UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-6477
SM&R Investments, Inc.
P.O. Box 58969
Houston, TX 77258-8969
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
(800) 231-4639
Fiscal year end: August 31
Reporting period: August 31, 2006
Item 1 Report to Shareholders
<Page>
ANNUAL REPORT
SM&R INVESTMENTS, INC.
- - 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
ANNUAL REPORT
AUGUST 31, 2006
<Page>
SM&R INVESTMENTS, INC. 2450 South Shore Boulevard, League City, TX 77573
- --------------------------------------------------------------------------------
The report contained herein is included for the general information of our
shareholders. This report is not authorized for distribution to prospective
investors unless it is preceded or accompanied by a current prospectus. ALL
INVESTORS ARE ADVISED TO CONSIDER THE INVESTMENT OBJECTIVES, RISKS, AND CHARGES
AND EXPENSES OF THE INVESTMENT COMPANIES CAREFULLY BEFORE INVESTING. THE
PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANIES.
YOU SHOULD READ IT CAREFULLY BEFORE INVESTING.
The investment adviser is responsible for exercising the voting rights
associated with the securities purchased and held by the Funds. A description of
the policies and procedures the investment adviser uses in fulfilling this
responsibility is included in the Funds' Statement of Additional Information and
is available without charge, upon request, by calling 1-800-231-4639. The
policies and procedures are also available on the Securities and Exchange
Commission's website at http://www.sec.gov. Information on how the Funds voted
proxies relating to portfolio securities during the most recent 12 month period
ended June 30 is available without charge, upon request, by calling
1-800-231-4639 and is also available on the SEC's website at http://www.sec.gov.
The Funds file their complete schedule of holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. The Funds' Form N-Q is
available on the SEC's website, beginning with the November 30, 2004 report, at
http://www.sec.gov. You may review and make copies at the SEC's Public Reference
Room in Washington, D.C. You may also obtain copies after paying a duplicating
fee by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102
or by electronic request to publicinfo@sec.gov. A copy of the quarterly holdings
report is available, without charge, upon request, by calling 1-800-231-4639.
<Page>
AN EXAMPLE OF ONGOING EXPENSES (UNAUDITED)
Each shareholder of the Company may incur two types of expenses: (1)
transactional (e.g., sales charges, contingent deferred sales charges on
redemptions and redemption fees) and (2) ongoing (e.g., asset-based charges such
as investment advisory fees and distribution and/or 12b-1 fees). The example,
included below, is intended to help a shareholder better understand the ongoing
expenses of investing in this Company and to compare these expenses with other
mutual funds. The example is based on an investment of $1,000 invested at the
beginning of the period, March 1, 2006, and held for six months ending August
31, 2006.
ACTUAL EXPENSES
The example below provides information about actual account values and actual
expenses. A shareholder may use the information in this example, together with
the amount they have invested, to estimate the expenses that they have paid over
the period. Simply divide the account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in actual column under the heading entitled "Expenses Paid During Period" to
estimate the expenses paid on their account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The example also provides information about hypothetical account values and
hypothetical expenses based on the Company's actual expense ratios and an
assumed rate of return of 5% per year before expenses, which is not the
Company's actual return. The hypothetical account values and expenses may not be
used to estimate the actual ending account balance or expenses a shareholder
paid for the period. This information may be used to compare the ongoing
expenses of investing in the Company and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in this table are meant to help a
shareholder understand the ongoing expenses only and do not reflect any
transactional expenses, such as sales charges, contingent deferred sales charges
on redemptions or redemption fees. Therefore, the table is useful in comparing
ongoing expenses only, and will not help determine the relative total costs of
owning different funds. In addition, if these transactional expenses were
included, the expenses would have been higher.
<Table>
<Caption>
ACTUAL HYPOTHETICAL
BEGINNING ENDING EXPENSES ENDING EXPENSES
ACCOUNT ANNUALIZED ACCOUNT PAID ACCOUNT PAID
VALUE EXPENSE VALUE DURING VALUE DURING
FUNDS (03/01/06) RATIOS (08/31/06) (1) PERIOD (2) (08/31/06) (1) PERIOD (2)
- ----- ---------- ---------- -------------- ---------- -------------- ----------
Alger Technology Fund
Class A $1,000.00 1.99% $ 903.23 $ 9.55 $1,015.17 $10.11
Class B 1,000.00 2.52% 900.00 12.06 1,012.51 12.77
Alger Aggressive Growth Fund
Class A 1,000.00 1.81% 1,017.70 9.20 1,016.09 9.19
Class B 1,000.00 2.45% 1,012.23 12.44 1,012.81 12.44
Alger Small-Cap Fund
Class A 1,000.00 2.06% 976.09 10.25 1,014.83 10.45
Class B 1,000.00 2.59% 972.94 12.88 1,012.11 13.14
Alger Growth Fund
Class A 1,000.00 1.55% 951.74 7.65 1,017.37 7.91
Class B 1,000.00 2.16% 948.28 10.60 1,014.32 10.96
Growth Fund
Class A 1,000.00 1.32% 1,019.28 6.71 1,018.56 6.70
Class B 1,000.00 1.80% 1,017.01 9.14 1,016.14 9.14
Class T 1,000.00 1.17% 1,019.87 5.96 1,019.30 5.96
Equity Income Fund
Class A 1,000.00 1.27% 1,055.75 6.57 1,018.82 6.45
Class B 1,000.00 1.66% 1,053.55 8.62 1,016.81 8.46
Class T 1,000.00 1.14% 1,056.84 5.92 1,019.45 5.81
</Table>
1
<Page>
<Table>
<Caption>
ACTUAL HYPOTHETICAL
BEGINNING ENDING EXPENSES ENDING EXPENSES
ACCOUNT ANNUALIZED ACCOUNT PAID ACCOUNT PAID
VALUE EXPENSE VALUE DURING VALUE DURING
FUNDS (03/01/06) RATIOS (08/31/06) (1) PERIOD (2) (08/31/06) (1) PERIOD (2)
- ----- ---------- ---------- -------------- ---------- -------------- ----------
Balanced Fund
Class A $1,000.00 1.25% $1,026.01 $6.36 $1,018.93 $6.34
Class B 1,000.00 1.76% 1,024.14 8.98 1,016.34 8.94
Class T 1,000.00 1.24% 1,026.91 6.34 1,018.95 6.32
Government Bond Fund
Class A 1,000.00 0.71% 1,019.26 3.62 1,021.56 3.63
Class B 1,000.00 1.09% 1,017.01 5.57 1,019.63 5.57
Class T 1,000.00 0.72% 1,020.33 3.68 1,021.51 3.68
Tax Free Fund
Class A 1,000.00 0.68% 1,015.54 3.45 1,021.72 3.46
Class B 1,000.00 1.23% 1,012.83 6.23 1,018.97 6.24
Class T 1,000.00 0.74% 1,015.29 3.78 1,021.40 3.79
Primary Fund 1,000.00 0.81% 1,020.84 4.12 1,021.07 4.12
Money Market Fund 1,000.00 0.53% 1,022.58 2.69 1,022.48 2.69
</Table>
(1) The actual ending account value is based on actual total return of each
class of each of the funds for the period March 1, 2006 to August 31, 2006
after actual expenses and will differ from the hypothetical ending account
value which is based on each class of each of the funds' actual expense
ratios and a hypothetical annual return of 5% before expenses.
(2) Expenses are equal to the annualized expense ratios, shown in the table
above, multiplied by the average account value over the period, then
multiplied by 184/365 (to reflect the six month period).
2
<Page>
SM&R ALGER TECHNOLOGY FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
INVESTMENT OBJECTIVE: The SM&R Alger Technology Fund seeks to achieve long-term
capital appreciation. The fund normally invests at least 85% of its 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 and improvements. During the recent
fiscal year, the management of the Fund remained unchanged: a research
intensive, bottom-up approach focusing on the stocks of rapidly growing
companies undergoing positive dynamic change. Over the twelve months ending
August 31, 2006, the inherent technology focus of the Fund hurt relative
performance as technology stocks as a whole underperformed the rest of the
market.
MARKET REVIEW: The twelve months ending August 31, 2006 was a generally positive
time period for the domestic equity markets. The Dow Jones Industrial Average
was up 11.16%, the S&P 500 index was up 8.88%, and the Nasdaq Composite was up
1.47%. Stocks across all market capitalizations faired well as the Russell 2000
(representing small cap stocks), the Russell MidCap (representing mid cap
stocks) and the Russell 1000 (representing large cap stocks) indices all posted
returns of nearly 9%. Returns were more disparate across the growth/value
spectrum with value decidedly outperforming growth. The Russell 2000 Growth and
the Russell MidCap Growth were both up 6.0%, while the Russell 2000 Value and
the Russell MidCap Value were up 12.72% and 12.36%, respectively. Among large
cap indices, the difference was more extreme. The Russell 1000 Growth was up
3.68% while the Russell 1000 Value was up 13.96%.
Americans have a tendency to flip-flop from optimism to pessimism, not
necessarily overnight, but for years at a time. The optimism of the "Roaring
1920s" gave way to the fear and despair of the Depression; the heady sense of
progress that characterized the early 1960s gave way to the dark moods of the
1970s, replete with war in the Middle East, oil shocks, stagflation and a wildly
gyrating stock market (perhaps mimicking the disco era in which this all
unfolded). More recently, the New Economy exuberance of the 1990s has been
buried under an avalanche of negative events: the bursting of the Nasdaq bubble
in 2000-2001, the aftermath of 9/11, the subsequent war in Iraq, and an economic
expansion that has seen a notable divergence between extraordinary levels of
corporate profitability and tepid levels of wage growth for the average worker.
In our view, sentiment remains a serious headwind for the economy and the
markets as it has for much of the past five years. We do not believe that there
are structural or systemic reasons facing U.S. equity markets. But cultural
malaise and the sense that the future is less bright than the present--like its
obverse belief that tomorrow will be better than today--are powerful forces. The
issue is not whether there are things going on in the world that are cause for
concern.
Of course there are. Iraq, Lebanon, and North Korea alone are enough to give one
pause. (Indeed, we seem to be in no imminent danger of peace breaking out.) The
disruptive effects of globalization on jobs, wages, and capital flows are also
evident. But none of the earlier periods of hope and optimism were without
dangers. The 1990s saw the twin evils of Serbia and Rwanda as well as terrorist
attacks on U.S. embassies in Africa, U.S. naval ships in the Persian Gulf, and
the World Trade Center in 1993, not to mention the near-economic collapse of
Russia, Mexico, and the Asian "Tigers," along with Long Term Capital Management
roiling Wall Street. The issue is not whether there are risks; it is whether the
culture focuses on risks rather than rewards.
Today, risks are at the forefront, but that doesn't negate the rewards nor the
positive changes that are occurring daily--from the purely entertaining (think
iPod) to the more revolutionary (think ethanol, hybrids, new solar technologies,
and next generation communication devices). Most importantly, we believe the
opportunity for businesses to grow, efficiently and dramatically, is greater
than ever due to productivity enhancing technologies and the globalization of
markets. That, too, has costs and disruptions--both are well known and the
subject of considerable political and moral debate--but the benefits should not
be ignored.
Earnings growth for the second quarter of 2006 was more than 18% for the S&P
500; more striking was that even ex-energy, earnings grew nearly 15%. That is
considerably stronger than even the most bullish of prognosticators assumed
earlier in the year when it was widely believed that the run of double-digit
quarters would come to an end. What is so startling about these numbers is their
divergence from the U.S.'s overall GDP growth, which is still in the range of 3%
a year. Profit growth of large U.S. companies now exceeds U.S. economic growth
by more than 10%, which was the case in 2003, 2004, and 2005.
Equally telling is that while the markets have been flat since the end of 2005,
more than 120 companies with a market capitalization of over $3 billion have
seen their stocks rise by more than 20% in the first half of 2006. The current
vogue for index funds notwithstanding, the indices have not performed nearly as
well as many of their individual components. The "average stock" may be up only
minimally, but many individual companies are up considerably more. Here, too,
the divergence between large averages and individual companies is striking.
MARKET & ECONOMIC OUTLOOK: We are fundamental investors who make decisions based
on bottom-up analysis, and that leads to a healthy skepticism of what many
top-down strategists are currently saying. It also leads to a different view of
the big picture. As we have said before, we believe that the twin effects of
globalization and information technologies will keep inflation contained, wages
low, and profits strong. As a result, we have stayed with our thesis of above
trend earnings growth and stable economic growth. The recent spate of corporate
and economic data only confirms that view. The moderation in U.S. economic
growth for the second quarter of 2006 is a predictable result of the steady
increase in short-term rates and the cooling of the U.S. housing market, but it
does not alter the overall picture.
3
<Page>
For the markets, we believe quality companies with strong earnings growth
continue to get cheaper on a multiple basis. The forward multiple for the S&P
500 is now below 14x, and the overall indices have been treading water as
investors trade largely on news of wars abroad and interest rates at home. It is
interesting that the earnings of the S&P 500 have grown over 75% in the past
five years (July 2001-2006), while the Index itself is up only approximately 6%
(not including dividend reinvestment). Driven by the Fed interest rate cycle, as
well as sentiment, multiple compression has brought the market back, in
valuation terms, to levels last seen toward the end of 1994 and in early 1995.
In our view, the fundamentals support a significant rally in the markets, even
though sentiment and strategists do not. Some investors clearly prefer to wait
on a rally, in effect, to time the market, but that is a difficult strategy over
the long term. We are not saying ignore sentiment or disregard the U.S. economic
cycle and the possible implications for earnings going forward. But we are
suggesting that those factors tell us less about the world we are living in and
how companies are performing than they used to. There are opportunities all
around us, regardless of whether the overall U.S. economy or the major indices
are soaring or slumping.
Dynamic companies, especially those with global reach, have defied both
expectations and predictions on the upside for the past five years. That is a
statistical fact. Most people seem to believe that this pattern is coming to an
end. Regardless of what the short-term holds, we believe that the pattern will
continue.
FUND PERFORMANCE: The SM&R Alger Technology Fund's Class A shares returned 1.99%
at net asset value during the fiscal year ending August 31, 2006,
underperforming the 2.96% return of the Lipper Science & Technology Fund index
and lagging the 8.88% return of the S&P 500 index.
Best Regards,
Dan Chung, CFA, Portfolio Manager
SM&R Alger Technology Fund
4
<Page>
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
INDEX AND THE S&P 500
[CHART]
<Table>
<Caption>
LIPPER SCIENCE
SM&R ALGER AND TECHNOLOGY
TECHNOLOGY FUND S&P 500 INDEX
9/1/2000 $9,497 $10,000 $10,000
12/31/2000 $4,919 $ 8,731 $ 5,868
8/31/2001 $3,077 $ 7,561 $ 3,680
12/31/2001 $3,182 $ 7,693 $ 3,831
8/31/2002 $1,586 $ 6,201 $ 2,249
12/31/2002 $1,586 $ 5,993 $ 2,245
8/31/2003 $2,460 $ 6,949 $ 3,110
12/31/2003 $2,783 $ 7,712 $ 3,398
8/31/2004 $2,308 $ 7,744 $ 2,920
12/31/2004 $2,783 $ 8,551 $ 3,538
8/31/2005 $2,868 $ 8,716 $ 3,532
12/31/2005 $3,096 $ 8,969 $ 3,728
8/31/2006 $2,925 $ 9,490 $ 3,637
</Table>
SM&R Alger Technology Fund performance figures 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 average annual returns
for Class A shares reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 09/01/00.
ONE FIVE SINCE
YEAR YEAR INCEPTION
-------------------------
Class A -3.14% -2.02% -18.53%
Class B -4.08% -1.38% -17.91%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 2.62%
Industrials 2.94%
Information Technology 88.25%
Miscellaneous 6.19%
</Table>
5
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER TECHNOLOGY FUND
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY--
INTERNET & CATALOG RETAIL--1.74%
eBay Inc. * 740 $ 20,616
MEDIA--0.89%
Focus Media Holding Ltd. ADR * 180 10,620
----------
TOTAL CONSUMER DISCRETIONARY--2.63% 31,236
----------
INDUSTRIALS--
COMMERCIAL SERVICES & SUPPLIES--2.95%
Traffic.com, Inc. * 125 569
West Corp. * 715 34,449
----------
35,018
----------
TOTAL INDUSTRIALS--2.95% 35,018
----------
INFORMATION TECHNOLOGY--
COMMUNICATIONS--1.60%
Research in Motion Ltd. * 230 18,975
COMMUNICATIONS EQUIPMENT--7.96%
Cisco Systems, Inc. * 2,190 48,158
Corning Inc. * 1,105 24,575
Motorola, Inc. 930 21,744
----------
94,477
COMPUTER RELATED & BUSINESS SERVICES--7.73%
Apple Computer, Inc. * 580 39,353
Network Appliance, Inc. * 790 27,050
Western Digital Corp. * 1,385 25,345
----------
91,748
COMPUTER SOFTWARE--14.52%
Embarcadero Technologies, Inc. * 2,535 16,401
Parametric Technology Corp. * 835 13,452
Symantec Corp. * 3,175 59,182
TIBCO Software Inc. * 6,880 54,077
VeriFone Holdings, Inc. * 1,260 29,169
----------
172,281
COMPUTERS & PERIPHERALS--0.88%
Mobility Electronics, Inc. * 1,605 10,416
ELECTRONIC EQUIPMENT & INSTRUMENTS--2.47%
Multi-Fineline Electronix, Inc. * 1,300 29,354
INFORMATION TECHNOLOGY SERVICES--6.62%
Accenture Ltd. (Class A) 925 27,436
Cognizant Technology Solutions Corp. (Class A) * 255 17,827
Kanbay International Inc. * 1,800 33,318
----------
78,581
INTERNET SOFTWARE & SERVICES--11.36%
DealerTrack Holdings Inc. * 1,425 30,994
Omniture, Inc. * 3,205 21,313
WebEx Communications, Inc. * 610 21,777
WebSideStory, Inc. * 1,325 16,788
Yahoo! Inc. * 1,525 43,950
----------
134,822
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT--7.06%
FormFactor Inc. * 670 $ 32,334
Freescale Semiconductor Inc. (Class A) * 770 23,639
Tessera Technologies Inc. * 845 27,801
----------
83,774
SEMICONDUCTORS--4.41%
Marvell Technology Group Ltd. * 615 10,769
Microsemi Corp. * 980 27,215
Texas Instruments Inc. 440 14,339
----------
52,323
SEMICONDUCTORS CAPITAL EQUIPMENT--3.07%
SiRF Technology Holdings, Inc. * 1,385 36,467
SOFTWARE--21.05%
Adobe Systems Inc. * 835 27,087
BEA Systems, Inc. * 1,970 27,048
Business Objects S.A. Sponsored ADR * 845 23,542
Cognos, Inc. * 415 13,496
Electronic Arts Inc. * 395 20,133
Microsoft Corp. 1,705 43,801
Oracle Corp. * 2,320 36,308
Quest Software, Inc. * 1,930 26,885
Synchronoss Technologies, Inc. * 3,350 31,524
----------
249,824
----------
TOTAL INFORMATION TECHNOLOGY--88.73% 1,053,042
----------
TOTAL COMMON STOCK--94.31%
(Cost $1,019,208) 1,119,296
----------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 73,901 73,901
----------
TOTAL MONEY MARKET FUND--6.23%
(Cost $73,901) 73,901
----------
TOTAL INVESTMENTS--100.54%
(Cost $1,093,109) 1,193,197
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.54)% (6,438)
----------
NET ASSETS--100.00% $1,186,759
==========
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
6
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER TECHNOLOGY FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $1,019,208) $ 1,119,296
Investment in affiliated money market fund (Cost $73,901) 73,901
------------
Total investments (Cost $1,093,109) 1,193,197
Prepaid expenses 10,703
Receivable for:
Capital stock sold 226
Dividends 153
Expense reimbursement 2,173
------------
TOTAL ASSETS 1,206,452
------------
LIABILITIES
Payable to investment adviser for fund expenses 9,629
Accrued:
Investment advisory fees 1,307
Service fees 242
Distribution fees 1,524
Other liabilities 6,991
------------
TOTAL LIABILITIES 19,693
------------
NET ASSETS (applicable to shares outstanding) $ 1,186,759
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 1,264,793
Accumulated net realized gain (loss) on investments (178,122)
Net unrealized appreciation (depreciation) of investments 100,088
------------
Net Assets $ 1,186,759
============
NET ASSETS:
Class A 870,234
- --------------------------------------------------------------------------------
Class B 316,525
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 1,186,759
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 282,757
- --------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 103,373
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 3.08
Offering price per share:
(Net assets value of $3.08 / 95%) $ 3.24
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 3.06
- --------------------------------------------------------------------------------
See notes to financial statements.
7
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER TECHNOLOGY FUND
INVESTMENT INCOME
Dividends $ 1,505
Interest from affiliated money market fund 1,771
--------
TOTAL INVESTMENT INCOME 3,276
--------
EXPENSES
Investment advisory fees 16,522
Service fees 3,060
Professional fees 6,437
Custody and transaction fees 4,765
Directors' fees 5,506
Insurance expenses 394
Compliance expenses 194
Qualification fees
Class A 7,864
Class B 5,541
Shareholder reporting expenses
Class A 1,727
Class B 1,167
Distribution fees
Class A 3,092
Class B 3,404
--------
TOTAL EXPENSES 59,673
LESS EXPENSES REIMBURSED (32,784)
--------
NET EXPENSES 26,889
--------
INVESTMENT INCOME (LOSS)--NET (23,613)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 100,512
Change in unrealized appreciation (depreciation) of investments (66,574)
--------
NET GAIN (LOSS) ON INVESTMENTS 33,938
--------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 10,325
========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R ALGER TECHNOLOGY FUND
YEAR ENDED AUGUST 31,
-----------------------
2006 2005
---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ (23,613) $ (15,729)
Net realized gain (loss) on investments 100,512 62,603
Change in unrealized appreciation (depreciation)
of investments (66,574) 161,855
---------- ----------
Net increase (decrease) in net assets resulting
from operations 10,325 208,729
---------- ----------
CAPITAL SHARE TRANSACTIONS--NET
Class A 66,049 67,874
Class B (23,532) (4,279)
---------- ----------
Total capital share transactions--net 42,517 63,595
---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 52,842 272,324
NET ASSETS
Beginning of year 1,133,917 861,593
---------- ----------
End of year $1,186,759 $1,133,917
========== ==========
See notes to financial statements.
8
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R ALGER TECHNOLOGY FUND
<Table>
<Caption>
CLASS A SHARES
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 3.02 $ 2.43 $ 2.59 $ 1.67 $ 3.24
Income (loss) from investment operations
Investment income (loss)--net (0.05) (0.04) (0.06) (0.04) (0.20)
Net realized and unrealized gain (loss)
on investments 0.11 0.63 (0.10) 0.96 (1.37)
-------- -------- -------- -------- --------
Total from investment operations 0.06 0.59 (0.16) 0.92 (1.57)
-------- -------- -------- -------- --------
Net asset value, end of year $ 3.08 $ 3.02 $ 2.43 $ 2.59 $ 1.67
======== ======== ======== ======== ========
Total return (2) 1.99% 24.28% (6.18)% 55.09% (48.46)%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $870,234 $798,200 $585,844 $449,337 $150,553
Ratio of expenses with reimbursement to
average net assets (3) 2.02% 2.10% 2.10% 2.10% 8.51%
Ratio of expenses without reimbursement to
average net assets 4.45% 6.29% 6.15% 11.46% 12.19%
Ratio of net investment loss to average net
assets (1.75)% (1.36)% (1.97)% (1.84)% (8.30)%
Portfolio turnover rate 127.07% 269.32% 215.21% 291.66% 301.01%
</Table>
<Table>
<Caption>
CLASS B SHARES
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 3.03 $ 2.46 $ 2.64 $ 1.68 $ 3.25
Income (loss) from investment operations
Investment income (loss)--net (0.08) (0.06) (0.08) (0.05) (0.19)
Net realized and unrealized gain (loss)
on investments 0.11 0.63 (0.10) 1.01 (1.38)
-------- -------- -------- -------- --------
Total from investment operations 0.03 0.57 (0.18) 0.96 (1.57)
-------- -------- -------- -------- --------
Net asset value, end of year $ 3.06 $ 3.03 $ 2.46 $ 2.64 $ 1.68
======== ======== ======== ======== ========
Total return (2) 0.99% 23.17% (6.82)% 57.14% (48.31)%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $316,525 $335,717 $275,749 $240,382 $130,975
Ratio of expenses with reimbursement to
average net assets (3) 2.67% 2.75% 2.75% 2.75% 9.42%
Ratio of expenses without reimbursement to
average net assets 5.99% 8.53% 8.02% 14.16% 14.23%
Ratio of net investment loss to average net
assets (2.40)% (2.01)% (2.62)% (2.48)% (9.22)%
Portfolio turnover rate 127.07% 269.32% 215.21% 291.66% 301.01%
</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) SM&R voluntarily agreed to waive or reduce expenses to 2.10% for Class A
and 2.75% for Class B until April 30, 2006. Effective May 1, 2006 until
April 30, 2007, the expenses will be waived or reduced 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.
9
<Page>
SM&R ALGER AGGRESSIVE GROWTH FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
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
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
the stocks of rapidly growing companies undergoing positive dynamic change. Over
the twelve months ending August 31, 2006, management's growth stock bias
provided a disadvantage as the Russell 3000 Growth index underperformed the
Russell 3000 Value index by nearly 10%.
MARKET REVIEW: The twelve months ending August 31, 2006 was a generally positive
time period for the domestic equity markets. The Dow Jones Industrial Average
was up 11.16%, the S&P 500 index was up 8.88%, and the Nasdaq Composite was up
1.47%. Stocks across all market capitalizations faired well as the Russell 2000
(representing small cap stocks), the Russell MidCap (representing mid cap
stocks) and the Russell 1000 (representing large cap stocks) indices all posted
returns of nearly 9%. Returns were more disparate across the growth/value
spectrum with value decidedly outperforming growth. The Russell 2000 Growth and
the Russell MidCap Growth were both up 6.0%, while the Russell 2000 Value and
the Russell MidCap Value were up 12.72% and 12.36%, respectively. Among large
cap indices, the difference was more extreme. The Russell 1000 Growth was up
3.68% while the Russell 1000 Value was up 13.96%.
Americans have a tendency to flip-flop from optimism to pessimism, not
necessarily overnight, but for years at a time. The optimism of the "Roaring
1920s" gave way to the fear and despair of the Depression; the heady sense of
progress that characterized the early 1960s gave way to the dark moods of the
1970s, replete with war in the Middle East, oil shocks, stagflation and a wildly
gyrating stock market (perhaps mimicking the disco era in which this all
unfolded). More recently, the New Economy exuberance of the 1990s has been
buried under an avalanche of negative events: the bursting of the Nasdaq bubble
in 2000-2001, the aftermath of 9/11, the subsequent war in Iraq, and an economic
expansion that has seen a notable divergence between extraordinary levels of
corporate profitability and tepid levels of wage growth for the average worker.
In our view, sentiment remains a serious headwind for the economy and the
markets as it has for much of the past five years. We do not believe that there
are structural or systemic reasons facing U.S. equity markets. But cultural
malaise and the sense that the future is less bright than the present--like its
obverse belief that tomorrow will be better than today--are powerful forces. The
issue is not whether there are things going on in the world that are cause for
concern.
Of course there are. Iraq, Lebanon, and North Korea alone are enough to give one
pause. (Indeed, we seem to be in no imminent danger of peace breaking out.) The
disruptive effects of globalization on jobs, wages, and capital flows are also
evident. But none of the earlier periods of hope and optimism were without
dangers. The 1990s saw the twin evils of Serbia and Rwanda as well as terrorist
attacks on U.S. embassies in Africa, U.S. naval ships in the Persian Gulf, and
the World Trade Center in 1993, not to mention the near-economic collapse of
Russia, Mexico, and the Asian "Tigers," along with Long Term Capital Management
roiling Wall Street. The issue is not whether there are risks; it is whether the
culture focuses on risks rather than rewards.
Today, risks are at the forefront, but that doesn't negate the rewards nor the
positive changes that are occurring daily--from the purely entertaining (think
iPod) to the more revolutionary (think ethanol, hybrids, new solar technologies,
and next generation communication devices). Most importantly, we believe the
opportunity for businesses to grow, efficiently and dramatically, is greater
than ever due to productivity enhancing technologies and the globalization of
markets. That, too, has costs and disruptions--both are well known and the
subject of considerable political and moral debate--but the benefits should not
be ignored.
Earnings growth for the second quarter of 2006 was more than 18% for the S&P
500; more striking was that even ex-energy, earnings grew nearly 15%. That is
considerably stronger than even the most bullish of prognosticators assumed
earlier in the year when it was widely believed that the run of double-digit
quarters would come to an end. What is so startling about these numbers is their
divergence from the U.S.'s overall GDP growth, which is still in the range of 3%
a year. Profit growth of large U.S. companies now exceeds U.S. economic growth
by more than 10%, which was the case in 2003, 2004, and 2005.
Equally telling is that while the markets have been flat since the end of 2005,
more than 120 companies with a market capitalization of over $3 billion have
seen their stocks rise by more than 20% in the first half of 2006. The current
vogue for index funds notwithstanding, the indices have not performed nearly as
well as many of their individual components. The "average stock" may be up only
minimally, but many individual companies are up considerably more. Here, too,
the divergence between large averages and individual companies is striking.
MARKET & ECONOMIC OUTLOOK: We are fundamental investors who make decisions based
on bottom-up analysis, and that leads to a healthy skepticism of what many
top-down strategists are currently saying. It also leads to a different view of
the big picture. As we have said before, we believe that the twin effects of
globalization and information technologies will keep inflation contained, wages
low, and profits strong. As a result, we have stayed with our thesis of above
trend earnings growth and stable economic growth. The recent spate of corporate
and economic data only confirms that view. The moderation in U.S. economic
growth for the second quarter of 2006 is a predictable result of the steady
increase in short-term rates and the cooling of the U.S. housing market, but it
does not alter the overall picture.
10
<Page>
For the markets, we believe quality companies with strong earnings growth
continue to get cheaper on a multiple basis. The forward multiple for the S&P
500 is now below 14x, and the overall indices have been treading water as
investors trade largely on news of wars abroad and interest rates at home. It is
interesting that the earnings of the S&P 500 have grown over 75% in the past
five years (July 2001-2006), while the Index itself is up only approximately 6%
(not including dividend reinvestment). Driven by the Fed interest rate cycle, as
well as sentiment, multiple compression has brought the market back, in
valuation terms, to levels last seen toward the end of 1994 and in early 1995.
In our view, the fundamentals support a significant rally in the markets, even
though sentiment and strategists do not. Some investors clearly prefer to wait
on a rally, in effect, to time the market, but that is a difficult strategy over
the long term. We are not saying ignore sentiment or disregard the U.S. economic
cycle and the possible implications for earnings going forward. But we are
suggesting that those factors tell us less about the world we are living in and
how companies are performing than they used to. There are opportunities all
around us, regardless of whether the overall U.S. economy or the major indices
are soaring or slumping.
Dynamic companies, especially those with global reach, have defied both
expectations and predictions on the upside for the past five years. That is a
statistical fact. Most people seem to believe that this pattern is coming to an
end. Regardless of what the short-term holds, we believe that the pattern will
continue.
FUND PERFORMANCE: It was a strong twelve month period for the SM&R Alger
Aggressive Growth Fund. The Fund's Class A shares returned 13.67% at net asset
value during the fiscal year ended August 31, 2006 versus returns of 8.88% for
the S&P 500 index and 5.01% for the Lipper Multi-Cap Growth Fund index. Relative
to the S&P 500 index, the Fund benefited from solid security selection in nine
out of ten sectors. The greatest impact came from our stock selection in the
Financials, Industrials, Information Technology, Materials and
Telecommunications Services sectors. Our underweighting in the Financials
sector, which comprised more than 20% of the benchmark, slightly held back the
Fund's relative performance.
Best Regards,
Patrick Kelly, CFA, Portfolio Manager
SM&R Alger Aggressive Growth Fund
11
<Page>
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
[CHART]
<Table>
<Caption>
SM&R ALGER AGGRESSIVE LIPPER MULTI-CAP
GROWTH FUND S&P 500 GROWTH INDEX
9/1/2000 $9,497 $10,000 $10,000
12/31/2000 $6,809 $ 8,731 $ 7,528
8/31/2001 $5,613 $ 7,561 $ 5,579
12/31/2001 $5,727 $ 7,693 $ 5,731
8/31/2002 $4,027 $ 6,201 $ 3,390
12/31/2002 $3,751 $ 5,993 $ 3,312
8/31/2003 $4,711 $ 6,949 $ 4,107
12/31/2003 $5,024 $ 7,712 $ 4,485
8/31/2004 $4,568 $ 7,744 $ 4,472
12/31/2004 $5,394 $ 8,551 $ 5,190
8/31/2005 $5,765 $ 8,716 $ 5,367
12/31/2005 $6,182 $ 8,969 $ 5,664
8/31/2006 $6,553 $ 9,490 $ 5,636
</Table>
SM&R Alger Aggressive Growth Fund performance figures 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 average annual returns
for Class A shares reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 09/01/00.
ONE FIVE SINCE
YEAR YEAR INCEPTION
-----------------------
Class A 7.98% 2.10% -6.80%
Class B 7.12% 2.16% -6.64%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 16.32%
Consumer Staples 5.44%
Energy 7.05%
Financials 7.51%
Health Care 11.81%
Industrials 15.22%
Information Technology 22.85%
Materials 2.91%
Miscellaneous 1.86%
Telecommunication Services 7.96%
Utilities 1.07%
</Table>
12
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER AGGRESSIVE GROWTH FUND
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY--
APPAREL--0.76%
Polo Ralph Lauren Corp. 350 $ 20,647
BROADCASTING--0.50%
EchoStar Communications Corp. (Class A) * 425 13,494
HOTELS, RESTAURANTS & LEISURE--0.68%
MGM MIRAGE * 515 18,375
INTERNET & CATALOG RETAIL--0.99%
eBay Inc. * 970 27,024
MEDIA--2.01%
Focus Media Holding Ltd. ADR * 435 25,665
NeuStar, Inc. (Class A) * 1,025 28,926
----------
54,591
MULTI-LINE RETAIL--1.05%
Federated Department Stores, Inc. 755 28,675
RETAILING--8.66%
Circuit City Stores, Inc. 4,745 112,029
CVS Corp. 3,270 109,709
PetSmart, Inc. 545 13,679
----------
235,417
SPECIALTY RETAIL--1.88%
Abercrombie & Fitch Co. (Class A) 280 18,068
GameStop Corp. (Class A) * 755 32,979
----------
51,047
----------
TOTAL CONSUMER DISCRETIONARY--16.53% 449,270
----------
CONSUMER STAPLES--
FOOD PRODUCTS--0.43%
ConAgra Foods, Inc. 495 11,781
HOUSEHOLD PRODUCTS--2.14%
Procter & Gamble Co. (The) 940 58,186
TOBACCO--2.94%
Altria Group, Inc. 955 79,771
----------
TOTAL CONSUMER STAPLES--5.51% 149,738
----------
ENERGY--
ENERGY & ENERGY SERVICES--1.31%
Diamond Offshore Drilling, Inc. 375 27,180
Rowan Companies, Inc. 245 8,379
----------
35,559
ENERGY EQUIPMENT & SERVICES--3.38%
Cameron International Corp. * 780 37,370
National-Oilwell Varco Inc. * 435 28,406
Transocean Inc. * 390 26,032
----------
91,808
OIL & GAS--2.45%
Denbury Resources Inc. * 370 11,474
Exxon Mobil Corp. 300 20,301
Petrobank Energy and Resources Ltd. * 1,945 26,815
Valero Energy Corp. 140 8,036
----------
66,626
----------
TOTAL ENERGY--7.14% 193,993
----------
FINANCIALS--
CAPITAL MARKETS--1.20%
Bear Stearns Companies (The) Inc. 110 $ 14,339
Legg Mason, Inc. 200 18,252
----------
32,591
COMMERCIAL BANKS--1.87%
Bank of America Corp. 990 50,955
DIVERSIFIED FINANCIALS--0.73%
Chicago Mercantile Exchange Holdings Inc. 45 19,800
FINANCIAL SERVICES--1.67%
GFI Group Inc. * 500 23,250
International Securities Exchange Holdings, Inc. 360 15,318
WNS Holdings Ltd. ADR * 250 6,737
----------
45,305
INSURANCE--2.13%
Genworth Financial Inc. (Class A) 910 31,331
Hartford Financial Services Group (The), Inc. 310 26,617
----------
57,948
----------
TOTAL FINANCIALS--7.60% 206,599
----------
HEALTH CARE--
BIOTECHNOLOGY--3.85%
Amgen Inc. * 380 25,813
Gilead Sciences, Inc. * 315 19,971
Myogen, Inc. * 1,100 38,280
United Therapeutics Corp. * 375 20,471
----------
104,535
HEALTH CARE EQUIPMENT & SUPPLIES--0.88%
Hologic, Inc. * 525 22,670
Kyphon Inc. * 30 1,086
----------
23,756
HEALTH CARE PROVIDERS & SERVICES--3.11%
Aetna Inc. 505 18,821
Psychiatric Solutions, Inc. * 770 24,648
United Surgical Partners International, Inc. * 745 21,024
UnitedHealth Group Inc. 385 20,001
----------
84,494
MEDICAL SERVICES--0.88%
Ventana Medical Systems, Inc. * 515 24,020
PHARMACEUTICALS--3.25%
Abbott Laboratories 305 14,854
Adams Respiratory Therapeutics, Inc. * 650 26,520
Salix Pharmaceuticals, Ltd. * 1,440 19,310
Schering-Plough Corp. 1,320 27,654
----------
88,338
----------
TOTAL HEALTH CARE--11.97% 325,143
----------
INDUSTRIALS--
AEROSPACE--1.54%
BE Aerospace, Inc. * 1,755 41,874
AEROSPACE & DEFENSE--2.82%
Boeing Co. (The) 340 25,466
13
<Page>
COMMON STOCK SHARES VALUE
L-3 Communications Holdings, Inc. 495 $ 37,318
United Technologies Corp. 220 13,796
----------
76,580
AIR FREIGHT & LOGISTICS--0.71%
FedEx Corp. 190 19,196
COMMERCIAL SERVICES & SUPPLIES--0.42%
Net 1 UEPS Technologies, Inc. * 475 11,533
CONSTRUCTION & ENGINEERING--0.91%
McDermott International, Inc. * 515 24,823
ELECTRICAL EQUIPMENT--0.43%
AMETEK, Inc. 275 11,792
INDUSTRIAL CONGLOMERATES--4.20%
Endurance Specialty Holdings Ltd. 585 18,878
General Electric Co. 990 33,720
Textron Inc. 735 61,637
----------
114,235
MACHINERY--3.51%
ESCO Technologies Inc. * 265 13,526
Joy Global Inc. 585 25,471
Terex Corp. * 1,280 56,230
----------
95,227
TRANSPORTATION--0.88%
Burlington Northern Santa Fe Corp. 355 23,767
----------
TOTAL INDUSTRIALS--15.42% 419,027
----------
INFORMATION TECHNOLOGY--
COMMUNICATIONS EQUIPMENT--3.68%
Cisco Systems, Inc. * 1,530 33,645
Comverse Technology, Inc. * 1,045 21,841
Level 3 Communications, Inc. * 3,450 15,283
Motorola, Inc. 1,255 29,342
----------
100,111
COMPUTER RELATED & BUSINESS SERVICES--1.15%
Network Appliance, Inc. * 910 31,158
COMPUTER SOFTWARE--2.66%
NAVTEQ Corp. * 50 1,328
Symantec Corp. * 1,945 36,255
VeriFone Holdings, Inc. * 1,495 34,609
----------
72,192
COMPUTERS & PERIPHERALS--1.06%
Avid Technology, Inc. * 460 18,322
Mobility Electronics, Inc. * 1,595 10,351
----------
28,673
INTERNET SOFTWARE & SERVICES--3.84%
DealerTrack Holdings Inc. * 1,072 23,316
Yahoo! Inc. * 2,815 81,128
----------
104,444
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT--6.31%
Advanced Micro Devices, Inc. * 1,790 44,732
Atheros Communications * 380 6,183
ATI Technologies Inc. * 1,585 34,062
FormFactor Inc. * 550 26,543
Tessera Technologies Inc. * 1,820 $ 59,878
----------
171,398
SEMICONDUCTORS--3.25%
Marvell Technology Group Ltd. * 1,320 23,113
Microsemi Corp. * 1,915 53,180
National Semiconductor Corp. 500 12,145
----------
88,438
SOFTWARE--1.20%
Microsoft Corp. 1,270 32,626
----------
TOTAL INFORMATION TECHNOLOGY--23.15% 629,040
----------
MATERIALS--
CHEMICALS--0.94%
Zoltek Companies, Inc. * 1,000 25,550
METALS & MINING--2.01%
Breakwater Resources, Ltd. * 18,060 20,950
Paladin Resources Ltd. * 8,310 33,655
----------
54,605
----------
TOTAL MATERIALS--2.95% 80,155
----------
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--1.30%
ALLTEL Corp. 650 35,236
WIRELESS TELECOMMUNICATION SERVICES--6.77%
America Movil S.A. de C.V. (Series L) ADR 560 20,894
American Tower Corp. (Class A) * 3,403 122,032
NII Holdings Inc. * 770 41,079
----------
184,005
----------
TOTAL TELECOMMUNICATION SERVICES--8.07% 219,241
----------
UTILITIES--
MULTI-UTILITIES & UNREGULATED POWER--1.09%
Veolia Environnement ADR 525 29,552
----------
TOTAL UTILITIES--1.09% 29,552
----------
TOTAL COMMON STOCK--99.43%
(Cost $2,525,611) 2,701,758
----------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 51,108 51,108
----------
TOTAL MONEY MARKET FUND--1.88%
(Cost $51,108) 51,108
----------
TOTAL INVESTMENTS--101.31%
(Cost $2,576,719) 2,752,866
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.31)% (35,695)
----------
NET ASSETS--100.00% $2,717,171
==========
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTES TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
14
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER AGGRESSIVE GROWTH FUND
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $2,525,611) $ 2,701,758
Investment in affiliated money market fund (Cost $51,108) 51,108
------------
Total investments (Cost $2,576,719) 2,752,866
Prepaid expenses 10,558
Receivable for:
Investment securities sold 110,332
Capital stock sold 275
Dividends 1,201
Expense reimbursement 4,993
------------
TOTAL ASSETS 2,880,225
------------
LIABILITIES
Investment securities purchased 136,312
Capital stock reacquired 1,925
Payable to investment adviser for fund expenses 10,605
Accrued:
Investment advisory fees 2,382
Service fees 567
Distribution fees 3,695
Other liabilities 7,568
------------
TOTAL LIABILITIES 163,054
------------
NET ASSETS (applicable to shares outstanding) $ 2,717,171
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 2,273,187
Accumulated net realized gain (loss) on investments 267,837
Net unrealized appreciation (depreciation) of investments 176,147
------------
Net Assets $ 2,717,171
============
NET ASSETS:
Class A 1,845,307
- ---------------------------------------------------------------------------------
Class B 871,864
- ---------------------------------------------------------------------------------
TOTAL NET ASSETS $ 2,717,171
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 267,563
- ---------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 131,702
- ---------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 6.90
Offering price per share:
(Net assets value of $6.90 / 95%) $ 7.26
- ---------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 6.62
- ---------------------------------------------------------------------------------
</Table>
See notes to financial statements.
15
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER AGGRESSIVE GROWTH FUND
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $108) $ 18,379
Interest from affiliated money market fund 2,530
--------
TOTAL INVESTMENT INCOME 20,909
--------
EXPENSES
Investment advisory fees 25,560
Service fees 6,086
Professional fees 6,437
Custody and transaction fees 26,573
Directors' fees 5,506
Insurance expenses 766
Compliance expenses 354
Qualification fees
Class A 8,939
Class B 6,354
Shareholder reporting expenses
Class A 3,196
Class B 1,862
Distribution fees
Class A 5,718
Class B 8,006
--------
TOTAL EXPENSES 105,357
LESS EXPENSES REIMBURSED (57,342)
--------
NET EXPENSES 48,015
--------
INVESTMENT INCOME (LOSS)--NET (27,106)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 378,625
Change in unrealized appreciation (depreciation) of investments (69,943)
--------
NET GAIN (LOSS) ON INVESTMENTS 308,682
--------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $281,576
========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R ALGER AGGRESSIVE GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-----------------------
2006 2005
---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ (27,106) $ (16,878)
Net realized gain (loss) on investments 378,625 224,516
Change in unrealized appreciation (depreciation) of investments (69,943) 207,698
---------- ----------
Net increase (decrease) in net assets resulting from operations 281,576 415,336
---------- ----------
CAPITAL SHARE TRANSACTIONS--NET
Class A 252,756 86,880
Class B 84,851 47,518
---------- ----------
Total capital share transactions--net 337,607 134,398
---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 619,183 549,734
NET ASSETS
Beginning of year 2,097,988 1,548,254
---------- ----------
End of year $2,717,171 $2,097,988
========== ==========
</Table>
See notes to financial statements.
16
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R ALGER AGGRESSIVE GROWTH FUND
<Table>
<Caption>
CLASS A SHARES
--------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
---------- ---------- ---------- -------- --------
Net asset value, beginning of year $ 6.07 $ 4.81 $ 4.96 $ 4.24 $ 5.91
Income (loss) from investment operations
Investment income (loss)--net (0.05) (0.04) (0.08) (0.06) (0.17)
Net realized and unrealized gain (loss)
on investments 0.88 1.30 (0.07) 0.78 (1.50)
---------- ---------- ---------- -------- --------
Total from investment operations 0.83 1.26 (0.15) 0.72 (1.67)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 6.90 $ 6.07 $ 4.81 $ 4.96 $ 4.24
========== ========== ========== ======== ========
Total return (2) 13.67% 26.20% (3.02)% 16.98% (28.26)%
========== ========== ========== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $1,845,307 $1,402,928 $1,034,437 $994,871 $666,982
Ratio of expenses with reimbursement to
average net assets (3) 1.76% 1.85% 1.85% 1.85% 4.48%
Ratio of expenses without reimbursement to
average net assets 4.02% 4.43% 4.17% 5.52% 6.01%
Ratio of net investment loss to average
net assets (0.90)% (0.68)% (1.43)% (1.27)% (3.99)%
Portfolio turnover rate 200.29% 167.62% 159.89% 179.56% 177.62%
</Table>
<Table>
<Caption>
CLASS B SHARES
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 5.87 $ 4.69 $ 4.87 $ 4.19 $ 5.89
Income (loss) from investment operations
Investment income (loss)--net (0.09) (0.07) (0.11) (0.08) (0.21)
Net realized and unrealized gain (loss)
on investments 0.84 1.25 (0.07) 0.76 (1.49)
-------- -------- -------- -------- --------
Total from investment operations 0.75 1.18 (0.18) 0.68 (1.70)
-------- -------- -------- -------- --------
Net asset value, end of year $ 6.62 $ 5.87 $ 4.69 $ 4.87 $ 4.19
======== ======== ======== ======== ========
Total return (2) 12.78% 25.16% (3.70)% 16.23% (28.86)%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $871,864 $695,060 $513,817 $442,489 $328,254
Ratio of expenses with reimbursement to
average net assets (3) 2.41% 2.50% 2.50% 2.50% 5.56%
Ratio of expenses without reimbursement to
average net assets 4.95% 5.75% 5.52% 7.36% 7.78%
Ratio of net investment loss to average
net assets (1.55)% (1.33)% (2.09)% (1.91)% (5.08)%
Portfolio turnover rate 200.29% 167.62% 159.89% 179.56% 177.62%
</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) SM&R voluntarily agreed to waive or reduce expenses to 1.85% for Class A
and 2.50% for Class B until April 30, 2006. Effective May 1, 2006 until
April 30, 2007, the expenses will be waived or reduced to 1.60% for Class A
and 2.25% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
17
<Page>
SM&R ALGER SMALL-CAP FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
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 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 portfolio remained unchanged: a research intensive, bottom-up
approach focusing on the stocks of rapidly growing companies undergoing positive
dynamic change. Over the twelve months ending August 31, 2006, management's
growth stock bias provided a disadvantage in the small cap space as the Russell
2000 Growth index underperformed the Russell 2000 Value index by more than 6%.
MARKET REVIEW: The twelve months ending August 31, 2006 was a generally positive
time period for the domestic equity markets. The Dow Jones Industrial Average
was up 11.16%, the S&P 500 index was up 8.88%, and the Nasdaq Composite was up
1.47%. Stocks across all market capitalizations faired well as the Russell 2000
(representing small cap stocks), the Russell MidCap (representing mid cap
stocks) and the Russell 1000 (representing large cap stocks) indices all posted
returns of nearly 9%. Returns were more disparate across the growth/value
spectrum with value decidedly outperforming growth. The Russell 2000 Growth and
the Russell MidCap Growth were both up 6.0%, while the Russell 2000 Value and
the Russell MidCap Value were up 12.72% and 12.36%, respectively. Among large
cap indices, the difference was more extreme. The Russell 1000 Growth was up
3.68% while the Russell 1000 Value was up 13.96%.
Americans have a tendency to flip-flop from optimism to pessimism, not
necessarily overnight, but for years at a time. The optimism of the "Roaring
1920s" gave way to the fear and despair of the Depression; the heady sense of
progress that characterized the early 1960s gave way to the dark moods of the
1970s, replete with war in the Middle East, oil shocks, stagflation and a wildly
gyrating stock market (perhaps mimicking the disco era in which this all
unfolded). More recently, the New Economy exuberance of the 1990s has been
buried under an avalanche of negative events: the bursting of the Nasdaq bubble
in 2000-2001, the aftermath of 9/11, the subsequent war in Iraq, and an economic
expansion that has seen a notable divergence between extraordinary levels of
corporate profitability and tepid levels of wage growth for the average worker.
In our view, sentiment remains a serious headwind for the economy and the
markets as it has for much of the past five years. We do not believe that there
are structural or systemic reasons facing U.S. equity markets. But cultural
malaise and the sense that the future is less bright than the present--like its
obverse belief that tomorrow will be better than today--are powerful forces. The
issue is not whether there are things going on in the world that are cause for
concern.
Of course there are. Iraq, Lebanon, and North Korea alone are enough to give one
pause. (Indeed, we seem to be in no imminent danger of peace breaking out.) The
disruptive effects of globalization on jobs, wages, and capital flows are also
evident. But none of the earlier periods of hope and optimism were without
dangers. The 1990s saw the twin evils of Serbia and Rwanda as well as terrorist
attacks on U.S. embassies in Africa, U.S. naval ships in the Persian Gulf, and
the World Trade Center in 1993, not to mention the near-economic collapse of
Russia, Mexico, and the Asian "Tigers," along with Long Term Capital Management
roiling Wall Street. The issue is not whether there are risks; it is whether the
culture focuses on risks rather than rewards.
Today, risks are at the forefront, but that doesn't negate the rewards nor the
positive changes that are occurring daily--from the purely entertaining (think
iPod) to the more revolutionary (think ethanol, hybrids, new solar technologies,
and next generation communication devices). Most importantly, we believe the
opportunity for businesses to grow, efficiently and dramatically, is greater
than ever due to productivity enhancing technologies and the globalization of
markets. That, too, has costs and disruptions--both are well known and the
subject of considerable political and moral debate--but the benefits should not
be ignored.
Earnings growth for the second quarter of 2006 was more than 18% for the S&P
500; more striking was that even ex-energy, earnings grew nearly 15%. That is
considerably stronger than even the most bullish of prognosticators assumed
earlier in the year when it was widely believed that the run of double-digit
quarters would come to an end. What is so startling about these numbers is their
divergence from the U.S.'s overall GDP growth, which is still in the range of 3%
a year. Profit growth of large U.S. companies now exceeds U.S. economic growth
by more than 10%, which was the case in 2003, 2004, and 2005.
Equally telling is that while the markets have been flat since the end of 2005,
more than 120 companies with a market capitalization of over $3 billion have
seen their stocks rise by more than 20% in the first half of 2006. The current
vogue for index funds notwithstanding, the indices have not performed nearly as
well as many of their individual components. The "average stock" may be up only
minimally, but many individual companies are up considerably more. Here, too,
the divergence between large averages and individual companies is striking.
MARKET & ECONOMIC OUTLOOK: We are fundamental investors who make decisions based
on bottom-up analysis, and that leads to a healthy skepticism of what many
top-down strategists are currently saying. It also leads to a different view of
the big picture. As we have said before, we believe that the twin effects of
globalization and information technologies will keep inflation contained, wages
low, and profits strong. As a result, we have stayed with our thesis of above
trend earnings growth and stable economic growth. The recent spate of corporate
and
18
<Page>
economic data only confirms that view. The moderation in U.S. economic growth
for the second quarter of 2006 is a predictable result of the steady increase in
short-term rates and the cooling of the U.S. housing market, but it does not
alter the overall picture.
For the markets, we believe quality companies with strong earnings growth
continue to get cheaper on a multiple basis. The forward multiple for the S&P
500 is now below 14x, and the overall indices have been treading water as
investors trade largely on news of wars abroad and interest rates at home. It is
interesting that the earnings of the S&P 500 have grown over 75% in the past
five years (July 2001-2006), while the Index itself is up only approximately 6%
(not including dividend reinvestment). Driven by the Fed interest rate cycle, as
well as sentiment, multiple compression has brought the market back, in
valuation terms, to levels last seen toward the end of 1994 and in early 1995.
In our view, the fundamentals support a significant rally in the markets, even
though sentiment and strategists do not. Some investors clearly prefer to wait
on a rally, in effect, to time the market, but that is a difficult strategy over
the long term. We are not saying ignore sentiment or disregard the U.S. economic
cycle and the possible implications for earnings going forward. But we are
suggesting that those factors tell us less about the world we are living in and
how companies are performing than they used to. There are opportunities all
around us, regardless of whether the overall U.S. economy or the major indices
are soaring or slumping.
Dynamic companies, especially those with global reach, have defied both
expectations and predictions on the upside for the past five years. That is a
statistical fact. Most people seem to believe that this pattern is coming to an
end. Regardless of what the short-term holds, we believe that the pattern will
continue.
FUND PERFORMANCE: The fiscal year ended August 31, 2006 was a strong period for
the SM&R Alger Small-Cap Fund. Over the twelve month period ended August 31,
2006, the Fund's Class A shares returned 11.24% at net asset value versus a
return of 8.88% for the S&P 500 index and a return of 3.28% for the Lipper
Small-Cap Growth Fund index. Relative to the S&P 500 index, the Fund benefited
from solid security selection in several sectors, with the greatest impact
coming from our stock selection in the Consumer Discretionary, Health Care and
Materials sectors. Relative performance was hurt by an underweighting in the
strong Financials sector, which comprised over 20% of the S&P 500 index.
Best Regards,
Jill Greenwald, CFA, Portfolio Manager
SM&R Alger Small-Cap Fund
19
<Page>
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
[CHART]
<Table>
<Caption>
SM&R ALGER SMALL CAP FUND S&P 500 LIPPER SMALL-CAP GROWTH INDEX
9/1/2000 $9,497 $10,000 $10,000
12/31/2000 $7,864 $ 8,731 $ 7,940
8/31/2001 $5,261 $ 7,561 $ 6,676
12/31/2001 $5,508 $ 7,693 $ 6,928
8/31/2002 $4,112 $ 6,201 $ 5,049
12/31/2002 $3,998 $ 5,993 $ 5,001
8/31/2003 $5,185 $ 6,949 $ 6,619
12/31/2003 $5,708 $ 7,712 $ 7,240
8/31/2004 $5,442 $ 7,744 $ 6,607
12/31/2004 $6,578 $ 8,551 $ 8,022
8/31/2005 $7,218 $ 8,716 $ 8,263
12/31/2005 $7,592 $ 8,969 $ 8,450
8/31/2006 $8,029 $ 9,490 $ 8,534
</Table>
SM&R Alger Small Cap Fund performance figures 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 average annual returns
for Class A shares reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 09/01/00.
ONE FIVE SINCE
YEAR YEAR INCEPTION
---- ---- ---------
Class A 5.70% 7.72% -3.59%
Class B 4.94% 7.74% -3.08%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 17.26%
Consumer Staples 1.27%
Energy 6.85%
Financials 8.99%
Health Care 19.89%
Industrials 15.58%
Information Technology 21.20%
Materials 3.25%
Miscellaneous 4.22%
Telecommunication Services 1.49%
</Table>
20
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER SMALL-CAP FUND
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY--
APPAREL--0.71%
Gymboree Corp. (The) * 695 $ 23,317
AUTO COMPONENTS--2.29%
LKQ Corp. * 2,000 41,540
Tenneco Inc. * 1495 34,011
--------
75,551
HOTELS, RESTAURANTS & LEISURE--1.18%
McCormick & Schmick's Seafood Restaurants, Inc. * 1,960 38,847
INTERNET & CATALOG RETAIL--1.88%
Coldwater Creek Inc. * 980 26,921
Priceline.com Inc. * 1,055 35,226
--------
62,147
LEISURE & ENTERTAINMENT--1.17%
WMS Industries Inc. * 1,440 38,592
LEISURE EQUIPMENT & SERVICES--1.04%
LIFE TIME FITNESS, Inc. * 765 34,372
MEDIA--3.30%
Focus Media Holding Ltd. ADR * 630 37,170
NeuStar, Inc. (Class A) * 1,350 38,097
World Wresting Entertainment, Inc. 1,945 33,610
--------
108,877
RESTAURANTS & LODGING--0.72%
Orient-Express Hotels Ltd. 715 23,938
RETAILING--1.38%
Phillips-Van Heusen Corp. 1,180 45,595
SPECIALTY RETAIL--1.63%
Aeropostale, Inc. * 1,350 34,290
DSW, Inc. (Class A) * 705 19,733
--------
54,023
TEXTILES, APPAREL & LUXURY GOODS--2.00%
Deckers Outdoor Corp. * 1,015 41,625
Iconix Brand Group, Inc. * 1,640 24,305
--------
65,930
--------
TOTAL CONSUMER DISCRETIONARY--17.30% 571,189
--------
CONSUMER STAPLES--
FOOD PRODUCTS--1.28%
Hain Celestial Group (The) Inc. * 1,790 42,155
--------
TOTAL CONSUMER STAPLES--1.28% 42,155
--------
ENERGY--
ENERGY & ENERGY SERVICES--2.79%
Dril-Quip, Inc. * 545 41,851
Grey Wolf, Inc. * 3,295 24,086
Veritas DGC Inc. * 440 26,211
--------
92,148
OIL & GAS--4.07%
Carrizo Oil & Gas, Inc. * 860 23,960
Giant Industries, Inc. * 395 32,271
Holly Corp. 465 21,306
Petrobank Energy & Resources Ltd. * 2,305 $ 31,779
Warren Resources Inc. * 1,740 25,178
--------
134,494
--------
TOTAL ENERGY--6.86% 226,642
--------
FINANCIALS--
CAPITAL MARKETS--0.84%
Greenhill & Co., Inc. 505 27,790
COMMERCIAL BANKS--2.98%
Boston Private Financial Holdings, Inc. 1,125 28,080
Signature Bank * 1,130 37,120
Wintrust Financial Corp. 660 33,205
--------
98,405
FINANCIAL SERVICES--2.59%
GFI Group Inc. * 620 28,830
International Securities Exchange Holdings, Inc. 920 39,146
WNS Holdings Ltd. ADR * 645 17,383
--------
85,359
INSURANCE--0.86%
Ohio Casualty Corp. 1,095 28,415
REAL ESTATE MANAGEMENT--0.92%
Jones Lang LaSalle Inc. 365 30,390
THRIFTS & MORTGAGE FINANCE--0.82%
Flagstar Bancorp, Inc. 1,870 27,190
--------
TOTAL FINANCIALS--9.01% 297,549
--------
HEALTH CARE--
BIOTECHNOLOGY--7.25%
Cubist Pharmaceuticals, Inc. * 960 22,522
Human Genome Sciences, Inc. * 1,650 18,529
Illumina, Inc. * 1,065 35,869
InterMune, Inc. * 1,410 24,308
Keryx Biopharmaceuticals, Inc. * 1,690 23,204
Myogen, Inc. * 1,025 35,670
Onyx Pharmaceuticals, Inc. * 1,460 22,060
Regeneron Pharmaceuticals, Inc. * 1,435 22,788
United Therapeutics Corp. * 630 34,392
--------
239,342
HEALTH CARE EQUIPMENT & SUPPLIES--3.23%
ArthroCare Corp. * 800 36,488
Haemonetics Corp. * 815 37,963
Hologic, Inc. * 745 32,169
--------
106,620
HEALTH CARE PROVIDERS & SERVICES--5.94%
Gentiva Health Services, Inc. * 2,125 38,399
PAREXEL International Corp. * 752 24,891
Psychiatric Solutions, Inc. * 1,415 45,294
Sierra Health Services, Inc. * 810 34,749
VCA Antech, Inc. * 565 20,012
WellCare Health Plans Inc. * 585 32,807
--------
196,152
MEDICAL SERVICES--1.23%
Ventana Medical Systems, Inc. * 870 40,577
21
<Page>
COMMON STOCK SHARES VALUE
MEDICAL TECHNOLOGY--1.11%
Allscripts Healthcare Solutions, Inc. * 1,810 $ 36,852
PHARMACEUTICALS--1.18%
Adams Respiratory Therapeutics, Inc. * 815 33,252
POZEN Inc. * 460 5,709
----------
38,961
----------
TOTAL HEALTH CARE--19.94% 658,504
----------
INDUSTRIALS--
AEROSPACE--1.21%
BE Aerospace, Inc. * 1,675 39,966
AEROSPACE & DEFENSE--0.75%
Esterline Technologies Corp. * 705 24,696
AIRLINES--0.64%
AirTran Holdings, Inc. * 1,840 21,068
COMMERCIAL SERVICES & SUPPLIES--4.10%
American Reprographics Co. * 1,320 40,286
CoStar Group Inc. * 505 20,341
FTI Consulting, Inc. * 1,505 33,622
Gevity HR, Inc. 1,600 41,136
----------
135,385
CONSTRUCTION & ENGINEERING--2.12%
URS Corp. * 1,000 40,550
Williams Scotsman International Inc. * 1,410 29,596
----------
70,146
FREIGHT--0.92%
Landstar System, Inc. 715 30,530
MACHINERY--5.87%
Actuant Corp. (Class A) 790 35,629
Bucyrus International, Inc. (Class A) 820 42,337
ESCO Technologies Inc. * 695 35,473
Gardner Denver Inc. * 1,200 43,164
RBC Bearings Inc. * 1,750 37,222
----------
193,825
----------
TOTAL INDUSTRIALS--15.61% 515,616
----------
INFORMATION TECHNOLOGY--
COMMUNICATIONS EQUIPMENT--1.17%
Polycom, Inc. * 1,625 38,659
COMPUTER SERVICES--0.99%
Open Solutions Inc. * 1,110 32,789
COMPUTER SOFTWARE--2.15%
TIBCO Software Inc. * 4,880 38,357
VeriFone Holdings, Inc. * 1,410 32,641
----------
70,998
COMPUTERS & PHERIPHERALS--1.49%
Avid Technology, Inc. * 735 29,275
Mobility Electronics, Inc. * 3,100 20,119
----------
49,394
ELECTRONIC EQUIPMENT & INSTRUMENTS--0.56%
Multi-Fineline Electronix, Inc. * 815 18,403
INFORMATION TECHNOLOGY SERVICES--1.81%
SI International Inc. * 1,135 $ 32,790
SRA International, Inc. * 960 26,890
----------
59,680
INTERNET SOFTWARE & SERVICES--4.59%
DealerTrack Holdings Inc. * 1,755 38,171
Internap Network Services Corp. * 2,187 26,135
Omniture, Inc. * 2,480 16,492
WebEx Communications, Inc. * 880 31,416
Wright Express Corp. * 1,465 39,408
----------
151,622
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT--3.67%
Atheros Communications * 1,420 23,104
FormFactor Inc. * 805 38,849
Netlogic Microsystems Inc. * 855 25,231
Tessera Technologies Inc. * 1,040 34,216
----------
121,400
SEMICONDUCTORS--2.40%
ATMI, Inc. * 1,300 37,531
Microsemi Corp. * 1,500 41,655
----------
79,186
SEMICONDUCTORS CAPITAL EQUIPMENT--0.76%
SiRF Technology Holdings, Inc. * 950 25,013
SOFTWARE--1.66%
Quest Software, Inc. * 1,795 25,004
Synchronoss Technologies, Inc. * 3,165 29,783
----------
54,787
----------
TOTAL INFORMATION TECHNOLOGY--21.25% 701,931
----------
MATERIALS--
CHEMICALS--1.06%
Zoltek Companies, Inc. * 1,375 35,131
METALS & MINING--2.20%
Breakwater Resources, Ltd. * 25,215 29,249
Paladin Resources Ltd. * 10,690 43,295
----------
72,544
----------
TOTAL MATERIALS--3.26% 107,675
----------
TELECOMMUNICATION SERVICES--
WIRELESS TELECOMMUNICATION SERVICES--1.50%
SBA Communications Corp. (Class A) * 1,920 49,421
----------
TOTAL TELECOMMUNICATION SERVICES--1.50% 49,421
----------
TOTAL COMMON STOCK--96.01%
(Cost $2,819,521) 3,170,682
----------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 139,659 139,659
----------
TOTAL MONEY MARKET FUND--4.23%
(Cost $139,659) 139,659
----------
TOTAL INVESTMENTS--100.24%
(Cost $2,959,180) 3,310,341
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.24)% (7,890)
----------
NET ASSETS--100.00% $3,302,451
==========
22
<Page>
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
23
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER SMALL-CAP FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $2,819,521) $ 3,170,682
Investment in affiliated money market fund (Cost $139,659) 139,659
------------
Total investments (Cost $2,959,180) 3,310,341
Prepaid expenses 10,560
Receivable for:
Investment securities sold 63,261
Capital stock sold 428
Dividends 239
Expense reimbursement 3,687
------------
TOTAL ASSETS 3,388,516
------------
LIABILITIES
Investment securities purchased 58,431
Capital stock reacquired 1,593
Payable to investment adviser for fund expenses 10,876
Accrued:
Investment advisory fees 2,736
Service fees 684
Distribution fees 4,174
Other liabilities 7,571
------------
TOTAL LIABILITIES 86,065
------------
NET ASSETS (applicable to shares outstanding) $ 3,302,451
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 2,838,041
Accumulated net realized gain (loss) on investments 113,249
Net unrealized appreciation (depreciation) of investments 351,161
------------
Net Assets $ 3,302,451
============
NET ASSETS:
Class A 2,485,024
- --------------------------------------------------------------------------------
Class B 817,427
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 3,302,451
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 337,928
- --------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 113,623
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 7.35
Offering price per share:
(Net assets value of $7.35 / 95%) $ 7.74
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 7.19
- --------------------------------------------------------------------------------
See notes to financial statements.
24
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER SMALL-CAP FUND
INVESTMENT INCOME
Dividends $ 5,861
Interest from affiliated money market fund 7,190
--------
TOTAL INVESTMENT INCOME 13,051
--------
EXPENSES
Investment advisory fees 27,126
Service fees 6,781
Professional fees 6,437
Custody and transaction fees 22,805
Directors' fees 5,507
Insurance expenses 755
Compliance expenses 349
Qualification fees
Class A 7,173
Class B 5,725
Shareholder reporting expenses
Class A 2,922
Class B 1,628
Distribution fees
Class A 6,886
Class B 7,450
--------
TOTAL EXPENSES 101,544
LESS EXPENSES REIMBURSED (47,889)
--------
NET EXPENSES 53,655
--------
INVESTMENT INCOME (LOSS)--NET (40,604)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 208,778
Change in unrealized appreciation (depreciation) of investments 37,298
--------
NET GAIN (LOSS) ON INVESTMENTS 246,076
--------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $205,472
========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R ALGER SMALL-CAP FUND
YEAR ENDED AUGUST 31,
-----------------------
2006 2005
---------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ (40,604) $ (29,779)
Net realized gain (loss) on investments 208,778 230,960
Change in unrealized appreciation (depreciation)
of investments 37,298 283,112
---------- ----------
Net increase (decrease) in net assets resulting
from operations 205,472 484,293
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Capital gains
Class A (175,041) (26,456)
Class B (80,011) (12,091)
---------- ----------
Total distributions to shareholders (255,052) (38,547)
---------- ----------
CAPITAL SHARE TRANSACTIONS--NET
Class A 1,130,748 100,319
Class B 222,922 20,517
---------- ----------
Total capital share transactions--net 1,353,670 120,836
---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,304,090 566,582
NET ASSETS
Beginning of year 1,998,361 1,431,779
---------- ----------
End of year $3,302,451 $1,998,361
========== ==========
See notes to financial statements.
25
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R ALGER SMALL-CAP FUND
<Table>
<Caption>
CLASS A SHARES
------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
---------- ---------- -------- -------- --------
Net asset value, beginning of year $ 7.44 $ 5.73 $ 5.46 $ 4.33 $ 5.54
Income (loss) from investment operations
Investment income (loss)--net (0.08) (0.10) (0.10) (0.07) (0.32)
Net realized and unrealized gain (loss) on investments 0.87 1.96 0.37 1.20 (0.89)
---------- ---------- -------- -------- --------
Total from investment operations 0.79 1.86 0.27 1.13 (1.21)
Less distributions from capital gains (0.88) (0.15) -- -- --
---------- ---------- -------- -------- --------
Net asset value, end of year $ 7.35 $ 7.44 $ 5.73 $ 5.46 $ 4.33
========== ========== ======== ======== ========
Total return (2) 11.24% 32.64% 4.94% 26.10% (21.84)%
========== ========== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $2,485,024 $1,388,538 $978,028 $789,625 $436,796
Ratio of expenses with reimbursement to average net assets (3) 1.79% 1.90% 1.90% 1.90% 6.60%
Ratio of expenses without reimbursement to average net assets 3.42% 4.55% 4.65% 6.89% 9.68%
Ratio of net investment loss to average net assets (1.31)% (1.49)% (1.70)% (1.64)% (6.33)%
Portfolio turnover rate 83.78% 126.84% 143.21% 131.48% 176.50%
</Table>
<Table>
<Caption>
CLASS B SHARES
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 7.34 $ 5.69 $ 5.47 $ 4.32 $ 5.65
Income (loss) from investment operations
Investment income (loss)--net (0.13) (0.14) (0.14) (0.10) (0.41)
Net realized and unrealized gain (loss) on investments 0.86 1.94 0.36 1.25 (0.92)
-------- -------- -------- -------- --------
Total from investment operations 0.73 1.80 0.22 1.15 (1.33)
Less distributions from capital gains (0.88) (0.15) -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year $ 7.19 $ 7.34 $ 5.69 $ 5.47 $ 4.32
======== ======== ======== ======== ========
Total return (2) 10.51% 31.80% 4.02% 26.62% (23.54)%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $817,427 $609,823 $453,751 $372,330 $206,871
Ratio of expenses with reimbursement to average net assets (3) 2.46% 2.55% 2.55% 2.55% 8.05%
Ratio of expenses without reimbursement to average net assets 4.58% 6.06% 6.11% 9.05% 11.65%
Ratio of net investment loss to average net assets (1.97)% (2.14)% (2.35)% (2.29)% (7.77)%
Portfolio turnover rate 83.78% 126.84% 143.21% 131.48% 176.50%
</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) SM&R voluntarily agreed to waive or reduce expenses to 1.90% for Class A
and 2.55% for Class B until April 30, 2006. Effective May 1, 2006 until
April 30, 2007, the expenses will be waived or reduced to 1.65% for Class A
and 2.30% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
26
<Page>
SM&R ALGER GROWTH FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
INVESTMENT OBJECTIVE: The SM&R Alger Growth Fund seeks to achieve long-term
capital appreciation. The fund normally invests at least 65% of its 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 portfolio remained unchanged: a research intensive, bottom-up
approach focusing on the stocks of rapidly growing companies undergoing positive
dynamic change. Over the twelve months ending August 31, 2006, management's
growth stock bias provided a disadvantage in the large cap space as the Russell
1000 Growth index underperformed the Russell 1000 Value index by more than 10%.
MARKET REVIEW: The twelve months ending August 31, 2006 was a generally positive
time period for the domestic equity markets. The Dow Jones Industrial Average
was up 11.16%, the S&P 500 index was up 8.88%, and the Nasdaq Composite was up
1.47%. Stocks across all market capitalizations faired well as the Russell 2000
(representing small cap stocks), the Russell MidCap (representing mid cap
stocks) and the Russell 1000 (representing large cap stocks) indices all posted
returns of nearly 9%. Returns were more disparate across the growth/value
spectrum with value decidedly outperforming growth. The Russell 2000 Growth and
the Russell MidCap Growth were both up 6.0%, while the Russell 2000 Value and
the Russell MidCap Value were up 12.72% and 12.36%, respectively. Among large
cap indices, the difference was more extreme. The Russell 1000 Growth was up
3.68% while the Russell 1000 Value was up 13.96%.
Americans have a tendency to flip-flop from optimism to pessimism, not
necessarily overnight, but for years at a time. The optimism of the "Roaring
1920s" gave way to the fear and despair of the Depression; the heady sense of
progress that characterized the early 1960s gave way to the dark moods of the
1970s, replete with war in the Middle East, oil shocks, stagflation and a wildly
gyrating stock market (perhaps mimicking the disco era in which this all
unfolded). More recently, the New Economy exuberance of the 1990s has been
buried under an avalanche of negative events: the bursting of the Nasdaq bubble
in 2000-2001, the aftermath of 9/11, the subsequent war in Iraq, and an economic
expansion that has seen a notable divergence between extraordinary levels of
corporate profitability and tepid levels of wage growth for the average worker.
In our view, sentiment remains a serious headwind for the economy and the
markets as it has for much of the past five years. We do not believe that there
are structural or systemic reasons facing U.S. equity markets. But cultural
malaise and the sense that the future is less bright than the present--like its
obverse belief that tomorrow will be better than today--are powerful forces. The
issue is not whether there are things going on in the world that are cause for
concern.
Of course there are. Iraq, Lebanon, and North Korea alone are enough to give one
pause. (Indeed, we seem to be in no imminent danger of peace breaking out.) The
disruptive effects of globalization on jobs, wages, and capital flows are also
evident. But none of the earlier periods of hope and optimism were without
dangers. The 1990s saw the twin evils of Serbia and Rwanda as well as terrorist
attacks on U.S. embassies in Africa, U.S. naval ships in the Persian Gulf, and
the World Trade Center in 1993, not to mention the near-economic collapse of
Russia, Mexico, and the Asian "Tigers," along with Long Term Capital Management
roiling Wall Street. The issue is not whether there are risks; it is whether the
culture focuses on risks rather than rewards.
Today, risks are at the forefront, but that doesn't negate the rewards nor the
positive changes that are occurring daily--from the purely entertaining (think
iPod) to the more revolutionary (think ethanol, hybrids, new solar technologies,
and next generation communication devices). Most importantly, we believe the
opportunity for businesses to grow, efficiently and dramatically, is greater
than ever due to productivity enhancing technologies and the globalization of
markets. That, too, has costs and disruptions--both are well known and the
subject of considerable political and moral debate--but the benefits should not
be ignored.
Earnings growth for the second quarter of 2006 was more than 18% for the S&P
500; more striking was that even ex-energy, earnings grew nearly 15%. That is
considerably stronger than even the most bullish of prognosticators assumed
earlier in the year when it was widely believed that the run of double-digit
quarters would come to an end. What is so startling about these numbers is their
divergence from the U.S.'s overall GDP growth, which is still in the range of 3%
a year. Profit growth of large U.S. companies now exceeds U.S. economic growth
by more than 10%, which was the case in 2003, 2004, and 2005.
Equally telling is that while the markets have been flat since the end of 2005,
more than 120 companies with a market capitalization of over $3 billion have
seen their stocks rise by more than 20% in the first half of 2006. The current
vogue for index funds notwithstanding, the indices have not performed nearly as
well as many of their individual components. The "average stock" may be up only
minimally, but many individual companies are up considerably more. Here, too,
the divergence between large averages and individual companies is striking.
MARKET & ECONOMIC OUTLOOK: We are fundamental investors who make decisions based
on bottom-up analysis, and that leads to a healthy skepticism of what many
top-down strategists are currently saying. It also leads to a different view of
the big picture. As we have said before, we believe that the twin effects of
globalization and information technologies will keep inflation contained, wages
low, and profits strong. As a result, we have stayed with our thesis of above
trend earnings growth and stable economic growth. The recent spate of corporate
and economic data only confirms that view. The moderation in U.S. economic
growth for the second quarter of 2006 is a predictable result of the steady
increase in short-term rates and the cooling of the U.S. housing market, but it
does not alter the overall picture.
27
<Page>
For the markets, we believe quality companies with strong earnings growth
continue to get cheaper on a multiple basis. The forward multiple for the S&P
500 is now below 14x, and the overall indices have been treading water as
investors trade largely on news of wars abroad and interest rates at home. It is
interesting that the earnings of the S&P 500 have grown over 75% in the past
five years (July 2001-2006), while the Index itself is up only approximately 6%
(not including dividend reinvestment). Driven by the Fed interest rate cycle, as
well as sentiment, multiple compression has brought the market back, in
valuation terms, to levels last seen toward the end of 1994 and in early 1995.
In our view, the fundamentals support a significant rally in the markets, even
though sentiment and strategists do not. Some investors clearly prefer to wait
on a rally, in effect, to time the market, but that is a difficult strategy over
the long term. We are not saying ignore sentiment or disregard the U.S. economic
cycle and the possible implications for earnings going forward. But we are
suggesting that those factors tell us less about the world we are living in and
how companies are performing than they used to. There are opportunities all
around us, regardless of whether the overall U.S. economy or the major indices
are soaring or slumping.
Dynamic companies, especially those with global reach, have defied both
expectations and predictions on the upside for the past five years. That is a
statistical fact. Most people seem to believe that this pattern is coming to an
end. Regardless of what the short-term holds, we believe that the pattern will
continue.
FUND PERFORMANCE: During the fiscal year ended August 31, 2006, the performance
of the S&P 500 was led by what have historically been low-growth sectors (the
five top performing sectors were Materials, Telecommunication Services,
Financials, Energy and Consumer Staples). In this environment, the SM&R Alger
Growth Fund's relative performance has suffered. Over the twelve months ended
August 31, 2006. the Fund's Class A shares returned -1.41% at net asset value
versus a return of 8.88% for the S&P 500 index and a return of 1.49% for the
Lipper Large-Cap Growth Fund index. Relative to the S&P 500 index, the Fund
benefited from solid security selection within the Consumer Staples, Energy,
Information Technology and Utilities sectors. However, the Fund's overall
performance was held back by disappointing returns in the Consumer Discretionary
and Health Care sectors and an underweighting in the strong Financials sector.
Best Regards,
Dan Chung, CFA, Portfolio Manager
SM&R Alger Growth Fund
28
<Page>
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
[CHART]
<Table>
<Caption>
SM&R ALGER GROWTH FUND S&P 500 LIPPER LARGE-CAP GROWTH INDEX
9/1/2000 $9,497 $10,000 $10,000
12/31/2000 $7,265 $ 8,731 $ 7,528
8/31/2001 $6,059 $ 7,561 $ 5,579
12/31/2001 $6,126 $ 7,693 $ 5,731
8/31/2002 $4,350 $ 6,201 $ 4,372
12/31/2002 $4,065 $ 5,993 $ 4,120
8/31/2003 $4,938 $ 6,949 $ 4,855
12/31/2003 $5,423 $ 7,712 $ 5,231
8/31/2004 $4,976 $ 7,744 $ 4,993
12/31/2004 $5,693 $ 8,551 $ 5,621
8/31/2005 $6,078 $ 8,716 $ 5,766
12/31/2005 $6,306 $ 8,969 $ 6,047
8/31/2006 $5,993 $ 9,490 $ 5,852
</Table>
SM&R Alger Growth Fund performance figures 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 average annual returns for
Class A shares reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 09/01/00.
ONE FIVE SINCE
YEAR YEAR INCEPTION
-------------------------
Class A -6.38% -1.25% -8.18%
Class B -7.07% -1.03% -8.03%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 14.17%
Consumer Staples 5.82%
Energy 8.99%
Financials 9.65%
Health Care 15.46%
Industrials 10.27%
Information Technology 17.03%
Materials 7.43%
Miscellaneous 0.75%
Telecommunication Services 4.10%
Utilities 6.34%
</Table>
29
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER GROWTH FUND
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY--
BROADCASTING--1.26%
Cablevision Systems Corp. (Class A) * 975 $ 22,698
EchoStar Communications Corp. (Class A) * 470 14,923
--------
37,621
CONSUMER ELECTRONICS--1.41%
Nintendo Co., Ltd. ADR 1,640 42,089
HOTELS, RESTAURANTS & LEISURE--0.52%
Wynn Resorts, Ltd. * 200 15,482
INTERNET & CATALOG RETAIL--2.03%
eBay Inc. * 2,175 60,596
MEDIA--3.82%
News Corp. (Class A) 1,570 29,877
Viacom Inc. New (Class B) * 815 29,585
XM Satellite Radio Holdings Inc. (Class A) * 4,215 54,626
--------
114,088
MULTI-LINE RETAIL--1.97%
Federated Department Stores, Inc. 1,545 58,679
RETAILING--1.68%
CVS Corp. 1,495 50,157
SPECIALTY RETAIL--0.49%
Home Depot (The), Inc. 425 14,573
TEXTILES, APPAREL & LUXURY GOODS--1.01%
Coach, Inc. * 1,000 30,190
--------
TOTAL CONSUMER DISCRETIONARY--14.19% 423,475
--------
CONSUMER STAPLES--
FOOD PRODUCTS--0.51%
Archer-Daniels-Midland Co. 370 15,233
HOUSEHOLD PRODUCTS--1.28%
Procter & Gamble Co. (The) 615 38,068
PERSONAL PRODUCTS--1.31%
Avon Products, Inc. 1,365 39,189
TOBACCO--2.73%
Altria Group, Inc. 975 81,442
--------
TOTAL CONSUMER STAPLES--5.83% 173,932
--------
ENERGY--
ENERGY & ENERGY SERVICES--2.84%
Diamond Offshore Drilling, Inc. 205 14,858
Schlumberger Ltd. 1,140 69,882
--------
84,740
ENERGY EQUIPMENT & SERVICES--4.81%
National-Oilwell Varco Inc. * 1,335 87,176
Transocean Inc. * 435 29,036
Weatherford International Ltd. * 635 27,305
--------
143,517
OIL & GAS--1.35%
Exxon Mobil Corp. 595 40,264
--------
TOTAL ENERGY--9.00% 268,521
--------
FINANCIALS--
CAPITAL MARKETS--3.61%
Bear Stearns Companies (The), Inc. 420 $ 54,747
Legg Mason, Inc. 580 52,931
--------
107,678
COMMERCIAL BANKS--0.97%
Bank of America Corp. 565 29,081
DIVERSIFIED FINANCIALS--2.53%
Chicago Mercantile Exchange Holdings Inc. 60 26,400
Goldman Sachs Group (The), Inc. 330 49,055
--------
75,455
FINANCIAL SERVICES--1.00%
UBS AG 525 29,804
INSURANCE--1.02%
Hartford Financial Services Group (The), Inc. 355 30,480
REAL ESTATE MANAGEMENT--0.53%
Jones Lang LaSalle Inc. 190 15,819
--------
TOTAL FINANCIALS--9.66% 288,317
--------
HEALTH CARE--
BIOTECHNOLOGY--2.49%
Amgen Inc. * 450 30,568
Biogen Idec Inc. * 315 13,904
Genentech, Inc. * 180 14,854
Gilead Sciences, Inc. * 235 14,899
--------
74,225
HEALTH CARE--2.14%
Humana Inc. * 1,050 63,977
HEALTH CARE ADMINISTRATIVE SERVICES--1.48%
McKesson Corp. 870 44,196
HEALTH CARE EQUIPMENT & SUPPLIES--2.11%
Baxter International Inc. 710 31,510
Zimmer Holdings, Inc. * 460 31,280
--------
62,790
HEALTH CARE PROVIDERS & SERVICES--4.31%
Brookdale Senior Living Inc. 310 14,827
DaVita, Inc. * 260 15,174
Health Management Associates, Inc. (Class A) 2,155 45,061
Medco Health Solutions, Inc. * 845 53,548
--------
128,610
PHARMACEUTICALS--2.96%
Johnson & Johnson 770 49,788
Pfizer Inc. 1,395 38,446
--------
88,234
--------
TOTAL HEALTH CARE--15.49% 462,032
--------
INDUSTRIALS--
AEROSPACE & DEFENSE--2.51%
Boeing Co. (The) 590 44,191
L-3 Communications Holdings, Inc. 410 30,910
--------
75,101
30
<Page>
COMMON STOCK SHARES VALUE
INDUSTRIAL CONGLOMERATES--3.11%
General Electric Co. 1,100 $ 37,466
Textron Inc. 660 55,348
----------
92,814
MACHINERY--1.63%
Joy Global Inc. 1,115 48,547
TRANSPORTATION--3.03%
Burlington Northern Santa Fe Corp. 1,350 90,382
----------
TOTAL INDUSTRIALS--10.28% 306,844
----------
INFORMATION TECHNOLOGY--
COMMUNICATIONS EQUIPMENT--2.58%
Cisco Systems, Inc. * 2,460 54,095
Corning Inc. * 355 7,895
JDS Uniphase Corp. * 2,965 6,731
Level 3 Communications, Inc. * 1,875 8,306
----------
77,027
COMPUTER RELATED & BUSINESS SERVICES--4.08%
Apple Computer, Inc. * 850 57,672
MEMC Electronic Materials, Inc. * 1,660 64,209
----------
121,881
COMPUTER SOFTWARE--0.26%
Symantec Corp. * 410 7,642
COMPUTERS & PERIPHERALS--0.28%
SanDisk Corp. * 140 8,249
INFORMATION TECHNOLOGY SERVICES--1.50%
Cognizant Technology Solutions Corp. (Class A) * 210 14,681
Satyam Computer Services Ltd. ADR 785 29,963
----------
44,644
INTERNET SOFTWARE & SERVICES--3.22%
Google Inc. (Class A) * 100 37,853
Yahoo! Inc. * 2,020 58,216
----------
96,069
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT--3.19%
Freescale Semiconductor Inc. (Class A) * 3,105 95,324
SEMICONDUCTORS--0.90%
Marvell Technology Group Ltd. * 1,535 26,878
SOFTWARE--1.04%
Microsoft Corp. 920 23,635
Oracle Corp. * 475 7,434
----------
31,069
----------
TOTAL INFORMATION TECHNOLOGY--17.05% 508,783
----------
MATERIALS--
CHEMICALS--1.86%
Air Products and Chemicals, Inc. 835 55,352
METALS & MINING--3.70%
Cameco Corp. * 370 15,151
Peabody Energy Corp. 1,510 66,546
Vedanta Resources Plc 1,130 28,702
----------
110,399
MINING--1.87%
Freeport-McMoRan Copper & Gold, Inc. 960 $ 55,882
----------
TOTAL MATERIALS--7.43% 221,633
----------
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--2.01%
ALLTEL Corp. 540 29,273
Verizon Communications Inc. 870 30,607
----------
59,880
WIRELESS TELECOMMUNICATION SERVICES--2.10%
NII Holdings Inc. * 595 31,743
SBA Communications Corp. (Class A) * 1,205 31,017
----------
62,760
----------
TOTAL TELECOMMUNICATION SERVICES--4.11% 122,640
----------
UTILITIES--
ELECTRIC & GAS COMPANIES--2.77%
Emerson Electric Co. 1,005 82,561
ELECTRIC UTILITIES--2.51%
Exelon Corp. 1,230 75,005
MULTI-UTILITIES & UNREGULATED POWER--1.07%
Veolia Environnement ADR 565 31,804
----------
TOTAL UTILITIES--6.35% 189,370
----------
TOTAL COMMON STOCK--99.39%
(Cost $2,936,327) 2,965,547
----------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 22,589 22,589
----------
TOTAL MONEY MARKET FUND--0.76%
(Cost $22,589) 22,589
----------
TOTAL INVESTMENTS--100.15%
(Cost $2,958,916) 2,988,136
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.15)% (4,404)
----------
NET ASSETS--100.00% $2,983,732
==========
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTES TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
31
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER GROWTH FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $2,936,327) $ 2,965,547
Investment in affiliated money market fund (Cost $22,589) 22,589
------------
Total investments (Cost $2,958,916) 2,988,136
Prepaid expenses 10,598
Receivable for:
Investment securities sold 18,998
Capital stock sold 422
Dividends 2,992
Expense reimbursement 4,116
------------
TOTAL ASSETS 3,025,262
------------
LIABILITIES
Investment securities purchased 14,676
Payable to investment adviser for fund expenses 11,020
Accrued:
Investment advisory fees 2,125
Service fees 625
Distribution fees 4,471
Other liabilities 8,613
------------
TOTAL LIABILITIES 41,530
------------
NET ASSETS (applicable to shares outstanding) $ 2,983,732
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 2,875,652
Accumulated net realized gain (loss) on investments 78,860
Net unrealized appreciation (depreciation) of investments 29,220
------------
Net Assets $ 2,983,732
============
NET ASSETS:
Class A 1,850,243
- --------------------------------------------------------------------------------
Class B 1,133,489
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 2,983,732
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 293,139
- --------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 187,239
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 6.31
Offering price per share:
(Net assets value of $6.31 / 95%) $ 6.64
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 6.05
- --------------------------------------------------------------------------------
See notes to financial statements.
32
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R ALGER GROWTH FUND
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $319) $ 27,903
Interest from affiliated money market fund 3,717
---------
TOTAL INVESTMENT INCOME 31,620
---------
EXPENSES
Investment advisory fees 26,137
Service fees 7,687
Professional fees 6,437
Custody and transaction fees 24,574
Directors' fees 5,506
Insurance expenses 1,071
Compliance expenses 490
Qualification fees
Class A 9,003
Class B 6,829
Shareholder reporting expenses
Class A 3,687
Class B 2,468
Distribution fees
Class A 6,627
Class B 11,814
---------
TOTAL EXPENSES 112,330
LESS EXPENSES REIMBURSED (54,996)
---------
NET EXPENSES 57,334
---------
INVESTMENT INCOME (LOSS)--NET (25,714)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 176,202
Change in unrealized appreciation (depreciation) of investments (210,426)
---------
NET GAIN (LOSS) ON INVESTMENTS (34,224)
---------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (59,938)
=========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R ALGER GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-----------------------
2006 2005
---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ (25,714) $ (16,159)
Net realized gain (loss) on investments 176,202 305,796
Change in unrealized appreciation (depreciation) of investments (210,426) 258,817
---------- ----------
Net increase (decrease) in net assets resulting from operations (59,938) 548,454
---------- ----------
CAPITAL SHARE TRANSACTIONS--NET
Class A 70,295 32,629
Class B 13,968 (26,306)
---------- ----------
Total capital share transactions--net 84,263 6,323
---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 24,325 554,777
NET ASSETS
Beginning of year 2,959,407 2,404,630
---------- ----------
End of year $2,983,732 $2,959,407
========== ==========
</Table>
See notes to financial statements.
33
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R ALGER GROWTH FUND
<Table>
<Caption>
CLASS A SHARES
------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
---------- ---------- ---------- ---------- --------
Net asset value, beginning of year $ 6.40 $ 5.24 $ 5.20 $ 4.58 $ 6.38
Income (loss) from investment operations
Investment income (loss)--net (0.04) (0.02) (0.06) (0.04) (0.12)
Net realized and unrealized gain (loss) on investments (0.05) 1.18 0.10 0.66 (1.68)
---------- ---------- ---------- ---------- --------
Total from investment operations (0.09) 1.16 0.04 0.62 (1.80)
---------- ---------- ---------- ---------- --------
Net asset value, end of year $ 6.31 $ 6.40 $ 5.24 $ 5.20 $ 4.58
========== ========== ========== ========== ========
Total return (2) (1.41)% 22.14% 0.77% 13.54% (28.21)%
========== ========== ========== ========== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $1,850,243 $1,815,584 $1,448,385 $1,071,035 $698,670
Ratio of expenses with reimbursement to average net assets (3) 1.61% 1.70% 1.70% 1.70% 3.54%
Ratio of expenses without reimbursement to average net assets 3.36% 3.63% 3.32% 4.76% 4.65%
Ratio of net investment loss to average net assets (0.58)% (0.33)% (1.06)% (0.86)% (2.64)%
Portfolio turnover rate 321.34% 256.52% 162.19% 222.55% 180.20%
</Table>
<Table>
<Caption>
CLASS B SHARES
------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------
2006 2005 2004 (1) 2003 (1) 2002 (4)
---------- ---------- ---------- ---------- --------
Net asset value, beginning of year $ 6.18 $ 5.09 $ 5.08 $ 4.51 $ 6.31
Income (loss) from investment operations
Investment income (loss)--net (0.08) (0.06) (0.09) (0.07) (0.15)
Net realized and unrealized gain (loss) on investments (0.05) 1.15 0.10 0.64 (1.65)
---------- ---------- -------- -------- --------
Total from investment operations (0.13) 1.09 0.01 0.57 (1.80)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 6.05 $ 6.18 $ 5.09 $ 5.08 $ 4.51
========== ========== ======== ======== ========
Total return (2) (2.10)% 21.41% 0.20% 12.64% (28.53)%
========== ========== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $1,133,489 $1,143,823 $956,245 $836,200 $653,702
Ratio of expenses with reimbursement to average net assets (3) 2.27% 2.35% 2.35% 2.35% 4.13%
Ratio of expenses without reimbursement to average net assets 4.13% 4.51% 4.20% 5.53% 5.30%
Ratio of net investment loss to average net assets (1.24)% (0.98)% (1.71)% (1.51)% (3.24)%
Portfolio turnover rate 321.34% 256.52% 162.19% 222.55% 180.20%
</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) SM&R voluntarily agreed to waive or reduce expenses to 1.70% for Class A
and 2.35% for Class B until April 30, 2006. Effective May 1, 2006 until
April 30, 2007, the expenses will be waived or reduced to 1.45% for Class A
and 2.10% for Class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
34
<Page>
SM&R GROWTH FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
The SM&R Growth Fund seeks to achieve long-term capital appreciation in the
equity market. The Fund is guided by a strategy of investing primarily in stocks
of well established companies with records of consistent earnings and cash flow
growth. For the twelve months ended August 31, 2006 the Fund's total return was
6.28%, before sales charges (but after other expenses), to Class T investors at
net asset value compared with the Lipper Large Cap Core Index, which returned
8.60% over the same time period. Year-to-date through August 31, 2006, the
Fund's return was 4.40%.
The Fund's performance during the year benefited from sector allocation choices,
primarily an overweight in Energy and an underweight in Information Technology.
Holdings which produced strong gains for the year include ExxonMobil, Disney,
Merck, Oracle, Cisco, and Kerr McGee. Underperforming selections that weighed
negatively on Fund performance include Given Imaging, Citi Trends, Maxim
Integrated, and Lowes.
Despite relatively strong performance from the equity market in the last twelve
months and a recent near all-time high of the Dow Jones Industrial Average,
investors seem uncertain. Although P/E ratios are lower than a year ago and the
Fed may be at the end of a rate hike cycle, major forces are at work on equity
price volatility. The risk of a geopolitical event, the direction of oil prices,
and uncertainty about the severity of the continuing decline in the housing
market are foremost in the minds of investors.
Economic growth slowed dramatically in the second quarter of 2006, following
5.6% growth in the first quarter. Even after an upward revision, second quarter
GDP came in at 2.9%. Weaker housing numbers, higher rates on adjustable mortgage
resets, and higher energy and food prices place significant pressure on consumer
spending, which accounts for more than two-thirds of GDP. While the consumer
continues to spend, as witnessed by the most recent rise in retail sales
reported, another spike in energy prices or a more severe than expected downturn
in the housing market could restrain household spending, thus further slowing
domestic growth.
Economic expansion, productivity gains, cost cutting efforts, and strong demand
produced substantial corporate earnings improvement, with gains of near 20% in
the first half of 2006. However, we believe corporate profit growth for the
second half of the year and into 2007 will slow, limited by slowing GDP growth.
Further, downward earnings guidance is on the rise, and sector specific
volatility, particularly in Energy and Home Building sectors, may lead to a less
bullish stock market in the near term.
For 2006, consensus forecasts for the S&P 500 are for 10% earnings growth over
2005 levels following a 14% earnings increase in 2005 over 2004 levels.
Corporate earnings are expected to increase 6% in 2007 versus 2006. While we
believe that most stocks are fairly valued at this point, there continues to be
some attractive valuations and growth opportunity in the equity market. Over the
coming months and into 2007, we will focus on value in core holdings that appear
to have underperformed fundamental expectations year-to-date, or show above
average growth opportunity over the next twelve months.
Sincerely,
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Growth Fund
35
<Page>
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R GROWTH FUND,
CLASS T, AT OFFERING PRICE, AND LIPPER LARGE CAP CORE INDEX AND THE S&P 500
[CHART]
<Table>
<Caption>
SM&R GROWTH FUND S&P 500 LIPPER LARGE-CAP CORE INDEX
9/1/1996 $ 9,424 $10,000 $10,000
8/31/1997 $12,335 $14,065 $13,523
8/31/1998 $11,502 $15,203 $14,426
8/31/1999 $15,983 $21,258 $19,456
8/31/2000 $20,168 $24,727 $23,535
8/31/2001 $12,979 $18,697 $17,388
8/31/2002 $ 9,833 $15,332 $14,497
8/31/2003 $10,846 $17,183 $15,921
8/31/2004 $12,003 $19,150 $17,193
8/31/2005 $13,084 $21,552 $19,164
8/31/2006 $13,906 $23,467 $20,812
</Table>
SM&R Growth Fund performance figures 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 average annual returns for Class A shares
reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 01/01/99.
ONE FIVE TEN SINCE
YEAR YEAR YEAR INCEPTION
-------------------------------
Class A 0.58% 0.11% -- -2.05%
Class B 0.44% 0.47% -- -1.87%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge of 5.75% through 8/31/06 for Class T shares.
10 YEAR 3.35%
5 YEAR 0.19%
1 YEAR 0.27%
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 12.89%
Consumer Staples 6.71%
Energy 14.97%
Financials 23.10%
Health Care 11.44%
Industrials 10.72%
Information Technology 9.83%
Materials 5.13%
Miscellaneous 0.03%
Telecommunication Services 1.76%
Utilities 3.42%
</Table>
36
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
COMMON STOCKS SHARES VALUE
CONSUMER DISCRETIONARY--
HOUSEHOLD DURABLES--2.80%
Newell Rubbermaid Inc. 38,200 $ 1,031,018
Stanley Works (The) 39,200 1,851,416
-----------
2,882,434
MEDIA--2.53%
News Corp. (Class A) 32,100 610,863
Walt Disney Co. (The) 67,000 1,986,550
-----------
2,597,413
MULTI-LINE RETAIL--3.74%
Citi Trends Inc. * 36,900 1,159,767
J.C. Penney Co., Inc. 23,200 1,462,528
Target Corp. 25,200 1,219,428
-----------
3,841,723
SPECIALTY RETAIL--3.81%
Bed Bath & Beyond Inc. * 13,900 468,847
Best Buy Co., Inc. 31,200 1,466,400
Home Depot, Inc. (The) 13,000 445,770
Limited Brands, Inc. 39,300 1,011,189
Lowe's Companies, Inc. 19,400 524,964
-----------
3,917,170
-----------
TOTAL CONSUMER DISCRETIONARY--12.88% 13,238,740
-----------
CONSUMER STAPLES--
BEVERAGES--4.03%
Coca-Cola Co. (The) 34,300 1,536,983
PepsiCo, Inc. 40,000 2,611,200
-----------
4,148,183
FOOD & DRUG RETAILING--0.26%
SUPERVALU INC 9,350 267,036
HOUSEHOLD PRODUCTS--2.41%
Procter & Gamble Co. (The) 40,000 2,476,000
-----------
TOTAL CONSUMER STAPLES--6.70% 6,891,219
-----------
ENERGY--
ENERGY EQUIPMENT & SERVICES--4.52%
Baker Hughes Inc. 15,800 1,124,644
Schlumberger Ltd. 26,400 1,618,320
Transocean Inc. * 14,100 941,175
Weatherford International Ltd. * 22,400 963,200
-----------
4,647,339
OIL & GAS--10.44%
Anadarko Petroleum Corp. 10,600 497,246
BP PLC ADR 15,200 1,034,360
Chevron Corp. 35,922 2,313,377
Exxon Mobil Corp. 72,800 4,926,376
Noble Corp. 14,200 928,538
Royal Dutch Shell PLC, ADR 14,900 1,027,206
-----------
10,727,103
-----------
TOTAL ENERGY--14.96% 15,374,442
-----------
FINANCIALS--
COMMERCIAL BANKS--10.88%
Golden West Financial Corp. 30,600 $ 2,309,994
PNC Financial Services Group, Inc. 60,000 4,247,400
U.S. Bancorp 54,085 1,734,506
Wachovia Corp. 42,600 2,327,238
Washington Mutual, Inc. 13,400 561,326
-----------
11,180,464
DIVERSIFIED FINANCIALS--2.59%
Goldman Sachs Group, Inc. (The) 5,000 743,250
JPMorgan Chase & Co. 13,800 630,108
Morgan Stanley 19,700 1,296,063
-----------
2,669,421
INSURANCE--8.30%
Allstate Corp. (The) 12,300 712,662
American International Group, Inc. 29,260 1,867,373
Brown & Brown, Inc. 24,400 730,536
Hartford Financial Services Group, Inc. (The) 26,400 2,266,704
Prudential Financial, Inc. 40,200 2,951,082
-----------
8,528,357
MISCELLANEOUS--1.16%
SPDR Trust Series 1 9,100 1,189,643
-----------
TOTAL FINANCIALS--22.93% 23,567,885
-----------
HEALTH CARE--
BIOTECHNOLOGY--4.45%
Amgen Inc. * 7,600 516,268
Celgene Corp. * 28,400 1,155,596
Genzyme Corp. * 12,000 794,760
Gilead Sciences, Inc. * 22,000 1,394,800
Given Imaging Ltd. * 36,900 711,063
-----------
4,572,487
HEALTH CARE EQUIPMENT & SUPPLIES--2.29%
Advanced Medical Optics, Inc. * 5,500 264,825
Hologic, Inc.* 21,700 937,006
Medtronic, Inc. 24,650 1,156,085
-----------
2,357,916
HEALTH CARE PROVIDERS & SERVICES--0.29%
DaVita, Inc. * 5,025 293,259
PHARMACEUTICALS--4.40%
Abbott Laboratories 13,900 676,930
Eli Lilly & Co. 41,200 2,304,316
Merck & Co., Inc. 38,000 1,540,900
-----------
4,522,146
-----------
TOTAL HEALTH CARE--11.43% 11,745,808
-----------
INDUSTRIALS--
AEROSPACE & DEFENSE--6.06%
Boeing Co. (The) 16,400 1,228,360
Goodrich Corp. 34,300 1,335,985
Honeywell International Inc. 14,500 561,440
Rockwell Collins, Inc. 32,100 1,683,003
United Technologies Corp. 22,600 1,417,246
-----------
6,226,034
37
<Page>
COMMON STOCKS SHARES VALUE
AIR FREIGHT & COURIERS--0.46%
FedEx Corp. 4,700 $ 474,841
BUILDING PRODUCTS--0.95%
American Standard Companies Inc. 23,400 977,418
CONSTRUCTION & ENGINEERING--1.19%
Cemex SAB de C.V. ADR 42,400 1,224,936
INDUSTRIAL CONGLOMERATES--0.47%
Tyco International Ltd. 18,600 486,390
MACHINERY--1.58%
Danaher Corp. 24,400 1,617,476
------------
TOTAL INDUSTRIALS--10.71% 11,007,095
------------
INFORMATION TECHNOLOGY--
COMMUNICATIONS EQUIPMENT--3.20%
Cisco Systems, Inc. * 84,500 1,858,155
Motorola, Inc. 30,900 722,442
Nokia Oyj ADR 34,100 712,008
------------
3,292,605
COMPUTERS & PERIPHERALS--1.70%
EMC Corp. * 30,800 358,820
Hewlett-Packard Co. 38,000 1,389,280
------------
1,748,100
ELECTRONIC EQUIPMENT & INSTRUMENTS--1.34%
Agilent Technologies, Inc. * 9,300 299,088
IntraLase Corp. * 57,200 1,075,932
------------
1,375,020
SEMICONDUCTOR EQUIPMENT & PRODUCTS--1.85%
Analog Devices, Inc. 15,600 477,984
KLA-Tencor Corp. 11,600 509,356
Linear Technology Corp. 15,200 516,952
Maxim Integrated Products, Inc. 13,600 395,760
------------
1,900,052
SOFTWARE--1.73%
Intuit Inc. * 24,800 749,456
Oracle Corp. * 65,700 1,028,205
1,777,661
------------
TOTAL INFORMATION TECHNOLOGY--9.82% 10,093,438
------------
MATERIALS--
CHEMICALS--1.15%
PPG Industries, Inc. 18,000 1,140,480
Tronox Inc. (Class B) 2,807 36,211
------------
1,176,691
CONTAINERS & PACKAGING--1.26%
Sealed Air Corp. * 25,000 1,296,750
------------
TOTAL MATERIALS--2.41% 2,473,441
------------
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--1.76%
Embarq Corp. 1,700 80,155
Sprint Nextel Corp. 34,007 575,398
Verizon Communications Inc. 32,800 $ 1,153,904
------------
1,809,457
------------
TOTAL TELECOMMUNICATION SERVICES--1.76% 1,809,457
------------
UTILITIES--
ELECTRIC UTILITIES--1.63%
Ameren Corp. 11,100 594,405
Exelon Corp. 9,100 554,918
Wisconsin Energy Corp. 12,100 520,300
------------
1,669,623
GAS UTILITIES--1.79%
El Paso Corp. 60,800 882,816
Kinder Morgan, Inc. 4,800 500,928
Sempra Energy 9,200 457,424
------------
1,841,168
------------
TOTAL UTILITIES--3.42% 3,510,791
------------
TOTAL COMMON STOCK--97.02%
(Cost $83,721,963) 99,712,316
------------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 32,597 32,597
------------
TOTAL MONEY MARKET FUND--0.03%
(Cost $32,597) 32,597
------------
COMMERCIAL PAPER
FACE
AMOUNT
FINANCIALS--
DIVERSIFIED FINANCIALS--0.15%
Textron Financial Corp., 5.28%, 09/05/06 $ 150,000 149,912
------------
TOTAL FINANCIALS--0.15% 149,912
------------
MATERIALS--
METALS & MINING--2.72%
Alcoa Inc. 5.25%, 09/01/06 2,800,000 2,800,000
------------
TOTAL MATERIALS--2.72% 2,800,000
------------
TOTAL COMMERCIAL PAPER--2.87%
(Cost $2,949,912) 2,949,912
------------
TOTAL INVESTMENTS--99.92%
(Cost $86,704,472) 102,694,825
CASH AND OTHER ASSETS, LESS LIABILITIES--0.08% 79,846
------------
NET ASSETS--100.00% $102,774,671
============
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
38
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $86,671,875) $102,662,228
Investment in affiliated money market fund (Cost $32,597) 32,597
------------
Total investments (Cost $86,704,472) 102,694,825
Prepaid expenses 46,326
Receivable for:
Capital stock sold 15,907
Dividends 210,921
Expense reimbursement 1,886
Other assets 93,341
------------
TOTAL ASSETS 103,063,206
------------
LIABILITIES
Capital stock reacquired 40,578
Payable to investment adviser for fund expenses 68,198
Accrued:
Investment advisory fees 65,038
Service fees 21,661
Distribution fees 9,562
Other liabilities 83,498
-------------
TOTAL LIABILITIES 288,535
------------
NET ASSETS (applicable to shares outstanding) $102,774,671
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 88,554,458
Undistributed net investment income 138,008
Accumulated net realized gain (loss) on investments (1,908,148)
Net unrealized appreciation (depreciation) of investments 15,990,353
------------
Net Assets $102,774,671
============
NET ASSETS:
Class A 5,619,890
- --------------------------------------------------------------------------------
Class B 3,218,341
- --------------------------------------------------------------------------------
Class T 93,936,440
- --------------------------------------------------------------------------------
TOTAL NET ASSETS: $102,774,671
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 1,303,741
- --------------------------------------------------------------------------------
Class B:
Authorized 25,000,000
Outstanding 762,496
- --------------------------------------------------------------------------------
Class T:
Authorized 95,000,000
Outstanding 21,326,068
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 4.31
Offering price per share:
(Net assets value of $4.31 / 95%) $ 4.54
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 4.22
- --------------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 4.40
Offering price per share:
(Net assets value of $4.40 / 94.25%) $ 4.67
- --------------------------------------------------------------------------------
See notes to financial statements.
39
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $7,529) $ 1,860,742
Interest 154,936
Interest from affiliated money market fund 490
-----------
TOTAL INVESTMENT INCOME 2,016,168
-----------
EXPENSES
Investment advisory fees 795,806
Service fees 264,658
Professional fees 20,136
Custody and transaction fees 24,066
Directors' fees 5,507
Insurance expenses 42,012
Compliance expenses 18,341
Qualification fees
Class A 7,690
Class B 7,190
Class T 23,935
Shareholder reporting expenses
Class A 11,427
Class B 6,227
Class T 65,841
Distribution fees
Class A 14,832
Class B 25,102
-----------
TOTAL EXPENSES 1,332,770
LESS EXPENSES REIMBURSED (30,804)
-----------
NET EXPENSES 1,301,966
-----------
INVESTMENT INCOME (LOSS)--NET 714,202
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 15,781,723
Change in unrealized appreciation (depreciation) of
investments (9,880,088)
-----------
NET GAIN (LOSS) ON INVESTMENTS 5,901,635
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,615,837
===========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------
2006 2005
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 714,202 $ 1,342,227
Net realized gain (loss) on investments 15,781,723 11,214,235
Change in unrealized appreciation (depreciation) of investments (9,880,088) (2,651,055)
------------ ------------
Net increase (decrease) in net assets resulting from operations 6,615,837 9,905,407
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (34,714) (65,264)
Class B (7,032) (24,873)
Class T (705,872) (1,228,147)
------------ ------------
Total distributions to shareholders (747,618) (1,318,284)
------------ ------------
CAPITAL SHARE TRANSACTIONS--NET
Class A (858,993) (318,767)
Class B (412,861) (161,881)
Class T (13,074,575) (10,991,288)
------------ ------------
Total capital share transactions--net (14,346,429) (11,471,936)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (8,478,210) (2,884,813)
NET ASSETS
Beginning of year 111,252,881 114,137,694
------------ ------------
End of year $102,774,671 $111,252,881
============ ============
Undistributed Net Investment Income $ 138,008 $ 171,424
============ ============
</Table>
See notes to financial statements.
40
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R GROWTH FUND
<Table>
<Caption>
CLASS A SHARES
-------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
Net asset value, beginning of year $ 4.09 $ 3.79 $ 3.45 $ 3.15 $ 4.18
Income (loss) from investment operations
Investment income (loss)--net 0.01 0.04 0.02 0.01 (0.01)
Net realized and unrealized gain (loss) on investments 0.23 0.30 0.34 0.30 (1.02)
------ ------ ------ ------ -------
Total from investment operations 0.24 0.34 0.36 0.31 (1.03)
Less distributions
Investment income--net (0.02) (0.04) (0.02) (0.01) --
Capital gains -- -- -- -- --
------ ------ ------ ------ -------
Total distributions (0.02) (0.04) (0.02) (0.01) --
------ ------ ------ ------ -------
Net asset value, end of year $ 4.31 $ 4.09 $ 3.79 $ 3.45 $ 3.15
====== ====== ====== ====== =======
Total return (1) 6.00% 9.05% 10.41% 10.00% (24.61)%
====== ====== ====== ====== =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $5,620 $6,154 $6,017 $5,039 $ 5,287
Ratio of expenses with reimbursement to average net assets (2) 1.36% 1.36% 1.36% 1.36% 1.47%
Ratio of expenses without reimbursement to average net assets 1.66% 1.69% 1.54% 1.60% 1.55%
Ratio of net investment income (loss) to average net assets 0.52% 1.03% 0.44% 0.42% (0.03)%
Portfolio turnover rate 56.05% 24.18% 4.93% 22.97% 41.74%
</Table>
<Table>
<Caption>
CLASS B SHARES
----------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
Net asset value, beginning of year $ 4.00 $ 3.72 $ 3.39 $ 3.11 $ 4.13
Income (loss) from investment operations
Investment income (loss)--net -- 0.02 0.01 (0.01) (0.02)
Net realized and unrealized gain (loss) on investments 0.23 0.29 0.33 0.29 (1.00)
------ ------ ------ ------ -------
Total from investment operations 0.23 0.31 0.34 0.28 (1.02)
Less distributions
Investment income--net (0.01) (0.03) (0.01) (0.00)*** --
Capital gains -- -- -- -- --
------ ------ ------ ------ -------
Total distributions (0.01) (0.03) (0.01) 0.00 0.00
------ ------ ------ ------ -------
Net asset value, end of year $ 4.22 $ 4.00 $ 3.72 $ 3.39 $ 3.11
====== ====== ====== ====== =======
Total return (1) 5.71% 8.27% 9.93% 9.12% (24.70)%
====== ====== ====== ====== =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $3,218 $3,456 $3,365 $2,700 $ 2,587
Ratio of expenses with reimbursement to average net assets (2) 1.86% 1.86% 1.86% 1.86% 1.97%
Ratio of expenses without reimbursement to average net assets 2.24% 2.20% 2.09% 2.24% 2.19%
Ratio of net investment income (loss) to average net assets 0.02% 0.52% (0.06)% (0.08)% (0.53)%
Portfolio turnover rate 56.05% 24.18% 4.93% 22.97% 41.74%
</Table>
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.36% for Class
A and 1.86% for Class B until December 31, 2006.
*** Amount less than $0.01
See notes to financial statements.
41
<Page>
<Table>
<Caption>
CLASS T SHARES
--------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------
2006 2005 2004 2003 2002
------- -------- -------- -------- -------
Net asset value, beginning of year $ 4.17 $ 3.87 $ 3.52 $ 3.21 $ 4.25
Income (loss) from investment operations
Investment income (loss)--net 0.03 0.05 0.03 0.03 0.01
Net realized and unrealized gain (loss) on investments 0.23 0.30 0.35 0.30 (1.04)
------- -------- -------- -------- -------
Total from investment operations 0.26 0.35 0.38 0.33 (1.03)
Less distributions
Investment income--net (0.03) (0.05) (0.03) (0.02) (0.01)
Capital gains -- -- -- -- --
------- -------- -------- -------- -------
Total distributions (0.03) (0.05) (0.03) (0.02) (0.01)
------- -------- -------- -------- -------
Net asset value, end of year $ 4.40 $ 4.17 $ 3.87 $ 3.52 $ 3.21
======= ======== ======== ======== =======
Total return (1) 6.28% 9.01% 10.67% 10.30% (24.24)%
======= ======== ======== ======== =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $93,937 $101,643 $104,756 $100,383 $98,912
Ratio of expenses to average net assets 1.18% 1.19% 1.12% 1.15% 1.10%
Ratio of net investment income to average net assets 0.70% 1.20% 0.68% 0.63% 0.34%
Portfolio turnover rate 56.05% 24.18% 4.93% 22.97% 41.74%
</Table>
(1) Does not include the effect of sales charge
See notes to financial statements.
42
<Page>
SM&R EQUITY INCOME FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
The SM&R Equity Income Fund's primary investment objective remains providing
current income for shareholders with a secondary objective of long-term capital
appreciation. The Fund's strategy is to invest principally in the stocks of
well-established companies with records of consistent and increasing dividend
payments. For the fiscal year ended August 31, 2006, the Fund's total return was
10.04%, before sales charges (but after other expenses), to Class T investors at
net asset value. Over that same time period the Fund's benchmark, the Lipper
Equity Income Fund Index, offered a total return of 10.63%. The broad equity
market, as measured by the S&P 500, returned 8.88% for the twelve months while
the Dow Jones Industrial Average returned 11.16%. The Fund continues to meet its
goal of maintaining a dividend yield greater than that of the market, as
represented by the Standard & Poor's 500 Index. The current dividend yield on
the fund is 3.7% (before expenses) versus about 1.8% for the S&P 500. As of
August 31, the Fund was almost fully invested, holding a cash position of
approximately 1.3%.
The Fund's performance during the year benefited significantly from holdings in
several sectors. Of particular note for out-performance were the Energy,
Consumer Discretionary, Consumer Staples, and Health Care sectors. Stock
selectivity in the Energy, Consumer Discretionary, Health Care and Financial
Services sectors contributed positively to performance. Alternately, selection
in the Materials and Industrials sectors hindered performance. Holdings which
produced strong gains for the year include Reynolds American, Merck,
Schlumberger, and AT&T. Laggards include Deluxe Corp., Standard Register and
ServiceMaster Corp. The Financial Services sector continues to have the largest
percentage weighting in the fund due to the above average dividend yields paid
by companies in the sector. These companies are also regularly increasing their
dividends so it is likely that we will continue to overweight the sector. We
expect to adhere to our conservative stock selection discipline of purchasing
attractively valued equities for long-term appreciation potential while
maintaining an above-market dividend yield.
Energy prices continued to climb over the past year as demand from both
developed and developing nations strained producers' ability to satisfy the need
for oil and natural gas. Oil reached a high of $79 per barrel in mid-July but
has since declined almost 20% to approaching $60 per barrel. Gasoline has
concurrently dropped from over $3.00 per gallon to below $2.50 a gallon. This
could add an estimated $60 billion annually to consumer spending. However, we do
not expect the recent price declines to continue, as it is likely that strong
demand from Asian economies, continuing geopolitical risks and the upcoming
winter heating season will result in prices stabilizing, if not rising, over the
coming months.
Housing starts in the U.S. fell 6% in August and 19.8% over the past year, a
greater decline than many analysts' forecasts. Starts declined to an annual rate
of 1.665 million, a three-year low. According to the Commerce Department, new
home sales dropped in July while inventories of unsold new homes rose to a
record. Builders have reduced construction and are offering significant
incentives to attract buyers, which may indicate that the housing market is
weaker than economic data suggest. Importantly, the housing contraction has
occurred while the overall economy has grown over the past year. Retail sales,
employment, and commercial construction all rose in August. This suggests that
the decline in housing will weaken, but not break, domestic economic growth.
However, should energy prices spike again, consumers could feel enough pressure
to restrain their spending enough to drag the rest of the economy down toward
zero growth.
For 2006, consensus forecasts for the S&P 500 are for 10% earnings growth over
2005 levels following a 14% earnings increase in 2005 over 2004 levels.
Corporate earnings are expected to increase 6% in 2007 versus 2006. Currently,
the trailing twelve-month P/E ratio for the S&P 500 is 16x and the year-end 2006
P/E is 16x. This compares to an historical long-term average P/E of 15.5x. Given
our expectations for slowing growth in corporate operating margins and profits,
we believe that equities are fairly valued at these levels. With the
anticipation of a slowing economy along with the probability of lower corporate
earnings growth, it does not seem likely that price/earnings multiples will be
able to expand meaningfully from these levels. This environment should favor
stocks with above-average total returns including dividends.
We believe the Fund is well-positioned to provide an attractive return over the
long-term for conservative equity investors. Its well-diversified portfolio of
companies expected to generate consistent earnings growth while continuing to
provide an above-average dividend yield should make the Fund an attractive core
holding for many investors.
Sincerely,
John S. Maidlow, CFA, Portfolio Manager
SM&R Equity Income Fund
43
<Page>
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 FUND INDEX AND THE
S&P 500
[CHART]
<Table>
<Caption>
SM&R EQUITY INCOME FUND S&P 500 LIPPER EQUITY INCOME FUND INDEX
9/1/1996 $ 9,426 $10,000 $10,000
8/31/1997 $11,866 $14,065 $13,148
8/31/1998 $12,131 $15,203 $13,308
8/31/1999 $14,707 $21,258 $16,444
8/31/2000 $15,394 $24,727 $17,185
8/31/2001 $13,867 $18,697 $16,791
8/31/2002 $11,783 $15,332 $14,529
8/31/2003 $12,588 $17,183 $15,789
8/31/2004 $14,116 $19,150 $18,103
8/31/2005 $15,437 $21,552 $20,683
8/31/2006 $16,986 $23,467 $22,881
</Table>
SM&R Equity Income Fund performance figures 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 average annual returns
for Class A shares reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 01/01/99.
ONE FIVE TEN SINCE
YEAR YEAR YEAR INCEPTION
------------------------------
Class A 4.40% 2.86% -- 1.27%
Class B 3.95% 3.17% -- 1.19%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge of 5.75% through 8/31/06 for Class T shares.
10 YEAR 5.44%
5 YEAR 2.91%
1 YEAR 3.72%
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 3.68%
Consumer Staples 11.59%
Energy 14.82%
Financials 31.36%
Health Care 9.87%
Industrials 8.03%
Information Technology 0.59%
Materials 3.57%
Telecommunication Services 6.34%
Utilities 10.15%
</Table>
44
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
COMMON STOCKS SHARES VALUE
CONSUMER DISCRETIONARY--
HOTELS RESTAURANTS & LEISURE--0.51%
McDonald's Corp. 15,100 $ 542,090
HOUSEHOLD DURABLES--1.71%
Newell Rubbermaid Inc. 17,800 480,422
Stanley Works (The) 17,900 845,417
Tupperware Brands Corp. 27,600 497,076
-----------
1,822,915
SPECIALTY RETAIL--1.46%
Limited Brands, Inc. 46,900 1,206,737
TJX Companies, Inc. (The) 13,300 355,775
-----------
1,562,512
-----------
TOTAL CONSUMER DISCRETIONARY--3.68% 3,927,517
-----------
CONSUMER STAPLES--
BEVERAGES--2.74%
Coca-Cola Co. (The) 25,700 1,151,617
PepsiCo, Inc. 27,200 1,775,616
-----------
2,927,233
FOOD PRODUCTS--3.00%
ConAgra Foods, Inc. 53,100 1,263,780
H.J. Heinz Co. 19,000 794,960
McCormick & Co., Inc. (b) 19,500 710,190
Sensient Technologies Corp. 21,500 432,580
-----------
3,201,510
FOOD & DRUG RETAILING--1.97%
SUPERVALU INC 18,500 528,360
Wal-Mart Stores, Inc. 35,200 1,574,144
-----------
2,102,504
HOUSEHOLD PRODUCTS--1.94%
Kimberly-Clark Corp. 13,600 863,600
Procter & Gamble Co. (The) 19,500 1,207,050
-----------
2,070,650
TOBACCO--1.74%
Altria Group, Inc. 12,000 1,002,360
Reynolds American Inc. 13,098 852,287
-----------
1,854,647
-----------
TOTAL CONSUMER STAPLES--11.39% 12,156,544
-----------
ENERGY--
ENERGY EQUIPMENT & SERVICES--3.68%
Boardwalk Pipeline Partners, LP 51,200 1,481,216
Schlumberger Ltd. 22,800 1,397,640
Weatherford International Ltd. * 24,400 1,049,200
-----------
3,928,056
OIL & GAS--11.12%
Anadarko Petroleum Corp. 27,200 1,275,952
BP PLC ADR 17,510 1,191,556
Chevron Corp. 38,000 2,447,200
Enterprise Products Partner L.P. 10,700 286,439
Exxon Mobil Corp. 56,000 3,789,520
Natural Resource Partners L.P. 19,700 1,146,540
Plains All American Pipeline, L.P. 11,700 538,200
Royal Dutch Shell PLC ADR 17,300 $ 1,192,662
-----------
11,868,069
-----------
TOTAL ENERGY--14.80% 15,796,125
FINANCIALS--
COMMERCIAL BANKS--14.17%
AmSouth Bancorporation 22,300 638,895
Bank of America Corp. 48,700 2,506,589
Comerica Inc. 19,200 1,099,200
Fifth Third Bancorp 27,700 1,089,718
First Horizon National Corp. 27,900 1,065,222
IndyMac Bancorp, Inc. 26,000 1,016,600
KeyCorp 17,100 629,109
National City Corp. 31,100 1,075,438
PNC Financial Services Group, Inc. 25,000 1,769,750
TrustCo Bank Corp NY 87,300 960,300
U.S. Bancorp 33,700 1,080,759
Washington Mutual, Inc. 13,700 573,893
Wells Fargo & Co. 46,400 1,612,400
-----------
15,117,873
DIVERSIFIED FINANCIALS--9.12%
Allied Capital Corp. 20,500 627,095
Citigroup Inc. 68,400 3,375,540
Colonial Properties Trust 22,500 1,115,550
JPMorgan Chase & Co. 31,700 1,447,422
New York Community Bancorp, Inc. 64,000 1,050,240
Principal Financial Group, Inc. 16,700 889,108
Weingarten Realty Investors 29,000 1,230,180
-----------
9,735,135
INSURANCE--2.30%
Allstate Corp. (The) 12,600 730,044
Prudential Financial, Inc. 10,400 763,464
St. Paul Travelers Companies, Inc. (The) 21,956 963,868
-----------
2,457,376
REAL ESTATE--4.82%
Health Care Property Investors, Inc. 45,200 1,360,068
Mack-Cali Realty Corp. 24,200 1,286,230
National Retail Properties Inc. 47,400 1,054,176
Plum Creek Timber Co., Inc. 41,500 1,445,445
-----------
5,145,919
-----------
TOTAL FINANCIALS--30.41% 32,456,303
-----------
HEALTH CARE--
BIOTECHNOLOGY--0.56%
Genzyme Corp. * 4,650 307,970
Gilead Sciences, Inc. * 4,650 294,810
-----------
602,780
HEALTH CARE EQUIPMENT & SUPPLIES--0.25%
Advanced Medical Optics, Inc. * 5,475 263,621
HEALTH CARE PROVIDERS & SERVICES--1.31%
DaVita, Inc. * 4,975 290,341
LTC Properties, Inc. 46,500 1,107,630
-----------
1,397,971
45
<Page>
COMMON STOCKS SHARES VALUE
PHARMACEUTICALS--7.73%
Abbott Laboratories 12,500 $ 608,750
Eli Lilly & Co. 14,000 783,020
Johnson & Johnson 39,200 2,534,672
Merck & Co. Inc. 25,300 1,025,915
Pfizer Inc. 85,580 2,358,585
Wyeth 19,300 939,910
------------
8,250,852
------------
TOTAL HEALTH CARE--9.85% 10,515,224
------------
INDUSTRIALS--
AEROSPACE & DEFENSE--1.69%
United Technologies Corp. 28,800 1,806,048
COMMERCIAL SERVICES & SUPPLIES--2.70%
Deluxe Corp. 40,400 723,968
ServiceMaster Co. (The) 51,500 591,735
Sovran Self Storage, Inc. 21,000 1,135,680
Standard Register Co. (The) 33,300 427,239
------------
2,878,622
INDUSTRIAL CONGLOMERATES--3.63%
3M Co. 10,200 731,340
General Electric Co. 77,550 2,641,353
Tyco International Ltd. 19,100 499,465
------------
3,872,158
------------
TOTAL INDUSTRIALS-- 8.02% 8,556,828
------------
INFORMATION TECHNOLOGY--
INTERNET SOFTWARE & SERVICES--0.59%
StarTek, Inc. 55,600 632,172
------------
TOTAL INFORMATION TECHNOLOGY--0.59% 632,172
------------
MATERIALS--
CHEMICALS--1.56%
Dow Chemical Co. (The) 20,100 766,413
E.I. du Pont de Nemours and Co. 11,100 443,667
PPG Industries, Inc. 7,200 456,192
------------
1,666,272
METALS & MINING--0.50%
Alcoa Inc. 18,400 526,056
PAPER & FOREST PRODUCTS--1.31%
International Paper Co. 7,725 268,598
Potlatch Corp. 29,500 1,130,145
------------
1,398,743
------------
TOTAL MATERIALS--3.37% 3,591,071
------------
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--6.33%
ALLTEL Corp. 9,650 523,127
AT&T Inc. 23,500 731,555
Citizens Communications Co. 84,300 1,162,497
Commonwealth Telephone Enterprises, Inc. 34,400 1,212,944
FairPoint Communications, Inc. 77,000 1,258,950
Verizon Communications Inc. 49,400 1,737,892
Windstream Corp. 9,977 131,696
------------
6,758,661
------------
TOTAL TELECOMMUNICATION SERVICES--6.33% 6,758,661
------------
UTILITIES--
ELECTRIC UTILITIES--7.00%
Ameren Corp. 15,200 $ 813,960
Consolidated Edison, Inc. 23,100 1,067,220
DTE Energy Co. 24,800 1,035,152
Duke Energy Corp. 38,600 1,158,000
Entergy Corp. 4,600 357,190
Pinnacle West Capital Corp. 25,500 1,171,470
Progress Energy, Inc. 25,000 1,108,250
Southern Co. 10,000 342,700
Xcel Energy, Inc. 20,000 416,000
------------
7,469,942
GAS UTILITIES--3.14%
Nicor Inc. 23,100 1,008,546
NiSource Inc. 51,600 1,092,372
Peoples Energy Corp. 29,400 1,245,972
------------
3,346,890
------------
TOTAL UTILITIES--10.14% 10,816,832
------------
TOTAL COMMON STOCK--98.58%
(Cost $84,733,908) 105,207,277
------------
MONEY MARKET FUND
SM&R Money Market Fund, 4.74% (a) 499 499
------------
TOTAL MONEY MARKET FUND--0.00%
(Cost $499) 499
------------
COMMERCIAL PAPER FACE
AMOUNT
CONSUMER STAPLES--
FOOD PRODUCTS--0.19%
Kraft Foods Inc., 5.25%, 09/06/06 $201,000 200,853
------------
TOTAL CONSUMER STAPLES--0.19% 200,853
------------
FINANCIALS--
DIVERSIFIED FINANCIALS--0.91%
Textron Financial Corp., 5.28%, 09/05/06 975,000 974,428
------------
TOTAL FINANCIALS--0.91% 974,428
------------
MATERIALS--
METALS & MINING--0.20%
Alcoa Inc. 5.25%, 09/01/06 210,000 210,000
------------
TOTAL MATERIALS--0.20% 210,000
------------
TOTAL COMMERCIAL PAPER--1.30%
(Cost $1,385,281) 1,385,281
------------
TOTAL INVESTMENTS--99.88%
(Cost $86,119,688) 106,593,057
CASH AND OTHER ASSETS, LESS LIABILITIES--0.12% 132,638
------------
NET ASSETS--100.00% $106,725,695
============
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
(b) Non-voting shares
See notes to financial statements.
46
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $86,119,189) $106,592,558
Investment in affiliated money market fund (Cost $499) 499
------------
Total investments (Cost $86,119,688) 106,593,057
Prepaid expenses 45,436
Receivable for:
Capital stock sold 3,153
Dividends 309,278
Expense reimbursement 4,044
Other assets 62,725
------------
TOTAL ASSETS 107,017,693
------------
LIABILITIES
Capital stock reacquired 65,420
Payable to investment adviser for fund expenses 59,547
Accrued:
Investment advisory fees 66,897
Service fees 22,256
Distribution fees 18,349
Other liabilities 59,529
------------
TOTAL LIABILITIES 291,998
------------
NET ASSETS (applicable to shares outstanding) $106,725,695
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 80,938,530
Undistributed net investment income 553,663
Accumulated net realized gain (loss) on investments 4,760,133
Net unrealized appreciation (depreciation) of investments 20,473,369
------------
Net Assets $106,725,695
============
NET ASSETS:
Class A 9,268,415
- --------------------------------------------------------------------------------
Class B 6,759,256
- --------------------------------------------------------------------------------
Class T 90,698,024
- --------------------------------------------------------------------------------
TOTAL NET ASSETS: $106,725,695
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 400,803
- --------------------------------------------------------------------------------
Class B:
Authorized 25,000,000
Outstanding 302,716
- --------------------------------------------------------------------------------
Class T:
Authorized 75,000,000
Outstanding 3,783,384
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 23.12
Offering price per share:
(Net assets value of $23.12 / 95%) $ 24.34
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 22.33
- --------------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 23.97
Offering price per share:
(Net assets value of $23.97 / 94.25%) $ 25.44
- --------------------------------------------------------------------------------
See notes to financial statements.
47
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $5,959) $ 3,370,919
Interest 132,928
Interest from affiliated money market fund 540
-----------
TOTAL INVESTMENT INCOME 3,504,387
-----------
EXPENSES
Investment advisory fees 801,151
Service fees 266,368
Professional fees 20,136
Custody and transaction fees 23,173
Directors' fees 5,507
Insurance expenses 42,274
Compliance expenses 18,346
Qualification fees
Class A 8,512
Class B 8,326
Class T 21,522
Shareholder reporting expenses
Class A 9,477
Class B 7,294
Class T 38,079
Distribution fees
Class A 22,338
Class B 53,839
-----------
TOTAL EXPENSES 1,346,342
LESS EXPENSES REIMBURSED (46,290)
-----------
NET EXPENSES 1,300,052
-----------
INVESTMENT INCOME (LOSS)--NET 2,204,335
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 5,009,183
Change in unrealized appreciation (depreciation) of
investments 3,046,019
-----------
NET GAIN (LOSS) ON INVESTMENTS 8,055,202
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $10,259,537
===========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------
2006 2005
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 2,204,335 $ 1,854,500
Net realized gain (loss) on investments 5,009,183 8,257,550
Change in unrealized appreciation (depreciation) of investments 3,046,019 148,670
------------ ------------
Net increase (decrease) in net assets resulting from operations 10,259,537 10,260,720
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (160,310) (147,054)
Class B (95,634) (97,366)
Class T (1,606,342) (1,611,802)
Capital gains
Class A (694,010) (194,102)
Class B (618,906) (179,300)
Class T (7,130,605) (2,210,425)
------------ ------------
Total distributions to shareholders (10,305,807) (4,440,049)
------------ ------------
CAPITAL SHARE TRANSACTIONS--NET
Class A 189,961 615,300
Class B (904,275) 2,101
Class T (5,090,295) (7,101,984)
------------ ------------
Total capital share transactions--net (5,804,609) (6,484,583)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (5,850,879) (663,912)
------------ ------------
NET ASSETS
Beginning of year 112,576,574 113,240,486
------------ ------------
End of year $106,725,695 $112,576,574
============ ============
Undistributed Net Investment Income $ 553,663 $ 211,614
============ ============
</Table>
See notes to financial statements.
48
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R EQUITY INCOME FUND
<Table>
<Caption>
CLASS A SHARES
-------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
Net asset value, beginning of year $23.22 $22.11 $20.03 $19.04 $ 22.72
Income (loss) from investment operations
Investment income (loss)--net 0.45 0.35 0.26 0.22 0.18
Net realized and unrealized gain (loss) on investments 1.70 1.68 2.10 1.01 (3.63)
------ ------ ------ ------ -------
Total from investment operations 2.15 2.03 2.36 1.23 (3.45)
Less distributions
Investment income--net (0.40) (0.39) (0.28) (0.24) (0.23)
Capital gains (1.85) (0.53) -- -- --
------ ------ ------ ------ -------
Total distributions (2.25) (0.92) (0.28) (0.24) (0.23)
------ ------ ------ ------ -------
Net asset value, end of year $23.12 $23.22 $22.11 $20.03 $ 19.04
====== ====== ====== ====== =======
Total return (1) 9.89% 9.25% 11.79% 6.61% (15.27)%
====== ====== ====== ====== =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $9,269 $9,088 $8,063 $5,940 $ 5,517
Ratio of expenses with reimbursement to average net assets (2) 1.26% 1.26% 1.26% 1.26% 1.44%
Ratio of expenses without reimbursement to average net assets 1.54% 1.50% 1.43% 1.50% 1.45%
Ratio of net investment income to average net assets 2.00% 1.53% 1.08% 1.21% 0.88%
Portfolio turnover rate 47.59% 18.45% 6.74% 7.57% 30.99%
</Table>
<Table>
<Caption>
CLASS B SHARES
-------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
Net asset value, beginning of year $22.49 $21.46 $19.44 $18.56 $ 22.22
Income (loss) from investment operations
Investment income (loss)--net 0.29 0.23 0.13 0.13 0.09
Net realized and unrealized gain (loss) on investments 1.69 1.61 2.07 0.94 (3.57)
------ ------ ------ ------ -------
Total from investment operations 1.98 1.84 2.20 1.07 (3.48)
Less distributions
Investment income--net (0.29) (0.28) (0.18) (0.19) (0.18)
Capital gains (1.85) (0.53) -- -- --
------ ------ ------ ------ -------
Total distributions (2.14) (0.81) (0.18) (0.19) (0.18)
------ ------ ------ ------ -------
Net asset value, end of year $22.33 $22.49 $21.46 $19.44 $ 18.56
====== ====== ====== ====== =======
Total return (1) 9.40% 8.64% 11.36% 5.85% (15.72)%
====== ====== ====== ====== =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $6,759 $7,744 $7,375 $6,182 $ 5,806
Ratio of expenses with reimbursement to average net assets (2) 1.76% 1.76% 1.76% 1.76% 1.94%
Ratio of expenses without reimbursement to average net assets 2.06% 2.05% 1.95% 1.99% 1.95%
Ratio of net investment income to average net assets 1.45% 1.04% 0.58% 0.71% 0.37%
Portfolio turnover rate 47.59% 18.45% 6.74% 7.57% 30.99%
</Table>
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.26% for Class
A and 1.76% for Class B until December 31, 2006.
See notes to financial statements.
49
<Page>
<Table>
<Caption>
CLASS T SHARES
------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- --------
Net asset value, beginning of year $ 23.97 $ 22.77 $ 20.56 $ 19.51 $ 23.26
Income (loss) from investment operations
Investment income (loss)--net 0.50 0.40 0.28 0.27 0.27
Net realized and unrealized gain (loss) on investments 1.76 1.72 2.21 1.04 (3.74)
------- ------- ------- ------- --------
Total from investment operations 2.26 2.12 2.49 1.31 (3.47)
Less distributions
Investment income--net (0.41) (0.39) (0.28) (0.26) (0.28)
Capital gains (1.85) (0.53) -- -- --
------- ------- ------- ------- --------
Total distributions (2.26) (0.92) (0.28) (0.26) (0.28)
------- ------- ------- ------- --------
Net asset value, end of year $ 23.97 $ 23.97 $ 22.77 $ 20.56 $ 19.51
======= ======= ======= ======= ========
Total return (1) 10.04% 9.35% 12.14% 6.83% (15.03)%
======= ======= ======= ======= ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $90,698 $95,744 $97,802 $94,943 $103,396
Ratio of expenses to average net assets 1.15% 1.14% 1.10% 1.12% 1.07%
Ratio of net investment income to average net assets 2.09% 1.66% 1.24% 1.36% 1.26%
Portfolio turnover rate 47.59% 18.45% 6.74% 7.57% 30.99%
</Table>
(1) Does not include the effect of sales charge
See notes to financial statements.
50
<Page>
SM&R BALANCED FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
The SM&R Balanced Fund's investment objectives are to conserve principal,
produce current income and achieve long-term capital appreciation. The Fund
seeks to accomplish these objectives with a balance of both growth and income
through its well-diversified portfolio of stocks of primarily large-cap
companies, U.S. Government agency and corporate fixed income securities, and
money market instruments. As of the fiscal year end on August 31, 2006, the
Fund's allocation was approximately 61% equities, 30% bonds and 9% cash
equivalents. For the fiscal year ended August 31, the Fund's total return was
4.79%, before sales charges (but after other expenses), to Class T investors at
net asset value. Over that same time period the Fund's benchmark, the Lipper
Balanced Fund Index, offered a total return of 6.91%. The equity portion of the
Fund produced a total return (capital appreciation and dividend income) of 6.74%
while the bond portion returned 2.81% for the year, both before sales charges.
The broad equity market, as measured by the S&P 500, returned 8.88% for the
twelve month period.
The Fund's performance during the year benefited significantly from holdings in
several sectors. Of particular note for out-performance were the Consumer
Discretionary, Health Care, Financial Services and Information Technology
sectors. Stock selectivity in these sectors made a positive contribution to
performance while selection in the Industrials and Telecommunication Services
sectors reduced performance. Holdings which produced strong gains for the year
include Nucor, Phelps Dodge, Merck and Schlumberger. Laggards include Dell,
American Power Conversions and Navistar International.
The fixed income allocation of the Balanced Fund has a AA rating, 5.35% average
coupon, and a modified duration of 2.23 years. Fund performance benefited from
an overweight in Agencies and corporate bonds over Treasuries this year.
The August meeting of the Federal Reserve ended a series of rate hikes totaling
425 basis points that began in June 2004 and continued for 17 consecutive
meetings. Many investors read the Fed's pause as the end of the tightening
cycle, and bond markets rallied, with benchmark Treasury yields dropping 15-25
basis points across the curve. The spread between the 10 year Treasury and the
Fed Funds rate was more than 370 basis points in May 2004. At the close of
trading on August 31, 2006, the yield curve was inverted and the 10 year to
Federal Funds Rate spread was -52 basis points.
Energy prices continued to climb over the past year as demand from both
developed and developing nations strained producers' ability to satisfy the need
for oil and natural gas. Oil reached a high of $79 per barrel in mid-July but
has since declined almost 20% to approaching $60 per barrel. Gasoline has
concurrently dropped from over $3.00 per gallon to below $2.50 a gallon. This
could add an estimated $60 billion annually to consumer spending. However, we do
not expect the recent price declines to continue, as it is likely that strong
demand from Asian economies, continuing geopolitical risks and the upcoming
winter heating season will result in prices stabilizing, if not rising, over the
coming months.
Housing starts in the U.S. fell 6% in August and 19.8% over the past year, a
greater decline than many analysts' forecasts. Starts declined to an annual rate
of 1.665 million, a three-year low. According to the Commerce Department, new
home sales dropped in July while inventories of unsold new homes rose to a
record. Builders have reduced construction and are offering significant
incentives to attract buyers, which may indicate that the housing market is
weaker than economic data suggest. Importantly, the housing contraction has
occurred while the overall economy has grown over the past year. Retail sales,
employment, and commercial construction all rose in August. This suggests that
the decline in housing will weaken, but not break, domestic economic growth.
However, should energy prices spike again, consumers could feel enough pressure
to restrain their spending enough to drag the rest of the economy down toward
zero growth.
For 2006, consensus forecasts for the S&P 500 are for 10% earnings growth over
2005 levels following a 14% earnings increase in 2005 over 2004 levels.
Corporate earnings are expected to increase 6% in 2007 versus 2006. Currently,
the trailing twelve-month P/E ratio for the S&P 500 is 16x and the year-end 2006
P/E is 16x. This compares to an historical long-term average P/E of 15.5x. Given
our expectations for slowing growth in corporate operating margins and profits,
we believe that equities are fairly valued at these levels. With the
anticipation of a slowing economy along with the probability of lower corporate
earnings growth, it does not seem likely that price/earnings multiples will be
able to expand meaningfully from these levels. This environment should favor
stocks with above-average total returns including dividends.
We plan to continue our conservative stock selection discipline of purchasing
attractively valued equities for long-term appreciation potential while
maintaining a high-quality, well-diversified fixed income allocation. Thus, we
believe the Fund will provide an attractive total return over the long-term for
conservative investors seeking both capital appreciation and current income
through a balance of equity and fixed income securities. This strategy should
make the Fund an attractive core holding for many investors.
Sincerely,
Anne M. LeMire, CPA, CFA, and John S. Maidlow, CFA, Co-Portfolio Managers
SM&R Balanced Fund
51
<Page>
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
[CHART]
<Table>
<Caption>
SM&R BALANCED FUND S&P 500 LIPPER BALANCED FUND
9/1/1996 $ 9,426 $10,000 $10,000
8/31/1997 $11,497 $14,065 $12,474
8/31/1998 $11,693 $15,203 $13,034
8/31/1999 $13,972 $21,258 $15,630
8/31/2000 $16,779 $24,727 $17,512
8/31/2001 $14,785 $18,697 $16,149
8/31/2002 $13,888 $15,332 $14,741
8/31/2003 $14,853 $17,183 $16,223
8/31/2004 $16,183 $19,150 $17,699
8/31/2005 $17,117 $21,552 $19,689
8/31/2006 $17,937 $23,467 $21,049
</Table>
SM&R Balanced Fund performance figures 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 average annual returns for Class A shares
reflect the current maximum sales charge 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.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 01/01/99.
ONE FIVE TEN SINCE
YEAR YEAR YEAR INCEPTION
-------------------------------
Class A -0.59% 2.78% -- 2.59%
Class B -1.03% 3.07% -- 2.95%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge of 5.75% through 8/31/06 for Class T shares.
10 YEAR 6.02%
5 YEAR 2.72%
1 YEAR -1.23%
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 7.49%
Consumer Staples 8.72%
Energy 6.63%
Financials 25.76%
Health Care 7.93%
Industrials 7.65%
Information Technology 9.96%
Materials 5.57%
Telecommunication Services 1.89%
U S Government 15.85%
Utilities 2.55%
</Table>
52
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
COMMON STOCKS SHARES VALUE
CONSUMER DISCRETIONARY--
AUTOMOBILES--0.21%
Navistar International Corp. * 2,800 $ 64,232
HOTELS, RESTAURANTS & LEISURE--1.16%
Host Hotels & Resorts Inc. 2,265 51,053
McDonald's Corp. 2,850 102,315
Starwood Hotels & Resorts Worldwide, Inc. 3,000 159,780
Wyndham Worldwide Corp. * 1,020 29,845
----------
342,993
HOUSEHOLD DURABLES--0.89%
Newell Rubbermaid Inc. 3,800 102,562
Stanley Works (The) 3,400 160,582
----------
263,144
MEDIA--2.14%
CBS Corp. (Class B) 2,000 57,100
News Corp. (Class A) 6,100 116,083
Time Warner Inc. 9,000 149,580
Viacom Inc. (Class B) * 2,000 72,600
Walt Disney Co. (The) 8,000 237,200
----------
632,563
MULTI-LINE RETAIL--1.01%
J.C. Penney Co., Inc. 2,200 138,688
Kohl's Corp. * 1,000 62,510
Target Corp. 2,000 96,780
----------
297,978
SPECIALTY RETAIL--2.03%
Best Buy Co., Inc. 3,000 141,000
Limited Brands, Inc. 7,600 195,548
Lowe's Companies, Inc. 5,800 156,948
TJX Companies, Inc. (The) 4,000 107,000
----------
600,496
----------
TOTAL CONSUMER DISCRETIONARY--7.44% 2,201,406
----------
CONSUMER STAPLES--
BEVERAGES--1.69%
Coca-Cola Co. (The) 6,000 268,860
International Flavors & Fragrances Inc. 900 35,793
PepsiCo, Inc. 3,000 195,840
----------
500,493
FOOD PRODUCTS--1.33%
H.J. Heinz Co. 2,600 108,784
McCormick & Co., Inc. (c) 3,700 134,754
Sensient Technologies Corp. 7,400 148,888
----------
392,426
FOOD & DRUG RETAILING--1.09%
SUPERVALU INC 3,475 99,246
Wal-Mart Stores, Inc. 5,000 223,600
----------
322,846
HOUSEHOLD PRODUCTS--1.73%
Kimberly-Clark Corp. 2,200 139,700
Procter & Gamble Co. (The) 6,000 371,400
----------
511,100
----------
TOTAL CONSUMER STAPLES--5.84% 1,726,865
----------
ENERGY--
ENERGY EQUIPMENT & SERVICES--1.02%
Schlumberger Ltd. 2,400 $ 147,120
Weatherford International Ltd. * 3,600 154,800
----------
301,920
OIL & GAS--5.57%
Anadarko Petroleum Corp. 3,600 168,876
BP PLC ADR 5,092 346,511
Chevron Corp. 6,001 386,464
Exxon Mobil Corp. 11,000 744,370
----------
1,646,221
----------
TOTAL ENERGY--6.59% 1,948,141
----------
FINANCIALS--
COMMERCIAL BANKS--4.34%
Bank of America Corp. 10,000 514,700
PNC Financial Services Group, Inc. 3,000 212,370
U.S. Bancorp 6,000 192,420
Wachovia Corp. 3,600 196,668
Wells Fargo & Co. 4,800 166,800
----------
1,282,958
DIVERSIFIED FINANCIALS--4.58%
Citigroup Inc. 14,500 715,575
Goldman Sachs Group, Inc. (The) 1,000 148,650
JPMorgan Chase & Co. 2,092 95,521
Morgan Stanley 6,000 394,740
----------
1,354,486
INSURANCE--3.75%
Allstate Corp. (The) 2,300 133,262
American International Group, Inc. 5,731 365,752
Genworth Financial Inc. (Class A) 6,200 213,466
Prudential Financial, Inc. 3,000 220,230
St. Paul Travelers Companies, Inc. (The) 4,000 175,600
----------
1,108,310
REAL ESTATE--0.09%
Realogy Corp. * 1,275 27,285
----------
TOTAL FINANCIALS--12.76% 3,773,039
----------
HEALTH CARE--
BIOTECHNOLOGY--0.68%
Amgen Inc. * 1,300 88,309
Genzyme Corp. * 875 57,951
Gilead Sciences, Inc. * 875 55,475
----------
201,735
HEALTH CARE EQUIPMENT & SUPPLIES--1.17%
Advanced Medical Optics, Inc. * 1,025 49,354
Beckman Coulter, Inc. 2,000 109,540
Biomet, Inc. 2,700 88,317
Zimmer Holdings, Inc. * 1,460 99,280
----------
346,491
HEALTH CARE PROVIDERS & SERVICES--0.50%
DaVita, Inc. * 925 53,983
Patterson Companies Inc. * 3,000 92,460
----------
146,443
53
<Page>
COMMON STOCKS SHARES VALUE
PHARMACEUTICALS--5.53%
Abbott Laboratories 4,200 $ 204,540
Allergan, Inc. 1,000 114,560
Hospira, Inc. * 420 15,385
Johnson & Johnson 6,000 387,960
Eli Lilly & Co. 2,400 134,232
Merck & Co. Inc. 5,300 214,915
Pfizer Inc. 15,000 413,400
Wyeth 3,100 150,970
----------
1,635,962
----------
TOTAL HEALTH CARE--7.88% 2,330,631
----------
INDUSTRIALS--
AEROSPACE & DEFENSE--1.10%
General Dynamics Corp. 1,400 94,570
Goodrich Corp. 1,900 74,005
L-3 Communications Holdings, Inc. 1,000 75,390
Northrop Grumman Corp. 1,200 80,172
----------
324,137
AIRFREIGHT & COURIERS--0.30%
FedEx Corp. 875 88,401
COMMERCIAL SERVICES & SUPPLIES--0.76%
Avis Budget Group Inc. 5,100 9,843
Cintas Corp. 2,000 74,060
Equifax Inc. 2,100 66,759
R.R. Donnelley & Sons Co. 2,300 74,566
----------
225,228
CONSTRUCTION & ENGINEERING--0.25%
ITT Corp. 1,500 73,425
ELECTRICAL EQUIPMENT--0.23%
American Power Conversion Corp. 3,900 68,523
INDUSTRIAL CONGLOMERATES--0.32%
Tyco International Ltd. 3,600 94,140
MACHINERY--2.38%
Caterpillar Inc. 1,100 72,985
Cummins Inc. 700 80,374
Danaher Corp. 1,400 92,806
Deere & Co. 1,000 78,100
Dover Corp. 1,700 82,654
Eaton Corp. 1,100 73,150
Illinois Tool Works Inc. 1,800 79,020
Ingersoll-Rand Co. Ltd (Class A) 1,900 72,238
Parker Hannifin Corp. 1,000 74,050
----------
705,377
ROAD & RAIL--0.23%
Norfolk Southern Corp. 1,600 68,368
TRADING COMPANIES & DISTRIBUTORS--0.25%
W.W. Grainger, Inc. 1,100 73,480
TRANSPORTATION INFRASTRUCTURE--0.30%
Ryder System, Inc. 1,800 88,956
----------
TOTAL INDUSTRIALS--6.12% 1,810,035
----------
INFORMATION TECHNOLOGY--
COMMUNICATIONS EQUIPMENT--1.82%
Cisco Systems, Inc. * 11,700 $ 257,283
Motorola, Inc. 6,200 144,956
Nokia Oyj ADR 6,500 135,720
----------
537,959
COMPUTERS & PERIPHERALS--1.73%
Dell Inc. * 6,800 153,340
EMC Corp. * 15,100 175,915
Hewlett-Packard Co. 5,000 182,800
----------
512,055
ELECTRONIC EQUIPMENT & INSTRUMENTS--0.17%
Agilent Technologies, Inc. * 1,525 49,044
SEMICONDUCTOR EQUIPMENT & PRODUCTS--1.28%
Intel Corp. 13,000 254,020
Linear Technology Corp. 1,500 51,015
Texas Instruments Inc. 2,300 74,957
----------
379,992
SOFTWARE--2.87%
Electronic Arts Inc. * 1,500 76,455
Microsoft Corp. 23,300 598,577
Oracle Corp. * 11,100 173,715
----------
848,747
----------
TOTAL INFORMATION TECHNOLOGY--7.87% 2,327,797
----------
MATERIALS--
CHEMICALS--0.60%
Dow Chemical Co. (The) 1,600 61,008
Eastman Chemical Co. 600 31,470
PPG Industries, Inc. 900 57,024
Sigma-Aldrich Corp. 400 29,052
----------
178,554
CONTAINERS & PACKAGING--0.10%
Ball Corp. 700 28,238
METALS & MINING--0.42%
Nucor Corp. 1,200 58,644
Phelps Dodge Corp. 400 35,800
United States Steel Corp. 500 29,085
----------
123,529
PAPER & FOREST PRODUCTS--0.30%
International Paper Co. 1,300 45,201
Louisiana-Pacific Corp. 1,000 19,560
MeadWestvaco Corp. 1,000 25,550
----------
90,311
----------
TOTAL MATERIALS--1.42% 420,632
----------
54
<Page>
COMMON STOCKS SHARES VALUE
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--1.53%
ALLTEL Corp. 2,400 $ 130,104
Embarq Corp. 513 24,188
Sprint Nextel Corp. 10,263 173,650
Verizon Communications Inc. 2,580 90,765
Windstream Corp. 2,481 32,749
-----------
451,456
WIRELESS TELECOMMUNICATION SERVICES--0.35%
Vodafone Group PLC ADR 4,812 104,613
-----------
TOTAL TELECOMMUNICATION SERVICES--1.88% 556,069
-----------
UTILITIES--
ELECTRIC UTILITIES--2.54%
Ameren Corp. 3,000 160,650
CenterPoint Energy, Inc. 5,500 79,475
Constellation Energy Group 5,000 300,450
Exelon Corp. 1,400 85,372
Southern Co. 1,600 54,832
Wisconsin Energy Corp. 1,600 68,800
-----------
749,579
-----------
TOTAL UTILITIES--2.54% 749,579
-----------
TOTAL COMMON STOCK--60.34%
(Cost $14,850,141) 17,844,194
-----------
FACE
BONDS AND NOTES AMOUNT
CONSUMER STAPLES--
PERSONAL PRODUCTS--1.78%
Avon Products, Inc., 7.15%, 11/15/09 $ 500,000 527,517
-----------
TOTAL CONSUMER STAPLES--1.78% 527,517
-----------
FINANCIALS--
COMMERCIAL BANKS--2.56%
Royal Bank of Scotland GRP PLC,
yankee bond, 6.40%, 04/01/09 500,000 517,718
Washington Mutual Inc., 4.20%, 01/15/10 250,000 241,180
-----------
758,898
DIVERSIFIED FINANCIALS--4.64%
General Electric Capital Corp., 3.75%, 12/15/09 350,000 335,121
JPMorgan & Co., Inc., 6.00%, 01/15/09 500,000 506,910
Weingarten Realty Investors, 7.35%, 07/20/09 500,000 530,223
-----------
1,372,254
INSURANCE--1.85%
Money Group Inc. (The), 8.35%, 03/15/10 500,000 546,213
-----------
TOTAL FINANCIALS--9.05% 2,677,365
-----------
INDUSTRIALS--
TRANSPORTATION INFRASTRUCTURE--1.49%
Hertz Corp., 7.40%, 03/01/11 455,000 440,212
-----------
TOTAL INDUSTRIALS--1.49% 440,212
-----------
FACE
BONDS AND NOTES AMOUNT VALUE
INFORMATION TECHNOLOGY--
ELECTRONIC EQUIPMENT & INSTRUMENTS--2.03%
Koninklijke Philips Elec., yankee bond,
8.375%, 09/15/06 (a) $ 600,000 $ 600,340
-----------
TOTAL INFORMATION TECHNOLOGY--2.03% 600,340
-----------
TOTAL BONDS--14.35%
(Cost $4,148,933) 4,245,434
-----------
U S GOVERNMENT AGENCY SECURITIES
U S GOVERNMENT AGENCY SECURITIES--15.76%
Federal Farm Credit Bank 4.70%, 10/06/08 400,000 395,821
Federal Farm Credit Bank 4.15%, 11/30/09 350,000 340,320
Federal Home Loan Bank, 2.45%, 03/23/07 (a) 1,500,000 1,476,297
Federal Home Loan Bank, 4.40%, 12/28/09 750,000 732,849
Federal Home Loan Mortgage Corp., 5.27%, 10/12/10 1,000,000 989,240
Federal Home Loan Mortgage Corp., Pool #284839, 8.50%,
01/01/17 4,849 5,147
Federal National Mortgage Association, 4.75%, 08/25/08 700,000 695,289
Federal National Mortgage Association, Pool #048974,
8.00%, 06/01/17 25,463 26,697
-----------
TOTAL US GOVERNMENT AGENCY SECURITIES--15.76%
(Cost $4,726,241) 4,661,660
-----------
MONEY MARKET FUND
SHARES
SM&R Money Market Fund, 4.74% (b) 281 281
-----------
TOTAL MONEY MARKET FUND--0.00%
(Cost $281) 281
-----------
COMMERCIAL PAPER
FACE
AMOUNT
CONSUMER STAPLES--
FOOD PRODUCTS--1.05%
Kraft Foods Inc., 5.25%, 09/06/06 $ 310,000 309,774
-----------
TOTAL CONSUMER STAPLES--1.05% 309,774
FINANCIALS--
DIVERSIFIED FINANCIALS--3.80%
Textron Financial Corp., 5.28%, 09/05/06 1,125,000 1,124,340
-----------
TOTAL FINANCIALS--3.80% 1,124,340
MATERIALS--
METALS & MINING--4.12%
Alcoa Inc. 5.25%, 09/01/06 1,218,000 1,218,000
-----------
TOTAL MATERIALS--4.12% 1,218,000
-----------
TOTAL COMMERCIAL PAPER--8.97%
(Cost $2,652,114) 2,652,114
-----------
TOTAL INVESTMENTS--99.42%
(Cost $26,377,710) 29,403,683
CASH AND OTHER ASSETS, LESS LIABILITIES--0.58% 171,588
-----------
NET ASSETS--100.00% $29,575,271
===========
55
<Page>
*--Non-income producing securities
ABBREVIATIONS
ADR--American Depositary Receipt
NOTES 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,
2006. 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.
(c) Non-voting shares
See notes to financial statements.
56
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $26,377,429) $29,403,402
Investment in affiliated money market fund (Cost $281) 281
-----------
Total investments (Cost $26,377,710) 29,403,683
Prepaid expenses 17,647
Receivable for:
Investments securities sold 34
Capital stock sold 6,967
Dividends 46,159
Interest 162,161
Expense reimbursement 2,893
Other assets 15,067
-----------
TOTAL ASSETS 29,654,611
-----------
LIABILITIES
Capital stock reacquired 536
Payable to investment adviser for fund expenses 21,151
Accrued:
Investment advisory fees 18,712
Service fees 6,237
Distribution fees 7,980
Other liabilities 24,724
-----------
TOTAL LIABILITIES 79,340
-----------
NET ASSETS (applicable to shares outstanding) $29,575,271
===========
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 24,701,754
Undistributed net investment income 133,747
Accumulated net realized gain (loss) on investments 1,713,797
Net unrealized appreciation (depreciation) of investments 3,025,973
-----------
Net Assets $29,575,271
===========
NET ASSETS:
Class A 4,429,659
- --------------------------------------------------------------------------------
Class B 2,771,973
- --------------------------------------------------------------------------------
Class T 22,373,639
- --------------------------------------------------------------------------------
TOTAL NET ASSETS: $29,575,271
===========
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 247,274
- --------------------------------------------------------------------------------
Class B:
Authorized 25,000,000
Outstanding 153,323
- --------------------------------------------------------------------------------
Class T:
Authorized 25,000,000
Outstanding 1,202,975
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 17.91
Offering price per share:
(Net assets value of $17.91 / 95%) $ 18.86
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 18.08
- --------------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 18.60
Offering price per share:
(Net assets value of $18.60 / 94.25%) $ 19.73
- --------------------------------------------------------------------------------
</Table>
See notes to financial statements.
57
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $441) $ 422,219
Interest 541,570
Interest from affiliated money market fund 269
----------
TOTAL INVESTMENT INCOME 964,058
----------
EXPENSES
Investment advisory fees 225,823
Service fees 75,275
Professional fees 15,837
Custody and transaction fees 16,925
Directors' fees 5,507
Insurance expenses 11,608
Compliance expenses 5,030
Qualification fees
Class A 7,594
Class B 4,981
Class T 16,972
Shareholder reporting expenses
Class A 5,629
Class B 3,750
Class T 6,032
Distribution fees
Class A 12,132
Class B 21,166
----------
TOTAL EXPENSES 434,261
LESS EXPENSES REIMBURSED (40,057)
----------
NET EXPENSES 394,204
----------
INVESTMENT INCOME (LOSS)--NET 569,854
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 1,764,695
Change in unrealized appreciation (depreciation) of
investments (951,013)
----------
NET GAIN (LOSS) ON INVESTMENTS 813,682
----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,383,536
==========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------
2006 2005
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 569,854 $ 576,586
Net realized gain (loss) on investments 1,764,695 1,243,042
Change in unrealized appreciation (depreciation) of investments (951,013) (94,371)
----------- -----------
Net increase (decrease) in net assets resulting from operations 1,383,536 1,725,257
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (85,723) (93,764)
Class B (38,847) (44,074)
Class T (403,808) (420,489)
Capital gains
Class A (217,989) (17,004)
Class B (120,455) (10,979)
Class T (941,602) (79,523)
----------- -----------
Total distributions to shareholders (1,808,424) (665,833)
----------- -----------
CAPITAL SHARE TRANSACTIONS--NET
Class A (519,607) 466,400
Class B (274,951) 40,698
Class T (128,140) (790,502)
----------- -----------
Total capital share transactions--net (922,698) (283,404)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,347,586) 776,020
NET ASSETS
Beginning of year 30,922,857 30,146,837
----------- -----------
End of year $29,575,271 $30,922,857
=========== ===========
Undistributed Net Investment Income $ 133,747 $ 92,271
=========== ===========
</Table>
See notes to financial statements.
58
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R BALANCED FUND
<Table>
<Caption>
CLASS A SHARES
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Net asset value, beginning of year $18.19 $17.60 $16.65 $15.93 $17.44
Income (loss) from investment operations
Investment income (loss)--net 0.32 0.35 0.28 0.32 0.39
Net realized and unrealized gain (loss)
on investments 0.50 0.65 1.18 0.77 (1.47)
------ ------ ------ ------ ------
Total from investment operations 0.82 1.00 1.46 1.09 (1.08)
Less distributions
Investment income--net (0.31) (0.35) (0.30) (0.37) (0.43)
Capital gains (0.79) (0.06) (0.21) -- --
------ ------ ------ ------ ------
Total distributions (1.10) (0.41) (0.51) (0.37) (0.43)
------ ------ ------ ------ ------
Net asset value, end of year $17.91 $18.19 $17.60 $16.65 $15.93
====== ====== ====== ====== ======
Total return (1) 4.65% 5.73% 8.83% 7.02% (6.29)%
====== ====== ====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $4,430 $5,030 $4,409 $3,419 $3,183
Ratio of expenses with reimbursement to
average net assets (2) 1.30% 1.30% 1.30% 1.30% 1.45%
Ratio of expenses without reimbursement
to average net assets 1.71% 1.73% 1.64% 1.69% 1.73%
Ratio of net investment income to average
net assets 1.90% 1.85% 1.51% 2.02% 2.27%
Portfolio turnover rate 21.82% 23.18% 11.15% 23.83% 25.80%
</Table>
<Table>
<Caption>
CLASS B SHARES
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Net asset value, beginning of year $18.37 $17.78 $16.83 $16.18 $17.72
Income (loss) from investment operations
Investment income (loss)--net 0.24 0.25 0.20 0.24 0.30
Net realized and unrealized gain
(loss) on investments 0.51 0.66 1.19 0.72 (1.47)
------ ------ ------ ------ ------
Total from investment operations 0.75 0.91 1.39 0.96 (1.17)
Less distributions
Investment income--net (0.25) (0.26) (0.23) (0.31) (0.37)
Capital gains (0.79) (0.06) (0.21) -- --
------ ------ ------ ------ ------
Total distributions (1.04) (0.32) (0.44) (0.31) (0.37)
------ ------ ------ ------ ------
Net asset value, end of year $18.08 $18.37 $17.78 $16.83 $16.18
====== ====== ====== ====== ======
Total return (1) 4.20% 5.15% 8.33% 6.10% (6.69)%
====== ====== ====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $2,772 $3,095 $2,952 $2,336 $2,105
Ratio of expenses with reimbursement to
average net assets (2) 1.80% 1.80% 1.80% 1.80% 1.95%
Ratio of expenses without reimbursement
to average net assets 2.24% 2.23% 2.13% 2.18% 2.22%
Ratio of net investment income to average
net assets 1.40% 1.36% 1.00% 1.51% 1.77%
Portfolio turnover rate 21.82% 23.18% 11.15% 23.83% 25.80%
</Table>
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.30% for Class
A and 1.80% for Class B until December 31, 2006.
See notes to financial statements.
59
<Page>
SM&R BALANCED FUND
<Table>
<Caption>
CLASS T SHARES
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Net asset value, beginning of year $ 18.85 $ 18.21 $ 17.18 $ 16.42 $ 17.91
Income (loss) from investment operations
Investment income (loss)--net 0.36 0.36 0.29 0.34 0.43
Net realized and unrealized gain
(loss) on investments 0.51 0.68 1.24 0.77 (1.50)
------- ------- ------- ------- -------
Total from investment operations 0.87 1.04 1.53 1.11 (1.07)
Less distributions
Investment income--net (0.33) (0.34) (0.29) (0.35) (0.42)
Capital gains (0.79) (0.06) (0.21) -- --
------- ------- ------- ------- -------
Total distributions (1.12) (0.40) (0.50) (0.35) (0.42)
------- ------- ------- ------- -------
Net asset value, end of year $ 18.60 $ 18.85 $ 18.21 $ 17.18 $ 16.42
======= ======= ======= ======= =======
Total return (1) 4.79% 5.77% 8.95% 6.95% (6.07)%
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $22,373 $22,798 $22,785 $21,569 $21,631
Ratio of expenses with reimbursement to
average net assets 1.25% 1.24% 1.23% 1.25% 1.25%
Ratio of expenses without reimbursement
to average net assets 1.29% 1.24% 1.23% 1.26% 1.27%
Ratio of net investment income to average
net assets 1.95% 1.92% 1.58% 2.08% 2.47%
Portfolio turnover rate 21.82% 23.18% 11.15% 23.83% 25.80%
</Table>
(1) Does not include the effect of sales charge
See notes to financial statements.
60
<Page>
SM&R GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
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.
For the fiscal year ending August 31, 2006, the Fund has provided a total return
of 1.65%, before sales charges (but after other expenses) to Class T investors
at net asset value. The Fund's benchmark, the Lipper General U.S. Government
Fund Index, delivered a total return of 1.20% over the past year. The
year-to-date total return for the Fund for the eight months ended August 31,
2006 was 1.89%. The Fund has an average maturity of 4.19 years, a
market-weighted average coupon of 4.64%, and a modified duration of 3.57 years.
The Fund benefited from an overweight in agency bonds versus Treasuries, and
several rebalances throughout the year to slightly extend duration, making the
Fund a little more price sensitive to interest rate movements. Thus, if rates
decline, the Fund would relatively increase in value a bit more than previously,
yet the same is also true in reverse if interest rates would increase.
The August meeting of the Federal Reserve ended a series of rate hikes totaling
425 basis points that began in June 2004 and continued for 17 consecutive
meetings. Many investors read the Fed's pause as the end of the tightening
cycle, and bond markets rallied, with benchmark Treasury yields dropping 15-25
basis points across the curve. The spread between the 10 year Treasury and the
Fed Funds rate was more than 370 basis points in May 2004. At the close of
trading on August 31, 2006, the yield curve was inverted and the 10 year to Fed
Funds spread was -52 basis points.
The economy seems to have responded to the series of rate hikes. CPI slowed,
Michigan's survey on consumer sentiment improved, the residential housing market
is slowing, and business inventory growth seems to be moderating. However, many
economists caution that inflation uncertainties remain, and Fed officials
continue to comment on upside inflation risks. Most recent Labor Department data
indicates a higher than expected rise in wages against subdued worker
productivity. Companies are also faced with higher energy prices, difficult to
pass on to consumers.
The Fed remains highly data dependent for the direction of further action. While
the Fed futures market currently indicates rate easing should begin early in
2007, we believe the Fed will require economic growth to fall below baselines
before reacting. However, another spike in oil prices or more severe weakness in
the housing sector than currently anticipated could speed a switch in direction.
We expect long-term rates to remain in their recent trading range and the yield
curve to remain flat for the remainder of the year. The Fed will likely begin
easing by mid 2007, and the yield curve should become more normalized and
positively sloped.
Sincerely,
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Government Bond Fund
61
<Page>
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R GOVERNMENT
BOND FUND, CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL US
GOVERNMENT FUND INDEX
[CHART]
<Table>
<Caption>
SM&R GOVERNMENT BOND FUND LIPPER GENERAL US GOVERNMENT FUND INDEX
9/1/1996 $ 9,548 $10,000
8/31/1997 $10,443 $10,931
8/31/1998 $11,311 $12,070
8/31/1999 $11,397 $11,911
8/31/2000 $12,033 $12,758
8/31/2001 $13,465 $14,194
8/31/2002 $14,284 $15,365
8/31/2003 $14,636 $15,619
8/31/2004 $15,096 $16,413
8/31/2005 $15,374 $17,016
8/31/2006 $15,628 $17,220
</Table>
SM&R Government Bond Fund performance figures 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 average annual returns
for Class A shares reflect the current maximum sales charge of 4.75%. Class B
shares reflect the applicable contingent deferred sales charge (CDSC), which is
3% in the first year declining to 1% in the third year, and is eliminated
thereafter.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 01/01/99.
ONE FIVE TEN SINCE
YEAR YEAR YEAR INCEPTION
-------------------------------
Class A -3.22% 1.98% -- 3.25%
Class B -1.90% 2.47% -- 3.43%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge of 4.5% through 8/31/06 for Class T shares.
10 YEAR 4.56%
5 YEAR 2.08%
1 YEAR -2.95%
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Financials 1.91%
Materials 3.78%
Miscellaneous 0.09%
U S Government 4.22%
</Table>
Y
62
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
CORPORATE BONDS DATE RATE (%) AMOUNT VALUE
FINANCIALS--
DIVERSIFIED FINANCIALS--1.89%
MBNA Master Credit Card Trust 02/15/12 7.000 $ 500,000 $ 527,090
-----------
TOTAL FINANCIALS--1.89% 527,090
-----------
MATERIALS--
METALS & MINING--3.74%
Carpenter Technology Corp. 05/15/13 6.625 1,000,000 1,041,478
-----------
TOTAL MATERIALS--3.74% 1,041,478
-----------
TOTAL CORPORATE BONDS--5.63%
(Cost $1,511,384) 1,568,568
-----------
U S GOVERNMENT AGENCY AND U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--43.79%
Federal Home Loan Mortgage Corp. (a) 03/15/07 7.000 9,239 9,217
Federal Home Loan Mortgage Corp. 06/12/13 4.000 1,000,000 938,211
Federal National Mortgage Assoc. 02/01/08 3.875 500,000 491,366
Federal National Mortgage Assoc. 02/15/09 3.250 1,100,000 1,054,676
Federal National Mortgage Assoc. 12/15/10 4.750 1,900,000 1,879,358
Federal National Mortgage Assoc. 02/01/11 6.250 1,850,000 1,926,107
Federal National Mortgage Assoc. 03/15/11 5.500 1,300,000 1,324,206
Federal National Mortgage Assoc. 03/29/11 5.600 1,925,000 1,923,472
Federal National Mortgage Assoc. 11/15/11 5.375 1,610,000 1,635,464
Federal National Mortgage Assoc. 07/13/11 6.000 1,000,000 1,003,871
Private Export Funding 01/15/10 7.200 15,000 15,988
-----------
12,201,936
U S GOVERNMENT SECURITIES--46.39%
U S Treasury Note (a) 03/31/07 3.750 1,930,000 1,914,770
U S Treasury Note 05/15/08 2.625 700,000 675,090
U S Treasury Note 05/15/08 5.625 500,000 506,406
U S Treasury Note 09/15/08 3.125 2,000,000 1,937,188
U S Treasury Note 10/15/08 3.125 2,000,000 1,934,766
U S Treasury Note 02/15/09 3.000 1,000,000 960,352
U S Treasury Note 10/15/10 4.250 1,700,000 1,671,911
U S Treasury Note 05/15/14 4.750 1,319,000 1,320,443
U S Treasury Note 08/15/14 4.250 500,000 484,043
U S Treasury Note 02/15/15 4.000 600,000 569,414
U S Treasury Bond 05/15/16 7.250 800,000 952,344
-----------
12,926,727
-----------
TOTAL U S GOVERNMENT AGENCY AND U S GOVERNMENT
SECURITIES--90.18%
(Cost $25,413,956) 25,128,663
-----------
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS
GOVERNMENT AGENCIES--2.97%
Federal Home Loan Bank 09/01/06 5.120 725,000 725,000
Federal National Mortgage Assoc. 09/05/06 5.150 103,000 102,941
-----------
827,941
-----------
TOTAL U S GOVERNMENT AGENCY SHORT-TERM
OBLIGATIONS--2.97%
(Cost $827,941) 827,941
-----------
</Table>
63
<Page>
<Table>
<Caption>
INTEREST/
MATURITY STATED
DATE RATE (%) SHARES VALUE
MONEY MARKET FUND--0.09%
SM&R Money Market Fund, 4.74% (b) 25,361 $ 25,361
-----------
TOTAL MONEY MARKET FUND--0.09%
(Cost $25,361) 25,361
-----------
TOTAL INVESTMENTS--98.87%
(Cost $27,778,642) 27,550,533
CASH AND OTHER ASSETS, LESS LIABILITIES--1.13% 315,231
-----------
NET ASSETS--100.00% $27,865,764
===========
</Table>
NOTES 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,
2006. 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.
64
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R GOVERNMENT BOND FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $27,753,281) $ 27,525,172
Investment in affiliated money market fund
(Cost $25,361) 25,361
------------
Total Investments
(Cost $27,778,642) 27,550,533
Prepaid expenses 17,416
Receivable for:
Capital stock sold 4,815
Interest 337,376
Expense reimbursement 7,450
Other assets 2,782
------------
TOTAL ASSETS 27,920,372
------------
LIABILITIES
Capital stock reacquired 337
Distribution payable 616
Payable to investment adviser for fund expenses 17,740
Accrued:
Investment advisory fees 11,790
Service fees 5,895
Distribution fees 2,000
Other liabilities 16,230
------------
TOTAL LIABILITIES 54,608
------------
NET ASSETS (applicable to shares outstanding) $ 27,865,764
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 28,528,187
Undistributed net investment income 576
Accumulated net realized gain (loss) on investments (434,890)
Net unrealized appreciation (depreciation) of investments (228,109)
------------
Net Assets $ 27,865,764
============
NET ASSETS:
Class A 976,353
- -------------------------------------------------------------------------------
Class B 695,934
- -------------------------------------------------------------------------------
Class T 26,193,477
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $ 27,865,764
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,001,150
Outstanding 94,767
- -------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 67,642
- -------------------------------------------------------------------------------
Class T:
Authorized 23,000,000
Outstanding 2,576,088
- -------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.30
Offering price per share:
(Net assets value of $10.30 / 95.25%) $ 10.81
- -------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.29
- -------------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.17
Offering price per share:
(Net assets value of $10.17 / 95.5%) $ 10.65
- -------------------------------------------------------------------------------
See notes to financial statements.
65
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R GOVERNMENT BOND FUND
INVESTMENT INCOME
Interest $1,174,894
Interest from affiliated money market fund 1,556
----------
TOTAL INVESTMENT INCOME 1,176,450
----------
EXPENSES
Investment advisory fees 140,112
Service fees 70,056
Professional fees 14,335
Custody and transaction fees 7,774
Directors' fees 5,507
Compliance expenses 4,678
Insurance expenses 10,687
Qualification fees
Class A 8,232
Class B 6,007
Class T 20,792
Shareholder reporting expenses
Class A 1,834
Class B 1,621
Class T 2,206
Distribution fees
Class A 2,427
Class B 6,425
----------
TOTAL EXPENSES 302,693
LESS EXPENSES REIMBURSED (93,852)
----------
NET EXPENSES 208,841
----------
INVESTMENT INCOME (LOSS)--NET 967,609
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments (257,242)
Change in unrealized appreciation (depreciation) of
investments (285,397)
----------
NET GAIN (LOSS) ON INVESTMENTS (542,639)
----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 424,970
==========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------
2006 2005
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 967,609 $ 706,564
Net realized gain (loss) on investments (257,242) (177,508)
Change in unrealized appreciation (depreciation) of investments (285,397) 6,348
----------- -----------
Net increase (decrease) in net assets resulting from operations 424,970 535,404
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (33,623) (24,908)
Class B (25,134) (20,641)
Class T (908,798) (660,768)
Capital gains
Class A -- (579)
Class B -- (620)
Class T -- (15,913)
----------- -----------
Total distributions to shareholders (967,555) (723,429)
----------- -----------
CAPITAL SHARE TRANSACTIONS--NET
Class A (40,465) 60,012
Class B (293,136) (116,102)
Class T (144,086) (734,217)
----------- -----------
Total capital share transactions--net (477,687) (790,307)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,020,272) (978,332)
----------- -----------
NET ASSETS
Beginning of year 28,886,036 29,864,368
----------- -----------
End of year $27,865,764 $28,886,036
=========== ===========
Undistributed Net Investment Income $ 576 $ 522
=========== ===========
</Table>
See notes to financial statements.
66
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
CLASS A SHARES
---------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Net asset value, beginning of year $10.50 $10.56 $10.75 $10.88 $10.75
Income (loss) from investment operations
Investment income (loss)--net 0.36 0.25 0.23 0.40 0.48
Net realized and unrealized gain (loss) on
investments (0.20) (0.06) 0.11 (0.13) 0.13
------ ------ ------ ------ ------
Total from investment operations 0.16 0.19 0.34 0.27 0.61
Less distributions
Investment income--net (0.36) (0.25) (0.23) (0.40) (0.48)
Capital gains -- (0.00)*** (0.30) -- --
------ ------ ------ ------ ------
Total distributions (0.36) (0.25) (0.53) (0.40) (0.48)
------ ------ ------ ------ ------
Net asset value, end of year $10.30 $10.50 $10.56 $10.75 $10.88
====== ====== ====== ====== ======
Total return (1) 1.57% 1.93% 3.14% 2.51% 5.82%
====== ====== ====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 976 $1,036 $ 983 $1,240 $1,137
Ratio of expenses with reimbursement to average net
assets (2) 0.73% 0.73% 0.73% 0.73% 1.12%
Ratio of expenses without reimbursement to average
net assets 2.19% 2.32% 2.04% 1.75% 1.80%
Ratio of net investment income to average net assets 3.46% 2.43% 2.13% 3.62% 4.73%
Portfolio turnover rate 78.38% 51.35% 50.62% 99.26% 25.87%
</Table>
<Table>
<Caption>
CLASS B SHARES
---------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Net asset value, beginning of year $10.49 $10.55 $10.74 $10.86 $10.74
Income (loss) from investment operations
Investment income (loss)--net 0.31 0.20 0.17 0.33 0.43
Net realized and unrealized gain (loss) on
investments (0.20) (0.06) 0.11 (0.12) 0.12
------ ------ ------ ------ ------
Total from investment operations 0.11 0.14 0.28 0.21 0.55
Less distributions
Investment income--net (0.31) (0.20) (0.17) (0.33) (0.43)
Capital gains -- (0.00)*** (0.30) -- --
------ ------ ------ ------ ------
Total distributions (0.31) (0.20) (0.47) (0.33) (0.43)
------ ------ ------ ------ ------
Net asset value, end of year $10.29 $10.49 $10.55 $10.74 $10.86
====== ====== ====== ====== ======
Total return (1) 1.10% 1.44% 2.65% 1.96% 5.27%
====== ====== ====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 696 $1,009 $1,131 $1,643 $ 758
Ratio of expenses with reimbursement to average net
assets (2) 1.23% 1.23% 1.23% 1.23% 1.57%
Ratio of expenses without reimbursement to average
net assets 2.55% 2.34% 2.06% 1.95% 2.61%
Ratio of net investment income to average net assets 2.94% 1.92% 1.65% 2.99% 4.20%
Portfolio turnover rate 78.38% 51.35% 50.62% 99.26% 25.87%
</Table>
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.73 for Class A
and 1.23% for Class B until December 31, 2006.
See notes to financial statements.
67
<Page>
<Table>
<Caption>
CLASS T SHARES
--------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Net asset value, beginning of year $ 10.36 $ 10.43 $ 10.62 $ 10.75 $ 10.64
Income (loss) from investment operations
Investment income (loss)--net 0.35 0.25 0.22 0.40 0.52
Net realized and unrealized gain (loss) on
investments (0.19) (0.07) 0.11 (0.13) 0.11
------- ------- ------- ------- -------
Total from investment operations 0.16 0.18 0.33 0.27 0.63
Less distributions
Investment income--net (0.35) (0.25) (0.22) (0.40) (0.52)
Capital gains -- (0.00)*** (0.30) -- --
------- ------- ------- ------- -------
Total distributions (0.35) (0.25) (0.52) (0.40) (0.52)
------- ------- ------- ------- -------
Net asset value, end of year $ 10.17 $ 10.36 $ 10.43 $ 10.62 $ 10.75
======= ======= ======= ======= =======
Total return (1) 1.65% 1.84% 3.15% 2.46% 6.08%
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $26,194 $26,841 $27,750 $27,946 $26,807
Ratio of expenses with reimbursement to average net
assets (2) 0.73% 0.73% 0.73% 0.73% 0.93%
Ratio of expenses without reimbursement to average
net assets 0.99% 0.96% 0.95% 0.91% 0.95%
Ratio of net investment income to average net assets 3.47% 2.43% 2.12% 3.60% 4.92%
Portfolio turnover rate 78.38% 51.35% 50.62% 99.26% 25.87%
</Table>
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.73% for Class
T until December 31, 2006.
See notes to financial statements.
68
<Page>
SM&R TAX FREE FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
The SM&R Tax Free Fund is a well-diversified portfolio designed to produce
monthly tax-free dividends to investors seeking current income, while minimizing
federal tax liability. The Fund focuses primarily on issuers of the highest
quality rating and often in insured issues. We analyze the credit worthiness and
financial strength of both the insurers (such as AMBAC and MBIA, two
market-leading municipal bond private insurers) and the underlying issuers in an
effort to minimize the default risk within the portfolio to a level below the
municipal market in general. Our overall average credit rating is maintained at
AAA because we do not believe that the market adequately compensates for the
risk profile of lower rated issuers.
For the fiscal year ending August 31, 2006, the Fund has provided a total return
of 1.91%, before sales charges (but after other expenses) to class T investors
at net asset value. The Lipper General Municipal Debt Index, meanwhile, has
offered a return of 3.29% over the past fiscal year. The year-to-date total
return for the Fund for the eight months ended August 31, 2006 was 2.00%. The
Fund has an average maturity of 6.02 years, a market-weighted average coupon of
4.81%, and a modified duration of 5.74 years. Because the Fund maintains a very
high average quality, returns sometimes lag general municipal bond indices.
Performance of the municipal market for the twelve months ended August 31, 2006
had very similar characteristics to the previous twelve months. Once again,
longer dated bonds outperformed the short and intermediate areas of the yield
curve. Lower rated bonds significantly outperformed higher quality issues. The
SM&R Tax Free Fund is positioned in the intermediate area of the yield curve
and, therefore, did not realize some of the performance that a longer duration
would have provided. Normally in Fed tightening cycles, longer dated municipals
underperform shorter maturities, but that has not been the case this cycle.
However, when this cycle of tightenings is complete, as some believe is the
case, the Fund should be well positioned as longer rates rise.
The municipal yield curve has flattened further over the last twelve months. The
current 2 to 30 year curve spread is 75 basis points, far narrower than the 200
basis point historical normal spread, but much steeper than the negatively
sloped Treasury curve. The positive slope of the municipal curve has drawn the
attention of investors seeking yield. The household sector has become a solid
buyer of municipal bonds, purchasing both directly and with strong inflows into
bond funds. While demand has been relatively strong, supply has been tight.
Year-to-date municipal bond issuance is down 22% through the end of July 2006.
This imbalance of supply and demand has provided strong support for bond prices.
We expect the municipal market performance to remain in positive territory for
the remainder of the year, marking the seventh consecutive year of positive
performance for the asset class. Municipal bonds remain a core holding in the
portfolio of many investors, and the positively sloped curve provides an
opportunity for incremental yield absent in the taxable market.
Sincerely,
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Tax Free Fund
69
<Page>
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R TAX FREE
FUND, CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL MUNICIPAL DEBT INDEX
[CHART]
<Table>
<Caption>
SM&R TAX LIPPER GENERAL
FREE FUND MUNICIPAL DEBT INDEX
9/1/1996 $ 9,549 $10,000
8/31/1997 $10,371 $10,501
8/31/1998 $11,260 $11,470
8/31/1999 $11,229 $12,457
8/31/2000 $11,920 $12,312
8/31/2001 $13,064 $12,973
8/31/2002 $13,748 $14,276
8/31/2003 $14,075 $14,945
8/31/2004 $14,807 $15,330
8/31/2005 $15,209 $16,378
8/31/2006 $15,500 $17,302
</Table>
SM&R Tax Free Fund performance figures 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 average annual returns for Class A shares
reflect the current maximum sales charge of 4.75%. Class B shares reflect the
applicable contingent deferred sales charge (CDSC), which is 3% in the first
year declining to 1% in the third year, and is eliminated thereafter.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge through 8/31/06. Inception date of these classes
is 01/01/99.
ONE FIVE TEN SINCE
YEAR YEAR YEAR INCEPTION
-------------------------------
Class A -2.77% 2.44% -- 3.22%
Class B -1.60% 2.93% -- 3.35%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
AVERAGE ANNUAL RETURNS
Includes maximum sales charge of 4.5% through 8/31/06 for Class T shares.
10 YEAR 4.48%
5 YEAR 2.54%
1 YEAR -2.67%
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Development 5.49%
Education 17.63%
General Obligation 33.13%
Government 4.82%
Housing 0.04%
Medical 6.67%
Miscellaneous 6.02%
Pollution 3.01%
Transportation 9.57%
Utilities 13.61%
</Table>
70
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R TAX FREE FUND
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
MUNICIPAL BONDS
RATING (a)
ALABAMA--1.32%
Aaa/AAA Alabama Drinking Water Financing Authority, Revolving
Fund Loan - Revenue Bonds, Series A 08/15/16 4.000 $180,000 $ 180,374
ARIZONA--1.91%
Aaa/AAA Scottsdale Industrial Development
Authority Hospital - Revenue Bonds, Series A 09/01/12 6.000 250,000 260,440
CALIFORNIA--0.19%
A1/A+ California State - General Obligation Bonds Unlimited 06/01/11 5.250 25,000 25,340
FLORIDA--9.31%
Aaa/AAA Dade County, Florida Water & Sewer System - Revenue
Bonds 10/01/16 5.375 400,000 414,684
Aaa/AAA Miami - Dade County, Florida Expressway Authority Toll
System - Revenue Bonds, Prerefunded to 07/01/2010 (b) 07/01/29 6.375 400,000 441,820
Aaa/AAA Miami - Dade County, Florida Solid Waste System -
Revenue Bonds 10/01/18 4.750 400,000 409,464
----------
1,265,968
HAWAII--1.98%
Aaa/AAA Honolulu, Hawaii City & County - General Obligation
Bonds Unlimited 07/01/13 5.000 250,000 268,982
ILLINOIS--4.71%
Aaa/AAA Chicago, Illinois - General Obligation Bonds Limited,
Unrefunded, Series B 01/01/25 5.125 15,000 15,224
Aaa/AAA Chicago, Illinois Park District - General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 235,322
Aaa/NR Rockford, Illinois - General Obligation Bonds Unlimited 12/15/18 4.500 180,000 182,461
Aaa/AAA State of Illinois - General Obligation Bonds Unlimited 03/01/19 5.000 200,000 207,096
----------
640,103
INDIANA--4.26%
Aaa/AAA Aurora, Indiana Building Corp. - Revenue Bonds 07/15/13 4.500 405,000 422,937
Aaa/AAA South Bend, Indiana Building Corp. - Revenue Bonds 02/01/13 4.500 150,000 156,246
----------
579,183
LOUISIANA--8.60%
Aaa/AAA Louisiana Public Facilities Authority Hospital -
Revenue Bonds, Prerefunded, Series C to 07/01/2008 (b) 07/01/19 5.000 335,000 346,309
Aaa/AAA Louisiana Public Facilities Authority Hospital -
Revenue Bonds, Unrefunded, Series C 07/01/19 5.000 65,000 66,600
Aaa/AAA Monroe, Louisiana Sales and Use Tax - Revenue Bonds 07/01/16 4.000 200,000 199,910
Aaa/AAA New Orleans, Louisiana Sewer Service - Revenue Bonds 06/01/18 5.000 300,000 306,810
Ba2/BB Plaquemines, Louisiana Port, Harbor & Terminal District,
Marine Terminal Facilities - Revenue Bonds 09/01/07 5.000 250,000 250,100
----------
1,169,729
MASSACHUSETTS--3.35%
Aaa/AAA Massachusetts State Water Revenues Authority - General
Purpose Bonds, Prerefunded, Series A to 11/01/2006 (b) 11/01/21 5.500 450,000 455,909
MISSISSIPPI--3.81%
NR/AAA Greenville Mississippi Public School District - General
Obligation Bonds Unlimited 12/15/11 3.250 205,000 198,270
Aaa/AAA Mississippi Development Bank Special Obligation Clinton
Recreational Facilities & Municipal Building - Revenue
Bonds 11/01/10 4.500 310,000 319,880
----------
518,150
NEW YORK--7.85%
Aaa/AAA New York City, New York - General Obligation Bonds
Unlimited, Series J 02/15/07 5.000 5,000 5,033
A1/AA- New York City, New York - General Obligation Bonds
Unlimited, Series J 08/01/18 5.000 200,000 205,278
Aa1/AAA New York City, New York - Transitional Financial
Authority Revenue Bonds, Prerefunded, Series C to
05/01/2009 (b) 05/01/19 5.000 145,000 151,769
Aa1/AAA New York City, New York - Transitional Financial
Authority Revenue Bonds, Unrefunded, Series C 05/01/19 5.000 105,000 109,103
</Table>
71
<Page>
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
MUNICIPAL BONDS
RATING (a)
Aaa/AAA New York State Tollway Authority Highway & Bridge -
Revenue Bonds, Series B 04/01/10 3.850 $200,000 $ 202,004
Aa2/AAA Triborough Bridge & Tunnel Authority, New York -
Revenue Bonds, General Purpose, Prerefunded, Series B
to 01/01/2022 (b) 01/01/27 5.200 350,000 394,765
----------
1,067,952
NORTH CAROLINA--1.50%
Aa1/AAA North Carolina State - General Obligation Bonds
Unlimited 03/01/15 4.000 200,000 203,902
OHIO--5.40%
Aaa/AAA Franklin County, Ohio - General Obligation Bonds
Limited, Prerefunded to 12/01/2006 (b) 12/01/08 5.100 300,000 304,131
Aaa/AAA Franklin County, Ohio - General Obligation Bonds
Limited, Prerefunded to 12/01/2011 (b) 12/01/11 5.300 100,000 101,426
Aaa/AAA Ohio State Department of Administrative Services -
Certificate Participation 09/01/15 5.250 300,000 329,130
----------
734,687
TEXAS--34.80%
Aaa/AAA Aransas County, Texas Correctional Facility
Improvements - General Obligation Bonds Limited 02/15/13 3.875 250,000 251,417
Aaa/AAA Austin, Texas Community College District - Revenue
Bonds 02/01/10 4.000 100,000 101,144
Aaa/AAA Austin, Texas Independent School District - General
Obligation Bonds Unlimited, Series A 08/01/12 3.750 150,000 150,217
Aaa/AAA College Station, Texas Utility Systems - Revenue Bonds 02/01/13 4.125 200,000 203,512
Aaa/AAA College Station, Texas Utility Systems - Revenue Bonds 02/01/14 4.250 65,000 66,313
Aaa/AAA Collin County, Texas Community College District,
Consolidated Fund - Revenue Bonds 02/01/15 5.250 400,000 402,484
Aaa/AAA Dallas, Texas Independent School District - General
Obligation Bonds Unlimited 02/15/09 4.200 100,000 101,444
Aaa/AAA El Paso, Texas Public Improvement - General Obligation
Bonds Limited 08/15/17 4.000 270,000 269,711
Aaa/AA- Flower Mound, Texas Refunding and Improvement - General
Obligation Bonds Limited, Prerefunded to 03/01/2007 (b) 03/01/17 5.500 190,000 191,851
Aaa/AA- Flower Mound, Texas Refunding and Improvement - General
Obligation Bonds Limited, Unrefunded 03/01/17 5.500 10,000 10,085
Aaa/NR Galveston County, Texas Public Improvements - General
Obligation Bonds Unlimited 02/01/10 4.300 25,000 25,525
Aaa/NR Galveston County, Texas Public Improvements - General
Obligation Bonds Limited 02/01/11 4.375 125,000 128,293
Aaa/AAA Jefferson County, Texas - Public Improvement
Certificates of Obligation, Series B 08/01/16 4.125 255,000 257,547
Aaa/AAA League City, Texas Public Improvements - General
Obligation Bonds Limited 02/15/13 4.750 100,000 104,815
Aaa/AAA Lubbock County, Texas - General Obligation Bonds
Limited 02/15/17 5.500 250,000 272,332
Aaa/AAA Lubbock, Texas Municipal Drainage Utility - General
Obligation Bonds Limited 02/15/14 4.000 250,000 252,378
Aaa/AAA Mission, Texas Consolidated Independent School District
- General Obligation Bonds Unlimited 02/15/18 4.500 200,000 201,310
Aaa/AAA Montgomery County, Texas Public Improvements - General
Obligation Bonds Limited 03/01/12 4.000 250,000 253,665
Aaa/AAA Rockwall, Texas Waterworks & Sewer - General Obligation
Bonds Limited 08/01/11 3.700 115,000 115,115
Aaa/AAA Round Rock, Texas Independent School District Refunding
and Improvement - General Obligation Bonds Unlimited,
Prerefunded to 08/01/2009 (b) 08/01/11 4.400 100,000 102,297
Aaa/AAA Round Rock, Texas Independent School District Refunding
and Improvement - General Obligation Bonds Unlimited,
Unrefunded 08/01/11 4.400 150,000 152,783
Aaa/AAA San Antonio, Texas River Authority Sewer Refunding and
Improvement - Martinez Salatrillo, Revenue Bonds 07/01/12 3.750 100,000 100,100
Aaa/NR Tarrant County Health Facilities Development Corp. -
Health System Revenue Bonds, (Harris Methodist Health
System), Series 1994 (c) 09/01/14 6.000 200,000 225,756
Aa1/AA+ Texas A&M University Revenue and Financing System -
Revenue Refunding Bonds, Series A 05/15/17 5.000 250,000 265,165
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 07/01/2011 (b) 07/01/13 6.250 45,000 50,139
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 01/01/2012 (b) 07/01/13 6.250 55,000 61,813
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 01/01/2013 (b) 07/01/13 6.250 55,000 62,784
</Table>
72
<Page>
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
MUNICIPAL BONDS DATE RATE (%) AMOUNT VALUE
RATING (a)
Aaa/AAA Waco, Texas - General
Obligation Bonds Limited 02/01/16 4.000 $250,000 $ 250,683
NR/AAA Wylie, Texas Independent
School District - General Obligation
Bonds Unlimited 08/15/12 4.375 100,000 102,974
-----------
4,733,652
UTAH--0.04%
Aa2/AA Utah State Housing Financial
Agency - Single Family Revenue Bonds (d) 07/01/21 6.000 5,000 5,088
WASHINGTON--5.09%
Aaa/AAA Seattle, Washington Municipal Light &
Power - Revenue Bonds, Series B 06/01/24 5.000 100,000 102,464
Aa1/AA State of Washington - General Obligation
Bonds Unlimited, Series B 05/01/18 5.500 300,000 328,728
Aa2/NR Tumwater, Washington Office
Building - Revenue Bonds 07/01/15 5.250 240,000 260,832
-----------
692,024
-----------
TOTAL MUNICIPAL BONDS--94.12%
(Cost $12,481,593) 12,801,483
-----------
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS
U S GOVERNMENT AGENCY--4.78%
Federal Home Loan Bank 09/01/06 5.120 350,000 350,000
Federal National Mortgage Assoc. 09/05/06 5.150 300,000 299,828
-----------
TOTAL U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS--4.78%
(Cost $649,82 649,828
-----------
MONEY MARKET FUND SHARES
SM&R Money Market Fund, 4.74% (e) 20,278 20,278
-----------
TOTAL MONEY MARKET FUND--0.15%
(Cost $20,278) 20,278
-----------
TOTAL INVESTMENTS--99.05%
(Cost $13,151,699) 13,471,589
CASH AND OTHER ASSETS, LESS LIABILITIES--0.95% 129,621
-----------
TOTAL NET ASSETS--100.00% $13,601,210
===========
</Table>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corp. ("S&P"). Ratings are unaudited.
(b) Collateral for these prerefunded bonds are U.S. Government or U.S. Treasury
or state or local government securities.
(c) Issuer has defeased these bonds. Collateral for such defeasance is U.S.
Government obligations.
(d) Security subject to the alternative minimum tax.
(e) The rate quoted is the annualized seven-day yield of the fund at August 31,
2006. 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.
73
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R TAX FREE FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $13,131,421) $ 13,451,311
Investment in affiliated money market fund (Cost $20,278) 20,278
------------
Total Investments (Cost $13,151,699) 13,471,589
Prepaid expenses 14,389
Receivable for:
Capital stock sold 200
Interest 141,471
Expense reimbursement 5,313
Other assets 3,211
------------
TOTAL ASSETS 13,636,173
------------
LIABILITIES
Distribution payable 1,668
Payable to investment adviser for fund expenses 15,048
Accrued:
Investment advisory fees 5,756
Service fees 2,878
Distribution fees 1,172
Other liabilities 8,441
------------
TOTAL LIABILITIES 34,963
------------
NET ASSETS (applicable to shares outstanding) $ 13,601,210
============
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 13,278,126
Undistributed net investment income 71
Accumulated net realized gain (loss) on investments 3,123
Net unrealized appreciation (depreciation) of investments 319,890
------------
Net Assets $ 13,601,210
============
NET ASSETS:
Class A 331,989
- --------------------------------------------------------------------------------
Class B 449,767
- --------------------------------------------------------------------------------
Class T 12,819,454
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 13,601,210
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,101
Outstanding 31,627
- --------------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 42,825
- --------------------------------------------------------------------------------
Class T:
Authorized 21,000,000
Outstanding 1,230,931
- --------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.50
Offering price per share:
(Net assets value of $10.50 / 95.25%) $ 11.02
- --------------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.50
- --------------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.41
Offering price per share:
(Net assets value of $10.41 / 95.5%) $ 10.90
- --------------------------------------------------------------------------------
See notes to financial statements.
74
<Page>
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R TAX FREE FUND
INVESTMENT INCOME
Interest $ 622,907
Interest from affiliated money market fund 1,701
---------
TOTAL INVESTMENT INCOME 624,608
---------
EXPENSES
Investment advisory fees 68,860
Service fees 34,430
Professional fees 9,236
Custody and transaction fees 6,844
Directors' fees 5,507
Compliance expenses 2,295
Insurance expenses 5,261
Qualification fees
Class A 8,390
Class B 4,866
Class T 27,074
Shareholder reporting expenses
Class A 613
Class B 622
Class T 1,003
Distribution fees
Class A 1,169
Class B 3,907
---------
TOTAL EXPENSES 180,077
LESS EXPENSES REIMBURSED (74,182)
---------
NET EXPENSES 105,895
---------
INVESTMENT INCOME (LOSS)--NET 518,713
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 3,036
Change in unrealized appreciation
(depreciation) of investments (256,053)
---------
NET GAIN (LOSS) ON INVESTMENTS (253,017)
---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 265,696
=========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R TAX FREE FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------
2006 2005
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 518,713 $ 520,252
Net realized gain (loss) on investments 3,036 989
Change in unrealized appreciation (depreciation) of investments (256,053) (146,843)
----------- -----------
Net increase (decrease) in net assets resulting from operations 265,696 374,398
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (17,723) (19,542)
Class B (17,124) (17,062)
Class T (483,874) (483,570)
Capital gains
Class A (34) (95)
Class B (35) (94)
Class T (865) (2,336)
----------- -----------
Total distributions to shareholders (519,655) (522,699)
----------- -----------
CAPITAL SHARE TRANSACTIONS--NET
Class A (176,842) (16,983)
Class B (78,509) 8,014
Class T 51,195 (15,752)
----------- -----------
Total capital share transactions--net (204,156) (24,721)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (458,115) (173,022)
NET ASSETS
Beginning of year 14,059,325 14,232,347
----------- -----------
End of year $13,601,210 $14,059,325
=========== ===========
Undistributed Net Investment Income $ 71 $ 79
=========== ===========
</Table>
See notes to financial statements.
75
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R TAX FREE FUND
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 10.70 $ 10.81 $ 10.71 $ 10.89 $ 10.80
Income (loss) from investment operations
Investment income (loss)--net 0.41 0.40 0.42 0.44 0.43
Net realized and unrealized gain (loss) on investments (0.20) (0.11) 0.12 (0.18) 0.09
-------- -------- -------- -------- --------
Total from investment operations 0.21 0.29 0.54 0.26 0.52
Less distributions
Investment income--net (0.41) (0.40) (0.42) (0.44) (0.43)
Capital gains (0.00)*** (0.00)*** (0.02) -- --
-------- -------- -------- -------- --------
Total distributions (0.41) (0.40) (0.44) (0.44) (0.43)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.50 $ 10.70 $ 10.81 $ 10.71 $ 10.89
======== ======== ======== ======== ========
Total return (1) 2.05% 2.72% 5.12% 2.40% 4.99%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $331,989 $519,889 $542,502 $643,287 $384,438
Ratio of expenses with reimbursement to average net assets (2) 0.75% 0.75% 0.75% 0.75% 0.93%
Ratio of expenses without reimbursement to average net assets 3.14% 2.73% 1.26% 1.24% 1.26%
Ratio of net investment income to average net assets 3.80% 3.68% 3.84% 4.09% 4.14%
Portfolio turnover rate 2.05% 7.50% 1.15% 18.23% 8.80%
</Table>
<Table>
<Caption>
CLASS B SHARES
----------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Net asset value, beginning of year $ 10.70 $ 10.81 $ 10.71 $ 10.90 $ 10.79
Income (loss) from investment operations
Investment income (loss)--net 0.35 0.34 0.36 0.40 0.37
Net realized and unrealized gain (loss) on investments (0.20) (0.11) 0.12 (0.19) 0.11
-------- -------- -------- -------- --------
Total from investment operations 0.15 0.23 0.48 0.21 0.48
Less distributions
Investment income--net (0.35) (0.34) (0.36) (0.40) (0.37)
Capital gains (0.00)*** (0.00)*** (0.02) -- --
-------- -------- -------- -------- --------
Total distributions (0.35) (0.34) (0.38) (0.40) (0.37)
======== ======== ======== ======== ========
Net asset value, end of year $ 10.50 $ 10.70 $ 10.81 $ 10.71 $ 10.90
======== ======== ======== ======== ========
Total return (1) 1.43% 2.20% 4.59% 1.91% 4.57%
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $449,767 $538,594 $536,101 $496,912 $513,273
Ratio of expenses with reimbursement to average net assets (2) 1.25% 1.25% 1.25% 1.25% 1.42%
Ratio of expenses without reimbursement to average net assets 2.77% 2.85% 1.78% 1.74% 1.75%
Ratio of net investment income to average net assets 3.29% 3.18% 3.34% 3.59% 3.65%
Portfolio turnover rate 2.05% 7.50% 1.15% 18.23% 8.80%
</Table>
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.75% for Class
A and 1.25% for Class B until December 31, 2006.
See notes to financial statements.
76
<Page>
<Table>
<Caption>
CLASS T SHARES
-----------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Net asset value, beginning of year $ 10.61 $ 10.72 $ 10.61 $ 10.80 $ 10.71
Income (loss) from investment operations
Investment income (loss)--net 0.39 0.39 0.41 0.44 0.46
Net realized and unrealized gain (loss) on investments (0.20) (0.11) 0.13 (0.18) 0.08
------- ------- ------- ------- -------
Total from investment operations 0.19 0.28 0.54 0.26 0.54
Less distributions
Investment income--net (0.39) (0.39) (0.41) (0.45) (0.45)
Capital gains (0.00)*** (0.00)*** (0.02) -- --
------- ------- ------- ------- -------
Total distributions (0.39) (0.39) (0.43) (0.45) (0.45)
------- ------- ------- ------- -------
Net asset value, end of year $ 10.41 $ 10.61 $10.72 $ 10.61 $ 10.80
======= ======= ======= ======= =======
Total return (1) 1.91% 2.72% 5.20% 2.38% 5.24%
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $12,819 $13,001 $13,154 $13,330 $12,472
Ratio of expenses with reimbursement to average net assets (2) 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses without reimbursement to average net assets 1.18% 1.05% 1.04% 1.03% 1.05%
Ratio of net investment income to average net assets 3.79% 3.68% 3.83% 4.08% 4.34%
Portfolio turnover rate 2.05% 7.50% 1.15% 18.23% 8.80%
</Table>
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.75% for Class
T until December 31, 2006.
See notes to financial statements.
77
<Page>
SM&R PRIMARY FUND
- --------------------------------------------------------------------------------
MANAGER DISCUSSION
The SM&R Primary Fund is focused on providing competitive levels of current
income to the conservative investor through investments in short term government
and corporate securities.
For the fiscal year ending August 31, 2006, the Fund has provided a total return
of 2.73%, before sales charges (but after other expenses), to class T investors
at net asset value. Over the same time period, the Lipper Short Investment Grade
Index returned 3.07%. The year-to-date total return for the Fund for the eight
months ended August 31, 2006 was 2.69%.
The August meeting of the Federal Reserve ended a series of rate hikes totaling
425 basis points that began in June 2004 and continued for 17 consecutive
meetings. Many investors read the Fed's pause as the end of the tightening
cycle, and bond markets rallied, with benchmark Treasury yields dropping 15-25
basis points across the curve. The spread between the 10 year Treasury and the
Fed Funds rate was more than 370 basis points in May 2004. At the close of
trading on August 31, 2006, the yield curve was inverted and the 10 year to Fed
Funds spread was -52 basis points.
The economy seems to have responded to the series of rate hikes. CPI slowed,
Michigan's survey on consumer sentiment improved, the residential housing market
is slowing, and business inventory growth seems to be moderating. However, many
economists caution that inflation uncertainties remain, and Fed officials
continue to comment on upside inflation risks. Most recent Labor Department data
indicates a higher than expected rise in wages against subdued worker
productivity. Companies are also faced with higher energy prices, difficult to
pass on to consumers.
The Fed remains highly data dependent for the direction of further action. While
the Fed futures market currently indicates rate easing should begin early in
2007, we believe the Fed will require economic growth to fall below baselines
before reacting. However, another spike in oil prices or more severe weakness in
the housing sector than currently anticipated could speed a switch in direction.
While much of the total rate of return in the bond market normally comes from
longer-dated maturities, the SM&R Primary Fund provides fixed income investors
with an opportunity to invest in shorter duration assets with less interest rate
risk than long term bonds, and its short duration over the last year has
provided reinvestment opportunity at higher short term rates.
Sincerely,
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Primary Fund
78
<Page>
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R PRIMARY FUND,
AT OFFERING PRICE, AND THE LIPPER SHORT INVESTMENT GRADE FUND INDEX
[CHART]
<Table>
<Caption>
SM&R PRIMARY FUND LIPPER SHORT INVESTMENT GRADE FUND INDEX
9/1/1996 $10,000 $10,000
8/31/1997 $10,498 $10,725
8/31/1998 $11,039 $11,413
8/31/1999 $11,563 $11,793
8/31/2000 $12,104 $12,453
8/31/2001 $12,863 $13,634
8/31/2002 $13,034 $14,137
8/31/2003 $13,210 $14,575
8/31/2004 $13,320 $14,946
8/31/2005 $13,718 $15,212
8/31/2006 $14,093 $15,679
</Table>
SM&R Primary Fund performance figures 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.
AVERAGE ANNUAL RETURNS
Inception date of this fund is 03/16/92.
10 YEAR 3.49%
5 YEAR 1.84%
1 YEAR 2.73%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
[PIE CHART]
<Table>
Consumer Discretionary 9.11%
Consumer Staples 3.06%
Financials 11.78%
Health Care 10.84%
Industrials 8.58%
Information Technology 3.80%
Materials 4.97%
Telecommunication Services 3.82%
U S Government 30.67%
Utilities 13.37%
</Table>
79
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R PRIMARY FUND
COMMERCIAL PAPER
<Table>
<Caption>
INTEREST/
MATURITY DATE STATED RATE (%) FACE AMOUNT VALUE
CONSUMER DISCRETIONARY--
HOUSEHOLD DURABLES--2.66%
Whirlpool Corp. 09/25/06 5.310 $ 701,000 $ 698,516
MEDIA--6.42%
Gannett Co. 09/08/06 5.230 765,000 764,220
New York Times (The) 09/01/06 5.350 919,000 919,000
----------
1,683,220
----------
TOTAL CONSUMER DISCRETIONARY--9.08% 2,381,736
----------
CONSUMER STAPLES--
BEVERAGES--3.05%
Coca-Cola Enterprises Inc. 09/19/06 5.220 803,000 800,901
----------
TOTAL CONSUMER STAPLES--3.05% 800,901
----------
FINANCIALS--
DIVERSIFIED FINANCIALS--8.48%
Textron Financial Corp. 09/21/06 5.280 1,008,000 1,005,040
Vectren Utility Hldgs. 09/05/06 5.320 1,222,000 1,221,275
----------
2,226,315
INSURANCE--3.25%
St Paul Companies, Inc. 09/22/06 5.310 855,000 852,350
----------
TOTAL FINANCIALS--11.73% 3,078,665
----------
HEALTH CARE--
HEALTH CARE PROVIDERS & SERVICES--7.18%
Lincoln National Corp. 09/12/06 5.270 656,000 654,941
Wellpoint Inc. 09/18/06 5.340 1,232,000 1,228,888
----------
1,883,829
PHARMACEUTICALS--3.61%
Sanofi-Aventis 09/27/06 5.240 952,000 948,396
----------
TOTAL HEALTH CARE--10.79% 2,832,225
----------
INDUSTRIALS--
INDUSTRIAL CONGLOMERATES--3.90%
ITT Industries Inc. 10/02/06 5.320 1,028,000 1,023,290
TRANSPORTATION INFRASTRUCTURE--3.64%
Burlington Northern Santa Fe Corp. 09/15/06 5.310 957,000 955,019
----------
TOTAL INDUSTRIALS--7.54% 1,978,309
----------
INFORMATION TECHNOLOGY--
COMPUTERS & PERIPHERALS--3.79%
Motorola Corp. 09/06/06 5.280 994,000 993,269
----------
TOTAL INFORMATION TECHNOLOGY--3.79% 993,269
----------
MATERIALS--
CONTAINER & PACKAGING--4.95%
Bemis Co., Inc. 09/07/06 5.250 1,300,000 1,298,860
----------
TOTAL MATERIALS--4.95% 1,298,860
----------
TELECOMMUNICATION SERVICES--
DIVERSIFIED TELECOMMUNICATION SERVICES--3.80%
Verizon Global Funding Corp. 09/11/06 5.300 1,000,000 998,524
----------
TOTAL TELECOMMUNICATION SERVICES--3.80% 998,524
----------
UTILITIES--
ELECTRIC UTILITIES--10.89%
Cinergy Corp. 09/20/06 5.300 744,000 741,916
Dominion Resources 09/14/06 5.310 1,004,000 1,002,071
Southern Power Co. 09/13/06 5.320 1,117,000 1,115,015
----------
2,859,002
</Table>
80
<Page>
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
GAS UTILITIES--2.42%
Laclede Gas Co. 09/26/06 5.280 $ 637,000 $ 634,663
-----------
TOTAL UTILITIES--13.31% 3,493,665
-----------
TOTAL COMMERCIAL PAPER--68.04%
(Cost $17,856,154) 17,856,154
-----------
CORPORATE BONDS
INDUSTRIALS--
BUILDING PRODUCTS--1.01%
Armstrong Holdings Inc. (b) 08/15/03 6.350 500,000 265,000
-----------
TOTAL INDUSTRIALS--1.01% 265,000
-----------
TOTAL CORPORATE BONDS--1.01%
(Cost $500,000) 265,000
-----------
U S GOVERNMENT AGENCY AND U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--26.58%
Federal Home Loan Bank (a) 12/27/06 5.000 1,000,000 997,657
Federal Home Loan Bank (a) 12/29/06 4.700 500,000 498,837
Federal Home Loan Bank (a) 01/29/07 5.050 1,000,000 998,252
Federal Home Loan Bank (a) 03/01/07 4.875 1,000,000 997,590
Federal Home Loan Bank (a) 04/25/07 4.000 1,000,000 991,217
Federal Home Loan Bank (a) 06/21/07 3.870 500,000 494,337
Federal Home Loan Bank (a) 06/29/07 5.400 1,000,000 999,703
Federal Home Loan Mortgage Corp. (a) 03/30/07 5.050 1,000,000 997,410
-----------
6,975,003
U S GOVERNMENT SECURITIES--3.97%
U S Treasury Bond 02/15/29 5.250 1,000,000 1,042,656
-----------
TOTAL U S GOVERNMENT AGENCY AND U S GOVERNMENT
SECURITIES--30.55%
(Cost $7,883,326) 8,017,659
-----------
TOTAL INVESTMENTS--99.60%
(Cost $26,239,480) 26,138,813
CASH AND OTHER ASSETS, LESS LIABILITIES--0.40% 104,048
-----------
TOTAL NET ASSETS--100.00% $26,242,861
===========
</Table>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Long term obligations that will mature in less than one year.
(b) Security is in default of interest. The Company's "Fourth Amended Plan of
Reorganization, as Modified" was recently confirmed by the U.S. District
Court and Armstrong World Industries, Inc. currently expects to emerge from
Chapter 11 in the fourth quarter of 2006.
See notes to financial statements.
81
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R PRIMARY FUND
ASSETS
Investments in unaffiliated securities, at value
(Cost $26,239,480) $26,138,813
Cash 298
Prepaid expenses 14,281
Receivable for:
Capital stock sold 1,877
Interest 124,889
Expense reimbursement 3,164
Other assets 2,782
-----------
TOTAL ASSETS 26,286,104
-----------
LIABILITIES
Distribution payable 570
Payable to investment adviser for fund expenses 17,930
Accrued:
Investment advisory fees 11,123
Service fees 5,561
Other liabilities 8,059
-----------
TOTAL LIABILITIES 43,243
-----------
NET ASSETS $26,242,861
===========
Shares of capital stock outstanding, (2,176,000,000 shares
authorized, $.01 par value per share) 26,485,177
===========
Net asset value $ 0.99
===========
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 26,484,868
Accumulated net realized gain (loss) on investments (141,340)
Net unrealized appreciation (depreciation) of investments (100,667)
-----------
Net Assets $26,242,861
===========
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R PRIMARY FUND
INVESTMENT INCOME
Interest $1,170,299
----------
TOTAL INVESTMENT INCOME 1,170,299
----------
EXPENSES
Investment advisory fees 130,014
Service fees 65,007
Professional fees 8,235
Custody and transaction fees 11,613
Directors' fees 5,507
Compliance expenses 4,211
Insurance expenses 9,902
Qualification fees 324
Shareholder reporting expenses 3,273
----------
TOTAL EXPENSES 238,086
LESS EXPENSES REIMBURSED (30,111)
----------
NET EXPENSES 207,975
----------
INVESTMENT INCOME (LOSS)--NET 962,324
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Change in unrealized appreciation (depreciation) of investments (175,194)
----------
NET GAIN (LOSS) ON INVESTMENTS (175,194)
----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 787,130
==========
See notes to financial statements.
82
<Page>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R PRIMARY FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------
2006 2005
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 962,324 $ 511,536
Change in unrealized appreciation (depreciation) of investments (175,194) 163,787
----------- -----------
Net increase (decrease) in net assets resulting from operations 787,130 675,323
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (962,324) (511,536)
----------- -----------
CAPITAL SHARE TRANSACTIONS--NET 1,172,962 (1,116,093)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 997,768 (952,306)
NET ASSETS
Beginning of year 25,245,093 26,197,399
----------- -----------
End of year $26,242,861 $25,245,093
=========== ===========
</Table>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R PRIMARY FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Net asset value, beginning of year $ 1.00 $ 0.99 $ 0.99 $ 0.99 $ 1.00
Income (loss) from investment operations
Investment income (loss)--net 0.04 0.02 0.01 0.01 0.02
Net realized and unrealized gain (loss) on investments (0.01) 0.01 -- -- (0.01)
------- ------- ------- ------- -------
Total from investment operations 0.03 0.03 0.01 0.01 0.01
Less distributions
Investment income--net (0.04) (0.02) (0.01) (0.01) (0.02)
------- ------- ------- ------- -------
Total distributions (0.04) (0.02) (0.01) (0.01) (0.02)
------- ------- ------- ------- -------
Net asset value, end of year $ 0.99 $ 1.00 $ 0.99 $ 0.99 $ 0.99
======= ======= ======= ======= =======
Total return 2.73% 2.99% 0.83% 1.35% 1.33%
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $26,243 $25,245 $26,197 $27,409 $27,304
Ratio of expenses with reimbursement to average net assets (1) 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses without reimbursement to average net assets 0.92% 0.91% 0.91% 0.89% 0.92%
Ratio of net investment income to average net assets 3.70% 1.94% 0.83% 1.35% 2.29%
Portfolio turnover rate 25.75% 0.00% 70.47% 0.00% 0.00%
</Table>
(1) SM&R has voluntarily agreed to waive or reduce expenses to 0.80% until
December 31, 2006.
See notes to financial statements.
83
<Page>
SCHEDULE OF INVESTMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R MONEY MARKET FUND
<Table>
<Caption>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
AUTOMOBILES--4.69%
Dollar Thrifty Funding 09/14/06 5.260 $4,170,000 $ 4,162,063
-----------
TOTAL COMMERCIAL PAPER--4.69%
(Cost $4,162,063) 4,162,063
-----------
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS
GOVERNMENT AGENCIES--95.12%
Federal Farm Credit Bank 09/01/06 5.110 5,731,000 5,731,000
Federal Farm Credit Bank 09/08/06 5.150 5,125,000 5,119,850
Federal Home Loan Bank 09/06/06 5.160 7,633,000 7,627,511
Federal Home Loan Bank 09/07/06 5.110 5,400,000 5,395,396
Federal Home Loan Bank 09/14/06 5.110 3,529,000 3,522,484
Federal Home Loan Bank 09/15/06 5.100 5,573,000 5,561,931
Federal Home Loan Bank 09/20/06 5.130 6,294,000 6,276,952
Federal Home Loan Bank 09/22/06 5.130 7,360,000 7,337,940
Federal Home Loan Bank 09/27/06 5.130 4,390,000 4,373,715
Federal Home Loan Mortgage Corp. 09/05/06 5.160 6,709,000 6,705,136
Federal Home Loan Mortgage Corp. 09/12/06 5.110 3,275,000 3,269,868
Federal Home Loan Mortgage Corp. 09/19/06 5.130 4,608,000 4,596,179
Federal National Mortgage Assoc. 09/11/06 5.090 5,693,000 5,684,935
Federal National Mortgage Assoc. 09/13/06 5.110 5,306,000 5,296,939
Federal National Mortgage Assoc. 09/18/06 5.100 7,956,000 7,936,815
-----------
TOTAL U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS--95.12%
(Cost $84,436,651) 84,436,651
-----------
TOTAL INVESTMENTS--99.81%
(Cost $88,598,714) 88,598,714
CASH AND OTHER ASSETS, LESS LIABILITIES--0.19% 170,786
-----------
TOTAL NET ASSETS--100.00% $88,769,500
===========
</Table>
See notes to financial statements.
84
<Page>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2006
- --------------------------------------------------------------------------------
SM&R MONEY MARKET FUND
ASSETS
Investments in unaffiliated securities, at cost and value $88,598,714
Cash 774
Prepaid expenses 26,390
Receivable for:
Capital stock sold 289,807
Expense reimbursement 14,066
-----------
TOTAL ASSETS 88,924,193
-----------
LIABILITIES
Capital stock reacquired 69,994
Distribution payable 1,836
Payable to investment adviser for fund expenses 35,524
Accrued:
Investment advisory fees 18,852
Service fees 18,852
Other liabilities 15,193
-----------
TOTAL LIABILITIES 154,693
-----------
NET ASSETS $88,769,500
===========
Shares of capital stock outstanding, (2,000,000,000 shares
authorized, $.01 par value per share) 88,769,500
===========
Net asset value $ 1.00
===========
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 88,769,500
-----------
Net Assets $88,769,500
===========
STATEMENT OF OPERATIONS Year Ended August 31, 2006
- --------------------------------------------------------------------------------
SM&R MONEY MARKET FUND
INVESTMENT INCOME
Interest $ 3,161,644
-----------
TOTAL INVESTMENT INCOME 3,161,644
-----------
EXPENSES
Investment advisory fees 175,771
Service fees 175,771
Professional fees 8,535
Custody and transaction fees 15,699
Directors' fees 5,507
Compliance expense 11,231
Insurance expenses 32,726
Qualification fees 79,456
Shareholder reporting expenses 5,701
-----------
TOTAL EXPENSES 510,397
LESS EXPENSES REIMBURSED (160,389)
-----------
NET EXPENSES 350,008
-----------
INVESTMENT INCOME (LOSS)--NET $ 2,811,636
===========
See notes to financial statements.
85
<Page>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R MONEY MARKET FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
--------------------------
2006 2005
----------- ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income (loss)--net $ 2,811,636 $ 1,828,191
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (2,811,636) (1,828,191)
----------- ------------
CAPITAL SHARE TRANSACTIONS--NET 11,879,752 (18,311,786)
----------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 11,879,752 (18,311,786)
NET ASSETS
Beginning of year 76,889,748 95,201,534
----------- ------------
End of year $88,769,500 $ 76,889,748
=========== ============
</Table>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the years
indicated.
SM&R MONEY MARKET FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- -------- --------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income (loss) from investment operations
Investment income (loss)--net 0.04 0.02 0.01 0.01 0.02
------- ------- ------- -------- --------
Total from investment operations 0.04 0.02 0.01 0.01 0.02
Less distributions
Investment income--net (0.04) (0.02) (0.01) (0.01) (0.02)
------- ------- ------- -------- --------
Total distributions (0.04) (0.02) (0.01) (0.01) (0.02)
------- ------- ------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======== ========
Total return 4.04% 2.03% 0.58% 0.80% 1.53%
======= ======= ======= ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $88,769 $76,890 $95,202 $103,469 $154,610
Ratio of expenses with reimbursement to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of expenses without reimbursement to average net assets 0.73% 0.59% 0.60% 0.58% 0.56%
Ratio of net investment income to average net assets 4.01% 1.98% 0.58% 0.84% 1.48%
</Table>
See notes to financial statements.
86
<Page>
NOTES TO FINANCIAL STATEMENTS August 31, 2006
- --------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
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, Primary Fund and Money
Market 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 they were
added as a 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.
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 and short-term obligations are stated at amortized
cost, which is equivalent to value. Investments in the affiliated money market
fund are valued at the net asset value per share.
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 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.
On a daily basis, income, unrealized and realized gains and losses, and expenses
which are not class specific are allocated to each class based on their
respective net assets. Class specific expenses, such as distribution expenses,
are applied to the class to which they are attributed.
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.
TAX YEAR ENDING EXPIRATION
AUGUST 31, 2006 LOSS CARRYFORWARDS DATES
--------------------- ------------------ ----------
Alger Technology Fund $ 79,763 2009
$ 113,717 2010
Growth Fund $1,908,148 2011
Government Bond Fund $ 140 2013
$ 177,508 2014
Primary Fund $ 36,349 2007
$ 88 2008
$ 242 2009
$ 104,661 2010
87
<Page>
Capital loss carryovers are available to offset future realized capital gains
and thereby reduce further taxable gain distributions. As of August 31, 2006 the
Government Bond Fund had $257,242 of post-October losses which are deferred
until September 1, 2006 for tax purposes. Net capital losses incurred after
October 31, and within the taxable year are deemed to arise on the first day of
the fund's next taxable 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 Class B shares of the respective funds and 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.
Each Fund may periodically make reclassifications among certain of its capital
accounts as a result of the timing and characterization of certain income and
capital gains distributions determined in accordance with federal tax
regulations, which may differ from accounting principles generally accepted in
the United States of America. These reclassifications are due to differing
treatment for items such as deferral of wash sales, net operating losses and
post-October capital losses.
EXPENSES:
Qualification fees, distribution fees or other expenses 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 all of the series based on the relative amount of each series' net assets
or shareholders, and then allocated among the classes of that series.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEES:
Securities Management and Research, Inc. ("SM&R") is the investment adviser 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
INVESTMENT
SM&R ALGER FUNDS ADVISORY FEE
Alger Technology Fund 1.35%
Alger Aggressive Growth Fund 1.05%
Alger Small-Cap Fund 1.00%
Alger Growth Fund 0.85%
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, Inc. makes investment decisions for each of these funds and
continuously reviews and administers the investment program. SM&R monitors Fred
Alger Management, Inc.'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, Inc. for
each of these series. The series are not responsible for paying the sub-advisory
fee directly.
Growth, Equity Income and Balanced Funds
INVESTMENT
NET ASSETS ADVISORY FEE
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding $200,000,000 0.625%
Exceeding $200,000,000 but not exceeding $300,000,000 0.500%
Exceeding $300,000,000 0.400%
FIXED INCOME FUNDS
Government Bond and Tax Free Funds
NET ASSETS
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
Primary Fund
All average daily net assets 0.50%
Money Market Fund
All average daily net assets 0.25%
88
<Page>
ADMINISTRATIVE SERVICE FEES:
Administrative service fees paid to SM&R by the each of the series are computed
as a percentage of average daily net assets as follows:
NET ASSETS SERVICE FEES
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
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 year 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 do not include the
distribution and shareholder servicing fee.
Effective June 1, 2002, and until December 31, 2006, SM&R has voluntarily agreed
to reimburse expenses (after applicable waivers) which exceed the following
percentages of each fund's average daily net assets:
CLASS A CLASS B CLASS T UNIVERSAL
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%
Primary Fund 0.80%
SM&R has voluntarily agreed to reimburse expenses (after applicable waivers)
which exceed the following percentages of each fund's average daily net assets:
EFFECTIVE JUNE 1, 2002 EFFECTIVE MAY 1, 2006
UNTIL APRIL 30, 2006 UNTIL APRIL 30, 2007
---------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B
Alger Technology Fund 2.10% 2.75% 1.85% 2.50%
Alger Aggressive Growth Fund 1.85% 2.50% 1.60% 2.25%
Alger Small-Cap Fund 1.90% 2.55% 1.65% 2.30%
Alger Growth Fund 1.70% 2.35% 1.45% 2.10%
Fee waivers and/or reductions, other than those stated in the Administrative
Service Agreement, may be rescinded by SM&R at any time after December 31, 2006
and April 30, 2007, respectively as shown above, without notice to investors.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
The Company has adopted a 12b-1 Plan, for each series, except the Primary and
Money Market Funds, 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:
DISTRIBUTION SERVICE TOTAL 12b-
FEE FEE 1 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%
89
<Page>
For the year ended August 31, 2006, each series paid or accrued the following,
as compensation under the Plans:
Alger Technology Fund $ 6,496
Alger Aggressive Growth Fund $13,724
Alger Small-Cap Fund $14,336
Alger Growth Fund $18,441
Growth Fund $39,934
Equity Income Fund $76,177
Balanced Fund $33,298
Government Bond Fund $ 8,852
Tax Free Fund $ 5,076
SALES CHARGES:
During the year ended August 31, 2006, SM&R, as principal underwriter, received
as sales charges on sales of capital stock of each series and made reallowances
to dealers as follows:
SALES SALES
CHARGES CHARGES
RECEIVED BY SM&R REALLOWED TO DEALERS
Alger Technology Fund $ 2,134 $ 58
Alger Aggressive Growth Fund $ 6,208 $ 129
Alger Small-Cap Fund $17,969 $ 350
Alger Growth Fund $ 8,653 $1,029
Growth Fund $60,101 $1,960
Equity Income Fund $82,001 $2,278
Balanced Fund $22,092 $ 767
Government Bond Fund $ 6,060 $ 203
Tax Free Fund $ 491 $ --
For the year ended August 31, 2006, SM&R received $54,584 for contingent
deferred sales charges imposed on the redemptions of Class B shares of capital
stock of the series.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2006, SM&R and American National had the
following ownership in these series:
<Table>
<Caption>
AMERICAN NATIONAL
SM&R AMERICAN NATIONAL AFFILIATES
----------------------- ------------------------ ------------------------
PERCENT PERCENT PERCENT
OF SHARES OF SHARES OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
Growth Fund 231,179 0.99% 1,042,359 4.46% 1,518,225 6.49%
Equity Income Fund 23,357 0.52% -- 0.00% -- 0.00%
Balanced Fund 164,411 10.25% 93,185 5.81% 295,773 18.44%
Government Bond Fund 693,986 25.34% 129,194 4.72% 946,067 34.55%
Tax Free Fund 17,566 0.07% 22,389,921 84.54% 2,154,847 8.14%
Primary Fund 176,688 13.54% -- 0.00% 882,198 67.58%
Money Market Fund 2,444,814 2.75% 43,373,017 48.86% 28,761,291 32.40%
</Table>
Through the investment sub-advisory agreement, Fred Alger Management, Inc. is
affiliated with SM&R. As of August 31, 2006, Fred Alger Management, Inc. had the
following ownership in these series:
PERCENT OF SHARES
SHARES OUTSTANDING
Alger Technology Fund 25,000 6.47%
Alger Aggressive Growth Fund 25,000 6.26%
Alger Small-Cap Fund 25,000 5.54%
Alger Growth Fund 25,000 5.20%
The Company pays directors' fees and expenses for all the independent directors.
The Company also pays the salary and other expenses of the Chief Compliance
Officer.
90
<Page>
Fred Alger and Company, Incorporated ("Alger Inc.") is an affiliated
broker-dealer of Fred Alger Management, Inc. During the year ended August 31,
2006, 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 $842, $5,587, $2,610 and $11,445, respectively.
INVESTMENTS INTO AFFILIATED MONEY MARKET FUND:
The Company has received an exemptive order issued by the Securities and
Exchange Commission ("SEC") allowing the Company to sweep uninvested cash into
the SM&R Money Market Fund. The SM&R Money Market Fund is one of the eleven
funds included in the Company and is therefore considered to be affiliated. The
transactions in investments in the affiliated money market fund for the year
ended August 31, 2006 were:
Purchases $16,993,442
Sales $17,097,011
NOTE 3-COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
PURCHASES SALES
Alger Technology Fund $ 1,504,137 $ 1,501,051
Alger Aggressive Growth Fund $ 5,196,850 $ 4,785,718
Alger Small-Cap Fund $ 3,146,713 $ 2,148,157
Alger Growth Fund $ 9,683,393 $ 9,579,567
Growth Fund $56,516,546 $67,872,893
Equity Income Fund $50,248,164 $61,815,121
Balanced Fund $ 6,135,073 $ 7,979,130
Government Bond Fund $20,858,281 $21,790,043
Tax Free Fund $ 268,448 $ 615,625
Primary Fund $ 6,486,380 $ 1,500,000
Gross unrealized appreciation and depreciation as of August 31, 2006, based on
the cost for federal income tax purposes is as follows:
<Table>
<Caption>
NET APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
Alger Technology Fund $ 1,093,677 $ 136,052 $ 36,532 $ 99,520
Alger Aggressive Growth Fund $ 2,591,266 $ 231,247 $ 69,647 $ 161,600
Alger Small-Cap Fund $ 2,959,695 $ 437,973 $ 87,328 $ 350,645
Alger Growth Fund $ 3,055,777 $ 102,029 $ 169,670 $ (67,641)
Growth Fund $86,704,472 $18,281,317 $2,290,964 $15,990,353
Equity Income Fund $86,119,688 $24,007,197 $3,533,828 $20,473,369
Balanced Fund $26,377,710 $ 3,813,815 $ 787,842 $ 3,025,973
Government Bond Fund $27,778,642 $ 154,392 $ 382,501 $ (228,109)
Tax Free Fund $13,151,699 $ 363,088 $ 43,198 $ 319,890
Primary Fund $26,239,480 $ 150,292 $ 250,959 $ (100,667)
</Table>
91
<Page>
NOTE 4--CAPITAL STOCK
ALGER TECHNOLOGY FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
----------------------------------------
2006 2005
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- ------- --------
Sale of capital shares:
Class A 42,193 $ 139,760 55,007 $153,445
Class B 10,369 33,065 20,774 55,752
------- --------- ------- --------
Total sale of capital shares 52,562 172,825 75,781 209,197
Redemptions of capital shares
outstanding:
Class A (23,970) (73,711) (31,119) (85,571)
Class B (17,913) (56,597) (21,786) (60,031)
------- --------- ------- --------
Total redemptions of capital shares
outstanding (41,883) (130,308) (52,905) (145,602)
------- --------- ------- --------
Net increase (decrease) in capital
shares outstanding 10,679 $ 42,517 22,876 $ 63,595
========= ========
Shares outstanding at beginning of year 375,451 352,575
------- -------
Shares outstanding at end of year 386,130 375,451
======= =======
</Table>
ALGER AGGRESSIVE GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
----------------------------------------
2006 2005
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- ------- --------
Sale of capital shares:
Class A 69,943 $ 469,329 55,628 $306,350
Class B 27,662 177,347 20,571 110,355
------- --------- ------- --------
Total sale of capital shares 97,605 646,676 76,199 416,705
Redemptions of capital shares
outstanding:
Class A (33,401) (216,573) (39,529) (219,470)
Class B (14,371) (92,496) (11,767) (62,837)
------- --------- ------- --------
Total redemptions of capital shares
outstanding (47,772) (309,069) (51,296) (282,307)
------- --------- ------- --------
Net increase (decrease) in capital
shares outstanding 49,833 $ 337,607 24,903 $134,398
========= ========
Shares outstanding at beginning of year 349,432 324,529
------- -------
Shares outstanding at end of year 399,265 349,432
======= =======
</Table>
ALGER SMALL-CAP FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------------------
2006 2005
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------
Sale of capital shares:
Class A 151,580 $1,144,229 43,077 $ 281,607
Class B 27,000 201,061 15,746 101,681
------- ---------- ------- ---------
Total sale of capital shares 178,580 1,345,290 58,823 383,288
Distributions from net realized gains
reinvested
Class A 21,857 153,001 3,363 22,803
Class B 11,629 80,010 1,799 12,091
------- ---------- ------- ---------
Total distributions from net
realized gains reinvested 33,486 233,011 5,162 34,894
Redemptions of capital shares
outstanding:
Class A (22,244) (166,482) (30,405) (204,091)
Class B (8,130) (58,149) (14,131) (93,255)
------- ---------- ------- ---------
Total redemptions of capital shares
outstanding (30,374) (224,631) (44,536) (297,346)
------- ---------- ------- ---------
Net increase (decrease) in capital
shares outstanding 181,692 $1,353,670 19,449 $ 120,836
========== =========
Shares outstanding at beginning of year 269,859 250,410
------- -------
Shares outstanding at end of year 451,551 269,859
======= =======
</Table>
92
<Page>
ALGER GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------------------
2006 2005
------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- -------- ---------
Sale of capital shares:
Class A 70,902 $ 476,435 59,792 $ 341,796
Class B 28,203 179,080 44,939 258,227
------- --------- -------- ---------
Total sale of capital shares 99,105 655,515 104,731 600,023
Redemptions of capital shares outstanding:
Class A (61,337) (406,140) (52,731) (309,167)
Class B (25,975) (165,112) (47,829) (284,533)
------- --------- -------- ---------
Total redemptions of capital shares outstanding (87,312) (571,252) (100,560) (593,700)
------- --------- -------- ---------
Net increase (decrease) in capital shares outstanding 11,793 $ 84,263 4,171 $ 6,323
========= =========
Shares outstanding at beginning of year 468,585 464,414
------- --------
Shares outstanding at end of year 480,378 468,585
======= ========
</Table>
GROWTH FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
2006 2005
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
Sale of capital shares:
Class A 146,187 $ 612,616 219,222 $ 872,857
Class B 88,812 364,497 147,296 580,982
Class T 623,489 2,680,561 850,091 3,477,691
---------- ------------ ---------- ------------
Total sale of capital shares 858,488 3,657,674 1,216,609 4,931,530
Investment income dividends reinvested:
Class A 8,241 34,714 16,074 65,260
Class B 1,669 6,907 6,205 24,698
Class T 160,013 688,159 289,329 1,197,822
---------- ------------ ---------- ------------
Total investment income dividends reinvested 169,923 729,780 311,608 1,287,780
Redemptions of capital shares outstanding:
Class A (356,821) (1,506,323) (314,879) (1,256,884)
Class B (191,192) (784,265) (193,769) (767,561)
Class T (3,820,172) (16,443,295) (3,821,541) (15,666,801)
---------- ------------ ---------- ------------
Total redemptions of capital shares outstanding (4,368,185) (18,733,883) (4,330,189) (17,691,246)
---------- ------------ ---------- ------------
Net increase (decrease) in capital shares outstanding (3,339,774) $(14,346,429) (2,801,972) $(11,471,936)
============ ============
Shares outstanding at beginning of year 26,732,079 29,534,051
---------- ----------
Shares outstanding at end of year 23,392,305 26,732,079
========== ==========
</Table>
93
<Page>
EQUITY INCOME FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------------------------------
2006 2005
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
Sale of capital shares:
Class A 47,053 $ 1,056,963 61,265 $ 1,399,945
Class B 36,413 792,566 33,895 749,754
Class T 69,200 1,604,347 93,180 2,200,242
--------- ------------ --------- ------------
Total sale of capital shares 152,666 3,453,876 188,340 4,349,941
Investment income dividends reinvested:
Class A 7,181 160,038 6,445 147,032
Class B 4,389 94,683 4,398 97,146
Class T 67,232 1,551,903 66,099 1,553,475
--------- ------------ --------- ------------
Total investment income dividends reinvested 78,802 1,806,624 76,942 1,797,653
Distributions from net realized gains reinvested:
Class A 31,509 693,209 8,390 194,094
Class B 29,100 618,371 7,989 179,148
Class T 304,202 6,926,676 89,584 2,136,120
--------- ------------ --------- ------------
Total distributions from net realized gains reinvested 364,811 8,238,256 105,963 2,509,362
Redemptions of capital shares outstanding:
Class A (76,423) (1,720,249) (49,225) (1,125,771)
Class B (111,441) (2,409,895) (45,757) (1,023,947)
Class T (652,127) (15,173,221) (549,488) (12,991,821)
--------- ------------ --------- ------------
Total redemptions of capital shares outstanding (839,991) (19,303,365) (644,470) (15,141,539)
--------- ------------ --------- ------------
Net increase (decrease) in capital shares outstanding (243,712) $ (5,804,609) (273,225) $ (6,484,583)
============ ============
Shares outstanding at beginning of year 4,730,615 5,003,840
--------- ---------
Shares outstanding at end of year 4,486,903 4,730,615
========= =========
</Table>
BALANCED FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------------------------------
2006 2005
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
Sale of capital shares:
Class A 28,125 $ 496,899 64,985 $ 1,169,814
Class B 13,266 236,994 19,642 358,570
Class T 33,390 615,020 47,933 897,004
--------- ----------- --------- -----------
Total sale of capital shares 74,781 1,348,913 132,560 2,425,388
Investment income dividends reinvested:
Class A 4,840 85,714 5,203 93,772
Class B 2,123 37,988 2,390 43,470
Class T 21,234 389,775 21,755 405,823
--------- ----------- --------- -----------
Total investment income dividends reinvested 28,197 513,477 29,348 543,065
Distributions from net realized gains reinvested:
Class A 12,421 217,982 928 17,004
Class B 6,721 119,230 585 10,849
Class T 50,646 923,271 4,102 77,859
--------- ----------- --------- -----------
Total distributions from net realized gains reinvested 69,788 1,260,483 5,615 105,712
Redemptions of capital shares outstanding:
Class A (74,691) (1,320,202) (45,083) (814,190)
Class B (37,230) (669,163) (20,251) (372,191)
Class T (111,774) (2,056,206) (115,678) (2,171,188)
--------- ----------- --------- -----------
Total redemptions of capital shares outstanding (223,695) (4,045,571) (181,012) (3,357,569)
--------- ----------- --------- -----------
Net increase (decrease) in capital shares outstanding (50,929) $ (922,698) (13,489) $ (283,404)
=========== ===========
Shares outstanding at beginning of year 1,654,501 1,667,990
--------- ---------
Shares outstanding at end of year 1,603,572 1,654,501
========= =========
</Table>
94
<Page>
GOVERNMENT BOND FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------------------------------
2006 2005
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
Sale of capital shares:
Class A 16,840 $ 173,494 18,584 $ 194,747
Class B 7,934 81,221 9,777 102,362
Class T 49,765 504,256 52,700 544,848
--------- ----------- --------- -----------
Total sale of capital shares 74,539 758,971 81,061 841,957
Investment income dividends reinvested:
Class A 3,273 33,624 2,386 24,982
Class B 2,425 24,889 1,958 20,486
Class T 89,015 902,344 63,169 652,977
--------- ----------- --------- -----------
Total investment income dividends reinvested 94,713 960,857 67,513 698,445
Distributions from net realized gains reinvested:
Class A -- -- 55 579
Class B -- -- 59 620
Class T -- -- 1,522 15,913
--------- ----------- --------- -----------
Total distributions from net realized gains reinvested -- -- 1,636 17,112
Redemptions of capital shares outstanding:
Class A (24,035) (247,583) (15,341) (160,296)
Class B (38,881) (399,246) (22,880) (239,570)
Class T (152,619) (1,550,686) (188,305) (1,947,955)
--------- ----------- --------- -----------
Total redemptions of capital shares outstanding (215,535) (2,197,515) (226,526) (2,347,821)
--------- ----------- --------- -----------
Net increase (decrease) in capital shares outstanding (46,283) $ (477,687) (76,316) $ (790,307)
=========== ===========
Shares outstanding at beginning of year 2,784,780 2,861,096
--------- ---------
Shares outstanding at end of year 2,738,497 2,784,780
========= =========
</Table>
TAX FREE FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------------------------
2006 2005
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ---------
Sale of capital shares:
Class A 648 $ 6,806 644 $ 6,928
Class B -- -- 417 4,500
Class T 2,069 21,595 18,573 197,512
--------- --------- --------- ---------
Total sale of capital shares 2,717 28,401 19,634 208,940
Investment income dividends reinvested:
Class A 1,690 17,723 1,820 19,542
Class B 1,406 14,741 1,371 14,711
Class T 44,634 463,868 42,933 456,705
--------- --------- --------- ---------
Total investment income dividends reinvested 47,730 496,332 46,124 490,958
Distributions from net realized gains reinvested:
Class A 3 34 9 95
Class B 3 30 8 81
Class T 80 836 207 2,218
--------- --------- --------- ---------
Total distributions from net realized gains reinvested 86 900 224 2,394
Redemptions of capital shares outstanding:
Class A (19,297) (201,405) (4,061) (43,548)
Class B (8,941) (93,280) (1,047) (11,278)
Class T (41,691) (435,104) (63,271) (672,187)
--------- --------- --------- ---------
Total redemptions of capital shares outstanding (69,929) (729,789) (68,379) (727,013)
--------- --------- --------- ---------
Net increase (decrease) in capital shares outstanding (19,396) $(204,156) (2,397) $ (24,721)
========= =========
Shares outstanding at beginning of year 1,324,779 1,327,176
--------- ---------
Shares outstanding at end of year 1,305,383 1,324,779
========= =========
</Table>
95
<Page>
PRIMARY FUND
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------------------------------
2006 2005
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
Sale of capital shares 5,621,665 $ 5,574,810 713,272 $ 710,223
Investment income dividends reinvested 970,805 961,699 486,077 484,509
Redemptions of capital shares outstanding (5,414,836) (5,363,547) (2,313,753) (2,310,825)
---------- ---------- ---------- ----------
Net increase (decrease) in capital shares outstanding 1,177,634 $ 1,172,962 (1,114,404) $(1,116,093)
=========== ===========
Shares outstanding at beginning of year 25,307,543 26,421,947
---------- ----------
Shares outstanding at end of year 26,485,177 25,307,543
========== ==========
</Table>
MONEY MARKET
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------
2006 2005
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ -------------
Sale of capital shares 267,655,107 $ 267,655,107 220,001,683 $ 220,001,683
Investment income dividends reinvested 2,787,943 2,787,943 1,729,264 1,729,264
Redemptions of capital shares outstanding (258,563,298) (258,563,298) (240,042,733) (240,042,733)
------------ ------------- ------------ -------------
Net increase (decrease) in capital shares outstanding 11,879,752 $ 11,879,752 (18,311,786) $ (18,311,786)
============= =============
Shares outstanding at beginning of year 76,889,748 95,201,534
------------ ------------
Shares outstanding at end of year 88,769,500 76,889,748
============ ============
</Table>
RECLASSIFICATION OF CAPITAL ACCOUNTS:
Accounting principles generally accepted in the United States of America require
that certain components of net assets be reclassified between financial and tax
reporting. These reclassifications have no net effect on net assets or net asset
value per share. For the year ended August 31, 2006, each series recorded the
following reclassification to the accounts listed below:
ACCUMULATED NET
PAID IN CAPITAL INVESTMENT LOSS
--------------- ---------------
Alger Technology Fund $(23,613) $23,613
Alger Aggressive Growth Fund $(27,106) $27,106
Alger Small-Cap Fund $(40,604) $40,604
Alger Growth Fund $(25,714) $25,714
96
<Page>
NOTE 5--DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS
DISTRIBUTIONS TO SHAREHOLDERS:
The tax character of distributions paid during the following years ended August
31:
2006 2005
---------- ----------
ALGER SMALL-CAP
CLASS A
Distributions paid from:
Ordinary income $ 93,400 $ --
Long-term capital gain 81,641 26,456
---------- ----------
$ 175,041 $ 26,456
========== ==========
CLASS B
Distributions paid from:
Ordinary income $ 42,690 $ --
Long-term capital gain 37,321 12,091
---------- ----------
$ 80,011 $ 12,091
========== ==========
GROWTH FUND
CLASS A
Distributions paid from:
Ordinary income $ 34,714 $ 65,264
Long-term capital gain -- --
---------- ----------
$ 34,714 $ 65,264
========== ==========
CLASS B
Distributions paid from:
Ordinary income $ 7,032 $ 24,873
Long-term capital gain -- --
---------- ----------
$ 7,032 $ 24,873
========== ==========
CLASS T
Distributions paid from:
Ordinary income $ 705,872 $1,228,147
Long-term capital gain -- --
---------- ----------
$ 705,872 $1,228,147
========== ==========
EQUITY INCOME FUND
CLASS A
Distributions paid from:
Ordinary income $ 167,919 $ 147,054
Long-term capital gain 686,401 194,102
---------- ----------
$ 854,320 $ 341,156
========== ==========
CLASS B
Distributions paid from:
Ordinary income $ 102,420 $ 97,366
Long-term capital gain 612,120 179,300
---------- ----------
$ 714,540 $ 276,666
========== ==========
CLASS T
Distributions paid from:
Ordinary income $1,684,527 $1,611,802
Long-term capital gain 7,052,420 2,210,425
---------- ----------
$8,736,947 $3,822,227
========== ==========
BALANCED FUND
CLASS A
Distributions paid from:
Ordinary income $ 91,023 $ 103,785
Long-term capital gain 212,689 6,983
---------- ----------
$ 303,712 $ 110,768
========== ==========
CLASS B
Distributions paid from:
Ordinary income $ 41,776 $ 50,545
Long-term capital gain 117,526 4,508
---------- ----------
$ 159,302 $ 55,053
========== ==========
CLASS T
Distributions paid from:
Ordinary income $ 426,701 $ 467,355
Long-term capital gain 918,709 32,657
---------- ----------
$1,345,410 $ 500,012
========== ==========
GOVERNMENT BOND FUND
CLASS A
Distributions paid from:
Ordinary income $ 33,623 $ 24,908
Long-term capital gain -- 579
---------- ----------
$ 33,623 $ 25,487
========== ==========
CLASS B
Distributions paid from:
Ordinary income $ 25,134 $ 20,641
Long-term capital gain -- 620
---------- ----------
$ 25,134 $ 21,261
========== ==========
CLASS T
Distributions paid from:
Ordinary income $ 908,798 $ 660,768
Long-term capital gain -- 15,913
---------- ----------
$ 908,798 $ 676,681
========== ==========
97
<Page>
2006 2005
---------- ----------
TAX FREE FUND
CLASS A
Distributions paid from:
Exempted interest dividends $ 16,889 $ 18,007
Ordinary income 834 1,535
Long-term capital gain 34 95
---------- ----------
$ 17,757 $ 19,637
========== ==========
CLASS B
Distributions paid from:
Exempted interest dividends $ 16,196 $ 15,714
Ordinary income 928 1,348
Long-term capital gain 35 94
---------- ----------
$ 17,159 $ 17,156
========== ==========
CLASS T
Distributions paid from:
Exempted interest dividends $ 461,103 $ 445,596
Ordinary income 22,771 37,974
Long-term capital gain 865 2,336
---------- ----------
$ 484,739 $ 485,906
========== ==========
PRIMARY FUND
Distributions paid from:
Ordinary income $ 962,323 $ 511,536
---------- ----------
$ 962,323 $ 511,536
========== ==========
MONEY MARKET FUND
Distributions paid from:
Ordinary income $2,811,636 $1,828,191
---------- ----------
$2,811,636 $1,828,191
========== ==========
98
<Page>
Tax Components of Net Assets:
As of August 31, 2006, the components of accumulated earnings (deficit) on a tax
basis were as follows:
ALGER TECHNOLOGY FUND
Undistributed ordinary income $ --
Undistributed long-term capital gains --
-----------
Tax Accumulated Earnings --
Accumulated capital and other losses (177,554)
Unrealized appreciation (depreciation) 99,520
-----------
Total Accumulated Earnings (Deficit) $ (78,034)
===========
ALGER AGGRESSIVE GROWTH FUND
Undistributed ordinary income $ 206,131
Undistributed long-term capital gains 50,415
-----------
Tax Accumulated Earnings 256,546
Accumulated capital and other losses 25,838
Unrealized appreciation (depreciation) 161,600
-----------
Total Accumulated Earnings (Deficit) $ 443,984
===========
ALGER SMALL-CAP FUND
Undistributed ordinary income $ 25,541
Undistributed long-term capital gains 47,609
-----------
Tax Accumulated Earnings 73,150
Accumulated capital and other losses 40,615
Unrealized appreciation (depreciation) 350,645
-----------
Total Accumulated Earnings (Deficit) $ 464,410
===========
ALGER GROWTH FUND
Undistributed ordinary income $ 184,237
Undistributed long-term capital gains --
-----------
Tax Accumulated Earnings 184,237
Accumulated capital and other losses (8,516)
Unrealized appreciation (depreciation) (67,641)
-----------
Total Accumulated Earnings (Deficit) $ 108,080
===========
GROWTH FUND
Undistributed ordinary income $ 138,008
Undistributed long-term capital gains --
-----------
Tax Accumulated Earnings 138,008
Accumulated capital and other losses (1,908,148)
Unrealized appreciation (depreciation) 15,990,353
-----------
Total Accumulated Earnings (Deficit) $14,220,213
===========
EQUITY INCOME FUND
Undistributed ordinary income $ 816,575
Undistributed long-term capital gains 4,497,241
-----------
Tax Accumulated Earnings 5,313,816
Accumulated capital and other losses (20)
Unrealized appreciation (depreciation) 20,473,369
-----------
Total Accumulated Earnings (Deficit) $25,787,165
===========
BALANCED FUND
Undistributed ordinary income $ 203,578
Undistributed long-term capital gains 1,644,007
-----------
Tax Accumulated Earnings 1,847,585
Accumulated capital and other losses (41)
Unrealized appreciation (depreciation) 3,025,973
-----------
Total Accumulated Earnings (Deficit) $ 4,873,517
===========
GOVERNMENT BOND FUND
Undistributed ordinary income $ 576
Undistributed long-term capital gains --
-----------
Tax Accumulated Earnings 576
Accumulated capital and other losses (434,890)
Unrealized appreciation (depreciation) (228,109)
-----------
Total Accumulated Earnings (Deficit) $ (662,423)
===========
TAX FREE FUND
Undistributed ordinary income $ 71
Undistributed long-term capital gains 3,123
-----------
Tax Accumulated Earnings 3,194
Accumulated capital and other losses --
Unrealized appreciation (depreciation) 319,890
-----------
Total Accumulated Earnings (Deficit) $ 323,084
===========
PRIMARY FUND
Undistributed ordinary income $--
Undistributed long-term capital gains --
-----------
Tax Accumulated Earnings --
Accumulated capital and other losses (141,340)
Unrealized appreciation (depreciation) (100,667)
-----------
Total Accumulated Earnings (Deficit) $ (242,007)
===========
NOTE 6--NEW ACCOUNTING STANDARD
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement for a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The provisions for FIN 48 are effective for
fiscal years beginning after December 15, 2006. Management is currently
assessing the impact of FIN 48, if any, on the Funds' financial statements and
intends for the Funds to adopt the FIN 48 provisions during 2007.
INFORMATION ABOUT THE PORTFOLIO HOLDINGS (UNAUDITED)
The funds file their complete schedule of holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. The funds' Form N-Q is
available on the SEC's website, beginning with the November 30, 2004 report, at
http://www.sec.gov. You may review and make copies at the SEC's Public Reference
Room in Washington, D.C. You may also obtain copies after paying a duplicating
fee by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102
or by electronic request to publicinfo@sec.gov. A copy of the quarterly holdings
report is available, without charge, upon request, by calling 1-800-231-4639.
99
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Shareholders
SM&R Investments, Inc.
League City, Texas
We have audited the accompanying statements of assets and liabilities of the
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 (all the funds comprising the SM&R Investments,
Inc., hereafter referred to as "the Funds"), including the schedule of
investments, as of August 31, 2006, and the related statements of operations,
changes in net assets and the financial highlights for the year then ended.
These financial statements and the financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. 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, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures with respect to unsettled
portfolio security transactions. 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2006 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Funds as of August 31, 2006, and the results their operations, changes in their
net assets and their financial highlights for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
BKD, LLP
Houston, Texas
September 27, 2006
100
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
SM&R Investments, Inc.
League City, Texas
We have audited the accompanying statements of assets and liabilities of
SM&R Investments, Inc. comprising of SM&R Alger Technology Fund, SM&R
Alger Aggressive Growth Fund, SM&R Small-Cap Fund, SM&R Alger Growth
Fund, SM&R Growth Fund, SM&R Equity Income Fund, SM&R Balanced Fund,
SM&R Government 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, 2005, and the related statements of operations for the year
then ended, the statements of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of
the five years in the period then ended (with respect to Growth, Equity
Income and Balanced Funds for the year ended December 31, 2000, for the
period January 1, 2001 to August 31, 2001 and for the four years in the
period ended August 31, 2005). These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial
highlights are free of material misstatement. We were not engaged to
perform an audit of the Trust's internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of August 31, 2005, 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,
2005, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the
period then ended (with respect to Growth, Equity Income and Balanced
Funds for the year ended December 31, 2000, for the period January 1,
2001 to August 31, 2001 and for the four years in the period ended
August 31, 2005), in conformity with accounting principles generally
accepted in the United States of America.
Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
September 16, 2005
<Page>
SUPPLEMENTAL INFORMATION (Unaudited) (As of 8/31/06)
Information pertaining to the Directors and Officers 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.
INDEPENDENT DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX
NAME, ADDRESS, POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND AGE WITH FUND TIME SERVED DURING PAST 5 YEARS DIRECTOR
- ------------------------ ---------------- -------------- ----------------------------------------------- -------------
Florentino F. Gonzalez Director Indefinite Representative, The University of Texas Medical 19*
2450 South Shore Blvd., Since 11/05 Branch at Galveston, Office of Equal
League City, TX 77573 Opportunity and Diversity
Age 46
Edwin K. Nolan Director Indefinite Investor and Attorney, Law Offices, Edwin K. 19*
2450 South Shore Blvd., Since 11/97 Nolan, P.C.
League City, TX 77573
Age 62 Nominating Indefinite Director/Owner of Canyon Lake Aviation, Inc.
Committee Since 11/00
Audit Indefinite Director of Hancock Mini Mart, Inc.
Committee Since 11/03
Robert V. Shattuck Director Indefinite Attorney, Law Offices, Robert V. Shattuck, Jr. 19*
2450 South Shore Blvd., Since 11/97
League City, TX 77573
Age 64 Nominating Indefinite
Committee Since 11/00
Donald P. Stevens Director Indefinite Assistant to the President for Governmental 19*
2450 South Shore Blvd., Since 9/00 Relations of the University of Texas Medical
League City, TX 77573 Branch, Galveston, TX
Age 59
Nominating Indefinite Vice President and Director, Jamail Galveston
Committee Since 11/00 Foundation (a family charitable foundation)
Steven H. Stubbs Director Indefinite President and Director of Dancing Rabbit Press, 19*
2450 South Shore Blvd., Since 9/00 Inc. (a publishing company)
League City, TX 77573
Age 67 Audit Indefinite Director, Neshoba County Public Library
Committee Since 8/03
Chairman
</Table>
101
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX INTERESTED
NAME, ADDRESS, POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTOR
AND AGE WITH FUND TIME SERVED DURING PAST 5 YEARS DIRECTOR RELATIONSHIP
- ----------------------- ---------------- -------------- ------------------------------------ ------------- ------------
Michael W. McCroskey President & Indefinite President, CEO, Director and member 19* (1)
2450 South Shore Blvd., Director Since 8/94 of Executive Committee of Securities
League City, TX 77573 Management and Research, Inc.
Age 63 (SM&R)^
Executive Vice President and
Treasurer of American National
Insurance Company
Director and 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 Psychology Intern, Vanderbilt 19* (2)
2450 South Shore Blvd., Since 8/94 University Medical Center, Division
League City, TX 77573 of Adult Psychiatry (8/05-present)
Age 44
Communications Specialist, National
Western Life Insurance Company
(5/02-8/05)
Director of Garden State Life
Insurance 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 19* (3,2)
2450 South Shore Blvd., Since 11/97
League City, TX 77573
Age 69
Director of Moody Gardens, Inc.
(a charitable organization)
Jamie G. Williams Director Indefinite Regional Grants Director, The Moody 19* (4)
2450 South Shore Blvd., Since 11/97 Foundation (a charitable foundation)
League City, TX 77573
Age 60
Academic Language Therapist and
Educational Consultant
President's Advisory Council, Dallas
Center for the Performing Arts
Foundation (an organization that
supports the arts in the Dallas, TX
area)
</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 23.23% 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 46.55% 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.
102
<Page>
(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.
(4) Ms. Williams is an employee of The Moody Foundation, which owns
approximately 23.23% of American National, the parent of SM&R.
* Also a Director of American National Investment Accounts, Inc., another
investment company advised by SM&R, which has 8 portfolios.
^ Under control of American National.
OFFICERS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX
NAME, ADDRESS, POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND AGE WITH FUND TIME SERVED DURING PAST 5 YEARS OFFICER
- ----------------------- ---------------- -------------- ----------------------------------- -------------
Michael W. McCroskey President & Indefinite SEE INTERESTED DIRECTOR TABLE ABOVE 19
Director~ Since 8/94
Brenda T. Koelemay Vice Indefinite Vice President & Treasurer of SM&R 19
2450 South Shore Blvd., President & Since 7/92
League City, Treasurer~
TX 77573 Age 51
Teresa E. Axelson Vice Indefinite Vice President & Secretary of SM&R 19
2450 South Shore Blvd., President & Since 5/83
League City, TX 77573 Secretary~
Age 58
Debbie Hankins Chief Indefinite Manager & Supervisor, Financial 19
2450 South Shore Blvd., Compliance Since 10/04 Reporting of SM&R and Assistant
League City, TX Officer~ Treasurer
Age 50
</Table>
~ Positions also held with American National Investment Accounts, Inc.,
another investment company advised by SM&R.
103
<Page>
APPROVAL OF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
The Board of Directors of SM&R Investments, Inc. has renewed the investment
advisory arrangements with Securities Management and Research. Inc. ("Manager")
for the SM&R Tax Free Fund effective May 17, 2006. Additionally, the Board
renewed the investment advisory arrangements with the Manager and sub-advisory
arrangements with Fred Alger Management, Inc. (Sub-advisor") effective August
17, 2006 for the SM&R Alger Technology Fund, SM&R Alger Aggressive Growth Fund,
SM&R Alger Small-Cap Fund and SM&R Alger Growth Fund. The Board considered a
variety of factors in connection with its review of the advisory and
sub-advisory contracts ("Contracts"), also taking into account information
provided by the Manager and Sub-advisor during the course of the year as
discussed below:
NATURE, EXTENT, AND QUALITY OF SERVICES
The Board considered the nature, quality and extent of the services provided to
the funds by the Manager and Sub-advisor based upon information provided by the
Manager and Sub-advisor relating to its operations and personnel. These services
included, but were not limited to, management of the funds' portfolios and a
variety of activities related to portfolio management.
The Board also took into account its familiarity with the Manager's and
Sub-advisor's investment management through Board meetings, discussions and
reports during the preceding year. After careful consideration of these matters,
the Board concluded that it was satisfied with the nature, quality and extent of
the services provided by the Manager and Sub-advisor.
EXPENSES AND PERFORMANCE
The Board evaluated reports prepared by the Manager detailing the advisory fee
and total expense ratios of each of the funds' share classes as compared to
other open-end investment companies deemed to be comparable based upon the
Morningstar Principia Pro database with similar Morningstar category and
prospectus objectives to each class of the funds. The Board took into account
the Manager's current undertakings to maintain the expense limitations for the
funds. Also taken under consideration was the current size of each class of the
funds, and the level and method of computing the management fees.
The Board reviewed the funds' average annual total returns and compared these
returns to previously agreed upon comparable performance measures, including
those supplied by Lipper and Morningstar. On the basis of this evaluation and
the Board's ongoing reviews of investment results, the Board concluded that the
funds' performance was satisfactory.
COST, BENEFITS, PROFITS AND ECONOMIES OF SCALE
The Board reviewed detailed information regarding the revenues received by the
Manager and Sub-advisor under the Contracts and other benefits that the Manager
or Sub-advisor may have realized from its relationship with the funds. The Board
also received information on the direct costs incurred by the Manager as well as
profits realized. After careful consideration of this information, the Board
concluded that the Manager's profits were reasonable in light of the services
provided to the funds.
The Board reviewed reports prepared by the Manager comparing the funds' fee
breakpoints to other comparable funds. The Board concluded that the advisory fee
structure for the funds continued to provide for a reasonable sharing of
benefits from any economies of scale with the funds' investors.
104
<Page>
SM&R INVESTMENTS, INC. 2450 South Shore Boulevard, League City, TX 77573
- --------------------------------------------------------------------------------
DIRECTORS
Florentino F. Gonzalez
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
OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Teresa E. Axelson, Vice President and Secretary
Debbie L. Hankins, Chief Compliance Officer
INVESTMENT ADVISER AND MANAGER
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
CUSTODIAN
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza
Galveston, TX 77550
UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BKD, LLP
2800 Post Oak Blvd., Suite 3200
Houston, TX 77056
Form 9202 10/06
Item 2 Code of Ethics.
(a) The registrant has adopted a code of ethics that applies to the
registrants principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions (the Code).
(b) For purposes of this Item, the term code of ethics means
written standards that are reasonably designed to deter wrong-
dong and to promote:
(1) Honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest
between personal and professional relationships;
(2) Full, fair, accurate, timely, and understandable
disclosure in reports and documents that a registrant
files with, or submits to, the Commission and in other
public communications made by the registrant;
(3) Compliance with applicable governmental laws, rules,
and regulations;
(4) The prompt internal reporting of violations of the Code
to an appropriate person or persons identified in the
Code; and
(5) Accountability for adherence to the Code.
(c) There were no amendments to the Code during the perid covered
by the report.
(d) The registrant did not grant any waivers, including implicit
waivers, from any provisions of the Code to the principal executive
officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions during the
period covered by this report.
(e) Not applicable
(f) See item 12 (a) (1) regarding the filing of the Code of Ethics for
Principal Executive and Principal Financial Officers of SM&R
Investments, Inc.
Item 3 Audit Committee Financial Expert.
(a) The Board of Directors has determined that the registrant has at
least one Audit committee financial expert serving on its Audit
Committee.
(b) 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.
(a) Audit fees for SM&R Investments, Inc. totaled approximately $84,700
in 2006 and approximately $81,700 in 2005, including fees associated
with the annual audit and filings of the Portfolios Form N-1A and
Form N-SAR.
(b) None
(c) Fees for tax services to SM&R Investments, Inc., including tax
compliance, tax advice and tax planning, totaled approximately
$0 in 2006 and $11,000 in 2005.
(d) None
(e) (1) The registrants audit committee has adopted policies and
procedures that require the audit committee to pre-approve
all audit and non-audit services provided to the registrant
by the principal accountant.
(2) All of the services described in paragraphs (b) through (d)
of Item 4 were approved by the audit committee.
(f) All services performed on the engagement to audit the registrants
financial statements for the most recent fiscal year-end were
performed by the principal accountants full-time, permanent
employees.
(g) None
(h) The registrants independent auditor did not provide any non-audit
services to the registrants investment adviser or any entity
controlling, controlled by or controlled with the registrants
investment adviser that provides ongoing services to the registrant.
Item 5 Audit Committee of Listed Registrants.
Not applicable
Item 6 Schedule of Investments.
The Schedule of Investments is filed under Item 1 of this form.
Item 7 Disclosure of Proxy Voting Policies and Procedures for Closed-end
Management Investment Companies.
Not applicable
Item 8 Portfolio Managers of Closed-end Management Investment Companies.
Not applicable
Item 9 Purchases of Equity Securities by Closed-end Management Investment
Company and Affiliated Purchasers.
Not applicable
Item 10 Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders
may recommend nominees to the registrants board of directors during this
period.
Item 11 Controls and Procedures.
(a) As of October 23, 2006, 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 28, 2005, 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.
(b) 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
filing of this report, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Item 12 Exhibits.
(a) (1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and
attached hereto.
(2) Certifications pursuant to Rule 30a-2(a) under the
Investment Act of 1940 are filed and attached hereto.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are filed and attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SM&R Investments, Inc.
By: \S\ Michael W. McCroskey
-------------------------------------
Principal Executive Officer
Date: November 3, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registant and in the capacities and on the
dates indicated.
By: \S\ Michael W. McCroskey
-------------------------------------
Principal Executive Officer
Date: November 3, 2006
By: \S\ Brenda T. Koelemay
-------------------------------------
Principal Financial Officer
Date: November 3, 2006