,
short-term volatility is rare, and really underscores the mixed economic signals
being interpreted by the market. We have been faced with a weak job market and
anemic capital spending, yet a relatively strong consumer and superior housing
market.
<Page>
90
The Fed has made it very clear that it is in no hurry to raise rates until the
recovery is well underway and jobs data improves. We expect the Fed to try to
hold inflation near 2% and remain accommodative until evidence of a sustainable,
demand-led expansion is firm. Our working thesis is that the Fed will gradually
begin raising short-term rates around mid-2004.
Regardless of the near-term direction of the fixed income markets, we believe
bonds remain an important component of well-diversified portfolios. The future
is never certain, and that fact underscores the importance of including limited
risk holdings as part of your overall portfolio.
Best Regards,
/s/ Anne M. LeMire
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Primary Fund
[CHART]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R PRIMARY FUND,
AND LIPPER SHORT INVESTMENT GRADE FUND INDEX
<Table>
<Caption>
LIPPER SHORT INV. GRADE
PRIMARY FUND INDEX
9/1/1993 $ 10,000 $ 10,000
8/31/1994 $ 10,290 $ 10,177
8/31/1995 $ 10,806 $ 10,874
8/31/1996 $ 11,353 $ 11,407
8/31/1997 $ 11,919 $ 12,233
8/31/1998 $ 12,533 $ 13,018
8/31/1999 $ 13,128 $ 13,452
8/31/2000 $ 13,742 $ 14,204
8/31/2001 $ 14,604 $ 15,552
8/31/2002 $ 14,798 $ 16,126
8/31/2003 $ 14,998 $ 16,625
</Table>
AVERAGE ANNUAL RETURN
Through 8/31/03. Inception date of this fund 03/16/92.
<Table>
10 YEAR 4.14%
5 YEAR 3.66%
1 YEAR 1.35%
</Table>
SM&R Primary Fund performance figures are historical and reflect reinvestment of
all dividends and capital gains distributions and changes in net asset value.
The Primary Fund does not have a sales charge. Average annual returns include
reinvestment of all dividends and capital gains. Past performance does not
guarantee future results. Investment return and principal value of an investment
will fluctuate and investments, when redeemed, may be worth more or less than
their original cost.
Past performance does not guarantee future results. Investment return and
principal value of an investment will fluctuate and investments, when redeemed,
may be worth more or less than their original cost.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
<Page>
91
SM&R PRIMARY FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMERCIAL PAPER MATURITY DATE INTEREST/STATED RATE (%) FACE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
BEVERAGES -- 4.45%
Coors Brewing Company 10/16/03 1.120 $ 1,220,000 $ 1,218,292
DIVERSIFIED FINANCIALS -- 19.96%
Countrywide Home Loans Incorporated 09/09/03 1.090 1,199,000 1,198,709
Dollar Thrifty Funding Corporation 09/24/03 1.080 1,199,000 1,198,173
General Motors Acceptance Corporation 09/04/03 1.250 888,000 887,907
Sears Roebuck Acceptance Corporation 09/18/03 1.170 1,002,000 1,001,446
Textron Financial Corporation 09/05/03 1.150 1,184,000 1,183,849
5,470,084
DIVERSIFIED TELECOMMUNICATION SERVICES -- 4.07%
AT&T Corporation 09/08/03 1.190 1,117,000 1,116,741
ELECTRIC UTILITIES -- 11.07%
Carolina Power & Light Company 09/17/03 1.150 926,000 925,526
Empire District Electric Company 09/26/03 1.150 1,145,000 1,144,085
PacifiCorp 09/19/03 1.150 966,000 965,444
3,035,055
FOOD PRODUCTS -- 14.59%
Campbell Soup Company 09/30/03 1.050 1,105,000 1,104,065
General Mills Incorporated 09/16/03 1.120 1,042,000 1,041,513
Kraft Foods Incorporated 09/09/03 1.220 1,122,000 1,121,696
Sara Lee Corporation 09/15/03 1.070 733,000 732,695
3,999,969
GAS UTILITIES -- 13.11%
KeySpan Corporation 09/23/03 1.080 800,000 799,472
Laclede Gas Company 09/10/03 1.100 982,000 981,730
Sempra Energy Global Enterprises 09/03/03 1.200 825,000 824,945
Wisconsin Gas Company 09/11/03 1.120 987,000 986,693
3,592,840
</Table>
<Page>
92
<Table>
<Caption>
COMMERCIAL PAPER MATURITY DATE INTEREST/STATED RATE (%) FACE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.34%
Boston Scientific Corporation 09/02/03 1.170 $ 1,190,000 $ 1,189,961
HOUSEHOLD DURABLES -- 3.65%
Centex Corporation 09/12/03 1.150 1,000,000 999,648
LEISURE EQUIPMENT & PRODUCTS -- 3.67%
Mattel Incorporated 09/25/03 1.120 1,007,000 1,006,247
PHARMACEUTICALS -- 4.01%
Wyeth 10/06/03 1.080 1,100,000 1,098,845
TEXTILES & APPAREL -- 4.74%
VF Corporation 09/22/03 1.150 1,300,000 1,299,128
TOTAL COMMERCIAL PAPER -- 87.66%
(Cost $24,026,810) 24,026,810
CORPORATE BONDS
BUILDING PRODUCTS -- 0.93%
Armstrong World Industries, Incorporated (a) 08/15/03 6.350 500,000 255,000
DIVERSIFIED FINANCIALS -- 1.88%
Transamerica Financial Corporation (b) 05/14/04 6.370 500,000 516,172
ELECTRIC UTILITIES -- 1.77%
West Penn Power Company (b) 06/01/04 6.375 500,000 485,000
HOTELS, RESTAURANTS & LEISURE -- 1.47%
Carnival Cruise Lines (b) 10/01/03 6.150 400,000 401,406
TOTAL CORPORATE BONDS -- 6.05%
(Cost $1,897,077) 1,657,578
</Table>
<Page>
93
SM&R PRIMARY FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
MUNICIPAL BONDS MATURITY DATE INTEREST/STATED RATE (%) FACE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
WATER & SEWER -- 1.89%
Lower Colorado River Authority, Texas Revenue Bonds,
Refunding and Improvement Series C (b)
(Rating(c) Aaa/AAA) 05/15/04 6.820 $ 500,000 $ 518,575
TOTAL MUNICIPAL BONDS -- 1.89%
(Cost $500,188) 518,575
U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES -- 0.74%
Federal Home Loan Bank (b) 11/10/03 5.750 200,000 201,742
U S GOVERNMENT SECURITIES -- 3.59%
U S Treasury Bonds 02/15/29 5.250 1,000,000 983,555
TOTAL U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES -- 4.33%
(Cost $1,085,950) 1,185,297
TOTAL INVESTMENTS -- 99.93%
(Cost $27,510,025) 27,388,260
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.07%
20,541
TOTAL NET ASSETS -- 100.00% $ 27,408,801
==============
</Table>
Notes to Schedule of Investments
(a) Security is in default of principal and interest. On May 30, 2003,
Armstrong Wold Industries, Incorporated received approval of its Disclosure
Statement in the Chapter 11 reorganization case from the U.S. Bankruptcy
Court in Wilmington, Delaware. Armstrong anticipates the reorganization
will be implemented before the end of 2003.
(b) Long term obligations that mature in less than one year.
(c) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
See notes to financial statements.
<Page>
94
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value (Cost $27,510,025) $ 27,388,260
Prepaid expenses 672
Receivable for:
Capital stock sold 2,739
Interest 50,155
Expense reimbursement 2,071
Other assets 2,782
TOTAL ASSETS 27,446,679
LIABILITIES
Distribution payable 1,643
Capital stock reacquired 1,750
Accrued:
Investment advisory fee 11,637
Service fee 5,819
Other liabilities 17,029
TOTAL LIABILITIES 37,878
NET ASSETS $ 27,408,801
Shares of capital stock outstanding,
(2,176,000,000 shares authorized,
$.01 par value per share) 27,678,420
Net asset value $ 0.99
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 599,595
EXPENSES
Investment advisory fees 140,029
Service fees 70,015
Professional fees 5,931
Custody and transaction fees 11,184
Directors' fees 9,024
Qualification fees 502
Shareholder reporting expenses 2,750
Insurance expenses 8,276
Other expenses 83
TOTAL EXPENSES 247,794
LESS EXPENSES REIMBURSED (24,342)
NET EXPENSES 223,452
INVESTMENT INCOME -- NET 376,143
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Change in unrealized depreciation of investments for the year (116,082)
NET LOSS ON INVESTMENTS (116,082)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 260,061
</Table>
See notes to financial statements.
<Page>
95
SM&R PRIMARY FUND
FINANCIALS
STATEMENT OF CHANGES IN NET ASSETS
INCREASE IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
--------------- ---------------
Investment income -- net $ 376,143 $ 631,293
Net realized loss on investments -- (104,903)
Change in unrealized
appreciation (depreciation) (116,082) 27,022
Net increase in net assets
resulting from operations 260,061 553,412
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income -- net (376,143) (631,293)
CAPITAL SHARE TRANSACTION-NET
Capital share transactions -- net 220,849 (4,475,120)
TOTAL INCREASE (DECREASE) 104,767 (4,553,001)
NET ASSETS
Beginning of Year 27,304,034 31,857,035
End of Year $ 27,408,801 $ 27,304,034
</Table>
<Page>
96
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
Year Ended August 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 0.99 $ 1.00 $ 0.99 $ 1.00 $ 1.00
Investment income -- net 0.01 0.02 0.05 0.06 0.05
Net realized and unrealized
gain (loss) on investments -- (0.01) 0.01 (0.01) --
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.01 0.01 0.06 0.05 0.05
Less distributions from
Investment income -- net (0.01) (0.02) (0.05) (0.06) (0.05)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.01) (0.02) (0.05) (0.06) (0.05)
------------------------------------------------------------------------
Net Asset Value, End of Year $ 0.99 $ 0.99 $ 1.00 $ 0.99 $ 1.00
========================================================================
TOTAL RETURN 1.35% 1.33% 6.20% 4.68% 4.75%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 27,409 $ 27,304 $ 31,857 $ 26,795 $ 30,838
Ratio of expenses with reimbursement
to average net assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses without reimbursement
to average net assets 0.89% 0.92% 0.97% 1.04% 1.06%
Ratio of net investment income
to average net assets 1.35% 2.29% 5.10% 5.55% 4.66%
Portfolio turnover rate -- -- -- 18.46% 30.47%
</Table>
See notes to financial statements.
<Page>
97
SM&R MONEY MARKET FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2003
<Table>
<Caption>
COMMERCIAL PAPER MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 4.70%
First Data Corporation 09/04/03 1.040 $ 4,861,000 $ 4,860,579
DIVERSIFIED FINANCIALS -- 15.39%
American Honda Finance Corporation 10/06/03 1.050 2,377,000 2,374,571
CIT Group Incorporated 11/04/03 1.080 3,658,000 3,650,974
Dollar Thrifty Funding Corporation 09/03/03 1.050 4,474,000 4,473,739
General Electric Capital Corporation 09/19/03 1.040 5,431,000 5,428,175
15,927,459
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.99%
Sharp Electronics Corporation 09/08/03 1.070 3,089,000 3,088,357
INSURANCE -- 3.04%
Alfa Corporation 09/10/03 1.050 3,148,000 3,147,173
TOTAL COMMERCIAL PAPER -- 26.12%
(Cost $27,023,568) 27,023,568
</Table>
<Page>
98
<Table>
<Caption>
U S GOVERNMENT & AGENCY MATURITY INTEREST/STATED FACE
SHORT-TERM OBLIGATIONS DATE RATE (%) AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 74.75%
Federal Home Loan Bank 09/17/03 1.020 $ 6,129,000 $ 6,126,221
Federal Home Loan Bank 09/24/03 1.020 890,000 889,420
Federal Home Loan Mortgage Corporation 09/02/03 0.990 5,899,000 5,898,837
Federal Home Loan Mortgage Corporation 09/16/03 1.040 7,640,000 7,636,686
Federal Home Loan Mortgage Corporation 09/23/03 1.040 6,068,000 6,064,140
Federal Home Loan Mortgage Corporation 09/25/03 1.040 8,960,000 8,953,782
Federal Home Loan Mortgage Corporation 09/30/03 1.045 5,495,000 5,490,372
Federal Home Loan Mortgage Corporation 10/02/03 1.010 5,420,000 5,415,280
Federal Home Loan Mortgage Corporation 10/08/03 1.050 5,570,000 5,563,985
Federal Home Loan Mortgage Corporation 10/09/03 1.000 6,938,000 6,930,666
Federal Home Loan Mortgage Corporation 10/16/03 1.050 6,394,000 6,385,601
Federal Home Loan Mortgage Corporation 10/21/03 1.050 6,850,000 6,840,009
Federal Home Loan Mortgage Corporation 10/23/03 1.030 5,160,000 5,152,314
TOTAL U S GOVERNMENT & AGENCY
SHORT-TERM OBLIGATIONS -- 74.75%
(Cost $77,347,313) 77,347,313
TOTAL INVESTMENTS -- 100.87%
(Cost $104,370,881) 104,370,881
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.87)% (901,778)
TOTAL NET ASSETS -- 100.00% $ 103,469,103
==============
</Table>
See notes to financial statements.
<Page>
99
SM&R MONEY MARKET FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2003
<Table>
ASSETS
Investment in securities, at value $ 104,370,881
Cash 945
Prepaid expenses 3,039
Receivable from management company 10,653
Receivable for:
Expense Reimbursement 9,173
Capital stock sold 127,181
Other assets 12,579
TOTAL ASSETS 104,534,451
LIABILITIES
Capital stock reacquired 1,005,475
Accrued:
Investment advisory fee 22,655
Service fee 22,367
Other liabilities 14,851
TOTAL LIABILITIES 1,065,348
NET ASSETS $ 103,469,103
Shares of capital stock outstanding,
(2,000,000,000 shares authorized,
$.01 par value per share) 103,469,103
NET ASSET VALUE $ 1.00
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 1,599,964
EXPENSES
Investment advisory fees 298,765
Service fees 288,140
Professional fees 5,931
Custody and transaction fees 20,778
Directors' fees 9,024
Qualification fees 45,658
Shareholder reporting expenses 3,350
Insurance expenses 25,474
Other expenses 330
TOTAL EXPENSES 697,450
LESS EXPENSES REIMBURSED (97,666)
NET EXPENSES 599,784
INVESTMENT INCOME--NET $ 1,000,180
</Table>
See notes to financial statements.
<Page>
100
STATEMENT OF CHANGES IN NET ASSETS
INCREASE IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
2003 2002
---------------- ---------------
Investment income -- net $ 1,000,180 $ 1,906,810
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income -- net (1,000,180) (1,906,810)
CAPITAL SHARE TRANSACTIONS -- NET
Capital share transactions -- net (51,140,904) 52,518,470
TOTAL INCREASE (51,140,904) 52,518,470
NET ASSETS
Beginning of Year 154,610,007 102,091,537
End of Year $ 103,469,103 $ 154,610,007
</Table>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
PERIOD FROM
JANUARY 1,
YEAR ENDED AUGUST 31, TO AUG. 31,
------------------------------------------ ---------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income -- net 0.01 0.02 0.05 0.05 0.03
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.01 0.02 0.05 0.05 0.03
Less distributions from
Investment income -- net (0.01) (0.02) (0.05) (0.05) (0.03)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.01) (0.02) (0.05) (0.05) (0.03)
------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========================================================================
TOTAL RETURN 0.80% 1.53% 4.92% 5.56% 2.89%**
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 103,469 $ 154,610 $ 102,092 $ 54,258 $ 10,681
Ratio of expenses with reimbursement
to average net assets 0.50% 0.50% 0.49% 0.49% 0.50%*
Ratio of expenses without reimbursement
to average net assets 0.58% 0.56% 0.49% 0.66% 1.22%*
Ratio of net investment income to average net assets 0.84% 1.48% 4.63% 5.58% 4.45%*
</Table>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
<Page>
101
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The SM&R Investments, Inc. (the "Company"), is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Company is comprised of the SM&R Alger Technology Fund
("Alger Technology Fund"), SM&R Alger Aggressive Growth Fund ("Alger Aggressive
Growth Fund"), SM&R Alger Small-Cap Fund ("Alger Small-Cap Fund"), SM&R Alger
Growth Fund ("Alger Growth Fund"), SM&R Growth Fund ("Growth Fund"), SM&R Equity
Income Fund ("Equity Income Fund"), SM&R Balanced Fund ("Balanced Fund"), SM&R
Government Bond Fund ("Government Bond Fund"), SM&R Tax Free Fund ("Tax Free
Fund"), SM&R Primary Fund ("Primary Fund") and SM&R Money Market Fund ("Money
Market Fund"). The Government Bond Fund, Tax Free Fund, Money Market Fund and
Primary Fund are collectively referred to as the "Fixed Income Funds", while the
Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap Fund, Alger
Growth Fund, Growth Fund, Equity Income Fund and Balanced Fund are referred to
as the "Equity Funds".
The Growth Fund, Equity Income Fund, Balanced Fund, Government Bond Fund and Tax
Free Fund have adopted a Multiple Class Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. Each has three single classes of
shares. Class T shares are subject to an initial sales charge. The Class A
shares are subject to an initial sales charge and a distribution and shareholder
servicing plan ("12b-1 Plan"). The Class B shares are subject to a contingent
deferred sales charge and a 12b-1 Plan.
The Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap Fund
and Alger Growth Fund, each offer two classes of shares, they are: the Class A
shares subject to an initial sales charge and a 12b-1 Plan; and the Class B
shares subject to a contingent deferred sales charge and a 12b-1 Plan.
CHANGE IN FISCAL YEAR END:
The Growth Fund, Equity Income Fund and Balanced Fund changed their fiscal year
end from December 31 to August 31, effective January 1, 2001 when each was added
as separate series of the Company.
The following is a summary of significant accounting policies consistently
followed by the Company in the preparation of its financial statements. 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. Actual results could differ
from those estimates.
<Page>
102
SECURITY VALUATION:
Investments in securities listed on national exchanges are valued at the last
sales price of the day, or if there were no sales, then at the last bid price.
Other securities are valued based on market quotations or at fair value as
determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
value.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
The Company records security transactions based on trade date. Dividend income
is recognized on the ex-dividend date, and interest income is recognized on an
accrual basis. Premiums and discounts on securities purchased are amortized,
over the lives of the respective securities. Withholding taxes on foreign
dividends have been provided for in accordance with the company's understanding
of the applicable country's tax rules and rates.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Company intends to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intends to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. The Fixed Income Funds and the Alger Technology Fund, Alger
Aggressive Growth Fund, Alger Small-Cap Fund and Alger Growth Fund have the same
tax year end and fiscal year end.
<Table>
<Caption>
TAX YEAR ENDING AUG. 31, 2003 LOSS CARRYFORWARDS EXPIRATION DATES
- ----------------------------------------------------------------------------
Alger Technology Fund $ 366,000 2008-2011
Alger Aggressive Growth Fund $ 440,000 2008-2011
Alger Small-Cap Fund $ 274,000 2008-2011
Alger Growth Fund $ 499,000 2008-2011
Primary Fund $ 141,000 2007-2011
<Caption>
TAX YEAR ENDING DEC. 31, 2002 LOSS CARRYFORWARDS EXPIRATION DATES
- ----------------------------------------------------------------------------
Growth Fund $ 24,721,000 2009-2010
Equity Income Fund $ 1,572,000 2009-2010
</Table>
As of August 31, 2003, there were post-October capital loss deferrals of
approximately $7,131, $852 and $144,526, for the Alger Technology Fund, Alger
Small-Cap Fund, Alger Growth Fund, respectively, which will be recognized in the
following tax year. As of December31, 2002, the SM&R Growth Fund had a
post-October capital Loss deferral of approximately $4,037,549, which will be
recognized in the following tax year.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering at net asset value plus a
sales charge, except for the Primary and Money Market Funds. All transactions
for the Primary and Money Market Funds are made at net asset value. The Company
may repurchase shares at net asset value. Dividends and other distributions are
recorded by each fund on the ex-dividend date and may be reinvested at net asset
value.
EXPENSES:
Distribution, qualification fees or other fees directly attributable to a
series' class of shares are charged to that series' class operations. All other
operating expenses not directly attributable to a series are prorated among the
series based on the relative amount of each series' net assets or shareholders,
and then allocated among the classes of that series.
<Page>
103
NOTE 2 - OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEES:
Securities Management and Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Company. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
EQUITY FUNDS:
<Table>
Alger Technology Fund 1.35%
Alger Aggressive Growth Fund 1.05%
Alger Small-Cap Fund 1.00%
Alger GrowthFund 0.85%
</Table>
GROWTH, EQUITY INCOME AND BALANCED FUNDS
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
Less than $100,000,000 0.750%
$100,000,000 - $200,000,000 0.625%
$200,000,000 - $300,000,000 0.500%
More than $300,000,000 0.400%
</Table>
Through an investment sub-advisory agreement, SM&R has delegated the day-to-day
investment management of Alger Technology Fund, Alger Aggressive Growth Fund,
Alger Small-Cap Fund and Alger Growth Fund to Fred Alger Management Inc. Fred
Alger Management makes investment decisions for each of these funds and
continuously reviews and administers the investment program. SM&R monitors Fred
Alger Management's buying and selling of securities and administration of these
series' investment program. Pursuant to the sub-advisory agreement, SM&R is
responsible for paying a sub-advisory fee to Fred Alger Management for each of
these series. The series are not responsible for paying the sub-advisory fee
directly.
FIXED INCOME FUNDS:
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
GOVERNMENT BOND AND TAX FREE FUNDS
Less than $100,000,000 0.50%
$100,000,000 - $300,000,000 0.45%
More than $300,000,000 0.40%
PRIMARY FUND
All average daily net assets 0.50%
MONEY MARKET FUND
All average daily net assets 0.25%
</Table>
ADMINISTRATIVE SERVICE FEES:
Administrative service fees paid to SM&R by each of the series are computed as a
percentage of average daily net assets as follows:
<Table>
<Caption>
NET ASSETS SERVICE FEES
Less than $100,000,000 0.25%
$100,000,000 - $200,000,000 0.20%
$200,000,000 - $300,000,000 0.15%
More than $300,000,000 0.10%
</Table>
SM&R has contractually agreed to reimburse the Growth Fund, Equity Income Fund,
Balanced Fund, Government Bond Fund, Tax Free Fund and Primary Fund for regular
operating expenses in excess of 1.25% per annum of the average daily net assets,
and the Money Market Fund in excess of 0.50%. Regular operating expenses include
the advisory fee and administrative service fee, but does not include the
distribution and shareholder servicing fee.
Effective June 1, 2002, and until December 31, 2003, SM&R has voluntarily agreed
to reimburse expenses (after applicable waivers) which exceed the following
percentages of each funds' average daily net assets:
<Page>
104
<Table>
<Caption>
CLASS A CLASS B CLASS T
------- ------- -------
Alger Technology Fund 2.10% 2.75%
Alger Aggressive Growth Fund 1.85% 2.50%
Alger Small-Cap Fund 1.90% 2.55%
Alger Growth Fund 1.70% 2.35%
Growth Fund 1.36% 1.86% -
Equity Income Fund 1.26% 1.76% -
Balanced Fund 1.30% 1.80% -
Government Bond Fund 0.73% 1.23% 0.73%
Tax Free Fund 0.75% 1.25% 0.75%
</Table>
Fee waivers and/or reductions, other than those stated in the Administrative
Service Agreement, may be rescinded by SM&R at any time without notice to
investors.
DISTRIBUTION & SHAREHOLDER SERVICING FEES:
The Company has adopted a 12b-1 Plan, for each series, except the Primary Fund,
with respect to each series' Class A shares and Class B shares (the "Class A
Plan" and the "Class B Plan", respectively and collectively, the "Plans"). The
Plans permit each class a distribution fee to compensate SM&R, or enable SM&R to
compensate other persons, including Distributors, for distribution costs such as
service fees paid to dealers, printing and distribution of prospectuses to
prospective investors, sales literature and other sales and distribution related
activities. The Plans also permit a shareholder servicing fee to compensate
SM&R, or enable SM&R to compensate Service Providers, for providing ongoing
servicing to shareholders of the Company. These fees are computed as an annual
percentage of the average daily net assets of each class of shares of a series,
as follows:
<Table>
<Caption>
DISTRIBUTION SERVICE TOTAL 12b-1
FEE FEE FEE
- --------------------------------------------------------------------------------------
GROWTH, EQUITY INCOME, BALANCED,
GOVERNMENT BOND AND TAX FREE FUNDS
Class A Shares 0.25% - 0.25%
Class B Shares 0.50% 0.25% 0.75%
ALGER TECHNOLOGY, ALGER AGGRESSIVE GROWTH,
ALGER SMALL-CAP AND ALGER GROWTH FUNDS
Class A Shares 0.35% - 0.35%
Class B Shares 1.00% - 1.00%
</Table>
For the year ended August 31, 2003, each series paid or accrued the following,
as compensation under the Plans:
<Table>
Alger Technology Fund $ 2,617
Alger Aggressive Growth Fund $ 6,366
Alger Small-Cap Fund $ 4,709
Alger Growth Fund $ 9,903
Growth Fund $ 30,545
Equity Income Fund $ 55,737
Balanced Fund $ 23,830
Government Bond Fund $ 13,949
Tax Free Fund $ 5,252
</Table>
<Page>
105
SALES CHARGES:
During the year ended August 31, 2003, SM&R, as principal underwriter, received
as sales charges on sales of capital stock of each series and made reallowances
to dealers as follows (right chart):
For the year ended August 31, 2003, SM&R received $63,710 for contingent
deferred sales charges imposed on the redemptions of Class B shares of capital
stock.
<Table>
<Caption>
SALES CHARGES SALES CHARGES
RECEIVED BY SM&R REALLOWED TO DEALERS
- -------------------------------------------------------------------
Alger Technology Fund $ 5,068 $ 214
Alger Aggressive Growth $ 12,138 $ 462
Alger Small-Cap Fund $ 10,189 $ 212
Alger Growth Fund $ 11,450 $ 1,406
Growth Fund $ 86,493 $ 4,485
Equity Income Fund $ 103,057 $ 3,167
Balanced Fund $ 35,078 $ 1,401
Government Bond Fund $ 23,519 $ 1,387
Tax Free Fund $ 7,978 -
</Table>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2003, SM&R and American National had the
following ownership in these series:
<Table>
<Caption>
SM&R AMERICAN NATIONAL AMERICAN NATIONAL SUBSIDIARIES
PERCENT OF SHARES PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------------
Growth Fund 225,378 0.73% 1,009,118 3.28% 1,480,108 4.81%
Equity Income Fund 20,181 0.39% - - - -
Balanced Fund 147,396 9.22% 78,518 4.91% 265,164 16.58%
Government Bond Fund 622,438 21.46% 119,268 4.11% 848,528 29.26%
Tax Free Fund 157,420 11.55% - - 786,108 57.68%
Primary Fund 16,466 0.06% 24,524,565 88.61% 6,096 0.02%
Money Market Fund 891,883 0.86% 67,375,260 65.12% 17,520,154 16.93%
</Table>
Through the investment sub-advisory agreement, Fred Alger Management, Inc. is
affiliated with SM&R. As of August 31, 2003, Fred Alger Management, Inc. had the
following ownership in these series:
<Table>
<Caption>
SHARES PERCENT OF SHARES OUTSTANDING
- ---------------------------------------------------------------------------
Alger Technology Fund 25,000 9.45%
Alger Aggressive Growth Fund 25,000 8.58%
Alger Small-Cap Fund 25,000 11.76%
Alger Growth Fund 25,000 6.75%
</Table>
The Company pays directors' fees and expenses for all the disinterested
directors.
Fred Alger and Company, Incorporated ("Alger Inc.") is an affiliated
broker-dealer of Fred Alger Management. During the year ended August 31, 2003,
the Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap Fund
and Alger Growth Fund paid commissions for portfolio transactions to Alger Inc.,
in the amount of $3,276, $4,402, $2,438 and $9,748, respectively.
<Page>
106
NOTE 3 - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<Table>
<Caption>
PURCHASES SALES
- --------------------------------------------------------------
Alger Technology Fund $ 1,343,126 $ 1,213,232
Alger Aggressive Growth Fund $ 2,281,107 $ 1,963,001
Alger Small-Cap Fund $ 1,405,885 $ 1,059,537
Alger Growth Fund $ 3,652,167 $ 3,316,148
Growth Fund $ 25,710,101 $ 21,462,189
Equity Income Fund $ 7,607,687 $ 15,959,997
Balanced Fund $ 5,710,928 $ 6,496,035
Government Bond Fund $ 30,158,454 $ 28,066,888
Tax Free Fund $ 3,287,460 $ 2,493,625
Primary Fund - -
</Table>
Gross unrealized appreciation and depreciation as of August 31, 2003, based on
the cost for federal income tax purposes is as follows: Alger Technology
Fund-$591,483, Alger Aggressive Growth Fund-$1,277,883, Alger Small-Cap Fund-
$911,593, Alger Growth Fund-$1,708,892, Growth Fund- $87,488,229, Equity Income
Fund-$98,341,401, Balanced Fund-$24,715,236, Government Bond Fund-$30,918,640,
Tax Free Fund-$13,743,470 and Primary Fund-$27,510,025.
<Table>
<Caption>
APPRECIATION DEPRECIATION
- --------------------------------------------------------------
Alger Technology Fund $ 116,528 $ 9,656
Alger Aggressive Growth Fund $ 188,018 $ 9,033
Alger Small-Cap Fund $ 245,585 $ 6,999
Alger Growth Fund $ 243,149 $ 28,484
Growth Fund $ 25,971,436 $ 5,504,994
Equity Income Fund $ 20,371,089 $ 11,768,582
Balanced Fund $ 3,270,983 $ 816,774
Government Bond Fund $ 249,949 $ 486,524
Tax Free Fund $ 639,126 $ 78,703
Primary Fund $ 138,001 $ 259,766
</Table>
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily due to the tax deferral of losses on
wash sales.
<Page>
107
NOTE 4 - CAPITAL STOCK
SM&R ALGER TECHNOLOGY FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class A 89,106 $ 163,787 23,741 $ 63,132
Class B 17,041 34,919 60,278 175,967
Total sale of capital shares 106,147 198,706 84,019 239,099
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (5,853) (10,948) (4,586) (9,792)
Class B (4,253) (7,104) (7,456) (14,220)
Total redemptions of capital shares outstanding (10,106) (18,052) (12,042) (24,012)
Net increase in capital shares outstanding 96,041 $ 180,654 71,977 $ 215,087
Shares outstanding at beginning of year 168,376 96,399
Shares outstanding at end of year 264,417 168,376
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 955,581
Accumulated net realized loss on investments (380,135)
Net unrealized appreciation of investments 114,273
Net Assets $ 689,719
</Table>
SM&R ALGER AGGRESSIVE GROWTH FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class A 77,608 $ 327,865 91,628 $ 491,895
Class B 21,048 88,381 49,446 269,941
Total sale of capital shares 98,656 416,246 141,074 761,836
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (34,535) (146,048) (16,702) (83,644)
Class B (8,460) (34,489) (10,277) (45,285)
Total redemptions of capital shares outstanding (42,995) (180,537) (26,979) (128,929)
Net increase in capital shares outstanding 55,661 $ 235,709 114,095 $ 632,907
Shares outstanding at beginning of year 235,776 121,681
Shares outstanding at end of year 291,437 235,776
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,698,398
Accumulated net realized loss on investments (443,781)
Net unrealized appreciation of investments 182,743
Net Assets $ 1,437,360
</Table>
<Page>
108
SM&R ALGER SMALL-CAP FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class A 71,735 $ 315,392 55,486 $ 277,683
Class B 28,597 124,091 24,056 131,363
Total sale of capital shares 100,332 439,483 79,542 409,046
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (28,028) (122,681) (7,925) (37,700)
Class B (8,309) (35,116) (6,598) (36,641)
Total redemptions of capital shares outstanding (36,337) (157,797) (14,523) (74,341)
Net increase in capital shares outstanding 63,995 $ 281,686 65,019 $ 334,705
Shares outstanding at beginning of year 148,630 83,611
Shares outstanding at end of year 212,625 148,630
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,198,708
Accumulated net realized loss on investments (283,433)
Net unrealized appreciation of investments 246,680
Net Assets $ 1,161,955
</Table>
SM&R ALGER GROWTH FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class A 77,891 $ 352,230 73,786 $ 432,982
Class B 27,628 122,182 80,789 484,354
Total sale of capital shares 105,519 474,412 154,575 917,336
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (24,439) (110,247) (16,682) (94,347)
Class B (8,170) (35,832) (8,133) (39,001)
Total redemptions of capital shares outstanding (32,609) (146,079) (24,815) (133,348)
Net increase in capital shares outstanding 72,910 $ 328,333 129,760 $ 783,988
Shares outstanding at beginning of year 297,654 167,894
Shares outstanding at end of year 370,564 297,654
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 2,336,083
Accumulated net realized loss on investments (676,209)
Net unrealized appreciation of investments 247,361
Net Assets $ 1,907,235
</Table>
<Page>
109
SM&R GROWTH FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class T 1,294,556 $ 4,080,119 1,274,483 $ 4,883,579
Class A 215,845 673,356 768,187 2,814,039
Class B 178,083 543,928 272,508 1,025,923
Total sale of capital shares 1,688,484 5,297,403 2,315,178 8,723,541
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 166,989 543,862 95,757 370,138
Class A 6,547 20,778 550 2,226
Class B 901 2,711 - -
Total investment income dividends reinvested 174,437 567,351 96,307 372,364
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (3,702,391) (11,595,618) (3,682,628) (13,836,271)
Class A (438,935) (1,322,058) (518,832) (1,969,856)
Class B (214,947) (662,188) (125,501) (455,132)
Total redemptions of capital shares outstanding (4,356,273) (13,579,864) (4,326,961) (16,261,259)
Net decrease in capital shares outstanding (2,493,352) $ (7,715,110) (1,915,476) $ (7,165,354)
Shares outstanding at beginning of year 33,293,394 35,208,870
Shares outstanding at end of year 30,800,042 33,293,394
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 119,262,503
Undistributed net investment income 140,744
Accumulated net realized loss on investments (31,748,029)
Net unrealized appreciation of investments 20,466,442
Net Assets $ 108,121,660
</Table>
<Page>
110
SM&R EQUITY INCOME FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class T 163,042 $ 3,070,746 235,119 $ 4,847,351
Class A 90,653 1,642,882 61,716 1,304,230
Class B 78,644 1,369,294 90,424 1,887,222
Total sale of capital shares 332,339 6,082,922 387,259 8,038,803
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 66,034 1,238,312 72,077 1,564,604
Class A 4,000 73,101 3,109 65,773
Class B 3,241 57,761 2,439 50,237
Total investment income dividends reinvested 73,275 1,369,174 77,625 1,680,614
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (911,376) (16,836,585) (964,977) (20,284,629)
Class A (87,859) (1,561,458) (53,701) (1,130,641)
Class B (76,770) (1,337,375) (35,987) (722,009)
Total redemptions of capital shares outstanding (1,076,005) (19,735,418) (1,054,665) (22,137,279)
Net decrease in capital shares outstanding (670,391) (12,283,322) (589,781) $ (12,417,862)
Shares outstanding at beginning of year 5,902,320 6,492,101
Shares outstanding at end of year 5,231,929 5,902,320
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 98,415,888
Undistributed net investment income 248,562
Accumulated net realized loss on investments (201,852)
Net unrealized appreciation of investments 8,602,507
Net Assets $ 107,065,105
</Table>
<Page>
111
SM&R BALANCED FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class T 63,682 $ 1,009,907 51,387 $ 878,565
Class A 75,124 1,162,866 65,415 1,090,710
Class B 45,999 716,608 41,977 721,435
Total sale of capital shares 184,805 2,889,381 158,779 2,690,710
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 27,285 436,436 32,086 553,023
Class A 4,909 76,392 4,640 77,832
Class B 2,567 40,298 2,634 44,850
Total investment income dividends reinvested 34,761 553,126 39,360 675,705
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (152,989) (2,427,260) (150,750) (2,585,263)
Class A (74,555) (1,159,415) (25,796) (426,209)
Class B (39,905) (628,728) (22,690) (382,716)
Total redemptions of capital shares outstanding (267,449) (4,215,403) (199,236) (3,394,188)
Net decrease in capital shares outstanding (47,883) $ (772,896) (1,097) $ (27,773)
Shares outstanding at beginning of year 1,647,307 1,648,404
Shares outstanding at end of year 1,599,424 1,647,307
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid in capital) $ 24,692,000
Undistributed net investment income 86,180
Accumulated net realized gain on investments 91,128
Net unrealized appreciation of investments 2,454,209
Net Assets $ 27,323,517
</Table>
<Page>
112
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class T 252,906 $ 2,734,200 114,148 $ 1,215,319
Class A 78,358 858,856 86,597 934,084
Class B 119,318 1,304,310 51,016 547,721
Total sale of capital shares 450,582 4,897,366 251,761 2,697,124
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 93,203 1,007,451 115,312 1,224,009
Class A 4,173 45,640 4,931 52,875
Class B 3,818 41,758 1,617 17,326
Total investment income dividends reinvested 101,194 1,094,849 121,860 1,294,210
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (207,111) (2,258,130) (112,686) (1,192,971)
Class A (71,706) (781,195) (45,265) (484,935)
Class B (39,990) (437,505) (2,469) (26,457)
Total redemptions of capital shares outstanding (318,807) (3,476,830) (160,420) (1,704,363)
Net increase in capital shares outstanding 232,969 $ 2,515,385 213,201 $ 2,286,971
Shares outstanding at beginning of year 2,667,082 2,453,881
Shares outstanding at end of year 2,900,051 2,667,082
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 30,226,886
Undistributed net investment income 68
Accumulated net realized gain on investments 839,103
Net unrealized depreciation of investments (236,575)
Net Assets $ 30,829,482
</Table>
<Page>
113
SM&R TAX FREE FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
SALE OF CAPITAL SHARES:
Class T 68,922 $ 748,476 39,213 $ 419,181
Class A 35,017 383,329 14,613 158,324
Class B 8,174 89,258 38,187 412,000
Total sale of capital shares 112,113 1,221,063 92,013 989,505
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 47,349 512,152 45,740 485,660
Class A 2,073 22,631 1,202 12,869
Class B 1,615 17,637 948 10,159
Total investment income dividends reinvested 51,037 552,420 47,890 508,688
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (15,012) (162,539) (22,722) (241,287)
Class A (12,316) (134,925) (3,276) (35,352)
Class B (10,479) (114,821) (8,603) (92,128)
Total redemptions of capital shares outstanding (37,807) (412,285) (34,601) (368,767)
Net increase in capital shares outstanding 125,343 $ 1,361,198 105,302 $ 1,129,426
Shares outstanding at beginning of year 1,237,434 1,132,132
Shares outstanding at end of year 1,362,777 1,237,434
NET ASSETS AS OF AUGUST 31, 2003, ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 13,880,770
Accumulated net realized gain on investments 29,152
Net unrealized appreciation of investments 560,423
Net Assets $ 14,470,345
</Table>
<Page>
114
SM&R PRIMARY FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
Sale of capital shares 3,763,133 $ 3,729,719 8,010,726 $ 7,941,021
Investment income dividends reinvested 358,525 355,830 592,000 587,485
Redemptions of capital shares outstanding (3,901,482) (3,864,700) (13,077,161) (13,003,626)
Net increase (decrease) in capital shares
outstanding 220,176 $ 220,849 (4,474,435) $ (4,475,120)
Shares outstanding at beginning of year 27,458,244 31,932,679
Shares outstanding at end of year 27,678,420 27,458,244
NET ASSETS AS OF AUGUST 31, 2003 ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 27,671,818
Accumulated net realized loss on investments (141,252)
Net unrealized depreciation of investments (121,765)
Net Assets $ 27,408,801
</Table>
SM&R MONEY MARKET FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
Sale of capital shares 220,003,976 $ 222,003,976 265,270,963 $ 265,270,963
Investment income dividends reinvested 951,422 951,422 1,844,623 1,844,623
Redemptions of capital shares outstanding (274,096,302) (274,096,302) (214,597,116) (214,597,116)
Net increase (decrease) in capital shares
outstanding (51,140,904) $ (51,140,904) 52,518,470 $ 52,518,470
Shares outstanding at beginning of year 154,610,007 102,091,537
Shares outstanding at end of year 103,469,103 154,610,007
NET ASSETS AS OF AUGUST 31, 2003 ARE COMPRISED
OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 103,469,103
Net Assets $ 103,469,103
</Table>
RECLASSIFICATION OF CAPITAL ACCOUNTS:
The Company accounts and reports for distributions to shareholders in accordance
with the American Institute of Certified Public of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital and Return
of Capital Distributions by Investment Companies. For the year ended August 31,
2003, each series recorded the following reclassification to the accounts listed
below:
<Table>
<Caption>
PAID IN CAPITAL ACCUMULATED NET INVESTMENT LOSS ACCUMULATED NET REALIZED LOSS
- ----------------------------------------------------------------------------------------------------------------------
Alger Technology Fund $ (9,238) $ 9,238 -
Alger Aggressive Growth Fund $ (16,999) $ 16,999 -
Alger Small-Cap Fund $ (15,753) $ 15,753 -
Alger Growth Fund $ (17,726) $ 17,726 -
Tax Free Fund $ (14) $ 14 -
</Table>
<Page>
115
NOTE 5 -- DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid during the following years:
SM&R GROWTH FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Class T
Distributions paid from:
Ordinary income $ 557,596 $ 379,966
Long-term capital gain -- --
-------------- --------------
$ 557,596 $ 379,966
============== ==============
Class A
Distributions paid from:
Ordinary income $ 20,780 $ 2,226
Long-term capital gain -- --
-------------- --------------
$ 20,780 $ 2,226
============== ==============
Class B
Distributions paid from:
Ordinary income $ 2,731 --
Long-term capital gain -- --
-------------- --------------
$ 2,731 --
============== ==============
</Table>
SM&R BALANCED FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Class T
Distributions paid from:
Ordinary income $ 451,037 $ 573,591
Long-term capital gain -- --
-------------- --------------
$ 451,037 $ 573,591
============== ==============
Class A
Distributions paid from:
Ordinary income $ 76,409 $ 77,849
Long-term capital gain -- --
-------------- --------------
$ 76,409 $ 77,849
============== ==============
Class B
Distributions paid from:
Ordinary income $ 40,931 $ 45,601
Long-term capital gain -- --
-------------- --------------
$ 40,931 $ 45,601
============== ==============
</Table>
SM&R EQUITY INCOME FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Class T
Distributions paid from:
Ordinary income $ 1,284,991 $ 1,619,324
Long-term capital gain -- --
-------------- --------------
$ 1,284,991 $ 1,619,324
============== ==============
Class A
Distributions paid from:
Ordinary income $ 73,915 $ 66,630
Long-term capital gain -- --
-------------- --------------
$ 73,915 $ 66,630
============== ==============
Class B
Distributions paid from:
Ordinary income $ 58,246 $ 50,927
Long-term capital gain -- --
-------------- --------------
$ 58,246 $ 50,927
============== ==============
</Table>
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Class T
Distributions paid from:
Ordinary income $ 1,026,403 $ 1,251,921
Long-term capital gain -- --
-------------- --------------
$ 1,026,403 $ 1,251,921
============== ==============
Class A
Distributions paid from:
Ordinary income $ 45,677 $ 52,795
Long-term capital gain -- --
-------------- --------------
$ 45,677 $ 52,795
============== ==============
Class B
Distributions paid from:
Ordinary income $ 43,390 $ 19,629
Long-term capital gain -- --
-------------- --------------
$ 43,390 $ 19,629
============== ==============
</Table>
<Page>
116
SM&R TAX FREE FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Class T
Distributions paid from:
Ordinary income $ 541,077 $ 514,001
Long-term capital gain -- --
-------------- --------------
$ 541,077 $ 514,001
============== ==============
Class A
Distributions paid from:
Ordinary income $ 22,631 $ 12,919
Long-term capital gain -- --
-------------- --------------
$ 22,631 $ 12,919
============== ==============
Class B
Distributions paid from:
Ordinary income $ 18,736 $ 10,159
Long-term capital gain -- --
-------------- --------------
$ 18,736 $ 10,159
============== ==============
</Table>
SM&R PRIMARY FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Distributions paid from:
Ordinary income $ 376,143 $ 631,293
-------------- --------------
$ 376,143 $ 631,293
============== ==============
</Table>
SM&R MONEY MARKET FUND
<Table>
<Caption>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2003 2002
-------------- --------------
Distributions paid from:
Ordinary income $ 1,000,180 $ 1,906,810
-------------- --------------
$ 1,000,180 $ 1,906,810
============== ==============
</Table>
As of August 31, 2003, the components of distributable earnings on a tax basis
were as follows:
SM&R GROWTH FUND
<Table>
Undistributed net investment income $ 140,744
</Table>
SM&R BALANCED FUND
<Table>
Undistributed net investment income $ 86,180
Undistributed gains 91,128
</Table>
SM&R TAX FREE FUND
<Table>
Undistributed gains $ 29,152
</Table>
SM&R EQUITY INCOME FUND
<Table>
Undistributed net investment income $ 248,562
</Table>
SM&R GOVERNMENT BOND FUND
<Table>
Undistributed net investment income $ 68
Undistributed gains $ 839,103
</Table>
<Page>
117
INDEPENDENT AUDITORS REPORT
A CLOSER LOOK
THE BOARD OF DIRECTORS AND SHAREHOLDERS / SM&R INVESTMENTS, INC.
We have audited the accompanying statements of assets and liabilities of SM&R
Investments, Inc. comprised of SM&R Alger Technology Fund, SM&R Alger Aggressive
Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Growth Fund, SM&R Growth
Fund, SM&R Equity Income Fund, SM&R Balanced Fund, SM&R Government Bond Fund,
SM&R Tax Free Fund, SM&R Primary Fund and SM&R Money Market Fund, including the
schedule of investments as of August 31, 2003, the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended (with respect to SM&R Money
Market Fund for the four years ended August 31, 2003 and the period January 1,
1999 to August 31, 1999) (with respect to the Alger Technology, Alger Aggressive
Growth, Alger Small-Cap and Alger Growth Funds for the three years ended
August 31, 2003, and) (with respect to Growth, Equity Income and Balanced Funds
for each of the three years in the period ended December 31, 2000, for the
period January 1, 2001 to August 31, 2001 and for the two years in the period
ended August 31, 2003). These financial statements and financial highlights are
the responsibility of the Funds' management. and financial highlights based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2003, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
fund comprising SM&R Investments, Inc. as of August 31, 2003, the results of
their operations for the year then ended, the changes in their net ssets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended (with respect to SM&R Money
Market Fund for the four years ended August 31, 2003 and the period January 1,
1999 to August 31, 1999) (with respect to the Alger Technology, Alger Aggressive
Growth, Alger Small-Cap and Alger Growth Funds for the three years ended
August 31, 2003, and) (with respect to Growth, Equity Income and Balanced Funds
for each of the three years in the period ended December 31, 2000, for the
period January 1, 2001 to August 31, 2001 and for the two years in the period
ended August 31, 2003), in conformity with accounting principles generally
accepted in the United States of America.
Tait, Weller & Baker
Philadelphia, Pennsylvania
September 19, 2003
<Page>
SUPPLEMENTAL INFORMATION (Unaudited)
Information pertaining to the Directors of the Fund is set forth below. The
statement of additional information (SAI) includes additional information about
the Directors and is available without charge, upon request by calling
(800)231-4639.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
INDEPENDENT DIRECTORS IN FUND
- ---------------------------------------------------------------------------------------------------------------------- COMPLEX
POSITION(S) HELD TERM OF OFFICE AND OVERSEEN
NAME, ADDRESS AND AGE WITH FUND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS BY DIRECTOR
- ------------------------ ------------------ ---------------------- ------------------------------------------------ -----------
Ernest S. Barratt, Ph.D. Director Indefinite Since 8/90 - Marie B. Gale Centennial Professor in 19*
2450 South Shore Blvd., Audit Committee Indefinite Since 12/97 Psychiatry, Cognitive Neuroscience
League City, TX 77573 Laboratory, Department of Psychiatry and
Age 78 Behavioral Sciences, University of Texas
Medical Branch
Edwin K. Nolan Director Indefinite Since 11/97 - Investor and Attorney, Law Offices, Edwin K. 19*
2450 South Shore Blvd., Nominating Indefinite Since 11/00 Nolan, P.C.
League City, TX 77573 Committee - Director/Owner of Canyon Lake Aviation, Inc.
Age 59 - Director of Hancock Mini Mart, Inc.
Robert V. Shattuck Director Indefinite Since 11/97 - Attorney, Law Offices, Robert V. Shattuck, Jr. 19*
2450 South Shore Blvd., Nominating Indefinite Since 11/00
League City, TX 77573 Committee
Age 61
Donald P. Stevens Director Indefinite Since 9/00 - Assistant to the President for Governmental 19*
2450 South Shore Blvd., Nominating Indefinite Since 11/00 Relations of the University of Texas
League City, TX 77573 Committee Medical Branch, Galveston, TX
Age 56 - Vice President and Director, Jamail
Galveston Foundation (a family charitable
foundation)
Steven H. Stubbs Director Indefinite Since 9/00 - President and Director of Dancing Rabbit 19*
2450 South Shore Blvd., Audit Committee Indefinite Since 8/03 Press, Inc. (a publishing company)
League City, TX 77573 - Director, Neshoba County Public Library
Age 64
Jamie G. Williams Director Indefinite Since 11/97 - Academic Language Therapist and Educational 19*
2450 South Shore Blvd., Audit Committee Indefinite Since 11/00 Consultant
League City, TX 77573 Chairman - Director, Center for Computer Assistance to
Age 57 the Disabled (C-CAD)
Frank P. Williamson Director Indefinite Since 11/97 - Retired, Owner of Professional Pharmacy 19*
2450 South Shore Blvd.,
League City, TX 77573
Age 71
<Caption>
NUMBER OF
INTERESTED DIRECTORS PORTFOLIOS
- ---------------------------------------------------------------------------------------------------------- IN FUND
TERM OF OFFICE COMPLEX INTERESTED
POSITION(S) HELD AND LENGTH OF OVERSEEN DIRECTOR
NAME, ADDRESS AND AGE WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS BY DIRECTOR RELATIONSHIP
- ------------------------ ---------------- -------------- ----------------------------------------------- ----------- ------------
Michael W. McCroskey President & Indefinite President, CEO, Director and member of 19* (1)
2450 South Shore Blvd., Director Since 8/94 Executive Committee of Securities Management
League City, TX 77573 and Research, Inc. (SM&R) - Executive Vice
Age 60 President and Treasurer of American National
Insurance Company Director - President of
ANREM Corporation (real estate management
company)^ - President and Director of ANTAC
Corporation (real estate management company)^
- Director of Comprehensive Investment
Services, Inc. (investment services company)^
- Vice President of Garden State Life
Insurance Company^ - Vice President of
American National Property & Casualty
Company^ - Vice President of Standard Life &
Accident Insurance Company^ - Vice President
of Pacific Property and Casualty Company^ -
Assistant Secretary of American National
General Insurance Company^ - Assistant
Secretary of American National Life Insurance
Company of Texas^ - Vice President of Farm
Family Life Insurance Company^ - Vice
President of Farm Family Casualty Insurance
Company^ - Vice President of United Farm
Family Insurance Company^
Lea McLeod Matthews Director Indefinite Communications Specialist, National Western 19* (2)
2450 South Shore Blvd., Since 8/94 Life Insurance Company (5/02-present)
League City, TX 77573 Director of Garden State Life Insurance
Age 41 Company^ - Senior Communications Specialist,
Texas Guaranteed Student Loan Corporation
(1/01-5/02) - Internal Publications Manager,
Tivoli Software 4/00-1/01 - Communications
Consultant, Texas Association of School
Boards 8/99-4/00 - Technical
Writer/Publications Editor, National Western
Life Insurance Company 1/92-8/99
Ann McLeod Moody Director Indefinite Housewife, Personal Investments - Director of 19* (3)
2450 South Shore Blvd., Since 11/97 Gal-Tex Hotel Corporation (hospitality and
League City, TX 77573 hotel management company)# - Director of
Age 66 Moody Gardens, Inc. (a charitable
organization)
</Table>
(1) Mr. McCroskey serves as an officer and director of SM&R, the Fund's
investment adviser. He also serves as an officer of SM&R's parent company,
American National Insurance Company ("American National").
(2) Ms. Matthews is the step-daughter of Robert L. Moody. Mr. Moody is the
Chairman of the Board and Chief Executive Officer of American National, the
parent of SM&R. Mr. Moody is also a trustee of The Moody Foundation, a
charitable foundation established for charitable and educational purposes,
which owns approximately 23.6% of the outstanding common shares of American
National, and he serves as Chairman of the Board, President, and Chief
Executive Officer of The Moody National Bank of Galveston (the "Bank"),
which, in its capacity as trustee and custodian, votes approximately 46.6%
of the outstanding common shares of American National. Mr. Moody is also the
President and a director of the companies owning the controlling interests
in such bank, and he is a life income beneficiary of one of such trusts.
Ms. Matthews is the daughter of Fund director Ann McLeod Moody.
(3) Ms. Moody is the spouse of Robert L. Moody. See footnote 2 above.
Ms. Moody is the mother of Fund director Lea McLeod Matthews.
* Also a Director of American National Investment Accounts, Inc., another
investment company advised by SM&R.
^ Under control of American National.
# Under common control with American National.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
OFFICERS IN FUND
- ---------------------------------------------------------------------------------------------------------------------- COMPLEX
POSITION(S) HELD TERM OF OFFICE AND OVERSEEN
NAME, ADDRESS AND AGE WITH FUND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS BY DIRECTOR
- ----------------------- ---------------- --------------------- ---------------------------------------------------- -----------
Michael W. McCroskey President & Indefinite Since 8/94 SEE INTERESTED DIRECTOR TABLE ABOVE 19*
2450 South Shore Blvd., Director~
League City, TX 77573
Age 60
Brenda T. Koelemay Vice President & Indefinite Since 1992 Vice President & Treasurer of SM&R 19*
2450 South Shore Blvd., Treasurer~
League City, TX 77573
Age 48
Teresa E. Axelson 2450 Vice President & Indefinite Since 1983 Vice President & Secretary of SM&R 19*
South Shore Blvd., Secretary~
League City, TX 77573
Age 55
</Table>
~ Positions also held with American National Investment Accounts, Inc., another
investment company advised by SM&R.
<Page>
[SM&R MUTUAL FUNDS LOGO]
FUNDS LISTING
SM&R Alger Technology Fund
SM&R Alger Aggressive Growth Fund
SM&R Alger Small-Cap Fund
SM&R Alger Growth Fund
SM&R Growth Fund
SM&R Equity Income Fund
SM&R Balanced Fund
SM&R Government Bond Fund
SM&R Tax Free Fund
SM&R Primary Fund
SM&R Money Market Fund
HOW TO REACH US:
Investor Services: 800.231.4639
Fund Quotes and Investor Hotline: 877.239.2049
Sales and Marketing: 800.526.8346
To Request a Prospectus: 800.231.4639
Visit our website at: www.smrinvest.com
Securities Management and Research, Inc.
Manager & Distributor / Member NASD, SIPC
2450 South Shore Blvd., Suite 400
League City, TX 77573 - 281.334.2469
DIRECTORS
Ernest S. Barratt, Ph.D.
Lea McLeod Matthews
Michael W. McCroskey
Ann McLeod Moody
Edwin K. Nolan
Robert V. Shattuck, Jr.
Donald P. Stevens
Steven H. Stubbs
Jamie G. Williams
Frank P. Williamson
OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Teresa E. Axelson, Vice President and Secretary
INVESTMENT ADVISOR AND MANAGER
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, Texas 77258-8969
CUSTODIAN
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, Texas 77258-8969
LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza - Galveston, Texas 77550
UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, Texas 77258-8969
TRANSFER AGENT, REGISTRAR AND
DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, Texas 77258-8969
INDEPENDENT AUDITORS
Tait, Weller & Baker
1818 Market Street, Suite 2400
Philadelphia, Pennsylvania 19103
10/03 Form 9202
<Page>
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that the registrant has at least one
audit committee financial expert serving on its Audit Committee. The Audit
Committee financial expert is Seven H. Stubbs. Mr. Stubbs is "independent"
within the meaning of that term used in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. [Reserved]
ITEM 6. [Reserved]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND
PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT
COMPANIES.
Not applicable
ITEM 8. [Reserved]
ITEM 9. CONTROLS AND PROCEDURES
As of October 30, 2003, an evaluation was performed under the supervision
and with the participation of the officers of SM&R Investments, Inc. (the
"Company"), including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the officers, including the
CEO and CFO, conclude that, as of October 30, 2003, the company's
disclosure controls and procedures were reasonably designed so as to ensure
that material information relating to the Company is made known to the CEO
and CFO. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation and until the filling of this
report, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
(a) Not applicable.
(b) (1) Certifications of Chief Executive Officer and Chief Financial Officer
as required by Rule 30a-2 under the Investment Company Act of 1940.
Certification of Chief Executive Officer and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
<Page>
SIGNITURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Michael W. McCroskey
- --------------------------------------
Chief Executive Officer
Date: October 30, 2003
By: /s/ Brenda T. Koelemay
- ------------------------------------
Chief Financial Officer
Date: October 30, 2003
EXHIBIT INDEX
(b) (1) Certifications of Chief Executive Officer and Chief Financial Officer
as required by Rule 30a-2 under the Investment Company Act of 1940.
Certification of Chief Executive Officer and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002.