==================
OMB APPROVAL
==================
OMB Number:
3235-0570
Expires:
September 30, 2007
Estimated average
burden hours per
response: 19.4
==================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05371
RUSSELL INVESTMENT FUNDS
(Exact name of registrant as specified in charter)
909 A STREET, TACOMA WASHINGTON 98402
(Address of principal executive offices) (Zip code)
GREGORY J. LYONS, ASSISTANT SECRETARY
RUSSELL INVESTMENT FUNDS
909 A STREET
TACOMA, WASHINGTON 98402
253-439-2406
--------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 253-572-9500
Date of fiscal year end: DECEMBER 31
Date of reporting period: January 1, 2006 to December 31, 2006
ITEM 1. REPORTS TO STOCKHOLDERS
INVESTMENT FUNDS
RUSSELL INVESTMENT FUNDS
2006 ANNUAL REPORT
MULTI-STYLE EQUITY FUND
AGGRESSIVE EQUITY FUND
NON-U.S. FUND
REAL ESTATE SECURITIES FUND
CORE BOND FUND
DECEMBER 31, 2006
(RUSSELL LOGO)
Russell Investment Funds
Russell Investment Funds is a series investment company with five different
investment portfolios referred to as Funds. These financial statements report on
all five of the Funds.
Russell Investment Management Company
Responsible for overall management and administration of the Funds.
[Blank Page]
Russell Investment Funds
Annual Report
December 31, 2006
Table of Contents
<Table>
<Caption>
Page
To Our Clients....................................................... 3
Market Summary....................................................... 4
Multi-Style Equity Fund.............................................. 8
Aggressive Equity Fund............................................... 18
Non-U.S. Fund........................................................ 34
Real Estate Securities Fund.......................................... 52
Core Bond Fund....................................................... 60
Notes to Schedules of Investments.................................... 86
Statement of Assets and Liabilities.................................. 87
Statement of Operations.............................................. 89
Statement of Changes in Net Assets................................... 90
Financial Highlights................................................. 92
Notes to Financial Statements........................................ 94
Report of Independent Registered Public Accounting Firm.............. 107
Tax Information...................................................... 108
Basis for Approval of Investment Advisory Contracts.................. 109
Shareholder Requests for Additional Information...................... 113
Disclosure of Information about Fund Directors....................... 114
Manager, Money Managers and Service Providers........................ 119
</Table>
Russell Investment Funds
Copyright (c) Frank Russell Company 2006. All rights reserved.
FUND OBJECTIVES, RISKS, CHARGES AND EXPENSES SHOULD BE CAREFULLY CONSIDERED
BEFORE INVESTING. A PROSPECTUS CONTAINING THIS AND OTHER IMPORTANT INFORMATION
MUST PRECEDE OR ACCOMPANY THIS MATERIAL. PLEASE READ THE PROSPECTUS CAREFULLY
BEFORE INVESTING.
Russell Investment Group is a Washington, USA corporation, which operates
through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual
Life Insurance Company.
SECURITIES DISTRIBUTED THROUGH RUSSELL FUND DISTRIBUTORS, INC. MEMBER NASD, PART
OF RUSSELL INVESTMENT GROUP.
Russell Investment Group and Standard & Poor's Corporation are the owners of the
trademarks, service marks, and copyrights related to their respective indexes.
Index performance is not indicative of the performance of any specific
investment. Indexes are not managed and may not be invested in directly.
Performance quoted represents past performance and does not guarantee future
results. The investment return and principal value of an investment will
fluctuate so that 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. Current to the most recent month-end performance data may be
obtained by visiting www.russell.com/us/fundperformance.
TO OUR CLIENTS
As you read Russell Investment Funds' 2006 Annual Report, we would like to take
this opportunity to review our investment approach, which is designed to help
long-term investors build financial security and save for retirement.
Our process is complex, but our goal is simple. We evaluate and select money
managers in each asset class and within each investment style. Then we build
diversified mutual funds aimed at providing long-term, consistent results.
Russell guides investments for some of the world's largest investors--and we
provide that same manager research to our mutual funds, which are available to
individual investors.
Thank you for your continued support and for choosing Russell, GLOBAL LEADERS IN
MULTI-MANAGER INVESTING.
Regards,
(/s/ GREG STARK)
Greg Stark
Chief Executive Officer, Chairman and President.
To Our Clients 3
RUSSELL INVESTMENT FUNDS
MARKET SUMMARY AS OF DECEMBER 31, 2006 (UNAUDITED)
U.S. EQUITY MARKETS
For the fiscal year ending December 31, 2006, investors were focused on The
Federal Reserve Board's actions and commentary, as well as the potential impact
of a slowdown in the housing market.
Through April, when both economic growth and inflation were running above the
Fed's comfort levels, the U.S. stock market was led by highly cyclical stocks,
especially those tied to the strong performing commodities market. The stock
market rewarded companies that were generating strong earnings growth in an
economy that was growing at unsustainable levels.
However, the cumulative effects of rising energy prices and interest rates, and
a notable slowdown in housing activity eventually resulted in the moderation in
economic activity that the Fed had been seeking. By late spring and early summer
2006, investors were now concerned that the Fed had engineered a hard landing
for the economy and whether a housing-led recession was unavoidable. This marked
change in investor sentiment was reflected in a significant leadership reversal
with lower risk, recession resistant stocks gaining favor. The market began
strongly favoring stocks with the highest dividend yields while companies with
above-average earnings growth prospects lost favor. During the fourth quarter,
the market advanced strongly as investors became more confident in the
durability of economic growth.
For the year, the overall market indexes registered impressive gains during the
fiscal year as the market responded to both positive corporate earnings and
evidence that the Fed's tightening cycle had ended. For the fiscal year ending
December 31, 2006, the Russell 3000(R) Index (an index of large, medium and
small capitalization companies) returned 15.72%.
Despite the backdrop of strong corporate earnings (that have grown at double
digit rates for the last three years), overall market leadership in this period
was highly defensive. Stocks with high dividend yields substantially
outperformed lower yielding stocks. Companies with well above-average growth
rates lagged in favor of slower growing firms. This investor preference for
yield over growth was reflected in style leadership for the fiscal year as the
Russell 1000 Value(R) Index (+22.25%) outperformed the Russell 1000 Growth(R)
Index (+9.07%). This extended the multi-year outperformance of value stocks and
resulted in a further compression of valuations among companies (i.e., narrower
dispersion of P/E multiples within the stock market).
Some of the value leadership is attributable to the market's preference for
yield and interest rate sensitivity as investors factored in the Fed's interest
rate pause. Among the best sector performers within the Russell 1000(R) Index
were integrated oils (34.70%), utilities (+30.60%), and financial services
(+19.37%). Meanwhile, REITs within the Russell 1000(R) Index returned an
extraordinary 36.40%. In contrast, traditional growth sector returns within the
Russell 1000(R) Index such as technology (+10.62%), health care (+6.34%), and
consumer discretionary (+11.94%), while delivering positive absolute returns,
lagged the Russell 1000(R) Index.
Market leadership continued to favor smaller and medium sized companies,
although the spread narrowed as investors grew more defensive. The Russell
1000(R) Index (an index of large and medium capitalization
4 Market Summary
RUSSELL INVESTMENT FUNDS
companies) returned 15.46% versus 18.37% for the Russell 2000(R) Index (an index
of small capitalization companies).
The fiscal year was extremely challenging for active money managers across the
style spectrum. The Lipper Large-Cap Core Funds Average trailed the Russell
1000(R) Index by 2.61%, the Lipper Large Cap Value Funds Average lagged the
Russell 1000(R) Value Index by 4.42%, the Lipper Large Cap Growth Funds Average
underperformed the Russell 1000(R) Growth Index by 3.52%, and the Lipper
Small-Cap Core Funds Average trailed the Russell 2000(R) Index by 3.47.%. Even
though the Lipper returns are net of fees, actively managed mutual funds still
trailed the indexes by a large margin.
The main contributors to the difficult active management environment were the
significant out-performance of higher yielding stocks that many value managers
considered overvalued and the poor returns of the faster growing companies
within the growth arena. With the narrow valuation spreads among companies of
differing growth rates, active money managers were positioned toward "growthier"
companies within their benchmarks. The market did not reward this positioning
during this period.
U.S. REAL ESTATE MARKETS
During the year ending December 31, 2006, the public real estate investment
trust (REIT) market again exhibited strong performance. REITs, as measured by
the FTSE-NAREIT US Equity REIT Index (NAREIT Equity Index), posted a 35.06%
total return for the year. Several factors helped boost REIT performance
including robust demand for real estate by private institutional investors, a
wave of REIT privatizations and an overall equity market that continued to
reward higher yielding stocks.
Apartment, office and health care were among the best performing sectors for the
year; all generating total returns of 40% or better. The specialty sector, which
includes several timber companies, and the manufactured home sub-sector, were
the poorest performers.
During the calendar year 2006, there were 23 REIT mergers/privatizations
transactions with a total value including debt of over $91 billion (the equity
value alone was $49.2 billion). These transactions, in which the acquirers,
mainly private buyers, purchase all of the outstanding publicly traded shares of
a REIT, have helped increase REIT share prices to higher levels. The level of
transaction activity in 2006 increased significantly over the 2005 calendar
year, which saw approximately $37 billion in transactions. Putting this
transaction volume in perspective, with the equity market capitalization of the
NAREIT Equity Index at approximately $398 billion on December 31, 2006, about
12% of the REIT industry was sold to a combination of public and private buyers
during the year.
When compared to REIT share prices prior to the announcements, the major 2006
transactions averaged an overall 10% premium.
At the end of 2006, while REITs were trading near their historic private market
valuation level, they were also trading at the top of historic ranges versus
stocks and bonds.
NON-U.S. EQUITY MARKETS
Non-U.S. stocks gained 26.86% as measured by the MSCI EAFE Index (gross) for the
fiscal year ending December 31, 2006. Non-U.S. stocks were boosted as the U.S.
dollar weakened over the course of the fiscal year. In local currency, the MSCI
EAFE Index rose a more modest 16.94% over the 12-month period.
Non-U.S. stocks benefited from continued global growth and strong corporate
earnings. Continued belief in the integration of the world's economies lent
significant support to market trends. China again stood out as a major theme in
global economic drivers; however, the U.S. economy and markets continued to play
the
Market Summary 5
RUSSELL INVESTMENT FUNDS
dominant role in the prospects for global growth. There was evidence of this as
the U.S. interest rate cycle and direction of the Federal Reserve affected
global markets throughout the year. Growth in emerging economies like India and
China had an increasing impact on the developed markets through their demand,
both real and prospective, for goods and infrastructure development.
After strong gains in 2005, the MSCI Japan Index lagged other major non-U.S.
markets in the year, returning only 6.33%. Investor sentiment waned towards
Japanese stocks on fears of a deceleration in the economy. Elsewhere in the
region, the MSCI Pacific ex-Japan Index gained 33.15% due to strong gains in
companies in Australia and Singapore.
Europe, as represented by the MSCI Europe Index was the strongest region in the
EAFE Index, returning 34.36% over the fiscal year. In Europe, the best
performing sector was utilities, which gained nearly 60%. The materials and
industrials sectors both rose over 40%. The technology and healthcare sectors
were the only notable laggards though these sectors were still up 18.03% and
16.04%, respectively. Helped by merger and acquisition activity in the materials
and utilities sectors, continental Europe's largest markets of Germany and
France delivered returns above the index.
From the sector perspective, utilities performed best across the non-U.S.
developed markets. This sector returned 50.05%, as measured by the utilities
sector of the MSCI EAFE Index. Returns were largely due to a mid-year shift in
market sentiment whereby defensive-oriented, high dividend yielding stocks
gained favor and the merger and acquisition activity involving Europe's largest
utilities. Demand from China continued to support gains in the materials sector,
led by metals and mining stocks. The sector rose 32.51% as measured by the MSCI
EAFE Index materials sector. Technology, healthcare, and energy stocks were the
laggards for the year. The constant possibility of a likely slackening of
economic growth weighed on technology shares. Energy stocks weakened as oil
prices in the latter half of the year fell from nearly $80 per barrel to less
than $60, effectively the same level at which they started in 2006.
With the value segment of MSCI EAFE more weighted towards utilities and
industrial cyclicals (materials and industrials), the market environment was
more favorable for value-oriented investors. The MSCI EAFE Value Index rose
31.05%, compared with 22.69% for the MSCI EAFE Growth Index. Investors continued
to favor smaller capitalization stocks over larger capitalization stocks with
the S&P/Citigroup EMI World ex US Index (an index of smaller capitalization
companies) up 29.42% in the period versus the S&P/Citigroup PMI World ex US (an
index of larger capitalization companies) up 24.74%.
Markets not represented in the MSCI EAFE Index, but commonly included in
non-U.S. stock funds, offered significant opportunities for gains during the
period. Emerging markets outperformed their developed counterparts, as the MSCI
Emerging Markets Index rose 32.59%. Emerging markets countries benefited from
the strong performance of industrial commodities, particularly metals and mining
stocks. In contrast, Canadian stocks lagged their EAFE counterparts with a gain
of 18.35%. Weaker trends in energy, a large component of the Canadian market,
and the currency weakness of the Canadian dollar relative to the U.S. dollar
accounted for the more modest gains.
U.S. FIXED INCOME MARKETS
The Federal Reserve Board's interest rate decisions were one of the primary
factors affecting the fixed income markets. The Fed raised the target fed funds
rate (the interest rate at which depository institutions lend money at the Fed
to other depository institutions overnight) four times throughout 2006, from
4.25% at the end of December 2005 to 5.25% one year later. The Fed's interest
rate hikes reflected a continued attempt to move toward a neutral monetary
policy to counter rising inflationary pressures. Despite inflation measures
6 Market Summary
RUSSELL INVESTMENT FUNDS
that remained elevated and above the Fed's comfort level, the Fed's highly
anticipated pause, after 17 consecutive rate hikes since June 2004, came in
August. The Fed cited moderating economic growth and the cumulative effects of
previous interest rate hikes as impetuses for the pause.
The Treasury yield curve moved markedly from month to month as investors tried
to reconcile conflicting economic signals (e.g., a slowing housing market,
rising (and falling) commodity prices, wage inflation, and productivity
concerns). Cumulative moves over the year, however, resulted in shorter-term
rates that followed Fed policy (rising nearly 1.00%), while longer-term rates
increased more modestly. This resulted in a nearly normal (i.e., upward-sloping)
yield curve becoming inverted (when short term interest rates exceed long rates)
by year end. The Lehman Brothers US Aggregate Bond Index, a broad measure of
U.S. investment grade fixed income securities, returned 4.33% for the year
ending December 31, 2006.
Among sectors, the riskier sectors posted strong performance. As in recent
years, high yield and emerging market debt bonds outperformed other bond
sectors. High yield bonds continued to benefit from record low corporate default
levels, as well as strong technical demand for increased yield. The high yield
bond sector, as represented by the Lehman Brothers US Corporate High Yield
Index, returned 11.85% over the year compared to 3.08% for the Lehman Brothers
US Treasury Index. Emerging market debt performed well due in part to commodity
price increases, credit ratings upgrades and relatively non-turbulent election
cycles. Emerging market bonds, as represented by the Lehman Brothers Emerging
Markets (US Dollar) Index, returned 9.96%.
Investment grade corporate bonds benefited from the same factors that drove the
high yield market. The Lehman Brothers US Credit Index returned 4.26% for the
year. Despite another year of increased regulatory scrutiny of the mortgage
market, mortgage securities continued to do well. The Lehman Brothers MBS Fixed
Rate Index returned 5.22%. As the year ended, yield spreads between corporate
bonds and mortgages relative to Treasuries continued to be at historical lows.
This reflected a search for yield even in the face of a bondholder-unfriendly
market environment with loosening underwriting standards, share repurchases, and
escalating leveraged buyout activity.
Market Summary 7
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
MULTI-STYLE EQUITY FUND RUSSELL 1000 INDEX**
----------------------- --------------------
Inception* 10000 10000
1997 12853 13378
1998 16543 16993
1999 19383 20546
2000 17006 18946
2001 14590 16587
2002 11207 12996
2003 14441 16880
2004 15858 18805
2005 17011 19984
2006 19179 23073
</Table>
Multi-Style Equity Fund
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 12.75%
5 Years 5.62%S
Inception* 6.73%S
</Table>
Russell 1000()(R) Index**
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 15.46%
5 Years 6.82%S
Inception* 8.73%S
</Table>
8 Multi-Style Equity Fund
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Multi-Style Equity Fund (the "Fund") allocates most of its assets among
multiple money managers. Russell Investment Management Company ("RIMCo"), as the
Fund's manager, may change the allocation of the Fund's assets among money
managers at any time. An exemptive order from the Securities and Exchange
Commission (SEC) permits the Fund to engage or terminate a money manager at any
time, subject to approval by the Fund's Board of Trustees (the "Board") without
a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is
required to notify its shareholders within 60 days of when a money manager
begins providing services.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide long term capital growth.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006?
For the fiscal year ended December 31, 2006, the Multi-Style Equity Fund gained
12.75%. This compared to the Russell 1000(R) Index, which gained 15.46% during
the same period. The Fund's performance includes operating expenses, whereas
Index returns are unmanaged and do not include expenses of any kind.
For the year ended December 31, 2006, the Lipper(R) Large-Cap Core Funds Average
returned 12.85%. This result serves as a peer comparison and is expressed net of
operating expenses.
HOW DID THE MARKET CONDITIONS DESCRIBED IN THE MARKET SUMMARY REPORT AFFECT THE
FUND'S PERFORMANCE?
Given the Fund's focus on undervalued companies with above-average growth rates,
the market's preference during the year for stocks with high dividend yields and
its relative disfavor of companies with above-average growth rates and strong
earnings trends represented a difficult environment for the Fund. After many
years of value stocks outperforming growth stocks, growth stocks still had
unusually low valuation premiums. However, the Fund's performance was in line
with its peers during this difficult environment for active money managers.
HOW DID THE INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND AND ITS
MONEY MANAGERS AFFECT ITS PERFORMANCE?
During the past year, the Fund's money managers maintained their preference for
companies with above-average growth rates that were selling at attractive
valuations. Additionally, Fund money managers emphasized companies showing
strong current earnings trends. With an anticipated slowdown in the economy and
corporate earnings growth rates, the Fund's money managers believed that the
market would reward growth companies that could sustain their growth rates.
However, with the market's preference for yield rather than growth and continued
strong corporate earnings, the relative advantage of undervalued growth
companies was not rewarded by the market.
The main driver of the Fund's underperformance relative to the benchmark was its
underweight to high dividend yield groups such as utilities and REITs and its
overweight to growth companies. Industry selection also detracted from relative
performance with the Fund being overweight to underperforming industry groups
such as communications technology, biotechnology, health services, and oil
service. Finally, the market did not reward companies that generated positive
earnings surprises or raised their earnings forecasts. The Fund's money managers
focused on such companies, which detracted from relative performance.
At the manager level, Suffolk Capital Management, LLC and Institutional Capital
LLC outperformed their respective style benchmarks, due to favorable stock
selection. In contrast, the market environment was challenging for the Fund's
growth managers such as Ark Asset Management Co., Inc., Turner Investment
Partners, Inc., and Montag & Caldwell, Inc. and they underperformed their
respective style benchmarks.
RIMCo employs a "select holdings" strategy for a portion of the Fund's assets
that RIMCo determines not to allocate to the money managers. Pursuant to this
strategy, RIMCo analyzes the holdings of the Fund's money managers in their Fund
segments to identify particular stocks that have been selected by multiple money
managers. RIMCo uses a proprietary model to rank these stocks. Based on this
ranking, RIMCo purchases additional shares of certain stocks for the Fund. The
strategy is designed to increase the Fund's exposure to stocks that are viewed
as attractive by multiple money managers. As the Fund underperformed for the
period, the select holdings strategy also underperformed the benchmark. The
strategy's overweight to under-valued growth companies was not rewarded during
the period.
At the stock selection level, the Fund benefited from overweight positions in
strong performers such as Goldman Sachs, Apple, Kohls, McDonald's, Marathon Oil,
Research in Motion, and Hewlett Packard, as well as from underweight positions
in underperformers such as Intel and Dell. However, overweights in
underperformers such as Genentech, Maxim, Sandisk, Halliburton, Qualcomm, and
JDS Uniphase, as well as underweights in strong performers such as AT&T,
ExxonMobil, and Microsoft, detracted from performance.
WHAT WERE THE OTHER PRIMARY CONTRIBUTORS AND DETRACTORS TO THE FUND'S
PERFORMANCE DURING THE LAST 12 MONTHS?
Sector positioning also impacted Fund performance. Underweightings in interest
sensitive groups such as financial services and utilities, as well as an
overweighting in the underperforming health care sector, had an adverse impact
on relative performance.
Multi-Style Equity Fund 9
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
DESCRIBE ANY CHANGES TO THE FUND'S STRUCTURE OR THE MONEY MANAGER LINE-UP.
There were no changes to the Fund's structure or money manager lineup during the
fiscal year.
Money Managers as of Styles
December 31, 2006
<Table>
Ark Asset Management Co., Inc. Growth
DePrince, Race & Zollo, Inc. Value
Institutional Capital LLC Value
Jacobs Levy Equity Management, Inc. Value
Montag & Caldwell, Inc. Growth
Suffolk Capital Management, LLC Market-Oriented
Turner Investment Partners, Inc. Growth
</Table>
The views expressed in this report reflect those of the portfolio managers only
through the end of the period covered by the report. These views do not
necessarily represent the views of Russell Investment Management Company
(RIMCo), or any other person in RIMCo or any other affiliated organization.
These views are subject to change at any time based upon market conditions or
other events, and RIMCo disclaims any responsibility to update the views
contained herein. These views should not be relied on as investment advice and,
because investment decisions for Russell Investment Funds (RIF) are based on
numerous factors, should not be relied on as an indication of investment
decisions of any RIF Fund.
--------------------
* The Fund commenced operations on January 2, 1997.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index. The Russell 1000(R) Index represents the universe of stocks
from which most active money managers typically select. The Russell
1000(R) Index return reflects adjustments for income dividends and capital
gains distributions reinvested as of the ex-dividend dates.
S Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
10 Multi-Style Equity Fund
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SHAREHOLDER EXPENSE EXAMPLE -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FUND EXPENSES
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING EACH FUND'S
EXPENSE EXAMPLE, WHICH APPEARS ON EACH FUND'S INDIVIDUAL PAGE IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
A FUND.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The Example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
indicated, which for this Fund is from July 1, 2006 to December 31, 2006.
ACTUAL EXPENSES
The information in the table under the heading "Actual Performance" provides
information about actual account values and actual expenses. You may use the
information in this column, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first column in the row entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information in the table under the heading "Hypothetical Performance (5%
return before expenses)" provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs. Therefore, the
information under the heading "Hypothetical Performance (5% return before
expenses)" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
ACTUAL (5% RETURN
PERFORMANCE BEFORE EXPENSES)
-------------- ----------------
Beginning Account Value
July 1, 2006 $ 1,000.00 $ 1,000.00
Ending Account Value
December 31, 2006 $ 1,100.90 $ 1,020.87
Expenses Paid During
Period* $ 4.55 $ 4.38
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 0.86%
(representing the one-half year period annualized), multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half
year period). Reflects amounts waived and/or reimbursed by the investment
adviser. Without the waiver and/or reimbursement, expenses would have been
higher.
Multi-Style Equity Fund 11
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
COMMON STOCKS - 95.1%
Auto and Transportation - 1.8%
ArvinMeritor, Inc. (N) 1,600 29
Autoliv, Inc. 2,600 157
CH Robinson Worldwide, Inc. 19,400 793
CSX Corp. 51,450 1,772
FedEx Corp. 3,500 380
General Motors Corp. (N) 13,800 424
Polaris Industries, Inc. (N) 12,600 590
TRW Automotive Holdings Corp. (AE) 4,500 117
Union Pacific Corp. 5,500 506
United Parcel Service, Inc. Class B 16,700 1,252
US Airways Group, Inc. (AE)(N) 23,700 1,276
------------
7,296
------------
Consumer Discretionary - 13.8%
Abercrombie & Fitch Co. Class A 3,300 230
Advance Auto Parts, Inc. 9,600 341
AnnTaylor Stores Corp. (AE) 6,400 210
Autonation, Inc. (AE) 4,500 96
CBRL Group, Inc. 2,400 107
CBS Corp. Class B 8,800 274
CEC Entertainment, Inc. (AE) 1,900 77
Chipotle Mexican Grill, Inc. Class B (AE)(N) 1,244 65
Coach, Inc. (AE) 33,250 1,428
Convergys Corp. (AE) 5,100 121
Costco Wholesale Corp. (N) 35,500 1,877
Dollar General Corp. (N) 20,100 323
Dollar Tree Stores, Inc. (AE) 5,200 157
DreamWorks Animation SKG, Inc. Class A (AE) 3,200 94
eBay, Inc. (AE) 13,300 400
Electronic Arts, Inc. (AE) 55,400 2,790
Focus Media Holding, Ltd. - ADR (AE) 7,430 493
Foot Locker, Inc. 51,000 1,118
Gannett Co., Inc. 7,900 478
Gap, Inc. (The) 67,300 1,312
Google, Inc. Class A (AE) 15,789 7,271
Group 1 Automotive, Inc. (N) 1,400 72
Harman International Industries, Inc. 3,700 370
Hasbro, Inc. 45,400 1,237
Hewitt Associates, Inc. Class A (AE)(N) 37,100 955
Home Depot, Inc. 21,200 851
Intercontinental Hotels Group PLC - ADR 71,400 1,803
International Flavors & Fragrances, Inc. (N) 3,500 172
International Game Technology 20,410 943
Jack in the Box, Inc. (AE) 1,700 104
JC Penney Co., Inc. (N) 11,000 851
Jones Apparel Group, Inc. 5,800 194
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Kimberly-Clark Corp. 14,200 965
Kohl's Corp. (AE)(N) 10,900 746
Las Vegas Sands Corp. (AE) 19,140 1,713
Limited Brands, Inc. 13,200 382
Liz Claiborne, Inc. (N) 20,100 874
Lowe's Cos., Inc. 9,900 308
McClatchy Co. Class A (N) 3,400 147
McDonald's Corp. 136,148 6,035
McGraw-Hill Cos., Inc. (The) 13,800 939
Monster Worldwide, Inc. (AE) 12,100 564
News Corp. Class A 31,290 672
Nutri System, Inc. (AE)(N) 9,350 593
Phillips-Van Heusen Corp. 1,300 65
Polo Ralph Lauren Corp. Class A 6,100 474
Quiksilver, Inc. (AE)(N) 53,100 836
Rent-A-Center, Inc. Class A (AE) 3,600 106
RR Donnelley & Sons Co. (N) 35,100 1,247
Sears Holdings Corp. (AE)(N) 3,000 504
ServiceMaster Co. (The) (N) 34,700 455
Staples, Inc. 73,700 1,968
Starbucks Corp. (AE) 69,110 2,448
Starwood Hotels & Resorts Worldwide, Inc. (o) 15,800 988
Target Corp. 17,900 1,021
Time Warner, Inc. 30,600 667
Under Armour, Inc. Class A (AE)(N) 7,200 363
Urban Outfitters, Inc. (AE)(N) 37,200 857
Viacom, Inc. Class A (AE) 13,400 550
Wal-Mart Stores, Inc. 71,550 3,304
Yahoo!, Inc. (AE) 32,000 817
------------
57,422
------------
Consumer Staples - 7.9%
Altria Group, Inc. 48,550 4,167
Clorox Co. 4,200 269
Coca-Cola Co. (The) 74,600 3,600
Colgate-Palmolive Co. 36,500 2,381
ConAgra Foods, Inc. 17,800 481
Constellation Brands, Inc. Class A (AE)(N) 36,800 1,068
CVS Corp. 27,100 838
Del Monte Foods Co. 9,500 105
Hershey Co. (The) (N) 18,600 926
Hormel Foods Corp. 2,500 93
McCormick & Co., Inc. (N) 5,600 216
Molson Coors Brewing Co. Class B (N) 37,300 2,851
PepsiCo, Inc. 103,330 6,463
Procter & Gamble Co. 114,400 7,353
</Table>
12 Multi-Style Equity Fund
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ruddick Corp. 1,600 44
Walgreen Co. 50,300 2,308
------------
33,163
------------
Financial Services - 20.0%
AG Edwards, Inc. 8,500 538
AMBAC Financial Group, Inc. 2,100 187
American Express Co. 62,400 3,786
American Home Mortgage Investment Corp. (o) 1,200 42
American International Group, Inc. (N) 99,300 7,116
Ameriprise Financial, Inc. 4,800 262
Annaly Capital Management, Inc. (o) 52,600 732
Argonaut Group, Inc. (AE) 800 28
Arthur J Gallagher & Co. (N) 1,000 30
Astoria Financial Corp. (N) 15,700 473
Bank of America Corp. 119,141 6,361
BB&T Corp. 8,600 378
Capital One Financial Corp. 6,000 461
CapitalSource, Inc. (o) 9,600 262
Cash America International, Inc. 700 33
CB Richard Ellis Group, Inc. Class A (AE) 19,090 634
Charles Schwab Corp. (The) 52,930 1,024
Chicago Mercantile Exchange Holdings, Inc. 1,710 872
CIT Group, Inc. 9,000 502
Citigroup, Inc. 125,000 6,962
CNA Financial Corp. (AE) 2,500 101
Colonial BancGroup, Inc. (The) 6,700 172
Colonial Properties Trust (o) 2,100 98
Commerce Bancorp, Inc. (N) 13,400 473
Commerce Group, Inc. 1,900 56
Countrywide Financial Corp. (N) 17,000 722
Cullen/Frost Bankers, Inc. 9,800 547
DiamondRock Hospitality Co. (o) 1,100 20
Dow Jones & Co., Inc. (N) 16,000 608
Extra Space Storage, Inc. (o) 1,400 26
Fannie Mae 2,700 160
Federated Investors, Inc. Class B 23,600 797
FelCor Lodging Trust, Inc. (o) 3,900 85
First Data Corp. 12,800 327
First Horizon National Corp. (N) 12,200 510
FirstFed Financial Corp. (AE)(N) 1,600 107
Franklin Resources, Inc. 3,300 364
Franklin Street Properties Corp. (o)(N) 1,300 27
Fulton Financial Corp. (N) 1,890 32
Global Payments, Inc. 13,860 642
Goldman Sachs Group, Inc. 10,630 2,119
H&R Block, Inc. 23,000 530
Hartford Financial Services Group, Inc. 12,300 1,148
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Hospitality Properties Trust (o) 2,500 119
HRPT Properties Trust (o)(N) 9,400 116
Huntington Bancshares, Inc. (N) 39,500 938
IntercontinentalExchange, Inc. (AE) 4,440 479
JPMorgan Chase & Co. (N) 130,750 6,315
Knight Capital Group, Inc. Class A (AE)(N) 2,000 38
Lehman Brothers Holdings, Inc. 8,900 695
Lincoln National Corp. 7,900 525
MBIA, Inc. (N) 13,600 994
Mercury General Corp. 8,600 453
Merrill Lynch & Co., Inc. 41,700 3,882
Metlife, Inc. (N) 10,400 614
MGIC Investment Corp. (N) 16,600 1,038
Morgan Stanley (N) 41,000 3,339
National Retail Properties, Inc. (o) 1,200 27
Nationwide Financial Services, Inc. 2,000 108
Nelnet, Inc. Class A (AE)(N) 1,100 30
New Century Financial Corp. (o)(N) 1,600 51
New York Community Bancorp, Inc. (N) 45,900 739
Newcastle Investment Corp. (o)(N) 1,200 38
Northern Trust Corp. (N) 17,700 1,074
Paychex, Inc. 60,400 2,388
Pennsylvania Real Estate Investment Trust (o) 900 35
Philadelphia Consolidated Holding Co. (AE) 200 9
PMI Group, Inc. (The) (N) 7,400 349
PNC Financial Services Group, Inc. 6,600 489
Principal Financial Group, Inc. 5,100 299
Progressive Corp. (The) 1,700 41
Protective Life Corp. 100 5
Radian Group, Inc. 6,400 345
Raymond James Financial, Inc. 5,000 152
Redwood Trust, Inc. (o) 600 35
Regions Financial Corp. 16,400 613
Ryder System, Inc. 2,800 143
Senior Housing Properties Trust (o) 3,000 73
South Financial Group, Inc. (The) (N) 21,100 561
St. Paul Travelers Cos., Inc. (The) 36,161 1,941
Stancorp Financial Group, Inc. 2,300 104
State Street Corp. 2,800 189
SunTrust Banks, Inc. 10,800 912
TCF Financial Corp. (N) 6,500 178
Thornburg Mortgage, Inc. (o)(N) 6,200 156
UBS AG 11,800 712
UnionBanCal Corp. 2,200 135
US Bancorp 23,600 854
</Table>
Multi-Style Equity Fund 13
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ventas, Inc. (o) 4,900 207
Wachovia Corp. 67,750 3,858
Washington Mutual, Inc. 21,600 983
Wells Fargo & Co. 110,100 3,915
Western Union Co. (The) 21,900 491
Whitney Holding Corp. (N) 1,600 52
Wilmington Trust Corp. (N) 18,300 772
WR Berkley Corp. 8,300 286
Zenith National Insurance Corp. (N) 2,500 117
------------
83,365
------------
Health Care - 11.5%
Abbott Laboratories 96,750 4,713
Allergan, Inc. 12,990 1,555
AMERIGROUP Corp. (AE)(N) 1,100 40
Amgen, Inc. (AE) 20,300 1,387
Baxter International, Inc. 55,600 2,579
Biogen Idec, Inc. (AE) 17,000 836
Bristol-Myers Squibb Co. 40,200 1,058
Caremark Rx, Inc. (N) 15,000 857
Celgene Corp. (AE)(N) 19,600 1,128
Community Health Systems, Inc. (AE) 25,300 924
Cooper Cos., Inc. (The) (N) 2,000 89
Covance, Inc. (AE) 12,980 765
Eli Lilly & Co. 49,987 2,604
Genentech, Inc. (AE) 32,700 2,653
Gilead Sciences, Inc. (AE) 32,220 2,092
Human Genome Sciences, Inc. (AE)(N) 73,900 919
ImClone Systems, Inc. (AE)(N) 8,200 219
Intuitive Surgical, Inc. (AE)(N) 5,720 549
Invitrogen Corp. (AE)(N) 13,700 775
Johnson & Johnson 50,600 3,341
King Pharmaceuticals, Inc. (AE) 7,500 119
LifePoint Hospitals, Inc. (AE) 3,100 105
McKesson Corp. 4,000 203
Medco Health Solutions, Inc. (AE) 20,000 1,069
Medtronic, Inc. 12,900 690
Merck & Co., Inc. 26,500 1,155
New River Pharmaceuticals, Inc. (AE)(N) 5,300 290
Novartis AG - ADR 51,430 2,954
PDL BioPharma, Inc. (AE)(N) 38,700 779
Pfizer, Inc. 131,400 3,403
Schering-Plough Corp. 11,600 274
Sepracor, Inc. (AE)(N) 4,300 265
St. Jude Medical, Inc. (AE) 31,900 1,166
Stryker Corp. (N) 35,200 1,940
Universal Health Services, Inc. Class B 2,400 133
WellPoint, Inc. (AE) 13,100 1,031
Wyeth 69,100 3,519
------------
48,178
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Integrated Oils - 4.8%
Chevron Corp. 32,000 2,353
ConocoPhillips 31,700 2,281
Exxon Mobil Corp. 69,450 5,322
Hess Corp. 64,200 3,182
Marathon Oil Corp. 13,700 1,267
Murphy Oil Corp. 23,000 1,170
Occidental Petroleum Corp. 51,200 2,500
Total SA - ADR 27,050 1,945
------------
20,020
------------
Materials and Processing - 4.9%
Air Products & Chemicals, Inc. 5,900 415
Airgas, Inc. 1,100 45
Albemarle Corp. (N) 1,000 72
Alcoa, Inc. 10,700 321
Archer-Daniels-Midland Co. 46,240 1,478
Avery Dennison Corp. 7,700 523
Bowater, Inc. (N) 20,800 468
Bunge, Ltd. 5,250 381
Cameco Corp. 43,900 1,776
Carpenter Technology Corp. 8,700 892
Celanese Corp. Class A (N) 33,100 857
Chemtura Corp. (N) 36,600 352
Cytec Industries, Inc. (N) 800 45
Dow Chemical Co. (The) 30,500 1,218
Eastman Chemical Co. (N) 4,800 285
EI Du Pont de Nemours & Co. 6,500 317
FMC Corp. 1,800 138
Freeport-McMoRan Copper & Gold, Inc. Class B 4,100 228
Greif, Inc. Class A 600 71
Hercules, Inc. (AE) 3,900 75
Imperial Chemical Industries PLC - ADR 26,450 937
International Paper Co. 28,600 975
Lubrizol Corp. 13,100 657
Lyondell Chemical Co. (N) 21,100 539
MeadWestvaco Corp. 21,400 643
Monsanto Co. 19,080 1,002
Mueller Industries, Inc. 2,600 82
Olin Corp. 4,600 76
OM Group, Inc. (AE) 3,300 149
Packaging Corp. of America 19,100 422
PPG Industries, Inc. (N) 5,600 360
Quanex Corp. 1,200 41
</Table>
14 Multi-Style Equity Fund
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Rio Tinto PLC - ADR (N) 4,600 977
Rohm & Haas Co. 9,100 465
RPM International, Inc. 23,600 493
Temple-Inland, Inc. 30,650 1,411
Texas Industries, Inc. (N) 1,600 103
Timken Co. 16,200 473
United States Steel Corp. 2,800 205
URS Corp. (AE) 2,000 86
Valspar Corp. 14,400 398
Westlake Chemical Corp. (N) 1,900 60
------------
20,511
------------
Miscellaneous - 5.1%
3M Co. 39,300 3,063
Brunswick Corp. (N) 14,700 469
General Electric Co. 344,720 12,827
Hillenbrand Industries, Inc. (N) 2,200 125
Honeywell International, Inc. 44,400 2,009
ITT Corp. 3,300 187
Textron, Inc. 27,500 2,579
------------
21,259
------------
Other Energy - 3.9%
Anadarko Petroleum Corp. 13,100 570
Apache Corp. 16,800 1,117
Baker Hughes, Inc. 30,900 2,307
Cameron International Corp. (AE) 16,530 877
Chesapeake Energy Corp. (N) 10,700 311
Devon Energy Corp. 8,100 543
Frontier Oil Corp. 2,300 66
Halliburton Co. 148,599 4,614
National-Oilwell Varco, Inc. (AE) 8,940 547
Newfield Exploration Co. (AE) 4,000 184
Noble Energy, Inc. 5,200 255
Oil States International, Inc. (AE)(N) 1,200 39
Schlumberger, Ltd. 43,100 2,722
Smith International, Inc. 6,200 255
Sunoco, Inc. 7,400 462
Swift Energy Co. (AE) 700 31
Tesoro Corp. 1,600 105
Valero Energy Corp. 12,300 629
Whiting Petroleum Corp. (AE) 2,100 98
XTO Energy, Inc. 15,400 725
------------
16,457
------------
Producer Durables - 4.1%
Agilent Technologies, Inc. (AE) 29,500 1,028
Alcatel-Lucent - ADR 63,500 903
Andrew Corp. (AE) 2,600 27
Boeing Co. 6,500 577
Brooks Automation, Inc. (AE) 800 12
Caterpillar, Inc. 8,300 509
Crane Co. 2,600 95
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Crown Castle International Corp. (AE) 19,720 637
Danaher Corp. 9,640 698
Deere & Co. 7,550 718
Emerson Electric Co. 29,000 1,279
Goodrich Corp. 29,200 1,330
KB Home (N) 800 41
KLA-Tencor Corp. (N) 19,230 957
Lennar Corp. Class A (N) 3,400 178
Meritage Homes Corp. (AE) 800 38
Nokia OYJ - ADR 78,100 1,587
Northrop Grumman Corp. 14,000 948
Parker Hannifin Corp. 3,600 277
Pentair, Inc. (N) 18,600 584
Rofin-Sinar Technologies, Inc. (AE) 500 30
Roper Industries, Inc. (N) 12,800 643
Standard-Pacific Corp. (N) 4,000 107
Steelcase, Inc. Class A (N) 2,400 44
Technitrol, Inc. 2,300 55
Thermo Fisher Scientific, Inc. (AE) 48,710 2,206
Toll Brothers, Inc. (AE)(N) 3,300 106
United Technologies Corp. 20,700 1,294
------------
16,908
------------
Technology - 12.7%
3Com Corp. (AE)(N) 6,100 25
Adobe Systems, Inc. (AE)(N) 18,300 753
Akamai Technologies, Inc. (AE) 13,550 720
Analog Devices, Inc. 14,800 486
Anixter International, Inc. (AE) 3,500 190
Apple Computer, Inc. (AE) 61,800 5,243
Applera Corp. - Applied Biosystems Group 12,500 459
Arrow Electronics, Inc. (AE) 4,700 148
Atmel Corp. (AE) 11,300 68
Avnet, Inc. (AE)(N) 3,000 77
AVX Corp. (N) 2,400 36
Benchmark Electronics, Inc. (AE) 100 2
Blackbaud, Inc. 2,500 65
Broadcom Corp. Class A (AE) 49,770 1,608
Brocade Communications Systems, Inc. (AE)(N) 6,000 49
Cadence Design Systems, Inc. (AE) 5,800 104
Ciena Corp. (AE)(N) 1,200 33
Cisco Systems, Inc. (AE) 162,300 4,436
Computer Sciences Corp. (AE) 4,500 240
Corning, Inc. (AE) 54,500 1,020
Cypress Semiconductor Corp. (AE)(N) 1,000 17
Dell, Inc. (AE) 61,800 1,551
</Table>
Multi-Style Equity Fund 15
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
EMC Corp. (AE)(N) 45,100 595
F5 Networks, Inc. (AE)(N) 6,910 513
Hewlett-Packard Co. 177,600 7,315
Ingram Micro, Inc. Class A (AE) 5,600 114
Integrated Device Technology, Inc. (AE) 8,900 138
Intel Corp. 37,700 763
International Business Machines Corp. 12,100 1,176
Intersil Corp. Class A 1,900 45
JDS Uniphase Corp. (AE)(N) 87,373 1,456
Komag, Inc. (AE) 900 34
L-3 Communications Holdings, Inc. 12,800 1,047
Linear Technology Corp. 14,600 443
Maxim Integrated Products, Inc. 8,300 254
McAfee, Inc. (AE) 1,100 31
Microsoft Corp. 152,000 4,539
Motorola, Inc. 60,550 1,245
National Semiconductor Corp. 38,600 876
Nvidia Corp. (AE) 23,060 853
PerkinElmer, Inc. 40,000 889
Qualcomm, Inc. 134,800 5,094
RealNetworks, Inc. (AE)(N) 2,100 23
Research In Motion, Ltd. (AE) 17,390 2,222
RF Micro Devices, Inc. (AE)(N) 2,200 15
Salesforce.com, Inc. (AE)(N) 20,400 744
SanDisk Corp. (AE)(N) 33,400 1,437
Sanmina-SCI Corp. (AE) 13,100 45
Seagate Technology, Inc. (AE) 2,300 --
Skyworks Solutions, Inc. (AE)(N) 3,900 28
Sun Microsystems, Inc. (AE) 151,920 823
Symantec Corp. (AE) 4,500 94
Synopsys, Inc. (AE) 10,200 273
Tellabs, Inc. (AE) 11,700 120
Texas Instruments, Inc. 71,300 2,053
Unisys Corp. (AE)(N) 19,900 156
Utstarcom, Inc. (AE)(N) 4,100 36
Vishay Intertechnology, Inc. (AE) 5,800 79
------------
52,898
------------
Utilities - 4.6%
Alltel Corp. 6,400 387
American Electric Power Co., Inc. 9,900 421
Aqua America, Inc. (N) 23,600 538
AT&T, Inc. 69,900 2,499
Atmos Energy Corp. 3,100 99
BellSouth Corp. 48,650 2,292
Citizens Communications Co. (N) 42,300 608
Comcast Corp. Class A (AE) 17,150 726
Consolidated Edison, Inc. (N) 4,700 226
Constellation Energy Group, Inc. 6,800 468
Dominion Resources, Inc. 41,250 3,458
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Edison International 8,600 391
Embarq Corp. 2,500 131
Entergy Corp. 9,750 900
Idacorp, Inc. 3,000 116
Level 3 Communications, Inc. (AE)(N) 54,600 306
NII Holdings, Inc. (AE)(N) 11,300 728
NiSource, Inc. 18,500 446
Progress Energy, Inc. - CVO 1,300 --
SCANA Corp. 5,100 207
Southwest Gas Corp. 700 27
Sprint Nextel Corp. 44,557 842
TECO Energy, Inc. 24,900 429
Verizon Communications, Inc. 62,100 2,313
Windstream Corp. (AE) 58,900 838
------------
19,396
------------
TOTAL COMMON STOCKS
(cost $346,782) 396,873
------------
SHORT-TERM INVESTMENTS - 5.2%
Russell Investment Company
Money Market Fund 20,451,000 20,451
United States Treasury Bills (z)(sec.)
4.968% due 03/15/07 1,200 1,184
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $21,639) 21,635
------------
OTHER SECURITIES - 10.1%
State Street Securities Lending
Quality Trust (X) 42,271,246 42,271
------------
TOTAL OTHER SECURITIES
(cost $42,271) 42,271
------------
TOTAL INVESTMENTS - 110.4%
(identified cost $410,692) 460,779
OTHER ASSETS AND LIABILITIES,
NET - (10.4%) (43,272)
------------
NET ASSETS - 100.0% 417,507
============
</Table>
See accompanying notes which are an integral part of the financial statements.
16 Multi-Style Equity Fund
RUSSELL INVESTMENT FUNDS
MULTI-STYLE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
UNREALIZED
NOTIONAL APPRECIATION
FUTURES CONTRACTS AMOUNT (DEPRECIATION)
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Long Positions
Russell 1000 Index
expiration date 03/07 (7) 2,715 (8)
S&P Midcap 400 E-Mini Index (CME)
expiration date 03/07 (119) 9,654 (147)
S&P 500 Index (CME)
expiration date 03/07 (14) 4,999 (2)
S&P 500 E-Mini Index (CME)
expiration date 03/07 (53) 3,785 4
---------------
Total Unrealized Appreciation (Depreciation) on
Open Futures Contracts (153)
===============
</Table>
- --------------------------------------------------------------------------------
PRESENTATION OF PORTFOLIO HOLDINGS -- DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
% OF
NET
CATEGORIES ASSETS
- -----------------------------------------------------------------
Auto and Transportation 1.8
Consumer Discretionary 13.8
Consumer Staples 7.9
Financial Services 20.0
Health Care 11.5
Integrated Oils 4.8
Materials and Processing 4.9
Miscellaneous 5.1
Other Energy 3.9
Producer Durables 4.1
Technology 12.7
Utilities 4.6
Short-Term Investments 5.2
Other Securities 10.1
---------------
Total Investments 110.4
Other Assets and Liabilities, Net (10.4)
---------------
100.0
===============
Futures Contracts (--)*
</Table>
* Less than .05% of net assets.
See accompanying notes which are an integral part of the financial statements.
Multi-Style Equity Fund 17
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
AGGRESSIVE EQUITY FUND RUSSELL 2500(TM) INDEX**
---------------------- ------------------------
Inception* 10000 10000
1997 13507 12582
1998 13644 12631
1999 14474 15680
2000 14378 16350
2001 14038 16549
2002 11363 13604
2003 16544 19795
2004 18981 23417
2005 20188 25315
2006 23174 29407
</Table>
Aggressive Equity Fund
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 14.79%
5 Years 10.55%sec.
Inception* 8.77%sec.
</Table>
Russell 2500(TM) Index**
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 16.17%
5 Years 12.19%sec.
Inception* 11.40%sec.
</Table>
18 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Aggressive Equity Fund (the "Fund") allocates most of its assets among
multiple money managers. Russell Investment Management Company ("RIMCo"), as the
Fund's manager, may change the allocation of the Fund's assets among money
managers at any time. An exemptive order from the Securities and Exchange
Commission (SEC) permits the Fund to engage or terminate a money manager at any
time, subject to approval by the Fund's Board of Trustees (the "Board") without
a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is
required to notify its shareholders within 60 days of when a money manager
begins providing services.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide long term capital growth.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006?
For the fiscal year ended December 31, 2006, the Aggressive Equity Fund gained
14.79%. This compared to the Russell 2500(TM) Index, which gained 16.17% during
the same period. The Fund's performance includes operating expenses, whereas
Index returns are unmanaged and do not include expenses of any kind.
For the year ended December 31, 2006, the Lipper(R) Small-Cap Core Funds Average
returned 14.90 %. This result serves as a peer comparison and is expressed net
of operating expenses.
HOW DID THE MARKET CONDITIONS DESCRIBED IN THE MARKET SUMMARY REPORT AFFECT THE
FUND'S PERFORMANCE?
The Fund was challenged in 2006 as a number of market forces combined to create
a difficult environment for outperformance. The continuation of a multi-year
value market was notable during the year after a first quarter in which growth
stocks were favored by the market. The year presented a significant challenge
for the Fund's money managers and active managers in general as Lipper data
shows that only 20% of active small capitalization managers beat the Russell
2000(R) Index. From a factor perspective, yield continued to be rewarded while
earnings surprise, estimate revision and earnings variability, which were
emphasized in the Fund, were not rewarded. In addition, higher dividend yielding
stocks, such as real estate investment trusts (REIT's) and utilities, in which
the Fund was underweight, continued to outperform.
HOW DID THE INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND AND ITS
MONEY MANAGERS AFFECT ITS PERFORMANCE?
Sector selection was the primary cause of the Fund's relative underperformance
for the year. The Fund was overweight to technology and energy and underweight
to utilities, which returned 25% for the year, well in excess of the Index
return. The results from these sector weights were somewhat balanced by positive
security selection. Most notably, stock selection was positive in the consumer
discretionary, materials and other energy sectors.
WHAT WERE THE OTHER PRIMARY CONTRIBUTORS AND DETRACTORS TO THE FUND'S
PERFORMANCE DURING THE LAST 12 MONTHS?
The Fund's underperforming money managers were Goldman Sachs Asset Management,
L.P. (market oriented style), Gould Investment Partners, LLC (growth style) and
Geewax, Terker & Company (growth style). Gould underperformed due to its very
aggressive approach to growth investing, a style which performed poorly after
the first quarter. While Gould's results were disappointing, when taking into
account market conditions, its performance was consistent with its aggressive
style. Goldman Sachs' chief detractor was poor stock selection in what was
probably the most disappointing performance within the Fund. Geewax's
performance was negatively impacted by poor stock selection within the
technology and materials sectors.
Five of the Fund's money managers outperformed the Fund's benchmark. The
outperformers included the following managers: CapitalWorks Investment Partners,
LLC, Tygh Capital Management, Inc., David J. Greene and Company, LLC, Jacobs
Levy Equity Management, Inc. and Nicholas-Applegate Capital Management LLC.
CapitalWorks benefited from positive stock selection in a difficult market for
its aggressive growth style. Tygh Capital also benefited from stock selection
and its focus on more consistent, predictable sources of earnings growth as well
as strong stock selection within the energy and materials sectors. Nicholas
Applegate, a value manager, also derived positive performance through strong
stock selection within the energy and materials sectors. David J. Greene
benefited from a robust mergers and acquisitions environment and its somewhat
contrarian value style which focuses not on yield or low price, but on catalyst
driven improvements and on valuing companies from a takeout framework. Jacobs
Levy also outperformed modestly through positive stock selection despite
negative sector selection.
DESCRIBE ANY CHANGES TO THE FUND'S STRUCTURE OR THE MONEY MANAGER LINE-UP.
In the fourth quarter, Goldman Sachs was terminated and ClariVest Asset
Management, LLC and PanAgora Asset Management, Inc. were hired as money managers
for the Fund.
Aggressive Equity Fund 19
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
Money Managers as of Styles
December 31, 2006
<Table>
CapitalWorks Investment Partners, LLC Growth
ClariVest Asset Management, LLC Market-Oriented
David J. Greene and Company, LLC Value
Geewax, Terker & Company Growth
Gould Investment Partners, LLC Growth
Jacobs Levy Equity Management, Inc. Value
Nicholas-Applegate Capital Management
LLC Value
PanAgora Asset Management, Inc. Market-Oriented
Tygh Capital Management, Inc. Growth
</Table>
The views expressed in this report reflect those of the portfolio managers only
through the end of the period covered by the report. These views do not
necessarily represent the views of Russell Investment Management Company
(RIMCo), or any other person in RIMCo or any other affiliated organization.
These views are subject to change at any time based upon market conditions or
other events, and RIMCo disclaims any responsibility to update the views
contained herein. These views should not be relied on as investment advice and,
because investment decisions for Russell Investment Funds (RIF) are based on
numerous factors, should not be relied on as an indication of investment
decisions of any RIF Fund.
--------------------
* The Fund commenced operations on January 2, 1997.
** Russell 2500(TM) Index is composed of the smallest 500 stocks in the
Russell 1000(R) Index and all the stocks in the Russell 2000(R) Index. The
Russell 2500(TM) Index return reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
sec. Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
20 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SHAREHOLDER EXPENSE EXAMPLE -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FUND EXPENSES
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING EACH FUND'S
EXPENSE EXAMPLE, WHICH APPEARS ON EACH FUND'S INDIVIDUAL PAGE IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
A FUND.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The Example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
indicated, which for this Fund is from July 1, 2006 to December 31, 2006.
ACTUAL EXPENSES
The information in the table under the heading "Actual Performance" provides
information about actual account values and actual expenses. You may use the
information in this column, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first column in the row entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information in the table under the heading "Hypothetical Performance (5%
return before expenses)" provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs. Therefore, the
information under the heading "Hypothetical Performance (5% return before
expenses)" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
ACTUAL (5% RETURN
PERFORMANCE BEFORE EXPENSES)
-------------- ----------------
Beginning Account Value
July 1, 2006 $ 1,000.00 $ 1,000.00
Ending Account Value
December 31, 2006 $ 1,068.30 $ 1,019.96
Expenses Paid During
Period* $ 5.42 $ 5.30
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.04%
(representing the one-half year period annualized), multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half
year period). Reflects amounts waived and/or reimbursed by the investment
adviser. Without the waiver and/or reimbursement, expenses would have been
higher.
Aggressive Equity Fund 21
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
COMMON STOCKS - 96.2%
Auto and Transportation - 3.4%
AAR Corp. (AE)(N) 14,700 429
ABX Air, Inc. (AE) 50,200 348
Aftermarket Technology Corp. (AE) 12,100 258
American Commercial Lines, Inc. (AE)(N) 6,600 432
AMR Corp. (AE) 1,600 48
Arctic Cat, Inc. (N) 2,500 44
ArvinMeritor, Inc. (N) 13,500 246
Autoliv, Inc. 9,800 591
Celadon Group, Inc. (AE)(N) 9,900 166
Commercial Vehicle Group, Inc. (AE) 2,700 59
Continental Airlines, Inc. Class A (AE) 7,800 322
Dana Corp. (N) 39,700 55
Danaos Corp. (AE) 3,100 74
ExpressJet Holdings, Inc. Class A (AE) 30,300 245
Grupo Aeroportuario del Centro Norte Sab de CV -
ADR (AE) 6,900 154
Grupo Aeroportuario del Sureste SAB de CV - ADR
(N) 3,300 140
Gulfmark Offshore, Inc. (AE) 3,100 116
Horizon Lines, Inc. Class A 17,400 469
HUB Group, Inc. Class A (AE)(N) 5,200 143
Kansas City Southern (AE)(N) 5,800 168
Kirby Corp. (AE)(N) 3,500 119
Navistar International Corp. (AE)(N) 11,300 378
Noble International, Ltd. (N) 3,100 62
Oshkosh Truck Corp. 7,000 339
PAM Transportation Services (AE)(N) 2,100 46
Quintana Maritime, Ltd. (N) 20,950 231
Republic Airways Holdings, Inc. (AE)(N) 6,200 104
Saia, Inc. (AE)(N) 11,700 272
Sauer-Danfoss, Inc. 3,500 113
Standard Motor Products, Inc. 8,500 127
Tidewater, Inc. (N) 1,800 87
TRW Automotive Holdings Corp. (AE) 11,200 290
US Xpress Enterprises, Inc. Class A (AE)(N) 6,100 101
UTI Worldwide, Inc. 18,761 561
Visteon Corp. (AE)(N) 14,700 125
Wabtec Corp. 7,800 237
------------
7,699
------------
Consumer Discretionary - 18.8%
24/7 Real Media, Inc. (AE)(N) 21,200 192
Abercrombie & Fitch Co. Class A 2,854 199
Activision, Inc. (AE)(N) 52,430 904
Adesa, Inc. 8,700 241
Advance Auto Parts, Inc. 11,400 405
Advisory Board Co. (The) (AE) 6,934 371
AFC Enterprises (AE)(N) 5,000 88
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
American Eagle Outfitters, Inc. 22,800 712
American Greetings Corp. Class A 1,800 43
American Woodmark Corp. 6,100 255
AMN Healthcare Services, Inc. (AE) 28,500 785
AnnTaylor Stores Corp. (AE) 5,100 167
aQuantive, Inc. (AE) 11,637 287
Asbury Automotive Group, Inc. 7,700 181
Autonation, Inc. (AE) 3,000 64
Baidu.com - ADR (AE)(N) 6,954 784
Barnes & Noble, Inc. 3,000 119
Bebe Stores, Inc. 10,338 205
Big Lots, Inc. (AE) 25,100 575
Blockbuster, Inc. Class A (AE) 14,100 75
Bon-Ton Stores, Inc. (The) (N) 4,000 139
Books-A-Million, Inc. Class A 3,600 82
Bowne & Co., Inc. 4,400 70
Bright Horizons Family Solutions, Inc. (AE)(N) 5,000 193
Brinker International, Inc. 15,450 466
Brown Shoe Co., Inc. 2,600 124
Buckle, Inc. (The) 1,000 51
Carmax, Inc. (AE)(N) 10,300 552
CBRL Group, Inc. 6,600 295
CEC Entertainment, Inc. (AE) 13,700 551
Central Parking Corp. (N) 9,500 171
Century Casinos, Inc. (AE)(N) 15,600 174
Cenveo, Inc. (AE)(N) 11,350 241
Charlotte Russe Holding, Inc. (AE) 4,200 129
Charming Shoppes, Inc. (AE)(N) 20,800 281
Chemed Corp. (N) 2,400 89
Chipotle Mexican Grill, Inc. Class A (AE)(N) 1,000 57
Churchill Downs, Inc. (N) 900 38
Coach, Inc. (AE) 7,439 320
Coldwater Creek, Inc. (AE)(N) 3,000 74
Convergys Corp. (AE) 22,400 533
Corinthian Colleges, Inc. (AE)(N) 12,700 173
Corporate Executive Board Co. 3,181 279
Corrections Corp. of America (AE) 17,450 789
CRA International, Inc. (AE)(N) 2,070 108
CROCS, Inc. (AE)(N) 17,700 765
CSK Auto Corp. (AE) 5,800 99
CSS Industries, Inc. 900 32
DeVry, Inc. 12,200 342
Dick's Sporting Goods, Inc. (AE)(N) 1,500 73
Dillard's, Inc. Class A 13,100 458
Directed Electronics, Inc. (AE)(N) 5,800 66
Dolby Laboratories, Inc. Class A (AE) 17,900 555
</Table>
22 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Dollar Tree Stores, Inc. (AE) 25,700 774
DreamWorks Animation SKG, Inc. Class A (AE) 8,700 257
DSW, Inc. Class A (AE) 1,000 39
Earthlink, Inc. (AE)(N) 25,500 181
Elizabeth Arden, Inc. (AE)(N) 15,100 288
Entercom Communications Corp. Class A (N) 5,500 155
Entravision Communications Corp. Class A (AE) 16,900 139
Focus Media Holding, Ltd. - ADR New (AE) 5,700 378
Foot Locker, Inc. 19,900 436
Forrester Research, Inc. (AE)(N) 13,900 377
FTD Group, Inc. (AE) 9,400 168
GameStop Corp. Class A (AE) 5,875 324
Gemstar-TV Guide International, Inc. (AE) 71,000 285
Global Imaging Systems, Inc. (AE) 6,800 149
Gmarket, Inc. - ADR (AE)(N) 10,200 244
Great Wolf Resorts, Inc. (AE) 6,100 85
Greenfield Online, Inc. (AE) 7,700 110
Group 1 Automotive, Inc. (N) 5,000 259
Guess?, Inc. (AE)(N) 10,600 672
Gymboree Corp. (AE) 2,000 76
Harris Interactive, Inc. (AE) 26,900 136
Hasbro, Inc. (N) 27,500 749
Haverty Furniture Cos., Inc. 8,500 126
Helen of Troy, Ltd. (AE) 9,100 221
Houston Wire & Cable Co. (AE)(N) 2,000 42
Iconix Brand Group, Inc. (AE)(N) 39,470 765
IKON Office Solutions, Inc. 11,200 183
infoUSA, Inc. 7,300 87
Insight Enterprises, Inc. (AE) 8,700 164
ITT Educational Services, Inc. (AE) 4,600 305
J Crew Group, Inc. (AE) 10,700 412
Jack in the Box, Inc. (AE) 6,000 366
Jakks Pacific, Inc. (AE)(N) 7,500 164
Jo-Ann Stores, Inc. (AE)(N) 4,800 118
Jones Apparel Group, Inc. 7,200 241
Journal Register Co. 10,600 77
K-Swiss, Inc. Class A (N) 6,400 197
K2, Inc. (AE) 19,900 262
Kellwood Co. 7,200 234
Kenneth Cole Productions, Inc. Class A (N) 1,000 24
Knology, Inc. (AE) 6,400 68
Knot, Inc. (The) (AE)(N) 5,000 131
Korn/Ferry International (AE)(N) 24,081 553
Leapfrog Enterprises, Inc. Class A (AE)(N) 12,000 114
LECG Corp. (AE)(N) 3,900 72
Lee Enterprises, Inc. (N) 4,900 152
Libbey, Inc. (N) 2,900 36
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Life Time Fitness, Inc. (AE)(N) 16,700 810
Lightbridge, Inc. (AE)(N) 3,000 41
Liz Claiborne, Inc. 5,600 243
LKQ Corp. (AE)(N) 6,300 145
Lodgenet Entertainment Corp. (AE) 7,400 185
Manpower, Inc. 3,114 233
McClatchy Co. Class A (N) 5,600 242
McCormick & Schmick's Seafood Restaurants, Inc.
(AE) 2,300 55
Men's Wearhouse, Inc. (The) 9,400 360
Morton's Restaurant Group, Inc. (AE) 2,000 33
Mothers Work, Inc. (AE) 400 16
Movado Group, Inc. (N) 3,800 110
MPS Group, Inc. (AE) 13,826 196
MSC Industrial Direct Co., Inc. Class A (N) 2,300 90
Navarre Corp. (AE)(N) 6,500 26
Nutri System, Inc. (AE)(N) 5,533 351
O'Charleys, Inc. (AE) 3,300 70
O'Reilly Automotive, Inc. (AE) 9,018 289
OfficeMax, Inc. 10,000 496
On Assignment, Inc. (AE)(N) 12,500 147
Orient-Express Hotels, Ltd. Class A 7,175 340
Pantry, Inc. (The) (AE)(N) 5,500 258
Payless Shoesource, Inc. (AE) 9,700 318
Penn National Gaming, Inc. (AE) 6,886 287
Perficient, Inc. (AE)(N) 9,900 162
Perry Ellis International, Inc. (AE) 10,300 422
PHH Corp. (AE) 8,800 254
Phillips-Van Heusen Corp. 15,700 788
Pier 1 Imports, Inc. (N) 22,000 131
Prestige Brands Holdings, Inc. (AE)(N) 23,700 309
Priceline.com, Inc. (AE)(N) 7,700 336
ProQuest Co. (AE)(N) 9,100 95
Quiksilver, Inc. (AE)(N) 16,000 252
Radio One, Inc. Class D (AE) 13,700 92
RadioShack Corp. (N) 9,700 163
Rare Hospitality International, Inc. (AE) 1,600 53
RC2 Corp. (AE) 6,200 273
Rent-A-Center, Inc. Class A (AE) 14,800 437
Republic Services, Inc. Class A 7,563 308
Revlon, Inc. Class A (AE) 37,400 48
Ruby Tuesday, Inc. 1,500 41
Rush Enterprises, Inc. Class A (AE) 2,300 39
Rush Enterprises, Inc. Class B (AE) 1,700 27
Sabre Holdings Corp. Class A 7,200 230
</Table>
Aggressive Equity Fund 23
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Scholastic Corp. (AE) 11,500 412
Shoe Carnival, Inc. (AE) 2,900 92
Sirva, Inc. (AE)(N) 9,700 34
Skechers USA, Inc. Class A (AE) 1,500 50
Snap-On, Inc. 5,100 243
Sonic Automotive, Inc. Class A 5,800 168
Speedway Motorsports, Inc. (N) 1,400 54
Standard Parking Corp. (AE) 1,100 42
Steak N Shake Co. (The) (AE)(N) 3,700 65
Take-Two Interactive Software, Inc. (AE)(N) 8,700 155
Talbots, Inc. (N) 15,900 383
Taser International, Inc. (AE)(N) 4,000 30
Tech Data Corp. (AE) 500 19
TeleTech Holdings, Inc. (AE)(N) 27,000 645
Topps Co., Inc. (The) 8,200 73
Tractor Supply Co. (AE) 6,274 281
Triarc Cos., Inc. Class A 11,500 230
Tuesday Morning Corp. (N) 13,700 213
Tween Brands, Inc. (AE)(N) 13,770 550
Under Armour, Inc. Class A (AE)(N) 6,400 323
Unifirst Corp. 1,500 58
United Online, Inc. (N) 14,800 197
Urban Outfitters, Inc. (AE)(N) 9,500 219
Valueclick, Inc. (AE) 1,900 45
Viad Corp. 4,300 175
Volcom, Inc. (AE) 900 27
Volt Information Sciences, Inc. (AE) 5,100 256
Warnaco Group, Inc. (The) (AE) 18,500 470
Waste Connections, Inc. (AE) 4,940 205
WESCO International, Inc. (AE)(N) 1,800 106
------------
42,037
------------
Consumer Staples - 2.3%
Alliance One International, Inc. (AE) 43,000 303
Boston Beer Co., Inc. Class A (AE)(N) 1,500 54
Dean Foods Co. (AE) 5,600 237
Del Monte Foods Co. 16,500 182
Hansen Natural Corp. (AE)(N) 10,400 350
Herbalife, Ltd. (AE)(N) 10,500 422
Imperial Sugar Co. (N) 4,700 114
Loews Corp. - Carolina Group 10,800 699
McCormick & Co., Inc. (N) 9,100 351
Molson Coors Brewing Co. Class B (N) 6,000 459
Nash Finch Co. 1,500 41
NBTY, Inc. (AE) 19,600 815
Pathmark Stores, Inc. (AE)(N) 9,700 108
PepsiAmericas, Inc. (N) 5,100 107
Performance Food Group Co. (AE)(N) 3,300 91
Ralcorp Holdings, Inc. (AE)(N) 4,800 244
Reddy Ice Holdings, Inc. 5,400 139
Schweitzer-Mauduit International, Inc. 2,500 65
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Spartan Stores, Inc. 4,600 96
Universal Corp. (N) 5,300 260
------------
5,137
------------
Financial Services - 16.5%
Advent Software, Inc. (AE)(N) 17,100 603
Affiliated Managers Group, Inc. (AE) 6,765 711
Affirmative Insurance Holdings, Inc. (N) 1,500 24
Affordable Residential Communities, LP (AE)(N) 5,500 64
AG Edwards, Inc. 4,500 285
Alliance Data Systems Corp. (AE) 17,663 1,103
AMB Property Corp. (o) 6,500 381
Amcore Financial, Inc. (N) 7,400 242
American Financial Group, Inc. 9,150 329
American Home Mortgage Investment Corp. (o)(N) 8,300 292
Annaly Capital Management, Inc. (o) 22,800 317
Anthracite Capital, Inc. (o) 5,700 73
Anworth Mortgage Asset Corp. (o) 17,500 166
Arbor Realty Trust, Inc. (o) 1,600 48
Ashford Hospitality Trust, Inc. (o)(N) 14,000 174
Associated Banc-Corp. (N) 7,899 276
Assurant, Inc. 8,111 448
Asta Funding, Inc. (N) 4,000 122
Bancfirst Corp. (N) 1,000 54
Bank of Hawaii Corp. 3,300 178
Bankunited Financial Corp. Class A (N) 18,900 528
Banner Corp. 1,000 44
BOK Financial Corp. 930 51
Brookline Bancorp, Inc. (N) 16,700 220
Capital Trust, Inc. Class A (o) 8,500 424
CapitalSource, Inc. (o)(N) 23,300 636
Cash America International, Inc. 5,600 263
CB Richard Ellis Group, Inc. Class A (AE) 2,900 96
CBL & Associates Properties, Inc. (o) 1,900 82
CIT Group, Inc. 4,000 223
City Bank (N) 1,200 43
City National Corp. 5,700 406
Colonial BancGroup, Inc. (The) 13,800 355
Colonial Properties Trust (o) 5,400 253
Commerce Bancshares, Inc. (N) 2,310 112
Commerce Group, Inc. 10,000 298
Community Bancorp (AE) 3,400 103
Corus Bankshares, Inc. (N) 21,600 498
Cousins Properties, Inc. (o)(N) 5,000 176
Covanta Holding Corp. (AE) 14,500 320
</Table>
24 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Deerfield Triarc Capital Corp. (o)(N) 14,900 252
Deluxe Corp. (N) 8,900 224
DiamondRock Hospitality Co. (o)(p) 14,300 258
DiamondRock Hospitality Co. (o) 7,200 130
Downey Financial Corp. 3,200 232
Entertainment Properties Trust (o) 1,700 99
Equity One, Inc. (o)(N) 4,100 109
Euronet Worldwide, Inc. (AE) 15,035 446
Fair Isaac Corp. 1,100 45
FelCor Lodging Trust, Inc. (o) 15,800 345
Fidelity Bankshares, Inc. 4,100 163
First American Corp. (N) 6,900 281
First Cash Financial Services, Inc. (AE) 3,700 96
First Community Bancorp, Inc. (N) 1,800 94
First Indiana Corp. (AE) 9,100 231
First Marblehead Corp. (The) 1,500 82
FirstFed Financial Corp. (AE) 3,900 261
GFI Group, Inc. (AE)(N) 4,700 293
Global Payments, Inc. 10,457 484
Greenhill & Co., Inc. 1,000 74
H&E Equipment Services, Inc. (AE)(N) 5,000 124
Hanmi Financial Corp. (N) 5,700 128
HCC Insurance Holdings, Inc. 14,500 465
Health Care REIT, Inc. (o) 1,000 43
HealthExtras, Inc. (AE)(N) 10,900 263
Heartland Payment Systems, Inc. New (N) 4,300 121
Hersha Hospitality Trust (o)(N) 3,400 39
Hospitality Properties Trust (o) 5,300 252
HRPT Properties Trust (o)(N) 27,400 338
IBERIABANK Corp. (N) 900 53
IMPAC Mortgage Holdings, Inc. (o)(N) 26,900 237
IndyMac Bancorp, Inc. 5,600 253
International Securities Exchange Holdings, Inc.
Class A (N) 13,400 627
Intersections, Inc. (AE)(N) 1,100 12
Intervest Bancshares Corp. Class A (AE)(N) 7,700 265
Investment Technology Group, Inc. (AE) 7,107 305
Investors Real Estate Trust (o) 2,600 27
iShares Russell 2000 Growth Index Fund (N) 5,000 393
iStar Financial, Inc. (o) 13,300 636
ITLA Capital Corp. (N) 1,400 81
Jefferies Group, Inc. 1,200 32
JER Investors Trust, Inc. (AE)(p) 9,200 190
JER Investors Trust, Inc. (o)(N) 15,900 329
Jones Lang LaSalle, Inc. 1,200 111
KKR Financial Corp. (o)(N) 14,350 384
Knight Capital Group, Inc. Class A (AE)(N) 64,400 1,235
Kronos, Inc. (AE) 8,100 298
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Luminent Mortgage Capital, Inc. (o) 21,600 210
Macatawa Bank Corp. (N) 11,404 242
Mack-Cali Realty Corp. (o) 8,200 418
MAF Bancorp, Inc. 2,300 103
Marshall & Ilsley Corp. 4,040 194
MCG Capital Corp. 24,000 488
Meadowbrook Insurance Group, Inc. (AE)(N) 4,800 47
Mercantile Bank Corp. 5,635 212
MFA Mortgage Investments, Inc. (o) 12,300 95
MGIC Investment Corp. 3,400 213
Mid-America Apartment Communities, Inc. (o) 4,200 240
Municipal Mortgage & Equity LLC (N) 1,600 52
National Retail Properties, Inc. (o) 7,200 165
Nationwide Financial Services, Inc. (N) 5,900 320
Navigators Group, Inc. (AE) 7,600 366
Nelnet, Inc. Class A (AE)(N) 5,600 153
New Century Financial Corp. (o)(N) 10,100 319
Newcastle Investment Corp. (o)(N) 20,100 630
NorthStar Realty Finance Corp. (o) 25,100 416
Oak Hill Financial, Inc. (N) 7,200 202
OceanFirst Financial Corp. 1,503 34
Ocwen Financial Corp. (AE) 9,300 148
Odyssey Re Holdings Corp. (N) 5,100 190
Ohio Casualty Corp. 7,400 221
optionsXpress Holdings, Inc. (N) 5,000 113
Pacific Capital Bancorp 12,600 423
Pennsylvania Real Estate Investment Trust (o) 5,100 201
Peoples Bancorp, Inc. 400 12
Philadelphia Consolidated Holding Co. (AE) 2,100 94
Pico Holdings, Inc. (AE) 2,200 77
PMI Group, Inc. (The) (N) 8,500 401
Portfolio Recovery Associates, Inc. (AE)(N) 5,100 238
Preferred Bank 700 42
ProAssurance Corp. (AE) 473 24
Protective Life Corp. 2,900 138
Provident Bankshares Corp. (N) 7,500 267
Provident Financial Services, Inc. (N) 5,300 96
PS Business Parks, Inc. (o) 1,600 113
R&G Financial Corp. Class B 8,400 64
Raymond James Financial, Inc. 13,000 394
Rayonier, Inc. (o) 1,100 45
Realty Income Corp. (o)(N) 9,800 271
</Table>
Aggressive Equity Fund 25
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ryder System, Inc. 10,700 546
S1 Corp. (AE) 3,462 19
Safety Insurance Group, Inc. 6,200 314
Scottish Re Group, Ltd. (N) 18,900 101
SeaBright Insurance Holdings, Inc. (AE) 2,900 52
SEI Investments Co. (N) 5,900 351
Senior Housing Properties Trust (o) 2,300 56
Sotheby's Holdings Class A (N) 3,000 93
Southwest Bancorp, Inc. 1,100 31
Spirit Finance Corp. (o)(N) 14,800 185
Stancorp Financial Group, Inc. 8,800 396
Sterling Bancorp Class N 1,260 25
Sterling Bancshares, Inc. (N) 11,400 148
Sterling Financial Corp. (N) 1,000 24
SVB Financial Group (AE) 1,000 47
SWS Group, Inc. 1,300 46
Taylor Capital Group, Inc. 2,600 95
TCF Financial Corp. (N) 4,800 132
Thornburg Mortgage, Inc. (o) 8,900 224
TierOne Corp. 1,400 44
TNS, Inc. (AE) 15,100 291
Total System Services, Inc. 400 11
Tower Group, Inc. 12,800 398
Triad Guaranty, Inc. (AE) 3,800 209
United America Indemnity, Ltd. Class A (AE) 2,100 53
United PanAm Financial Corp. (AE)(N) 16,800 231
Unitrin, Inc. 5,100 256
Ventas, Inc. (o)(N) 7,175 304
Washington Real Estate Investment Trust (o)(N) 4,000 160
Washington Trust Bancorp, Inc. 900 25
Weingarten Realty Investors (o)(N) 1,200 55
Whitney Holding Corp. (N) 3,700 121
Williams Scotsman International, Inc. (AE)(N) 1,400 27
Wilmington Trust Corp. 5,700 240
Winston Hotels, Inc. (o)(N) 3,700 49
Zenith National Insurance Corp. 7,300 342
------------
36,853
------------
Health Care - 10.6%
Abraxis BioScience, Inc. (AE)(N) 7,300 200
Accelrys, Inc. (AE)(N) 19,200 115
Adams Respiratory Therapeutics, Inc. (AE) 7,042 287
Air Methods Corp. (AE)(N) 2,900 81
Albany Molecular Research, Inc. (AE) 10,800 114
Alliance Imaging, Inc. (AE)(N) 23,400 156
Allscripts Healthcare Solutions, Inc. (AE) 12,216 330
Amedisys, Inc. (AE)(N) 12,533 412
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
American Dental Partners, Inc. (AE) 1,200 23
American Medical Systems Holdings, Inc. (AE) 26,240 486
American Oriental Bioengineering, Inc. (AE) 12,000 140
AMERIGROUP Corp. (AE) 8,500 305
Applera Corp. - Celera Group (AE) 32,700 457
Arthrocare Corp. (AE) 8,054 322
Beckman Coulter, Inc. 1,800 108
Bentley Pharmaceuticals, Inc. (AE)(N) 2,200 22
Centene Corp. (AE)(N) 6,600 162
Cerner Corp. (AE)(N) 13,900 632
Charles River Laboratories International, Inc.
(AE) 6,300 272
Community Health Systems, Inc. (AE)(N) 14,441 527
Cooper Cos., Inc. (The) (N) 15,200 676
Corvel Corp. (AE) 9,600 457
Covance, Inc. (AE) 3,500 206
Cutera, Inc. (AE)(N) 5,800 157
Cytyc Corp. (AE)(N) 6,600 187
DaVita, Inc. (AE) 19,921 1,133
Depomed, Inc. (AE)(N) 4,000 14
Discovery Laboratories, Inc. (AE)(N) 11,900 28
Enzon Pharmaceuticals, Inc. (AE) 9,600 82
Five Star Quality Care, Inc. (AE) 6,000 67
Foxhollow Technologies, Inc. (AE)(N) 3,900 84
Gentiva Health Services, Inc. (AE)(N) 6,600 126
Greatbatch, Inc. (AE)(N) 5,000 135
Haemonetics Corp. (AE) 4,596 207
Health Net, Inc. (AE) 2,700 131
Healthcare Services Group (N) 15,300 443
Healthspring, Inc. (AE) 31,600 643
HealthTronics, Inc. (AE)(N) 15,800 105
Healthways, Inc. (AE)(N) 8,926 426
Henry Schein, Inc. (AE) 13,082 641
Hologic, Inc. (AE) 14,718 696
ICU Medical, Inc. (AE) 3,100 126
Illumina, Inc. (AE)(N) 5,600 220
ImClone Systems, Inc. (AE) 7,400 198
Immucor, Inc. (AE) 6,400 187
Intralase Corp. (AE)(N) 12,700 284
Intuitive Surgical, Inc. (AE)(N) 2,000 192
Inverness Medical Innovations, Inc. (AE)(N) 8,000 310
King Pharmaceuticals, Inc. (AE) 29,200 465
LifePoint Hospitals, Inc. (AE) 15,300 516
Medcath Corp. (AE) 4,000 109
</Table>
26 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Medicines Co. (AE) 4,525 144
Mentor Corp. 5,735 280
MGI Pharma, Inc. (AE)(N) 9,200 169
Molina Healthcare, Inc. (AE)(N) 5,000 163
Myriad Genetics, Inc. (AE)(N) 7,400 232
Nabi Biopharmaceuticals (AE) 3,800 26
Neurocrine Biosciences, Inc. (AE)(N) 5,000 52
Nighthawk Radiology Holdings, Inc. (AE)(N) 5,100 130
Noven Pharmaceuticals, Inc. (AE) 5,700 145
NuVasive, Inc. (AE)(N) 9,100 210
Palomar Medical Technologies, Inc. (AE)(N) 9,600 486
Patterson Cos., Inc. (AE) 10,572 375
Perrigo Co. 7,800 135
Pharmaceutical Product Development, Inc. 12,108 390
Pharmacopeia Drug Discovery, Inc. (AE)(N) 10,250 44
Pharmacyclics, Inc. (AE)(N) 1,600 8
PharmaNet Development Group, Inc. (AE) 3,700 82
Phase Forward, Inc. (AE) 13,200 198
PolyMedica Corp. 3,800 154
PSS World Medical, Inc. (AE) 9,070 177
Psychiatric Solutions, Inc. (AE) 12,086 453
Quality Systems, Inc. 6,958 259
Quidel Corp. (AE)(N) 8,000 109
Radiation Therapy Services, Inc. (AE)(N) 5,100 161
RehabCare Group, Inc. (AE) 9,700 144
ResMed, Inc. (AE) 2,800 138
Savient Pharmaceuticals, Inc. (AE) 11,200 126
Sciclone Pharmaceuticals, Inc. (AE)(N) 4,600 15
Sciele Pharma, Inc. (AE)(N) 2,470 59
Sierra Health Services, Inc. (AE) 5,800 209
Stericycle, Inc. (AE)(N) 5,600 423
STERIS Corp. 10,100 254
Sun Healthcare Group, Inc. Class W (AE) 2,000 25
Techne Corp. (AE) 7,130 395
United Therapeutics Corp. (AE) 1,900 103
Universal Health Services, Inc. Class B 7,300 405
Ventana Medical Systems, Inc. (AE)(N) 4,800 207
VistaCare, Inc. Class A (AE)(N) 16,200 164
Watson Pharmaceuticals, Inc. (AE) 8,500 221
WellCare Health Plans, Inc. (AE)(N) 14,600 1,006
West Pharmaceutical Services, Inc. 5,500 282
Wyeth 2,100 107
Zoll Medical Corp. (AE) 6,100 355
Zymogenetics, Inc. (AE)(N) 8,600 134
------------
23,756
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Materials and Processing - 10.0%
Acuity Brands, Inc. (N) 6,400 333
Airgas, Inc. 14,310 580
AK Steel Holding Corp. (AE)(N) 5,000 84
Albemarle Corp. (N) 9,600 689
Andersons, Inc. (The) (N) 4,000 170
Apogee Enterprises, Inc. (N) 2,000 39
Arch Chemicals, Inc. 4,500 150
Barnes Group, Inc. (N) 1,000 22
Bluegreen Corp. (AE)(N) 3,300 42
Buckeye Technologies, Inc. (AE) 11,700 140
Building Materials Holding Corp. (N) 14,200 351
Cambrex Corp. (N) 11,400 259
Celanese Corp. Class A 21,800 564
Century Aluminum Co. (AE)(N) 7,600 339
Ceradyne, Inc. (AE)(N) 6,400 362
CF Industries Holdings, Inc. 10,900 279
Chaparral Steel Co. 4,100 181
Chesapeake Corp. (N) 3,100 53
Chicago Bridge & Iron Co. NV 11,345 310
China BAK Battery, Inc. (AE)(N) 3,000 20
Comfort Systems USA, Inc. 13,400 169
Commercial Metals Co. 15,300 395
Constar International, Inc. (AE)(N) 9,800 69
Crown Holdings, Inc. (AE) 6,100 128
Cytec Industries, Inc. (N) 6,900 390
Dycom Industries, Inc. (AE)(N) 10,900 230
Eastman Chemical Co. (N) 14,600 866
EMCOR Group, Inc. (AE) 9,900 563
Energy Conversion Devices, Inc. (AE) 6,473 220
Ennis, Inc. 4,300 105
FMC Corp. 5,300 406
Granite Construction, Inc. 4,000 201
Greif, Inc. Class A 1,200 142
Griffon Corp. (AE)(N) 9,700 247
Harsco Corp. 6,200 472
HB Fuller Co. 16,500 426
Hercules, Inc. (AE) 57,100 1,103
Huntsman Corp. (AE) 8,800 167
Infrasource Services, Inc. (AE) 8,200 179
Innospec, Inc. 6,100 284
Insituform Technologies, Inc. Class A (AE)(N) 10,800 279
Jacobs Engineering Group, Inc. (AE) 6,000 489
Kaydon Corp. 1,600 64
Louisiana-Pacific Corp. 15,800 340
Lubrizol Corp. 7,500 376
</Table>
Aggressive Equity Fund 27
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Mercer International, Inc. (AE)(N) 1,000 12
Metal Management, Inc. 9,400 356
Mueller Industries, Inc. 8,900 282
Mueller Water Products, Inc. Class A 5,013 75
Mueller Water Products, Inc. Class A (N) 26,519 395
Myers Industries, Inc. (N) 12,400 194
NCI Building Systems, Inc. (AE)(N) 4,000 207
Olin Corp. 14,500 240
Olympic Steel, Inc. (N) 2,500 56
OM Group, Inc. (AE) 8,100 367
Omrix Biopharmaceuticals, Inc. (AE) 3,900 118
Packaging Corp. of America 10,200 225
Perini Corp. (AE) 5,500 169
PolyOne Corp. (AE) 16,500 124
Quanex Corp. (N) 12,900 446
Quanta Services, Inc. (AE) 12,834 252
RBC Bearings, Inc. (AE) 1,600 46
Resource Capital Corp. (N) 2,500 42
Rock-Tenn Co. Class A 23,900 648
Rockwood Holdings, Inc. (AE) 6,800 172
Rogers Corp. (AE)(N) 11,700 692
RTI International Metals, Inc. (AE)(N) 4,000 313
Ryerson, Inc. (N) 1,000 25
SAIC, Inc. (AE) 14,500 258
Schnitzer Steel Industries, Inc. Class A (N) 3,900 155
Schulman A, Inc. 1,000 22
Sonoco Products Co. 10,700 407
Spartech Corp. 14,600 383
Standard Register Co. (The) 4,100 49
Superior Essex, Inc. (AE) 4,700 156
Temple-Inland, Inc. 5,700 262
Timken Co. 3,100 90
URS Corp. (AE) 13,800 591
USEC, Inc. 3,600 46
Valmont Industries, Inc. (N) 4,000 222
Washington Group International, Inc. (AE) 10,098 604
Westlake Chemical Corp. (N) 5,900 185
Xerium Technologies, Inc. (N) 16,900 165
------------
22,328
------------
Miscellaneous - 1.5%
Castlepoint Holdings, Ltd. (p) 30,900 340
Foster Wheeler, Ltd. (AE) 13,787 760
Hillenbrand Industries, Inc. 6,600 376
McDermott International, Inc. (AE) 17,839 907
Raven Industries, Inc. (N) 4,100 110
Teleflex, Inc. 2,400 155
Trinity Industries, Inc. (N) 6,700 236
Walter Industries, Inc. 16,049 434
------------
3,318
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Other Energy - 3.9%
Allis-Chalmers Energy, Inc. (AE)(N) 2,500 58
Alon USA Energy, Inc. (N) 1,800 47
Basic Energy Services, Inc. (AE) 6,800 168
Cameron International Corp. (AE) 4,651 247
Cimarex Energy Co. (N) 7,900 288
Core Laboratories NV (AE) 8,932 723
Dresser-Rand Group, Inc. (AE)(N) 5,900 144
Dril-Quip, Inc. (AE) 9,697 380
ENSCO International, Inc. 5,400 270
Forest Oil Corp. (AE)(N) 5,600 183
Foundation Coal Holdings, Inc. (N) 7,100 225
Frontier Oil Corp. 7,600 218
GeoMet, Inc. (AE)(N) 925 10
Global Industries, Ltd. (AE) 22,870 298
Helmerich & Payne, Inc. 8,660 212
Hercules Offshore, Inc. (AE)(N) 14,200 410
Horizon Offshore, Inc. (AE) 15,200 248
Hornbeck Offshore Services, Inc. (AE)(N) 11,672 417
Input/Output, Inc. (AE)(N) 19,700 269
Lufkin Industries, Inc. 3,400 197
Meridian Resource Corp. (AE) 15,500 48
NATCO Group, Inc. Class A (AE) 5,700 182
National-Oilwell Varco, Inc. (AE) 4,928 301
Oceaneering International, Inc. (AE)(N) 2,000 79
Ormat Technologies, Inc. (N) 3,200 118
Parker Drilling Co. (AE) 8,800 72
Rosetta Resources, Inc. (AE)(N) 5,500 103
Superior Energy Services, Inc. (AE) 10,000 327
Tesoro Corp. 4,000 263
Tetra Technologies, Inc. (AE)(N) 25,942 664
Trico Marine Services, Inc. (AE)(N) 11,800 452
Union Drilling, Inc. (AE)(N) 2,900 41
Veritas DGC, Inc. (AE) 4,331 371
W-H Energy Services, Inc. Class H (AE)(N) 11,800 575
Western Refining, Inc. (N) 4,000 102
------------
8,710
------------
Producer Durables - 8.6%
Advanced Energy Industries, Inc. (AE) 9,300 175
AGCO Corp. (AE) 9,200 285
Agilent Technologies, Inc. (AE) 3,100 108
Ametek, Inc. 3,000 96
AO Smith Corp. 1,200 45
</Table>
28 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Applied Industrial Technologies, Inc. (N) 10,900 287
Arris Group, Inc. (AE)(N) 37,800 473
ASML Holding NV Class G (AE) 18,640 459
Asyst Technologies, Inc. (AE) 2,000 15
Axcelis Technologies, Inc. (AE) 19,000 111
Baldor Electric Co. 6,300 211
BE Aerospace, Inc. (AE) 14,488 372
Beazer Homes USA, Inc. (N) 4,400 207
C&D Technologies, Inc. (N) 5,400 26
C-COR, Inc. (AE) 7,600 85
Champion Enterprises, Inc. (AE)(N) 32,600 305
Crane Co. 1,800 66
Credence Systems Corp. (AE) 49,600 258
Crown Castle International Corp. (AE)(N) 8,600 278
CTS Corp. 4,300 67
Cummins, Inc. 1,800 213
Desarrolladora Homex SAB de CV - ADR (AE)(N) 7,409 438
Diebold, Inc. 6,800 317
DXP Enterprises, Inc. (AE)(N) 6,000 210
EFJ, Inc. (AE)(N) 22,000 148
Entegris, Inc. (AE)(N) 26,931 291
ESCO Technologies, Inc. (AE)(N) 13,164 598
Flow International Corp. (AE)(N) 13,100 144
Flowserve Corp. (AE) 3,400 172
Gardner Denver, Inc. (AE)(N) 18,500 690
General Cable Corp. (AE) 1,500 66
Headwaters, Inc. (AE)(N) 6,400 153
Herman Miller, Inc. 12,800 465
Hubbell, Inc. Class B (N) 10,300 466
IDEX Corp. 7,300 346
Intevac, Inc. (AE) 15,400 400
Itron, Inc. (AE)(N) 3,520 182
K&F Industries Holdings, Inc. (AE) 4,600 104
Kadant, Inc. (AE) 2,300 56
Kennametal, Inc. 7,703 453
Kimball International, Inc. Class B 3,300 80
Knoll, Inc. 7,700 169
L-1 Identity Solutions, Inc. Class 1 (AE)(N) 13,600 206
Ladish Co., Inc. (AE)(N) 9,200 341
Lam Research Corp. (AE) 7,290 369
Lexmark International, Inc. Class A (AE) 3,600 263
Lincoln Electric Holdings, Inc. (N) 1,600 97
Mattson Technology, Inc. (AE) 17,500 163
Mettler Toledo International, Inc. (AE) 10,539 831
Milacron, Inc. (AE)(N) 31,245 25
Mine Safety Appliances Co. (N) 3,800 139
MKS Instruments, Inc. (AE) 7,500 169
MTS Systems Corp. 1,300 50
Novellus Systems, Inc. (AE) 4,500 155
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Pall Corp. (N) 10,300 356
Photronics, Inc. (AE)(N) 5,100 83
Polycom, Inc. (AE)(N) 26,200 810
Power-One, Inc. (AE)(N) 29,400 214
Regal-Beloit Corp. 5,000 263
Robbins & Myers, Inc. (N) 14,200 652
Rofin-Sinar Technologies, Inc. (AE) 3,600 218
SBA Communications Corp. Class A (AE)(N) 15,900 437
Semitool, Inc. (AE)(N) 3,800 51
Spectralink Corp. (AE)(N) 3,100 27
Steelcase, Inc. Class A (N) 19,500 354
Technical Olympic USA, Inc. (AE)(N) 21,600 220
Technitrol, Inc. 7,300 174
Tecumseh Products Co. Class A (AE)(N) 10,500 177
Teledyne Technologies, Inc. (AE)(N) 8,900 357
Tennant Co. 2,600 75
Teradyne, Inc. (AE) 3,900 58
Thomas & Betts Corp. (AE) 1,200 57
Ultratech, Inc. (AE)(N) 10,700 134
Varian Semiconductor Equipment Associates, Inc.
(AE)(N) 30,906 1,407
Verigy, Ltd. (AE) 5,178 92
------------
19,114
------------
Technology - 16.0%
3Com Corp. (AE)(N) 125,400 515
Acme Packet, Inc. (AE)(N) 12,800 264
Actel Corp. (AE) 7,100 129
Acxiom Corp. 500 13
Adaptec, Inc. (AE) 40,800 190
Adtran, Inc. (N) 9,700 220
Aeroflex, Inc. (AE) 17,300 203
Akamai Technologies, Inc. (AE)(N) 12,200 648
Alliance Semiconductor Corp. (AE)(N) 14,000 61
Amdocs, Ltd. (AE) 11,100 430
American Reprographics Co. (AE) 8,749 291
Amkor Technology, Inc. (AE) 12,400 116
Amphenol Corp. Class A 12,184 756
Anaren, Inc. (AE) 4,700 84
Anixter International, Inc. (AE)(N) 12,400 673
Ansys, Inc. (AE) 13,205 574
Applera Corp. - Applied Biosystems Group 10,500 385
Applied Micro Circuits Corp. (AE)(N) 93,100 331
Ariba, Inc. (AE)(N) 17,300 134
ARM Holdings PLC - ADR 4,100 30
</Table>
Aggressive Equity Fund 29
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Arrow Electronics, Inc. (AE)(N) 10,000 316
Aspen Technology, Inc. (AE)(N) 13,200 145
Atmel Corp. (AE) 17,500 106
Avanex Corp. (AE)(N) 32,400 61
Avici Systems, Inc. (AE)(N) 1,000 8
Avnet, Inc. (AE) 6,000 153
Avocent Corp. (AE) 9,700 328
AVX Corp. 12,000 178
BearingPoint, Inc. (AE)(N) 12,200 96
Benchmark Electronics, Inc. (AE) 39,895 972
Blackbaud, Inc. 3,500 91
Brocade Communications Systems, Inc. (AE)(N) 81,200 667
Captaris, Inc. (AE) 8,400 65
Carrier Access Corp. (AE) 11,900 78
Cbeyond, Inc. (AE)(N) 9,800 300
ChipMOS TECHNOLOGIES Bermuda, Ltd. (AE)(N) 31,500 214
Ciena Corp. (AE)(N) 16,526 458
Citrix Systems, Inc. (AE)(N) 7,100 192
Cogent Communications Group, Inc. (AE) 3,600 58
Cognizant Technology Solutions Corp. Class A
(AE) 6,600 509
Comtech Telecommunications Corp. (AE)(N) 7,950 303
Comverse Technology, Inc. (AE)(N) 5,200 110
CSG Systems International, Inc. (AE) 7,900 211
Cubic Corp. (N) 6,200 135
Cypress Semiconductor Corp. (AE) 3,500 59
Daktronics, Inc. (N) 8,500 313
DealerTrack Holdings, Inc. (AE) 8,600 253
Dendrite International, Inc. (AE) 4,800 51
Digital River, Inc. (AE)(N) 8,800 491
Eagle Test Systems, Inc. (AE)(N) 8,500 124
Echelon Corp. (AE)(N) 3,200 26
Electronics for Imaging, Inc. (AE) 8,000 213
Emulex Corp. (AE) 11,500 224
Epicor Software Corp. (AE)(N) 8,300 112
Equinix, Inc. (AE)(N) 14,123 1,068
Excel Technology, Inc. (AE) 1,700 44
Extreme Networks (AE) 8,600 36
Flir Systems, Inc. (AE)(N) 4,400 140
Foundry Networks, Inc. (AE) 27,200 407
Gartner, Inc. (AE)(N) 41,600 823
Gerber Scientific, Inc. (AE) 1,000 13
IHS, Inc. Class A (AE) 1,200 47
II-VI, Inc. (AE)(N) 7,900 221
Ikanos Communications, Inc. (AE)(N) 12,100 105
Ingram Micro, Inc. Class A (AE) 18,100 369
Integrated Device Technology, Inc. (AE)(N) 28,400 440
Integrated Silicon Solutions, Inc. (AE) 3,500 20
Internap Network Services Corp. (AE) 5,900 117
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Interwoven, Inc. (AE)(N) 53,700 788
IXYS Corp. (AE)(N) 17,900 159
JDS Uniphase Corp. (AE)(N) 15,062 251
Kemet Corp. (AE)(N) 15,300 112
Keynote Systems, Inc. (AE)(N) 12,300 130
Lattice Semiconductor Corp. (AE)(N) 15,400 100
Lawson Software, Inc. (AE)(N) 49,500 366
Leadis Technology, Inc. (AE)(N) 1,000 5
Lions Gate Entertainment Corp. (AE) 24,500 263
LoopNet, Inc. (AE)(N) 1,000 15
LSI Logic Corp. (AE)(N) 22,100 199
McAfee, Inc. (AE) 14,700 417
McData Corp. Class A (AE) 35,500 197
Mentor Graphics Corp. (AE)(N) 53,829 971
Mercury Computer Systems, Inc. (AE)(N) 3,400 45
Merge Technologies, Inc. (AE) 14,000 92
Methode Electronics, Inc. (N) 27,900 302
Micros Systems, Inc. (AE) 6,821 359
MicroStrategy, Inc. Class A (AE) 100 11
Ness Technologies, Inc. (AE) 3,800 54
Nextest Systems Corp. (AE) 10,237 115
Nuance Communications, Inc. (AE)(N) 40,800 468
Oplink Communications, Inc. (AE)(N) 6,000 123
Opsware, Inc. (AE)(N) 26,700 236
Orckit Communications, Ltd. (AE)(N) 10,100 98
Parametric Technology Corp. (AE) 23,688 427
Park Electrochemical Corp. 3,100 80
PerkinElmer, Inc. 8,200 182
Planar Systems, Inc. (AE)(N) 1,000 10
PMC - Sierra, Inc. (AE)(N) 44,000 295
PowerDsine, Ltd. (AE)(N) 10,900 120
QLogic Corp. (AE) 14,100 309
Quantum Corp. (AE)(N) 77,900 181
Rackable Systems, Inc. (AE)(N) 14,500 449
RADVision, Ltd. (AE) 2,400 48
RADWARE, Ltd. (AE) 4,600 73
RealNetworks, Inc. (AE)(N) 28,800 315
Riverbed Technology, Inc. (AE)(N) 4,100 126
Rockwell Automation, Inc. 3,639 222
Sanmina-SCI Corp. (AE) 43,800 151
Scansource, Inc. (AE)(N) 3,000 91
Seachange International, Inc. (AE)(N) 17,200 176
Seagate Technology (N) 10,897 289
Semtech Corp. (AE) 10,900 142
Sigma Designs, Inc. (AE)(N) 9,500 242
Sigmatel, Inc. (AE)(N) 18,100 79
</Table>
30 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Silicon Image, Inc. (AE)(N) 5,000 64
Silicon Storage Technology, Inc. (AE)(N) 69,900 315
Skyworks Solutions, Inc. (AE)(N) 74,900 530
Solectron Corp. (AE) 62,500 201
SonicWALL, Inc. (AE) 16,300 137
Spansion, Inc. Class A (AE)(N) 8,000 119
Standard Microsystems Corp. (AE)(N) 4,700 132
Stratex Networks, Inc. (AE)(N) 11,300 55
SupportSoft, Inc. (AE) 7,600 42
Sybase, Inc. (AE) 5,100 126
Sycamore Networks, Inc. (AE) 36,800 138
SYNNEX Corp. (AE) 14,500 318
Syntax-Brillian Corp. (AE) 15,200 131
Tekelec (AE)(N) 29,800 442
Tessera Technologies, Inc. (AE) 19,433 784
TIBCO Software, Inc. (AE) 37,800 357
Transaction Systems Architects, Inc. (AE) 24,304 792
Triquint Semiconductor, Inc. (AE)(N) 36,200 163
Trizetto Group, Inc. (The) (AE)(N) 15,200 279
Tyler Technologies, Inc. (AE) 6,700 94
Ultimate Software Group, Inc. (AE) 20,100 468
Unisys Corp. (AE)(N) 85,600 671
Utstarcom, Inc. (AE)(N) 19,000 166
Varian, Inc. (AE) 3,600 161
VeriFone Holdings, Inc. (AE)(N) 15,700 556
Verint Systems, Inc. (AE) 3,300 113
Vignette Corp. (AE) 7,100 121
Vocus, Inc. (AE)(N) 22,400 376
Wavecom Sa - ADR (AE)(N) 7,200 105
webMethods, Inc. (AE) 26,700 197
Westell Technologies, Inc. Class A (AE)(N) 13,000 33
Witness Systems, Inc. (AE)(N) 7,100 124
Zoran Corp. (AE) 10,900 159
------------
35,869
------------
Utilities - 4.6%
AGL Resources, Inc. 16,100 626
Allete, Inc. (N) 3,100 144
Alliant Energy Corp. (N) 11,300 427
Aqua America, Inc. (N) 5,500 125
Atlantic Tele-Network, Inc. (N) 400 12
Centerpoint Energy, Inc. (N) 16,200 269
CenturyTel, Inc. 6,100 266
Citizens Communications Co. 900 13
CMS Energy Corp. (AE)(N) 33,600 561
CT Communications, Inc. 9,800 225
El Paso Electric Co. (AE) 11,800 288
Energen Corp. 10,500 493
First Solar, Inc. (AE) 609 18
Laclede Group, Inc. (The) (N) 2,200 77
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Leap Wireless International, Inc. Class W
(AE)(N) 7,700 458
MDU Resources Group, Inc. 23,400 600
NeuStar, Inc. Class A (AE) 10,456 339
New Jersey Resources Corp. (N) 3,700 180
NII Holdings, Inc. (AE) 5,036 324
Northeast Utilities 8,900 251
Northwest Natural Gas Co. 1,100 47
OGE Energy Corp. 18,500 740
Pepco Holdings, Inc. 23,000 598
Pinnacle West Capital Corp. 11,300 573
PNM Resources, Inc. 5,100 159
Puget Energy, Inc. 9,900 251
RCN Corp. (AE) 4,700 142
Sierra Pacific Resources (AE) 22,300 375
Southern Union Co. (N) 9,700 271
Southwest Gas Corp. 1,900 73
Telephone & Data Systems, Inc. 400 22
UGI Corp. 30,400 829
Unisource Energy Corp. 1,800 66
VeraSun Energy Corp. (AE) 14,147 279
Westar Energy, Inc. 9,300 241
------------
10,362
------------
TOTAL COMMON STOCKS
(cost $192,804) 215,183
------------
WARRANTS & RIGHTS - 0.0%
Materials and Processing - 0.0%
Affordable Residential Communities Rights (AE) 5,500 5
Auto and Transportation - 0.0%
Quintana Maritime, Ltd. 5/11 Warrants (AE) 11,600 36
Financial Services - 0.0%
Washington Mutual, Inc. 2050 Warrants (AE) 35,400 5
------------
TOTAL WARRANTS & RIGHTS
(cost $8) 46
------------
SHORT-TERM INVESTMENTS - 4.1%
Russell Investment Company Money Market Fund 8,205,000 8,205
United States Treasury Bills (z)(sec.)
4.968% due 03/15/07 1,000 987
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $9,195) 9,192
------------
</Table>
Aggressive Equity Fund 31
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
OTHER SECURITIES - 30.4%
State Street Securities Lending
Quality Trust (X) 67,970,599 67,971
------------
TOTAL OTHER SECURITIES
(cost $67,971) 67,971
------------
TOTAL INVESTMENTS - 130.7%
(identified cost $269,978) 292,392
OTHER ASSETS AND LIABILITIES,
NET - (30.7%) (68,746)
------------
NET ASSETS - 100.0% 223,646
============
</Table>
<Table>
<Caption>
UNREALIZED
NOTIONAL APPRECIATION
FUTURES CONTRACTS AMOUNT (DEPRECIATION)
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Long Positions
Russell 2000 Mini Index (CME)
expiration date 03/07 (113) 8,982 (67)
---------------
Total Unrealized Appreciation (Depreciation) on
Open Futures Contracts (67)
===============
</Table>
A portion of the portfolio has been fair valued as of period end.
See accompanying notes which are an integral part of the financial statements.
32 Aggressive Equity Fund
RUSSELL INVESTMENT FUNDS
AGGRESSIVE EQUITY FUND
PRESENTATION OF PORTFOLIO HOLDINGS, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
% OF
NET
CATEGORIES ASSETS
- -----------------------------------------------------------------
Auto and Transportation 3.4
Consumer Discretionary 18.8
Consumer Staples 2.3
Financial Services 16.5
Health Care 10.6
Materials and Processing 10.0
Miscellaneous 1.5
Other Energy 3.9
Producer Durables 8.6
Technology 16.0
Utilities 4.6
Warrants & Rights --*
Short-Term Investments 4.1
Other Securities 30.4
---------------
Total Investments 130.7
Other Assets and Liabilities, Net (30.7)
---------------
100.0
===============
Futures Contracts (--)*
</Table>
* Less than .05% of net assets.
See accompanying notes which are an integral part of the financial statements.
Aggressive Equity Fund 33
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
PORTFOLIO MANAGEMENT DISCUSSION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
NON-U.S. FUND MSCI EAFE INDEX (NET)**
------------- -----------------------
Inception* 10000 10000
1997 10030 10178
1998 11330 12213
1999 15109 15506
2000 12928 13309
2001 10080 10455
2002 8553 8789
2003 11871 12180
2004 14043 14646
2005 15966 16629
2006 19740 21009
</Table>
Non-U.S. Fund
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 23.64%
5 Years 14.39%sec.
Inception* 7.04%sec.
</Table>
MSCI EAFE() Index (Net)**
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 26.34%
5 Years 14.98%sec.
Inception* 7.71%sec.
</Table>
34 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Non-U.S. Fund (the "Fund") allocates most of its assets among multiple money
managers. Russell Investment Management Company ("RIMCo"), as the Fund's
manager, may change the allocation of the Fund's assets among money managers at
any time. An exemptive order from the Securities and Exchange Commission (SEC)
permits the Fund to engage or terminate a money manager at any time, subject to
approval by the Fund's Board of Trustees (the "Board") without a shareholder
vote. Pursuant to the terms of the exemptive order, the Fund is required to
notify its shareholders within 60 days of when a money manager begins providing
services
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide long term capital growth.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006?
For the fiscal year ended December 31, 2006, the Non-U.S. Fund gained 23.64%.
This compared to its benchmark the MSCI EAFE(R) Index (net), which gained
26.34%. The Fund's performance includes operating expenses, whereas Index
returns are unmanaged and do not include expenses of any kind.
For the year ended December 31, 2006, the Lipper(R) International Core Funds
Average returned 22.45%. This result serves as a peer comparison and is
expressed net of operating expenses.
HOW DID THE MARKET CONDITIONS DESCRIBED IN THE MARKET SUMMARY REPORT AFFECT THE
FUND'S PERFORMANCE?
In 2006, value stocks and small capitalization stocks again outperformed growth
stocks and large/medium capitalization stocks respectively. The Fund's strategy
of attempting to moderate the influence of style and capitalization on
performance helped mitigate the impact of these trends on Fund results. However,
regional positioning and sector positioning detracted from relative performance
over the course of 2006.
From a regional perspective, a challenging stock selection environment in Japan
resulted in poor returns from the Fund's Japanese stock holdings. Attractive
valuations and some signs of nascent momentum in the Japanese market at the end
of 2005 failed to translate to strong market gains for Japanese stocks in 2006.
The Fund was positioned for an improvement in the Japanese economy which did not
occur despite continued evidence of incremental improvement in the investment
environment in Japan.
The Fund's overweight to value stocks contributed to relative underperformance.
The Fund had a slight tilt towards growth as even the Fund's value money
managers found compelling relative values in stocks with higher forecasts for
earnings growth. For all of 2006, the Fund had a small valuation premium to the
market with above-market forecasted growth rates. The Fund was also underweight
to stocks offering the highest dividend yields relative to the benchmark. High
dividend yielding stocks were rewarded in 2006.
Finally, variable trends over the course of the year also proved challenging
with the market anticipating a slowing of economic growth and a normalization of
market risk premium. The shift in market trends, from cyclical and higher risk
sector leadership to defensive leadership in the period from May to mid-July and
then back again, proved difficult for most active managers as is evidenced by
the underperformance of the average fund in the Lipper peer group to the
benchmark. While the Fund had some exposure to both sectors, it was underweight
relative to the Index in stocks with high dividend yields. While the Fund still
managed to produce better than average results with respect to its peer group,
this detracted meaningfully from benchmark-relative performance.
HOW DID THE INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND AND ITS
MONEY MANAGERS AFFECT ITS PERFORMANCE?
The market conditions discussed above had a negative impact on results relative
to the benchmark. Given the strong performance of value stocks relative to
growth stocks, exposure to value stocks was critical to success in 2006.
However, not all approaches to value investing were rewarded. The focus of the
Fund's value money manager on "normalized earnings power" (the long-term
expectation for a company's earnings) resulted in underexposure to some of the
trends most rewarded by the market. In particular, this resulted in an
underweight to key sectors, such as metals and mining stocks, where share prices
reflected the market's belief in the sustainability of peak (well above normal)
earnings. This detracted materially from performance.
At the country level, the Fund's underweight position to the U.K. proved
favorable given that market's lagging performance over the course of the year.
In addition, the Fund's money managers were effective in selecting stocks that
performed well relative to the market. In contrast, the Fund's slight
underweight to Japan contributed positively to performance, but ineffective
stock selection resulted in the biggest negative impact to performance from a
country/region perspective.
Although not part of the Fund's benchmark, emerging markets provided an
important source of opportunity for international investors in 2006. The impact
of the Fund's exposure to emerging markets on Fund performance was slightly
negative. The Fund's sector positioning in these markets favored technology
shares which underperformed. The Fund was underweighted in industrial
commodities stocks which were among the market's strongest performers.
At the money manager-level, the Fund's value manager, The Boston Company Asset
Management, LLC, had the most
Non-U.S. Fund 35
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
disappointing year. As previously mentioned, Boston Company's emphasis on
normalized earnings led it to underweight many of the more cyclical earnings
companies that outperformed through much of the year. Its performance was also
hurt by an overweight to Japan, and specifically, domestically-oriented Japanese
stocks. Wellington Management Company, LLP, the Fund's aggressive growth money
manager, performed well relative to the MSCI EAFE Growth Index, but lagged the
MSCI EAFE Index. The market environment was challenging to Wellington's style
through much of the year, though Wellington outperformed the MSCI EAFE Index in
both the third and fourth quarters.
The holdings of the Fund's other two money managers, Fidelity Management &
Research Company and AQR Capital Management, LLC, reflected some of the more
pronounced style influences of their strategies. Fidelity's performance lagged
through much of the year. Its growth orientation and slight overweight of the
Japanese market were the dominant influences on its underperformance. AQR
outperformed the benchmark for the year with its valuation emphasis more than
offsetting less effective country and currency decisions.
DESCRIBE ANY CHANGES TO THE FUND'S STRUCTURE OR THE MONEY MANAGER LINE-UP.
In November, Fidelity Management & Research Company was replaced with MFS
Institutional Advisors, Inc., another moderate growth money manager.
Money Managers as of Styles
December 31, 2006
<Table>
AQR Capital Management, LLC Market-Oriented
MFS Institutional Advisors, Inc. Growth
The Boston Company Asset Management, LLC Value
Wellington Management Company, LLP Growth
</Table>
The views expressed in this report reflect those of the portfolio managers only
through the end of the period covered by the report. These views do not
necessarily represent the views of Russell Investment Management Company
(RIMCo), or any other person in RIMCo or any other affiliated organization.
These views are subject to change at any time based upon market conditions or
other events, and RIMCo disclaims any responsibility to update the views
contained herein. These views should not be relied on as investment advice and,
because investment decisions for Russell Investment Funds (RIF) are based on
numerous factors, should not be relied on as an indication of investment
decisions of any RIF Fund.
--------------------
* The Fund commenced operations on January 2, 1997. Index comparison began
December 31, 1996.
** Morgan Stanley Capital International Europe, Australia, Far East (MSCI
EAFE) Index (net of tax on dividends from foreign holdings) is an index
composed of an arithmetic, market value-weighted average of the
performance of approximately 1,600 securities listed on the stock exchange
of the countries of Europe, Australia, and the Far East.
sec. Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
36 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SHAREHOLDER EXPENSE EXAMPLE -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FUND EXPENSES
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING EACH FUND'S
EXPENSE EXAMPLE, WHICH APPEARS ON EACH FUND'S INDIVIDUAL PAGE IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
A FUND.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The Example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
indicated, which for this Fund is from July 1, 2006 to December 31, 2006.
ACTUAL EXPENSES
The information in the table under the heading "Actual Performance" provides
information about actual account values and actual expenses. You may use the
information in this column, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first column in the row entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information in the table under the heading "Hypothetical Performance (5%
return before expenses)" provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs. Therefore, the
information under the heading "Hypothetical Performance (5% return before
expenses)" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
ACTUAL (5% RETURN
PERFORMANCE BEFORE EXPENSES)
-------------- ----------------
Beginning Account Value
July 1, 2006 $ 1,000.00 $ 1,000.00
Ending Account Value
December 31, 2006 $ 1,137.30 $ 1,019.46
Expenses Paid During
Period* $ 6.14 $ 5.80
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.14%
(representing the one-half year period annualized), multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half
year period). Reflects amounts waived and/or reimbursed by the investment
adviser. Without the waiver and/or reimbursement, expenses would have been
higher.
Non-U.S. Fund 37
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
COMMON STOCKS - 91.5%
Australia - 2.7%
AGL Energy, Ltd. (AE)(N) 3,882 50
Alinta, Ltd. (N) 1,301 12
Amcor, Ltd. 114,552 656
AMP, Ltd. 12,222 97
Ansell, Ltd. 4,319 38
Aristocrat Leisure, Ltd. (N) 29,547 371
Australia & New Zealand Banking Group, Ltd. 16,945 377
Australian Wealth Management, Ltd. 6,927 14
AXA Asia Pacific Holdings, Ltd. 13,300 77
BHP Billiton, Ltd. (N) 25,251 504
BlueScope Steel, Ltd. (N) 12,941 88
Brambles, Ltd. (AE) 36,934 374
Caltex Australia, Ltd. 2,881 52
Centro Properties Group (N) 7,593 55
Coca-Cola Amatil, Ltd. 63,309 388
Coles Group, Ltd. 17,205 190
Commonwealth Bank of Australia (N) 9,434 368
CSL, Ltd. 1,084 56
CSR, Ltd. 15,040 45
David Jones, Ltd. (N) 15,500 51
DB RREEF Trust (N) 11,747 16
Downer EDI, Ltd. 6,242 34
Foster's Group, Ltd. 18,830 103
Goodman Fielder, Ltd. New 15,862 28
GPT Group 13,500 60
Harvey Norman Holdings, Ltd. 11,443 34
Insurance Australia Group, Ltd. (N) 82,972 416
Investa Property Group (N) 6,524 13
Leighton Holdings, Ltd. 2,984 48
Lend Lease Corp., Ltd. 2,300 33
Macquarie Bank, Ltd. (N) 563 35
Macquarie Goodman Group (N) 12,431 75
Macquarie Infrastructure Group 11,174 30
Minara Resources, Ltd. (N) 2,735 13
Mirvac Group (N) 6,629 29
National Australia Bank, Ltd. 37,223 1,187
Newcrest Mining, Ltd. 1,987 41
OneSteel, Ltd. 24,106 89
Oxiana, Ltd. 5,088 13
Pacific Brands, Ltd. 40,307 83
Qantas Airways, Ltd. 25,912 107
QBE Insurance Group, Ltd. 48,748 1,110
Rinker Group, Ltd. 4,842 69
Rio Tinto, Ltd. (N) 906 53
Sims Group, Ltd. (N) 5,163 82
Smorgon Steel Group, Ltd. 14,342 21
Sons of Gwalia, Ltd. (AE)(N)(B) 8,400 --
Stockland (N) 8,200 54
Suncorp-Metway, Ltd. (N) 7,620 122
TABCORP Holdings, Ltd. 49,545 659
Telstra Corp., Ltd. (N) 153,900 503
Telstra Corp., Ltd. (AE) 6,606 14
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Toll Holdings, Ltd. (N) 26,106 376
Westfield Group 10,543 175
Westpac Banking Corp. (N) 14,100 270
Woodside Petroleum, Ltd. 166 5
Woolworths, Ltd. 8,100 153
Zinifex, Ltd. 8,158 121
------------
10,137
------------
Austria - 0.6%
Erste Bank der Oesterreichischen Sparkassen AG 28,154 2,159
------------
Belgium - 0.8%
Belgacom SA (N) 13,548 597
Delhaize Group 3,325 277
Dexia 2,543 70
Fortis 24,558 1,047
KBC Groep NV (N) 5,134 630
UCB SA 5,192 356
------------
2,977
------------
Bermuda - 0.7%
CNPC Hong Kong, Ltd. 90,000 50
Cofco International, Ltd. 38,000 38
Esprit Holdings, Ltd. 64,500 720
Great Eagle Holdings, Ltd. 13,000 38
Guoco Group, Ltd. 3,000 37
Jardine Matheson Holdings, Ltd. 2,000 43
Li & Fung, Ltd. 354,000 1,101
Orient Overseas International, Ltd. 9,800 62
People's Food Holdings, Ltd. 21,000 17
Vostok Nafta Investment, Ltd. (AE) 4,575 318
------------
2,424
------------
Brazil - 0.3%
Cia Vale do Rio Doce - ADR 25,900 770
Petroleo Brasileiro SA - ADR 4,320 445
------------
1,215
------------
Canada - 1.5%
Cameco Corp. 10,000 404
Canadian National Railway Co. 19,120 823
Potash Corp. of Saskatchewan 4,600 660
Research In Motion, Ltd. (AE) 17,100 2,185
</Table>
38 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Rogers Communications, Inc. Class B (N) 30,600 911
SNC-Lavalin Group, Inc. 25,300 683
------------
5,666
------------
Cayman Islands - 0.2%
Baidu.com - ADR New (AE)(N) 2,200 248
Foxconn International Holdings, Ltd. (AE) 8,000 26
Hutchison Telecommunications International, Ltd.
(AE) 204,000 514
------------
788
------------
Denmark - 0.3%
Carlsberg A/S Class B 2,050 203
FLSmidth & Co. A/S 4,700 299
Genmab A/S (AE) 2,150 145
Novo-Nordisk A/S Series B 2,650 221
Vestas Wind Systems A/S (AE) 8,200 346
------------
1,214
------------
Finland - 0.9%
Cargotec Corp. Class B (N) 1,660 92
M-real OYJ Class B 37,270 236
Nokia OYJ 48,203 985
Nokia OYJ - ADR 43,538 885
Oriola-KD OYJ (AE)(N) 3,400 14
Orion OYJ Class B (AE)(N) 10,261 223
Outokumpu OYJ 1,184 46
Rautaruukki OYJ 9,609 382
UPM-Kymmene OYJ 18,899 477
------------
3,340
------------
France - 13.1%
Air France-KLM 10,378 437
Air Liquide SA (N) 15,617 3,709
Alstom RGPT (AE)(N) 8,084 1,096
AXA SA (N) 74,908 3,033
BNP Paribas (N) 15,674 1,710
Capital Gemini SA 3,423 215
Carrefour SA (N) 13,840 839
Casino Guichard Perrachon SA 2,400 223
Christian Dior SA 2,375 253
Cie Generale d'Optique Essilor International SA
(N) 3,174 341
CNP Assurances 1,367 153
Credit Agricole SA 88,313 3,714
Eiffage SA (N) 3,308 315
France Telecom SA (N) 43,560 1,205
Gaz de France SA New (N) 20,489 943
Iliad SA (N) 6,406 556
L'Oreal SA 5,511 552
Lafarge SA (N) 452 67
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Lagardere SCA (N) 6,520 525
Legrand SA New 32,229 944
LVMH Moet Hennessy Louis Vuitton SA 25,372 2,678
Natixis 8,970 252
Nexans SA 2,825 362
NicOx SA (AE) 5,996 181
Pernod-Ricard SA (N) 8,412 1,932
Peugeot SA (N) 6,050 401
Rhodia SA (AE) 29,238 102
Safran SA 111 3
Sanofi-Aventis (N) 41,240 3,808
Schneider Electric SA (N) 27,270 3,027
Societe BIC SA 1,645 114
Societe Generale (N) 5,302 900
Sodexho Alliance SA (N) 4,748 298
Suez SA (AE)(N) 6,233 323
Suez SA (AE) 1,228 --
Thomson (AE)(N) 30,740 601
Total SA - ADR 10,632 765
Total SA (N) 59,832 4,316
Unibail (N) 5,130 1,253
Valeo SA (N) 14,196 591
Vallourec SA 7,649 2,224
Veolia Environnement (N) 27,020 2,083
Vivendi Universal SA 35,439 1,385
------------
48,429
------------
Germany - 6.4%
Allianz SE 8,260 1,687
BASF AG 1,196 117
Bayer AG 40,016 2,148
Bayerische Motoren Werke AG 13,790 792
Continental AG 4,824 561
DaimlerChrysler AG 6,542 404
Deutsche Bank AG 3,814 510
Deutsche Boerse AG 8,984 1,653
Deutsche Post AG 40,210 1,212
Deutsche Telekom AG 59,659 1,090
E.ON AG 31,354 4,256
GEA Group AG 3,226 73
Hannover Rueckversicherung AG 15,980 740
Hochtief AG 5,114 373
Infineon Technologies AG (AE) 59,279 836
KarstadtQuelle AG (AE)(N) 7,903 229
Lanxess AG (AE) 7,131 400
MAN AG 1,688 152
Medion AG (N) 5,900 63
</Table>
Non-U.S. Fund 39
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Metro AG 10,830 691
MTU Aero Engines Holding AG 3,277 153
Praktiker Bau- und Heimwerkermaerkte AG New 2,090 75
RWE AG 2,804 309
Salzgitter AG 12,044 1,575
Siemens AG 14,989 1,487
Suedzucker AG (N) 10,135 245
Symrise AG New (AE) 12,275 316
ThyssenKrupp AG 897 42
Volkswagen AG (N) 4,987 565
Wacker Chemie AG New (AE) 5,128 667
Wincor Nixdorf AG 1,900 296
------------
23,717
------------
Greece - 0.2%
Public Power Corp. 30,930 784
------------
Hong Kong - 1.1%
Bank of East Asia, Ltd. 20,800 118
BOC Hong Kong Holdings, Ltd. (N) 206,000 559
Cheung Kong Holdings, Ltd. 4,000 49
China Netcom Group Corp. Hong Kong, Ltd. 14,500 39
China Resources Power Holdings Co. 22,000 34
Citic Pacific, Ltd. (N) 72,800 251
CNOOC, Ltd. 745,000 708
Guangdong Investment, Ltd. 66,000 30
Guangzhou Investment Co., Ltd. 274,000 77
Hang Lung Group, Ltd. 27,000 82
Henderson Land Development Co., Ltd. 13,000 73
Hong Kong Exchanges and Clearing, Ltd. 6,500 71
HongKong Electric Holdings 24,500 120
Hopewell Holdings 12,000 42
Hutchison Whampoa, Ltd. 60,700 617
Link REIT (The) New (o) 9,000 19
New World Development, Ltd. 25,000 50
Shenzhen Investment, Ltd. 56,000 23
Shun Tak Holdings, Ltd. (N) 648,000 991
Sun Hung Kai Properties, Ltd. 2,000 23
Swire Pacific, Ltd. 7,500 81
Wheelock & Co., Ltd. 16,000 30
------------
4,087
------------
Indonesia - 0.2%
Bank Central Asia Tbk PT 1,081,000 625
Telekomunikasi Indonesia Tbk PT - ADR 1,750 80
------------
705
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ireland - 0.6%
Bank of Ireland 2,600 60
Bank of Ireland PLC 13,628 315
Elan Corp. PLC - ADR (AE)(N) 48,100 709
Ryanair Holdings PLC - ADR (AE)(N) 13,605 1,109
------------
2,193
------------
Israel - 0.1%
Teva Pharmaceutical Industries, Ltd. - ADR 17,270 537
------------
Italy - 3.1%
Assicurazioni Generali SpA 26,097 1,146
Banca Intesa SpA 127,612 985
Benetton Group SpA 5,900 113
Capitalia SpA 37,730 357
Enel SpA (N) 37,950 391
ENI SpA 56,628 1,905
ERG SpA (N) 8,129 187
Esprinet SpA 5,834 110
Fondiaria-Sai SpA (N) 9,454 452
Italcementi SpA (N) 15,628 441
Mediaset SpA 76,070 903
Milano Assicurazioni SpA (N) 51,100 417
Parmalat Finanziaria SpA (N)(B) 12,500 --
SanPaolo IMI SpA 7,413 172
Saras SpA New (AE)(N) 90,570 484
Telecom Italia SpA 39,617 101
Toro Assicurazioni SpA 3,125 87
UniCredito Italiano SpA (N) 301,650 2,644
Unipol SpA (N) 162,080 584
------------
11,479
------------
Japan - 19.5%
77 Bank, Ltd. (The) (N) 69,300 440
Aderans Co., Ltd. 900 22
Aeon Co., Ltd. 44,400 961
Aeon Credit Service Co., Ltd. 32,700 620
Aiful Corp. (N) 11,394 321
Alfresa Holdings Corp. (N) 400 24
Amada Co., Ltd. 10,000 106
Asahi Breweries, Ltd. (N) 11,400 182
Asahi Glass Co., Ltd. (N) 111,000 1,334
Asahi Kasei Corp. (N) 26,000 170
</Table>
40 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Astellas Pharma, Inc. 15,900 723
Bank of Nagoya, Ltd. (The) 7,000 43
Bank of Yokohama, Ltd. (The) 5,000 39
Bridgestone Corp. (N) 55,300 1,234
Brother Industries, Ltd. (N) 10,000 135
Calsonic Kansei Corp. 14,000 82
Canon Marketing Japan, Inc. (N) 2,800 64
Canon, Inc. (N) 55,503 3,125
Chiba Bank, Ltd. (The) 8,000 68
Dai Nippon Printing Co., Ltd. (N) 7,000 108
Daiichi Sankyo Co., Ltd. 17,300 541
Daiwa House Industry Co., Ltd. 4,000 70
Daiwa Securities Group, Inc. 23,000 258
Denki Kagaku Kogyo Kabushiki Kaisha 14,000 58
Denso Corp. 3,800 151
Dentsu, Inc. (N) 343 1,006
East Japan Railway Co. 23 154
Eisai Co., Ltd. (N) 21,200 1,165
Elpida Memory, Inc. (AE)(N) 19,900 1,094
Fanuc, Ltd. 12,400 1,221
Fuji Electric Holdings Co., Ltd. 8,000 43
Fuji Fire & Marine Insurance Co., Ltd. (The) 15,000 56
Fuji Heavy Industries, Ltd. (N) 21,000 108
FUJIFILM Holdings Corp. (N) 23,200 953
Fujikura, Ltd. 4,000 35
Fujitsu, Ltd. (N) 33,000 259
Funai Electric Co., Ltd. (N) 5,700 461
Hino Motors, Ltd. (N) 133,900 689
Hitachi, Ltd. 1,000 6
Honda Motor Co., Ltd. (N) 11,700 462
Hyakugo Bank, Ltd. (The) 2,000 13
Hyakujushi Bank, Ltd. (The) 3,000 18
Inpex Holdings, Inc. 2 16
Itochu Corp. 29,000 238
Izumi Co., Ltd. (N) 2,200 78
Japan Tobacco, Inc. 354 1,710
JFE Holdings, Inc. (N) 27,500 1,417
JGC Corp. 3,000 52
JS Group Corp. 28,400 598
Kagoshima Bank, Ltd. (The) 3,000 22
Kansai Electric Power Co., Inc. (The) 11,100 299
Kao Corp. 108,100 2,916
Kawasaki Kisen Kaisha, Ltd. (N) 18,000 141
KDDI Corp. 5 34
Keio Corp. 9,000 58
Keiyo Bank, Ltd. (The) 5,000 28
Kobe Steel, Ltd. 41,000 141
Komatsu, Ltd. 25,400 515
Komori Corp. 3,000 56
Konica Minolta Holdings, Inc. (N) 2,500 35
Kubota Corp. 22,000 204
Kuraray Co., Ltd. 31,200 368
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Kyocera Corp. 2,500 236
Lawson, Inc. 12,500 447
Leopalace21 Corp. 700 22
Lintec Corp. 500 10
Mabuchi Motor Co., Ltd. (N) 3,500 208
Makita Corp. 4,600 141
Matsumotokiyoshi Co., Ltd. (N) 16,800 373
Matsushita Electric Industrial Co., Ltd. 17,000 339
Matsushita Electric Works, Ltd. 14,000 162
Mazda Motor Corp. 31,000 212
Meiji Dairies Corp. 5,000 39
Millea Holdings, Inc. 6,100 215
Mitsubishi Chemical Holdings Corp. 27,500 173
Mitsubishi Corp. 45,800 862
Mitsubishi Electric Corp. 28,000 256
Mitsubishi Estate Co., Ltd. 10,000 259
Mitsubishi Heavy Industries, Ltd. 12,000 55
Mitsubishi UFJ Financial Group, Inc. 188 2,322
Mitsui & Co., Ltd. 13,000 194
Mitsui Chemicals, Inc. 4,000 31
Mitsui Engineering & Shipbuilding Co., Ltd. (N) 11,000 36
Mitsui Fudosan Co., Ltd. 8,000 195
Mitsui OSK Lines, Ltd. 16,000 158
Mitsui Sumitomo Insurance Co., Ltd. 7,000 77
Mitsui Trust Holdings, Inc. 38,900 447
Mizuho Financial Group, Inc. 65 464
Mochida Pharmaceutical Co., Ltd. 2,000 17
Mori Seiki Co., Ltd. (N) 3,300 74
Nabtesco Corp. 2,000 25
Nichirei Corp. 35,000 196
Nihon Unisys, Ltd. 3,000 49
Nikon Corp. (N) 3,000 66
Nintendo Co., Ltd. (N) 10,900 2,830
Nippon Express Co., Ltd. (N) 234,400 1,282
Nippon Oil Corp. 17,000 114
Nippon Paint Co., Ltd. 6,000 31
Nippon Paper Group, Inc. 143 540
Nippon Steel Corp. (N) 66,000 379
Nippon Telegraph & Telephone Corp. 82 404
Nippon Yusen KK 32,000 234
Nissan Motor Co., Ltd. (N) 87,600 1,055
Nisshin Seifun Group, Inc. 8,000 83
Nitto Denko Corp. 10,200 511
NOK Corp. (N) 6,500 128
Nomura Holdings, Inc. (N) 137,800 2,600
Nomura Research Institute, Ltd. 400 58
</Table>
Non-U.S. Fund 41
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
NTN Corp. (N) 7,000 63
NTT Data Corp. 8 40
NTT DoCoMo, Inc. (N) 88 139
Okasan Holdings, Inc. 1,000 6
Omron Corp. 33,000 937
ORIX Corp. (N) 3,210 929
Pacific Metals Co., Ltd. 3,000 29
Rakuten, Inc. (N) 1,887 880
Resona Holdings, Inc. (N) 52 142
Ricoh Co., Ltd. 131,000 2,675
Rinnai Corp. (N) 3,800 114
Rohm Co., Ltd. (N) 13,100 1,304
Sankyo Co., Ltd. (N) 2,100 116
Sapporo Hokuyo Holdings, Inc. 13 126
Secom Co., Ltd. 200 10
Seino Holdings Corp. 5,000 47
Sekisui Chemical Co., Ltd. 76,300 608
Sekisui House, Ltd. (N) 58,900 858
Seven & I Holdings Co., Ltd. 800 25
SFCG Co., Ltd. 1,475 229
Sharp Corp. (N) 26,000 448
Shiga Bank, Ltd. (The) 3,000 19
Shimano, Inc. (N) 1,400 41
Shin-Etsu Chemical Co., Ltd. 2,600 174
Shinsei Bank, Ltd. 303,500 1,785
Showa Shell Sekiyu KK 800 9
Sohgo Security Services Co., Ltd. 5,000 101
Sompo Japan Insurance, Inc. 13,000 159
Sony Corp. (N) 5,300 227
Sumitomo Chemical Co., Ltd. 19,000 147
Sumitomo Corp. 3,500 52
Sumitomo Heavy Industries, Ltd. 6,000 63
Sumitomo Metal Industries, Ltd. 49,000 213
Sumitomo Mitsui Financial Group, Inc. (N) 206 2,112
Sumitomo Realty & Development Co., Ltd. (N) 35,000 1,123
Sumitomo Trust & Banking Co., Ltd. (The) 23,000 241
Suzuken Co., Ltd. 1,800 68
Suzuki Motor Corp. 35,000 988
Taiyo Nippon Sanso Corp. 4,000 36
Takeda Pharmaceutical Co., Ltd. 7,600 522
Takefuji Corp. (N) 16,780 664
TDK Corp. (N) 6,600 525
Tobu Railway Co., Ltd. 17,000 82
Tokai Rubber Industries, Inc. 2,600 44
Tokyo Electric Power Co., Inc. (The) 14,400 466
Tokyo Electron, Ltd. (N) 1,100 87
Tokyo Gas Co., Ltd. 139,000 739
Tokyo Style Co., Ltd. 1,000 11
Tokyu Corp. (N) 19,000 122
Tokyu Land Corp. 1,000 9
Toppan Printing Co., Ltd. 1,000 11
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Toshiba Corp. 23,000 150
Toyo Seikan Kaisha, Ltd. 1,000 17
Toyobo Co., Ltd. (N) 32,000 97
Toyoda Gosei Co., Ltd. 10,000 231
Toyota Motor Corp. 70,900 4,742
West Japan Railway Co. 21 90
Yamaha Corp. 1,800 38
Yamato Kogyo Co., Ltd. 600 15
------------
72,102
------------
Mexico - 0.8%
America Movil SA de CV
Series L 32,700 1,479
Coca-Cola Femsa SA de CV - ADR 10,790 410
Fomento Economico Mexicano SA de CV - ADR (N) 6,600 764
Telefonos de Mexico SA de CV
Series L 11,330 320
------------
2,973
------------
Netherlands - 2.6%
ABN AMRO Holding NV 27,453 882
Aegon NV 33,874 646
ASML Holding NV (AE) 40,570 1,009
CSM 2,991 115
Euronext NV 900 106
Hagemeyer NV (AE) 50,903 258
Heineken Holding NV 2,816 114
Hunter Douglas NV 1,774 143
ING Groep NV 20,571 912
Koninklijke Ahold NV (AE) 26,305 280
Koninklijke Philips Electronics NV 69,394 2,616
Mittal Steel Co. NV 2,208 93
Rodamco Europe NV 989 132
Royal KPN NV 17,750 252
Royal Numico NV 20,380 1,096
TNT NV 7,780 335
Unilever NV 16,645 455
Univar NV 1,082 61
------------
9,505
------------
Norway - 0.1%
Telenor ASA 26,500 498
------------
Russia - 0.2%
OAO Gazprom - ADR 15,750 725
------------
</Table>
42 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Singapore - 1.1%
CapitaLand, Ltd. (N) 12,000 49
DBS Group Holdings, Ltd. 72,710 1,071
Fraser and Neave, Ltd. 31,000 91
Jardine Cycle & Carriage, Ltd. 8,000 77
Keppel Corp., Ltd. 3,000 34
NatSteel, Ltd. 10,000 10
Pacific Century Regional Developments, Ltd. (AE) 102,000 23
SembCorp Industries, Ltd. 15,880 40
Singapore Airlines, Ltd. 8,000 91
Singapore Petroleum Co., Ltd. 12,000 34
Singapore Telecommunications, Ltd. 639,000 1,367
United Overseas Bank, Ltd. 77,200 977
United Overseas Land, Ltd. 21,000 59
Want Want Holdings, Ltd. 7,000 11
Wing Tai Holdings, Ltd. 12,000 18
------------
3,952
------------
South Africa - 0.1%
Nedbank Group, Ltd. 25,400 484
------------
South Korea - 1.3%
Korea Electric Power Corp. - ADR 17,460 397
KT Corp. - ADR (N) 12,820 325
Samsung Electronics Co., Ltd. 5,330 3,513
SK Telecom Co., Ltd. - ADR (N) 14,760 391
------------
4,626
------------
Spain - 1.7%
Abengoa SA 8,044 295
Banco Bilbao Vizcaya Argentaria SA (N) 65,669 1,581
Banco Santander Central Hispano SA 68,685 1,282
Corporacion Mapfre SA (N) 105,165 475
Endesa SA (N) 4,796 227
Gestevision Telecinco SA (N) 17,914 510
Iberia Lineas Aereas de Espana 61,406 224
Obrascon Huarte Lain SA 700 22
Repsol YPF SA (N) 18,165 628
Repsol YPF SA - ADR (N) 6,779 234
Telefonica SA 31,817 677
Union Fenosa SA (N) 3,837 190
------------
6,345
------------
Sweden - 1.3%
D Carnegie & Co. AB 3,800 82
Electrolux AB 4,100 82
JM AB 9,800 238
Kungsleden AB 5,300 81
Lindex AB (N) 15,000 192
Scania AB Class B (AE) 600 42
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Skandinaviska Enskilda Banken AB Class A 7,000 223
SKF AB Class B 18,400 340
Ssab Svenskt Staal AB Series A 17,100 406
Ssab Svenskt Staal AB Series B 3,400 77
Svenska Cellulosa AB
Series B 9,180 479
Svenska Handelsbanken AB
Series A 6,700 203
Swedish Match AB 56,600 1,058
Telefonaktiebolaget LM Ericsson
Series B 245,180 990
TeliaSonera AB 29,500 242
Volvo AB Class B 2,200 152
------------
4,887
------------
Switzerland - 9.2%
ABB, Ltd. 71,335 1,279
Actelion, Ltd. (AE) 3,228 710
Ciba Specialty Chemicals AG 16,598 1,104
Clariant AG 27,150 407
Credit Suisse Group 21,564 1,509
Geberit AG 186 287
Georg Fischer AG 202 131
Givaudan SA 460 426
Julius Baer Holding AG 15,557 1,713
Kudelski SA 2,852 107
Logitech International SA (AE) 70,322 2,029
Nestle SA 18,962 6,738
Nobel Biocare Holding AG 3,300 976
Novartis AG 27,090 1,562
Phonak Holding AG 2,182 174
Roche Holding AG 27,449 4,922
Sulzer AG 218 248
Swatch Group AG 17,531 784
Swiss Reinsurance 34,350 2,920
Swisscom AG 1,235 467
Syngenta AG (AE) 1,962 365
UBS AG 84,212 5,118
Zurich Financial Services AG 611 164
------------
34,140
------------
Taiwan - 0.5%
HON HAI Precision Industry Co., Ltd. 184,400 1,316
United Microelectronics Corp. - ADR (N) 142,914 499
------------
1,815
------------
</Table>
Non-U.S. Fund 43
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Thailand - 0.2%
Bangkok Bank PCL 168,900 548
------------
United Kingdom - 19.9%
3i Group PLC 969 19
Admiral Group PLC 11,019 237
Alliance Boots PLC 107,429 1,762
Amvescap PLC 3,339 39
Anglo American PLC 16,576 808
ARM Holdings PLC 306,655 755
AstraZeneca PLC 5,142 276
Aviva PLC 41,264 664
Barclays PLC 22,493 321
Berkeley Group Holdings PLC (AE) 4,051 136
BG Group PLC 66,944 908
BHP Billiton PLC 96,219 1,761
BP PLC 250,320 2,781
Bradford & Bingley PLC 224 2
British Airways PLC (AE) 37,286 385
British American Tobacco PLC 8,538 239
British Energy Group PLC (AE) 24,924 265
British Land Co. PLC 26,501 889
Brixton PLC 936 11
BT Group PLC 120,732 713
Cadbury Schweppes PLC 67,658 724
Carnival PLC 6,235 316
Carphone Warehouse Group PLC (N) 171,271 1,053
Centrica PLC 114,806 797
Charter PLC (AE) 17,929 318
Compass Group PLC 6,023 34
Corus Group PLC 1,075 11
Davis Service Group PLC 9,300 92
De La Rue PLC 11,562 146
Debenhams PLC New 328,005 1,219
Diageo PLC 111,269 2,184
easyJet PLC (AE) 1,402 17
EMI Group PLC 229,968 1,193
Firstgroup PLC 36,041 406
Friends Provident PLC 96,700 411
Galiform PLC 4,040 11
Gallaher Group PLC 2,152 48
GlaxoSmithKline PLC 185,415 4,879
Great Portland Estates PLC 902 12
Hammerson PLC 342 11
HBOS PLC 72,302 1,603
HMV Group PLC 24,917 70
Home Retail Group 49,427 397
HSBC Holdings PLC 132,756 2,420
HSBC Holdings PLC (N) 2,400 44
Inchcape PLC 39,272 389
Invensys PLC (AE) 19,963 108
Investec PLC 167 2
ITV PLC 3,341 7
J Sainsbury PLC 54,290 435
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Kazakhmys PLC New 460 10
Kesa Electricals PLC 216,122 1,436
Ladbrokes PLC 155,206 1,271
Land Securities Group PLC 4,351 198
Legal & General Group PLC 128,157 395
Liberty International PLC 78 2
Lloyds TSB Group PLC 73,979 828
Man Group PLC 128,952 1,320
Next PLC 40,789 1,438
Old Mutual PLC 118,560 404
Pearson PLC 31,491 476
Premier Farnell PLC 17,297 67
Reckitt Benckiser PLC 97,826 4,471
Reed Elsevier PLC 77,100 846
Rentokil Initial PLC 295,490 959
Resolution PLC 815 10
RHM PLC New 263 2
Rio Tinto PLC 11,583 616
Rolls-Royce Group PLC 17,353 152
Royal & Sun Alliance Insurance Group PLC 144,112 430
Royal Bank of Scotland Group PLC 53,311 2,080
Royal Dutch Shell PLC Royal Dutch Shell PLC
Class A 113 3,957
Royal Dutch Shell PLC Class B 17,174 602
SABMiller PLC 41,251 949
Scottish & Southern Energy PLC 4,184 127
Scottish Power PLC 6,492 95
Smiths Group PLC 103,232 2,004
Standard Chartered PLC 8,724 255
Standard Life PLC New (AE) 6,347 37
Tesco PLC 676,636 5,359
Trinity Mirror PLC 93,690 861
Unilever PLC 63,036 1,762
Vodafone Group PLC 878,782 2,435
William Hill PLC 186,757 2,311
Wilson Bowden PLC 46 2
WPP Group PLC 140,501 1,900
Xstrata PLC 22,388 1,118
------------
73,513
------------
United States - 0.2%
Synthes, Inc. 4,846 578
------------
TOTAL COMMON STOCKS
(cost $275,656) 338,542
------------
</Table>
44 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
PREFERRED STOCKS - 0.2%
Germany - 0.2%
Volkswagen AG 7,199 537
------------
Italy - 0.0%
Unipol SpA 43,298 140
------------
TOTAL PREFERRED STOCKS
(cost $654) 677
------------
</Table>
<Table>
<Caption>
NOTIONAL
AMOUNT
$
------------
OPTIONS PURCHASED - 0.1%
Belgium - 0.1%
Bel 20 Index Futures
Jan 2007 4,306.38 (EUR)
Call (31) 1,762 241
------------
Hong Kong - 0.0%
Hang Seng Index Futures
Jan 2007 19,406.28 (HKD)
Call (19) 2,370 137
------------
Switzerland - 0.0%
Swiss Market Index Futures
Mar 2007 8,667.21 (CHF)
Put (10) 711 41
------------
TOTAL OPTIONS PURCHASED
(cost $306) 419
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 7.5%
United States - 7.5%
Russell Investment Company
Money Market Fund 25,707,000 25,707
United States Treasury Bills (z)(sec.)
4.928% due 03/15/07 700 692
4.973% due 03/15/07 1,500 1,480
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $27,885) 27,879
------------
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
OTHER SECURITIES - 17.0%
State Street Securities Lending Quality Trust
(X) 62,768,818 62,769
------------
TOTAL OTHER SECURITIES
(cost $62,769) 62,769
------------
TOTAL INVESTMENTS - 116.3%
(identified cost $367,270) 430,286
OTHER ASSETS AND LIABILITIES,
NET - (16.3%) (60,402)
------------
NET ASSETS - 100.0% 369,884
============
</Table>
A portion of the portfolio has been fair valued as of period end.
See accompanying notes which are an integral part of the financial statements.
Non-U.S. Fund 45
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
UNREALIZED
NOTIONAL APPRECIATION
FUTURES CONTRACTS AMOUNT (DEPRECIATION)
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Long Positions
AEX Index (Netherlands)
expiration date 01/07 (52) 6,811 146
CAC-40 Index (France)
expiration date 01/07 (38) 2,782 7
DAX Index (Germany)
expiration date 03/07 (24) 5,263 41
EUR STOXX 50 Index (EMU) expiration date 03/07
(90) 4,933 4
FTSE-100 Index (UK)
expiration date 03/07 (40) 4,866 (37)
IBEX Plus Indes (Spain)
expiration date 01/07 (1) 186 (1)
TOPIX Index (Japan)
expiration date 03/07 (98) 13,838 449
Short Positions
CAC-40 Index (France)
expiration date 01/07 (12) 879 (16)
FTSE-100 Index (UK)
expiration date 03/07 (49) 5,961 (26)
MIB-30 (Italy)
expiration date 03/07 (12) 3,304 (42)
OMX S30 Index (Sweden)
expiration date 01/07 (162) 2,731 (33)
SPI 200 Index (Australia)
expiration date 03/07 (38) 4,228 (41)
---------------
Total Unrealized Appreciation (Depreciation) on
Open Futures Contracts (a) 451
===============
</Table>
<Table>
<Caption>
NOTIONAL MARKET
OPTIONS WRITTEN AMOUNT VALUE
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Belgium
Bel 20 Index Futures
Jan 2007 4,306.38 (EUR) Put (31) 1,762 (205)
Hong Kong
Hang Seng Index Futures
Jan 2007 19,406.28 (HKD) Put (19) 2,370 (61)
Switzerland
Swiss Market Index Futures
Mar 2007 8,667.21 (CHF) Call (10) 711 (51)
---------------
Total Liability for Options Written
(premiums received $306) (317)
===============
</Table>
See accompanying notes which are an integral part of the financial statements.
46 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
USD 146 AUD 187 03/21/07 1
USD 466 AUD 597 03/21/07 4
USD 579 AUD 742 03/21/07 6
USD 883 AUD 1,131 03/21/07 8
USD 2,139 AUD 2,742 03/21/07 20
USD 67 CHF 81 03/21/07 --
USD 282 CHF 340 03/21/07 (1)
USD 1,200 CHF 1,446 03/21/07 (5)
USD 2,921 CHF 3,519 03/21/07 (12)
USD 5,670 CHF 6,824 03/21/07 (28)
USD 6,395 CHF 7,702 03/21/07 (27)
USD 46 DKK 263 03/21/07 --
USD 79 DKK 444 03/21/07 --
USD 135 EUR 103 01/02/07 --
USD 3 EUR 2 01/04/07 --
USD 267 EUR 200 03/20/07 (2)
USD 402 EUR 300 03/20/07 (4)
USD 659 EUR 500 03/20/07 3
USD 664 EUR 500 03/20/07 (1)
USD 668 EUR 500 03/20/07 (6)
USD 1,335 EUR 1,000 03/20/07 (10)
USD 2,736 EUR 2,050 03/20/07 (20)
USD 7,224 EUR 5,500 03/20/07 63
USD 7,342 EUR 5,500 03/20/07 (55)
USD 10,942 EUR 8,200 03/20/07 (78)
USD 2,182 EUR 1,652 03/21/07 6
USD 4,018 EUR 3,043 03/21/07 14
USD 6,040 EUR 4,574 03/21/07 20
USD 200 GBP 102 01/02/07 --
USD 392 GBP 200 03/20/07 --
USD 393 GBP 200 03/20/07 (1)
USD 491 GBP 250 03/20/07 (1)
USD 588 GBP 300 03/20/07 (1)
USD 789 GBP 400 03/20/07 (5)
USD 1,572 GBP 800 03/20/07 (5)
USD 3,904 GBP 2,000 03/20/07 13
USD 5,305 GBP 2,700 03/20/07 (17)
USD 7,268 GBP 3,700 03/20/07 (21)
USD 1,138 GBP 580 03/21/07 (2)
USD 2,842 GBP 1,449 03/21/07 (4)
USD 2,849 GBP 1,452 03/21/07 (5)
USD 3,299 GBP 1,682 03/21/07 (4)
USD 5,937 GBP 3,026 03/21/07 (10)
</Table>
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
USD 13 HKD 103 03/21/07 --
USD 48 HKD 368 03/21/07 --
USD 79 HKD 613 03/21/07 --
USD 105 HKD 816 03/21/07 --
USD 424 JPY 50,000 03/20/07 1
USD 432 JPY 50,000 03/20/07 (8)
USD 641 JPY 75,000 03/20/07 (4)
USD 1,318 JPY 150,000 03/20/07 (44)
USD 1,759 JPY 200,000 03/20/07 (61)
USD 2,460 JPY 280,000 03/20/07 (82)
USD 4,285 JPY 500,000 03/20/07 (39)
USD 7,381 JPY 840,000 03/20/07 (246)
USD 111 JPY 12,896 03/22/07 (1)
USD 68 SEK 462 03/21/07 --
USD 2,665 SEK 18,237 03/21/07 13
USD 2,835 SEK 19,429 03/21/07 17
USD 4,619 SEK 31,643 03/21/07 27
USD 5,170 SEK 35,389 03/21/07 25
USD 33 SGD 51 03/21/07 --
USD 35 SGD 54 03/21/07 --
USD 802 SGD 1,231 03/21/07 4
USD 1,084 SGD 1,663 03/21/07 4
USD 1,428 SGD 2,191 03/21/07 6
USD 4,129 SGD 6,336 03/21/07 19
AUD 54 USD 42 03/21/07 --
AUD 328 USD 257 03/21/07 (1)
AUD 813 USD 635 03/21/07 (5)
AUD 826 USD 645 03/21/07 (6)
AUD 1,094 USD 854 03/21/07 (8)
AUD 4,244 USD 3,315 03/21/07 (28)
CAD 3 USD 3 01/02/07 --
CHF 2,386 USD 1,980 03/21/07 8
CHF 11,469 USD 9,523 03/21/07 40
DKK 41 USD 7 03/21/07 --
DKK 59 USD 10 03/21/07 --
DKK 258 USD 46 03/21/07 --
DKK 799 USD 141 03/21/07 --
EUR 150 USD 197 01/02/07 (1)
EUR 13 USD 18 01/02/07 --
EUR 16 USD 21 01/03/07 --
EUR 139 USD 183 01/03/07 (1)
EUR 13 USD 18 01/03/07 --
EUR 300 USD 398 03/20/07 1
</Table>
See accompanying notes which are an integral part of the financial statements.
Non-U.S. Fund 47
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
EUR 500 USD 668 03/20/07 5
EUR 900 USD 1,202 03/20/07 9
EUR 7,200 USD 9,611 03/20/07 72
EUR 8,700 USD 11,520 03/20/07 (7)
EUR 53 USD 70 03/21/07 --
EUR 239 USD 315 03/21/07 (1)
EUR 846 USD 1,117 03/21/07 (4)
EUR 5,315 USD 7,019 03/21/07 (23)
EUR 5,699 USD 7,528 03/21/07 (22)
GBP 40 USD 78 01/02/07 --
GBP 21 USD 42 01/02/07 --
GBP 52 USD 103 01/03/07 --
GBP 5 USD 9 01/03/07 --
GBP 41 USD 81 01/04/07 --
GBP 270 USD 530 03/20/07 1
GBP 600 USD 1,178 03/20/07 3
GBP 3,300 USD 6,497 03/20/07 34
GBP 3,600 USD 7,073 03/20/07 22
GBP 129 USD 253 03/21/07 --
GBP 286 USD 562 03/21/07 2
GBP 1,132 USD 2,220 03/21/07 4
GBP 4,984 USD 9,777 03/21/07 16
HKD 218 USD 28 01/02/07 --
HKD 179 USD 23 01/02/07 --
HKD 376 USD 49 03/21/07 --
HKD 776 USD 100 03/21/07 --
JPY 30,000 USD 263 03/20/07 9
</Table>
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
JPY 45,000 USD 395 03/20/07 13
JPY 150,000 USD 1,320 03/20/07 46
JPY 250,000 USD 2,197 03/20/07 73
JPY 870,000 USD 7,450 03/20/07 62
JPY 9,458 USD 81 03/22/07 1
JPY 13,588 USD 117 03/22/07 1
JPY 58,431 USD 502 03/22/07 6
JPY 68,279 USD 583 03/22/07 3
JPY 74,537 USD 640 03/22/07 7
JPY 114,241 USD 981 03/22/07 10
JPY 262,233 USD 2,253 03/22/07 25
JPY 321,403 USD 2,762 03/22/07 32
JPY 620,586 USD 5,330 03/22/07 59
SEK 1,388 USD 203 03/21/07 (1)
SEK 2,585 USD 377 03/21/07 (2)
SEK 9,725 USD 1,420 03/21/07 (7)
SEK 16,385 USD 2,391 03/21/07 (14)
SGD 95 USD 62 03/21/07 --
SGD 120 USD 78 03/21/07 --
SGD 1,736 USD 1,132 03/21/07 (5)
SGD 1,887 USD 1,230 03/21/07 (6)
SGD 2,052 USD 1,338 03/21/07 (6)
--------------
Total Unrealized Appreciation (Depreciation) on Open
Foreign Currency Exchange Contracts (120)
==============
</Table>
<Table>
<Caption>
INDEX SWAP CONTRACTS
- ---------------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
FUND RECEIVES COUNTER NOTIONAL FUND PAYS TERMINATION (DEPRECIATION)
UNDERLYING SECURITY PARTY AMOUNT FLOATING RATE DATE $
- ------------------------------ ---------------- --------- ----------------------- -------------- ----------------
MSCI Belgium Local Net 1 Month EUR LIBOR
Total Return Index Merrill Lynch EUR 949 plus 0.15% 06/20/07 --
MSCI Belgium Local Net 1 Month EUR LIBOR
Total Return Index Merrill Lynch EUR 288 plus 0.15% 09/19/07 --
----------------
Total Unrealized Appreciation (Depreciation) on Open Index Swap Contracts --
================
</Table>
See accompanying notes which are an integral part of the financial statements.
48 Non-U.S. Fund
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
% OF MARKET
INDUSTRY DIVERSIFICATION NET VALUE
(UNAUDITED) ASSETS $
- -----------------------------------------------------------------------------
Auto and Transportation 6.0 22,338
Consumer Discretionary 10.8 39,910
Consumer Staples 10.0 37,036
Financial Services 21.7 80,232
Health Care 6.4 23,547
Integrated Oils 4.6 17,025
Materials and Processing 10.8 40,211
Miscellaneous 1.1 3,884
Other Energy 0.5 1,900
Producer Durables 6.7 24,846
Technology 5.6 20,563
Utilities 7.5 27,727
Options Purchased 0.1 419
Short-Term Investments 7.5 27,879
Other Securities 17.0 62,769
------------ ------------
Total Investments 116.3 430,286
Other Assets and Liabilities, Net (16.3) (60,402)
------------ ------------
Net Assets 100.0 369,884
============ ============
<Caption>
GEOGRAPHIC DIVERSIFICATION % OF MARKET
(UNAUDITED) ASSETS $
- -----------------------------------------------------------------------------
Africa 0.1 484
Asia 7.0 26,007
Europe 41.5 153,351
Japan 19.5 72,102
Latin America 2.0 7,400
Middle East 0.1 537
Other Regions 9.2 34,123
United Kingdom 19.9 73,513
Other Securities 17.0 62,769
------------ ------------
Total Investments 116.3 430,286
Other Assets and Liabilities, Net (16.3) (60,402)
------------ ------------
Net Assets 100.0 369,884
============ ============
</Table>
See accompanying notes which are an integral part of the financial statements.
Non-U.S. Fund 49
RUSSELL INVESTMENT FUNDS
NON-U.S. FUND
PRESENTATION OF PORTFOLIO HOLDINGS -- DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
% OF
NET
CATEGORIES ASSETS
- -----------------------------------------------------------------
Australia 2.7
Austria 0.6
Belgium 0.8
Bermuda 0.7
Brazil 0.3
Canada 1.5
Cayman Island 0.2
Denmark 0.3
Finland 0.9
France 13.1
Germany 6.4
Greece 0.2
Hong Kong 1.1
Indonesia 0.2
Ireland 0.6
Israel 0.1
Italy 3.1
Japan 19.5
Mexico 0.8
Netherlands 2.6
Norway 0.1
Russia 0.2
Singapore 1.1
South Africa 0.1
South Korea 1.3
Spain 1.7
Sweden 1.3
Switzerland 9.2
Taiwan 0.5
Thailand 0.2
United Kingdom 19.9
United States 0.2
Preferred Stocks 0.2
Options Purchased 0.1
Short-Term Investments 7.5
Other Securities 17.0
---------------
Total Investments 116.3
Other Assets and Liabilities Net (16.3)
---------------
100.0
===============
Futures Contracts 0.1
Options Written (0.1)
Foreign Currency Exchange Contracts (--)*
Index Swap Contracts --*
</Table>
* Less than .05% of net assets.
See accompanying notes which are an integral part of the financial statements.
50 Non-U.S. Fund
(This page intentionally left blank)
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
FTSE NAREIT EQUITY REITS
REAL ESTATE SECURITIES FUND INDEX**
--------------------------- ------------------------
Inception* 10000 10000
1999 9274 9153
2000 11800 11566
2001 12725 13177
2002 13209 13681
2003 18124 18761
2004 24445 24685
2005 27612 27687
2006 37507 37394
</Table>
Real Estate Securities Fund
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 35.84%
5 Years 24.13%sec.
Inception* 18.81%sec.
</Table>
FTSE NAREIT Equity REITs**
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 35.06%
5 Years 23.20%sec.
Inception* 18.76%sec.
</Table>
52 Real Estate Securities Fund
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Real Estate Securities Fund (the "Fund") allocates most of its assets among
multiple money managers. Russell Investment Management Company ("RIMCo"), as the
Fund's manager, may change the allocation of the Fund's assets among money
managers at any time. An exemptive order from the Securities and Exchange
Commission (SEC) permits the Fund to engage or terminate a money manager at any
time, subject to approval by the Fund's Board of Trustees (the "Board") without
a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is
required to notify its shareholders within 60 days of when a money manager
begins providing services.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide current income and long term capital growth.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006?
For the fiscal year ended December 31, 2006, the Real Estate Securities Fund
gained 35.84%. This compared to the FTSE NAREIT Equity REITs Index, which gained
35.06% during the same period. The Fund's performance includes operating
expenses, whereas Index returns are unmanaged and do not include expenses of any
kind.
For the year ended December 31, 2006, the Lipper(R) Real Estate Funds Average
returned 34.30%. This result serves as a peer comparison and is expressed net of
operating expenses.
HOW DID THE MARKET CONDITIONS DESCRIBED IN THE MARKET SUMMARY REPORT AFFECT THE
FUND'S PERFORMANCE?
During 2006, the money managers positioned the Fund to capitalize on improving
real estate market fundamentals. The largest overweight positions were in
sectors with strong earnings growth: lodging/resorts, regional malls,
apartments, office and industrial. As more fully described below, sector
positioning was a positive contributor to the Fund's performance during the
fiscal year.
The Fund maintained a primary focus on the larger capitalization and more liquid
REITs during the fiscal year. As this segment of the market outperformed the
broader REIT market, the Fund benefited from this positioning.
HOW DID THE INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND AND ITS
MONEY MANAGERS AFFECT ITS PERFORMANCE?
AEW Management and Advisors, L.P. pursues a value-oriented style that focuses on
identifying companies that they believe are mispriced relative to underlying
real estate net asset value. AEW's portfolio tends to track relatively closely
to the benchmark sector weights. AEW outperformed the benchmark during the
fiscal year due to strong stock selection and sector selection. Stock selection
was strongest in the regional malls and diversified sectors. This was partially
offset by weak stock selection in the specialty sector. Sector selection was
also positive as an overweight position in the apartments sector and underweight
positions in the specialty, manufactured homes and freestanding retail sectors
boosted performance. This was partially offset by an overweight position in the
underperforming mixed industrial/office sector and an underweight position in
the outperforming health care sector.
INVESCO Institutional (N.A.), Inc. maintains a broadly diversified portfolio
with exposure to all major property sectors. Their investment style incorporates
fundamental property market research and bottom-up quantitative securities
analysis. INVESCO outperformed the benchmark during the fiscal year due to
contributions from stock selection and, to a lesser extent, sector selection.
Stock selection was strongest in the office, specialty, regional malls and
diversified sectors. Positive sector selection was driven by an overweight
position in the office sector and an underweight position in the specialty
sector. An overweight position in the regional malls sector partially offset
these positive effects.
RREEF America, L.L.C.'s style emphasizes a top-down approach to property sector
weights based on an assessment of property market fundamentals. RREEF
outperformed the benchmark during the fiscal year due to contributions from both
stock selection and sector selection. Stock selection was strongest in the
office, regional malls, apartments and diversified sectors. This was partially
offset by weaker stock selection in the shopping centers and health care
sectors. Sector selection was positive, driven by underweight positions in the
specialty and mixed industrial/office sectors.
Heitman Real Estate Securities, LLC manages a concentrated portfolio with a
bottom-up approach to stock selection focusing on companies that they believe
have attractive valuations relative to growth prospects. Heitman underperformed
the benchmark during the fiscal year. Overall, Heitman's stock selection was a
negative contributor to performance, particularly in the office, apartments and
self storage sectors. Favorable stock selection in the regional malls sector
partially offset these adverse effects.
DESCRIBE ANY CHANGES TO THE FUND'S STRUCTURE OR THE MONEY MANAGER LINE-UP.
Heitman's target weight was increased.
Real Estate Securities Fund 53
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
Money Managers as of Styles
December 31, 2006
<Table>
AEW Management and Advisors, L.P. Value
Heitman Real Estate Securities, LLC Growth
INVESCO Institutional (N.A.), Inc.,
through its INVESCO Real Estate
Division Market-Oriented
RREEF America, L.L.C. Market-Oriented
</Table>
The views expressed in this report reflect those of the portfolio managers only
through the end of the period covered by the report. These views do not
necessarily represent the views of Russell Investment Management Company
(RIMCo), or any other person in RIMCo or any other affiliated organization.
These views are subject to change at any time based upon market conditions or
other events, and RIMCo disclaims any responsibility to update the views
contained herein. These views should not be relied on as investment advice and,
because investment decisions for Russell Investment Funds (RIF) are based on
numerous factors, should not be relied on as an indication of investment
decisions of any (RIF) Fund.
------------------------------
* The Fund commenced operations on April 30, 1999.
** FTSE NAREIT Equity REITS Index is an index composed of all the data based
on the last closing price of the month for all tax-qualified REITs listed
on the New York Stock Exchange, American Stock Exchange, and the NASDAQ
National Market System. The data is market value-weighted. The
total-return calculation is based upon whether it is a 1-month, 3-months
or 12-months. Only those REITs listed for the entire period are used in
the total return calculation.
sec. Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
54 Real Estate Securities Fund
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
SHAREHOLDER EXPENSE EXAMPLE -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FUND EXPENSES
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING EACH FUND'S
EXPENSE EXAMPLE, WHICH APPEARS ON EACH FUND'S INDIVIDUAL PAGE IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
A FUND.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The Example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
indicated, which for this Fund is from July 1, 2006 to December 31, 2006.
ACTUAL EXPENSES
The information in the table under the heading "Actual Performance" provides
information about actual account values and actual expenses. You may use the
information in this column, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first column in the row entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information in the table under the heading "Hypothetical Performance (5%
return before expenses)" provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs. Therefore, the
information under the heading "Hypothetical Performance (5% return before
expenses)" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
ACTUAL (5% RETURN
PERFORMANCE BEFORE EXPENSES)
-------------- ----------------
Beginning Account Value
July 1, 2006 $ 1,000.00 $ 1,000.00
Ending Account Value
December 31, 2006 $ 1,191.90 $ 1,020.67
Expenses Paid During
Period* $ 4.97 $ 4.58
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 0.90%
(representing the one-half year period annualized), multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half
year period). Reflects amounts waived and/or reimbursed by the investment
adviser.
Real Estate Securities Fund 55
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
COMMON STOCKS - 96.4%
Apartments - 18.6%
American Campus Communities, Inc. (o) 16,500 470
Apartment Investment & Management Co. Class A
(o) 111,825 6,264
Archstone-Smith Trust (o)(N) 514,122 29,927
AvalonBay Communities, Inc. (o) 202,850 26,381
BRE Properties, Inc. Class A (o)(N) 50,700 3,297
Camden Property Trust (o) 108,000 7,976
Equity Residential (o)(N) 395,000 20,046
Essex Property Trust, Inc. (o)(N) 71,700 9,267
GMH Communities Trust (o)(N) 235,600 2,391
Home Properties, Inc. (o) 19,800 1,174
Mid-America Apartment Communities, Inc. (o) 34,900 1,998
United Dominion Realty Trust, Inc. (o)(N) 219,200 6,968
------------
116,159
------------
Diversified - 6.2%
Colonial Properties Trust (o) 44,100 2,067
iStar Financial, Inc. (o) 35,500 1,698
Spirit Finance Corp. (o) 78,000 973
Vornado Realty Trust (o) 282,564 34,331
------------
39,069
------------
Free Standing Retail - 0.2%
Realty Income Corp. (o)(N) 37,500 1,039
------------
Health Care - 4.5%
Health Care Property Investors, Inc. (o)(N) 166,800 6,142
Health Care REIT, Inc. (o)(N) 72,750 3,129
Healthcare Realty Trust, Inc. (o)(N) 53,800 2,127
LTC Properties, Inc. (o)(N) 63,650 1,738
Nationwide Health Properties, Inc. (o) 219,750 6,640
Omega Healthcare Investors, Inc. (o) 80,800 1,432
Ventas, Inc. (o) 159,300 6,742
------------
27,950
------------
Industrial - 7.0%
AMB Property Corp. (o) 169,300 9,923
DCT Industrial Trust, Inc. (o) 111,200 1,312
EastGroup Properties, Inc. (o) 42,700 2,287
First Potomac Realty Trust (o) 40,600 1,182
ProLogis (o) 479,500 29,139
------------
43,843
------------
Lodging/Resorts - 8.4%
Ashford Hospitality Trust, Inc. (o) 57,000 710
DiamondRock Hospitality Co. (o) 136,050 2,450
FelCor Lodging Trust, Inc. (o)(N) 59,800 1,306
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Hilton Hotels Corp. 240,850 8,406
Hospitality Properties Trust (o) 18,100 860
Host Hotels & Resorts, Inc. (o)(N) 1,043,663 25,622
LaSalle Hotel Properties (o)(N) 73,350 3,363
Starwood Hotels & Resorts Worldwide, Inc. (o) 153,130 9,571
------------
52,288
------------
Manufactured Homes - 0.4%
Equity Lifestyle Properties, Inc. (o)(N) 51,350 2,795
------------
Mixed Industrial/Office - 1.7%
Duke Realty Corp. (o) 23,200 949
Liberty Property Trust (o)(N) 159,200 7,823
PS Business Parks, Inc. (o) 27,500 1,944
------------
10,716
------------
Office - 17.4%
Alexandria Real Estate Equities, Inc. (o)(N) 66,900 6,717
American Financial Realty Trust (o)(N) 100,200 1,146
BioMed Realty Trust, Inc. (o) 82,400 2,357
Boston Properties, Inc. (o) 260,000 29,089
Brandywine Realty Trust (o)(N) 186,986 6,217
Brookfield Properties Corp. 155,700 6,124
Corporate Office Properties Trust (o)(N) 38,500 1,943
Douglas Emmett, Inc. (o)(N) 39,500 1,050
Equity Office Properties Trust (o) 422,850 20,369
Highwoods Properties, Inc. (o) 79,000 3,220
HRPT Properties Trust (o) 164,000 2,025
Kilroy Realty Corp. (o) 72,200 5,632
Mack-Cali Realty Corp. (o)(N) 47,300 2,412
Maguire Properties, Inc. (o) 21,600 864
Parkway Properties, Inc. (o)(N) 11,700 597
SL Green Realty Corp. (o) 144,850 19,233
------------
108,995
------------
Regional Malls - 14.4%
CBL & Associates Properties, Inc. (o) 31,900 1,383
General Growth Properties, Inc. (o) 212,700 11,109
Macerich Co. (The) (o) 203,000 17,574
Simon Property Group, Inc. (o) 493,050 49,941
Taubman Centers, Inc. (o) 195,950 9,966
------------
89,973
------------
</Table>
56 Real Estate Securities Fund
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Self Storage - 5.1%
Extra Space Storage, Inc. (o) 159,200 2,907
Public Storage, Inc. (o) 266,749 26,008
Sovran Self Storage, Inc. (o) 25,400 1,455
U-Store-It Trust (o) 69,600 1,430
------------
31,800
------------
Shopping Centers - 10.6%
Cedar Shopping Centers, Inc. (o) 32,400 515
Developers Diversified Realty Corp. (o)(N) 231,300 14,560
Federal Realty Investors Trust (o)(N) 194,500 16,533
Kimco Realty Corp. (o)(N) 185,900 8,356
Kite Realty Group Trust (o) 40,900 762
Regency Centers Corp. (o)(N) 282,600 22,091
Tanger Factory Outlet Centrs (o) 46,550 1,819
Weingarten Realty Investors (o)(N) 39,100 1,803
------------
66,439
------------
Specialty - 1.9%
Digital Realty Trust, Inc. (o) 278,500 9,533
Plum Creek Timber Co., Inc. (o) 55,000 2,192
------------
11,725
------------
TOTAL COMMON STOCKS
(cost $375,046) 602,791
------------
SHORT-TERM INVESTMENTS - 3.2%
Russell Investment Company
Money Market Fund 19,676,000 19,676
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $19,676) 19,676
------------
OTHER SECURITIES - 12.6%
State Street Securities Lending
Quality Trust (X) 79,066,361 79,066
------------
TOTAL OTHER SECURITIES
(cost $79,066) 79,066
------------
TOTAL INVESTMENTS - 112.2%
(identified cost $473,788) 701,533
OTHER ASSETS AND LIABILITIES,
NET - (12.2%) (76,056)
------------
NET ASSETS - 100.0% 625,477
============
</Table>
See accompanying notes which are an integral part of the financial statements.
Real Estate Securities Fund 57
RUSSELL INVESTMENT FUNDS
REAL ESTATE SECURITIES FUND
PRESENTATION OF PORTFOLIO HOLDINGS -- DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
% OF
NET
CATEGORIES ASSETS
- --------------------------------------------------------------
Apartments 18.6
Diversified 6.2
Free Standing Retail 0.2
Health Care 4.5
Industrial 7.0
Lodging/Resorts 8.4
Manufactured Homes 0.4
Mixed Industrial/Office 1.7
Office 17.4
Regional Malls 14.4
Self Storage 5.1
Shopping Centers 10.6
Specialty 1.9
Short-Term Investments 3.2
Other Securities 12.6
------------
Total Investments 112.2
Other Assets and Liabilities, Net (12.2)
------------
100.0
============
</Table>
See accompanying notes which are an integral part of the financial statements.
58 Real Estate Securities Fund
(This page intentionally left blank)
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
LEHMAN BROTHERS AGGREGATE BOND
CORE BOND FUND INDEX**
-------------- ------------------------------
Inception* 10000 10000
1997 10973 11012
1998 11784 11969
1999 11712 11871
2000 12883 13251
2001 13837 14369
2002 15060 15843
2003 15986 16493
2004 16732 17209
2005 17068 17627
2006 17703 18391
</Table>
Core Bond Fund
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 3.72%
5 Years 5.05%sec.
Inception* 5.88%sec.
</Table>
Lehman Brothers Aggregate Bond Index**
- ----------------------------------------------------------
<Table>
<Caption>
PERIODS ENDED TOTAL
12/31/06 RETURN
- --------------------------- ---------------------------
1 Year 4.33%
5 Years 5.06%sec.
Inception* 6.29%sec.
</Table>
60 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Core Bond Fund (the "Fund") allocates most of its assets among multiple
money managers. Russell Investment Management Company ("RIMCo"), as the Fund's
manager, may change the allocation of the Fund's assets among money managers at
any time. An exemptive order from the Securities and Exchange Commission (SEC)
permits the Fund to engage or terminate a money manager at any time, subject to
approval by the Fund's Board of Trustees (the "Board") without a shareholder
vote. Pursuant to the terms of the exemptive order, the Fund is required to
notify its shareholders within 60 days of when a money manager begins providing
services.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide current income and the preservation of capital.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006?
For the fiscal year ended December 31, 2006, the Core Bond Fund gained 3.72%.
This compared to its benchmark the Lehman Brothers Aggregate Bond Index, which
gained 4.33%. The Fund's performance includes operating expenses, whereas Index
returns are unmanaged and do not include expenses of any kind.
For the year ended December 31, 2006, the Lipper(R) BBB Rated Corp Debt Funds
Average returned 3.74%. This result serves as a peer comparison and is expressed
net of operating expenses.
HOW DID THE MARKET CONDITIONS DESCRIBED IN THE MARKET SUMMARY REPORT AFFECT THE
FUND'S PERFORMANCE?
The Federal Reserve's target interest rate decisions were among the most notable
market movers of 2006. Ever adapting responses of the Treasury yield curve to
newly-released economic data created a challenging active management
environment. In order to add value through duration and/or yield curve
strategies in 2006, managers had to time their positioning precisely.
The year was characterized by tight spreads coupled with a market reach for
yield. Spread sectors (such as corporate and mortgage sectors) benefited from
this trend with additional returns accruing to higher risk portions of the
market. The Fund's exposure to emerging market debt and high yield debt
contributed positively to performance as these sectors benefited from general
market trends, as well as strong commodity pricing and credit rating upgrades.
HOW DID THE INVESTMENT STRATEGIES AND TECHNIQUES EMPLOYED BY THE FUND AND ITS
MONEY MANAGERS AFFECT ITS PERFORMANCE?
Duration and yield curve management detracted slightly from the Fund's
performance. Both Bear Stearns Asset Management, Inc. and Pacific Investment
Management Co., LLC (PIMCO) began the year long duration, which detracted from
performance during the first two quarters as the yield curve shifted up. The
addition of Goldman Sachs Asset Management, L.P. as a money manager in the Fund
added a short duration perspective to the Fund's multi-manager lineup. The third
quarter gains by Bear Stearns and PIMCO were offset by Goldman Sachs' diverging
view on duration. Bear Stearns moved to a shorter duration position by the end
of the year, which proved beneficial as the yield curve shifted up in the final
quarter. Overall, the managers' duration positioning detracted slightly from
performance in this difficult active management environment.
The Fund performed best in the mortgage sector. From a sector perspective,
mortgages outperformed equivalent-duration Treasuries for the year. Even during
periods when the sector underperformed, however, the Fund's money managers added
value through strong security selection.
The Fund continued to be defensively positioned with respect to extended sectors
(such as emerging markets and high yield sectors) in the face of historically
low spreads. That being said, the money managers' modest exposure overweight to
high yield and emerging market debt contributed positively to performance as
well.
Investment in Treasury Inflation-Protected Securities (TIPS) detracted from
performance for the government sector over the year. Economic data showed that
inflation continued to be contained--while stretching the Fed's comfort level -
which was detrimental to TIPS' performance.
DESCRIBE ANY CHANGES TO THE FUND'S STRUCTURE OR THE MONEY MANAGER LINE-UP.
Goldman Sachs was added as a money manager of the Fund on June 1, 2006 and the
allocations to Bear Stearns and PIMCO were decreased.
Core Bond Fund 61
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION, CONTINUED -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
Money Managers as of Styles
December 31, 2006
<Table>
Bear Stearns
Asset Management, Inc. Broad Market-Sector Rotation
Goldman Sachs
Asset Management, L.P. Market-Oriented
Pacific Investment
Management Company, LLC Fully Discretionary
</Table>
The views expressed in this report reflect those of the portfolio managers only
through the end of the period covered by the report. These views do not
necessarily represent the views of Russell Investment Management Company
(RIMCo), or any other person in RIMCo or any other affiliated organization.
These views are subject to change at any time based upon market conditions or
other events, and RIMCo disclaims any responsibility to update the views
contained herein. These views should not be relied on as investment advice and,
because investment decisions for Russell Investment Funds (RIF) are based on
numerous factors, should not be relied on as an indication of investment
decisions of any (RIF) Fund.
------------------------------
* The Fund commenced operations on January 2, 1997.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
sec. Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
62 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SHAREHOLDER EXPENSE EXAMPLE -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FUND EXPENSES
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING EACH FUND'S
EXPENSE EXAMPLE, WHICH APPEARS ON EACH FUND'S INDIVIDUAL PAGE IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
A FUND.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The Example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
indicated, which for this Fund is from July 1, 2006 to December 31, 2006.
ACTUAL EXPENSES
The information in the table under the heading "Actual Performance" provides
information about actual account values and actual expenses. You may use the
information in this column, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first column in the row entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information in the table under the heading "Hypothetical Performance (5%
return before expenses)" provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs. Therefore, the
information under the heading "Hypothetical Performance (5% return before
expenses)" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
ACTUAL (5% RETURN
PERFORMANCE BEFORE EXPENSES)
-------------- ----------------
Beginning Account Value
July 1, 2006 $ 1,000.00 $ 1,000.00
Ending Account Value
December 31, 2006 $ 1,045.30 $ 1,021.73
Expenses Paid During
Period* $ 3.56 $ 3.52
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 0.69%
(representing the one-half year period annualized), multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half
year period). Reflects amounts waived and/or reimbursed by the investment
adviser. Without the waiver and/or reimbursement, expenses would have been
higher.
Core Bond Fund 63
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
LONG-TERM INVESTMENTS - 94.6%
Asset-Backed Securities - 4.7%
Accredited Mortgage Loan Trust (E)
Series 2004-2 Class A2
5.620% due 07/25/34 60 60
ACE Securities Corp. (E)
Series 2005-SD3 Class A
5.720% due 08/25/45 364 364
Aegis Asset Backed Securities Trust (E)
Series 2003-3 Class M2
6.970% due 01/25/34 110 111
Ameriquest Mortgage Securities, Inc. (E)
Series 2002-D Class M1
6.745% due 02/25/33 90 90
Series 2004-R10 Class A5
5.710% due 11/25/34 46 46
Series 2004-R8 Class A5
5.690% due 09/25/34 138 138
Argent Securities, Inc. (E)
Series 2005-W4 Class A2A
5.460% due 02/25/36 81 81
Bayview Financial Acquisition Trust
Series 2006-A Class 1A3
5.865% due 02/28/41 190 190
Citifinancial Mortgage Securities, Inc.
Series 2003-4 Class AF3
3.221% due 10/25/33 3 3
Countrywide Asset-Backed Certificates
Series 2004-13 Class AF3
3.989% due 02/25/31 57 57
Series 2004-BC1 Class M1 (E)
5.820% due 02/25/34 105 105
Series 2006-11 Class 1AF4
6.300% due 09/25/46 170 173
Countrywide Home Equity Loan Trust (E)
Series 2006-H Class 2A1B
5.489% due 11/15/36 928 928
Credit-Based Asset Servicing and Securitization
LLC
Series 2005-CB1 Class AF2
4.088% due 12/25/35 47 46
First Franklin Mortgage Loan Asset Backed
Certificates (E)
Series 2006-FF1 Class A3
5.370% due 11/25/36 291 292
Fremont Home Loan Trust (E)
Series 2006-A Class 2A1
5.370% due 05/25/36 142 142
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
GSAA Home Equity Trust
Series 2006-4 Class 1A2
5.977% due 03/25/36 273 273
GSAA Trust (E)
Series 2006-2 Class 2A3
5.590% due 12/25/35 320 321
GSAMP Trust (E)
Series 2003-HE2 Class M1
5.970% due 08/25/33 175 175
Series 2004-SEA Class A2A
5.610% due 03/25/34 107 107
Heritage Property Investment Trust (o)
5.125% due 04/15/14 150 146
Home Equity Asset Trust (E)
Series 2003-5 Class M1
6.020% due 12/25/33 265 265
Series 2005-2 Class 2A2
5.520% due 07/25/35 134 135
HSI Asset Securitization Corp. Trust (E)
Series 2006-HE2 Class 2A1
5.383% due 12/25/36 99 99
Indymac Residential Asset Backed Trust (E)
Series 2006-H2 Class A
5.470% due 06/28/36 579 579
Lehman XS Trust (E)
Series 2005-1 Class 2A2
4.660% due 07/25/35 157 157
Series 2006-16N Class A1A
5.400% due 11/25/46 285 285
Long Beach Mortgage Loan Trust (E)
Series 2004-4 Class 1A1
5.600% due 10/25/34 47 47
Series 2006-9 Class 2A1
5.380% due 10/25/36 938 938
Mastr Asset Backed Securities Trust (E)
Series 2003-WMC Class M2
6.970% due 08/25/33 57 57
Morgan Stanley ABS Capital I (E)
Series 2003-NC8 Class M3
7.420% due 09/25/33 52 53
Series 2006-HE7 Class A2A
5.370% due 09/25/36 934 934
Morgan Stanley Mortgage Loan Trust
Series 2006-12X Class A6A
5.726% due 10/25/36 145 145
</Table>
64 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
New Century Home Equity Loan Trust (E)
Series 2004-4 Class M2
5.850% due 02/25/35 215 216
NWA Trust (o)
Series 1995-2 Class A
9.250% due 06/21/14 132 139
Option One Mortgage Loan Trust (E)
Series 2003-2 Class M2
7.020% due 04/25/33 63 63
Series 2003-3 Class M3
7.320% due 06/25/33 45 46
Series 2003-4 Class M2
6.970% due 07/25/33 77 78
Park Place Securities, Inc. (E)
Series 2005-WCW Class M1
5.770% due 09/25/35 210 211
Parker Hannifin Employee Stock Ownership Trust
(A)
6.340% due 07/15/08 111 111
Popular ABS Mortgage Pass-Through Trust
Series 2005-1 Class AF2
3.914% due 05/25/35 26 26
Series 2005-6 Class A3
5.680% due 01/25/36 230 229
Renaissance Home Equity Loan Trust
Series 2005-1 Class M1
5.357% due 05/25/35 80 79
Series 2005-2 Class AF4
4.934% due 08/25/35 85 84
Series 2006-1 Class AF6
5.746% due 05/25/36 175 177
Residential Asset Mortgage Products, Inc.
Series 2003-RS1 Class AI6A
5.980% due 12/25/33 205 207
Residential Asset Securities Corp.
Series 2003-KS1 Class M2 (E)
7.070% due 01/25/33 44 44
Series 2003-KS2 Class MI1
4.800% due 04/25/33 450 440
Series 2003-KS2 Class MI3
6.100% due 04/25/33 250 248
Series 2006-KS9 Class AI1 (E)
5.390% due 11/25/36 288 288
SBI Heloc Trust (E)(p)
Series 2006-1A Class 1A2A
5.490% due 08/25/36 183 183
SLM Student Loan Trust (E)
Series 2006-9 Class A1
5.345% due 10/25/12 700 700
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Small Business Administration
Series 2000-P10 Class 1
7.449% due 08/01/10 10 10
Soundview Home Equity Loan Trust
Series 2006-WF1 Class A2
5.645% due 10/25/36 290 290
Structured Asset Investment Loan Trust (E)
Series 2005-3 Class M2
5.760% due 04/25/35 120 120
Structured Asset Securities Corp.
Series 2004-19X Class A2
4.370% due 10/25/34 365 361
Series 2006-BC3 Class A2 (E)
5.370% due 10/25/36 278 278
Tenaska Alabama II Partners, LP (p)
6.125% due 03/30/23 -- --
Wells Fargo Home Equity Trust (E)(p)
Series 2005-4 Class AI1
5.440% due 12/25/35 240 240
------------
12,410
------------
Certificates of Deposit - 0.3%
BNP Paribas (z)
5.263% due 05/28/08 200 200
Fortis Bank (z)
5.265% due 04/28/08 400 400
Nordea Bank Finland PLC (z)
5.308% due 05/28/08 200 200
------------
800
------------
Corporate Bonds and Notes - 14.0%
Abbey National Treasury Services PLC (E)
Series YCD
5.276% due 07/02/08 500 500
Abbott Laboratories
5.600% due 05/15/11 165 167
5.875% due 05/15/16 80 82
Ace Capital Trust II (N)
9.700% due 04/01/30 175 240
Alamosa Delaware, Inc.
8.500% due 01/31/12 100 106
Allied Waste North America, Inc.
Series B
7.125% due 05/15/16 90 89
</Table>
Core Bond Fund 65
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Altria Group, Inc. (N)
7.750% due 01/15/27 25 30
American Casino & Entertainment Properties LLC
7.850% due 02/01/12 175 179
American Electric Power Co., Inc.
Series C
5.375% due 03/15/10 35 35
American Express Bank (E)
Series BKNT
5.350% due 10/16/08 300 300
American General Finance Corp.
4.875% due 05/15/10 225 222
American International Group, Inc.
4.700% due 10/01/10 130 128
5.375% due 10/18/11 170 171
5.050% due 10/01/15 (N) 130 126
American RE Corp. (N)
Series B
7.450% due 12/15/26 250 285
Americo Life, Inc. (p)
7.875% due 05/01/13 75 75
AmerUs Group Co.
5.950% due 08/15/15 150 156
Anadarko Petroleum Corp.
5.950% due 09/15/16 205 205
ANZ Capital Trust (f)(p)
4.484% due 12/31/49 225 219
Arizona Public Service Co.
5.800% due 06/30/14 100 100
6.250% due 08/01/16 125 128
AT&T, Inc.
5.100% due 09/15/14 45 44
4.214% due 06/05/21 (p) 300 298
Aztar Corp.
7.875% due 06/15/14 165 179
BAE Systems Holdings, Inc. (p)
6.400% due 12/15/11 330 341
Ball Corp.
6.625% due 03/15/18 185 184
Bank of America Corp.
5.875% due 02/15/09 80 81
5.400% due 06/19/09 (E) 900 900
5.378% due 11/06/09 (E)(N) 100 100
Bank of New York Co., Inc. (The)
5.125% due 11/01/11 190 189
BellSouth Corp.
6.550% due 06/15/34 35 36
BNP Paribas Capital Trust (f)(A)
9.003% due 12/29/49 450 503
Boardwalk Pipelines, LP (N)
5.875% due 11/15/16 125 124
Boeing Capital Corp., Ltd. (N)
6.100% due 03/01/11 50 52
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Boston Scientific Corp.
6.400% due 06/15/16 230 233
Burlington Northern Santa Fe Corp.
6.875% due 12/01/27 25 28
6.750% due 03/15/29 10 11
California Steel Industries, Inc.
6.125% due 03/15/14 140 133
CenterPoint Energy Houston Electric LLC
Series J2
5.700% due 03/15/13 110 111
CenterPoint Energy Resources Corp.
Series B
7.875% due 04/01/13 120 133
Cingular Wireless Services, Inc.
7.875% due 03/01/11 150 164
8.750% due 03/01/31 45 58
CIT Group, Inc.
6.875% due 11/01/09 45 47
Citigroup Funding, Inc.
5.343% due 12/08/08 (E) 100 100
Citigroup Global Markets Holdings, Inc.
Series MTNA (E)
5.460% due 03/17/09 200 200
Series MTNM (E)
5.390% due 03/07/08 400 400
Citigroup, Inc.
3.500% due 02/01/08 560 550
5.416% due 01/30/09 (E) 200 200
5.395% due 12/28/09 (E) 100 100
6.500% due 01/18/11 150 157
4.700% due 05/29/15 50 48
6.125% due 08/25/36 300 312
Clorox Co.
4.200% due 01/15/10 100 97
CNA Financial Corp. (N)
6.500% due 08/15/16 125 130
Columbus Southern Power Co.
Series C
5.500% due 03/01/13 10 10
Comcast Cable Communications Holdings, Inc.
9.455% due 11/15/22 125 162
</Table>
66 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Comcast Cable Holdings LLC
9.800% due 02/01/12 140 165
7.875% due 08/01/13 305 339
Comcast Corp.
5.900% due 03/15/16 20 20
Commonwealth Edison Co.
6.950% due 07/15/18 50 52
Series 105
5.400% due 12/15/11 125 124
Consolidated Natural Gas Co.
6.850% due 04/15/11 150 158
COX Communications, Inc.
4.625% due 01/15/10 (N) 350 343
5.875% due 12/01/16 (A) 75 74
Credit Suisse First Boston USA, Inc.
4.875% due 08/15/10 65 64
6.500% due 01/15/12 25 26
5.500% due 08/15/13 45 46
Credit Suisse USA, Inc. (N)
5.250% due 03/02/11 55 55
CVS Corp.
5.750% due 08/15/11 90 91
Detroit Edison Co.
6.350% due 10/15/32 50 52
Dex Media East Finance Co.
12.125% due 11/15/12 50 55
Dominion Resources, Inc.
Series A
5.200% due 01/15/16 195 188
Series B
6.250% due 06/30/12 30 31
DPL, Inc.
6.875% due 09/01/11 148 155
Dresdner Funding Trust I (p)
8.151% due 06/30/31 130 157
Drummond Co., Inc. (p)
7.375% due 02/15/16 60 59
Duke Energy Field Services LLC
6.875% due 02/01/11 20 21
El Paso Corp.
8.050% due 10/15/30 (N) 400 444
Series *
6.700% due 02/15/27 100 100
Eli Lilly & Co. (N)
6.770% due 01/01/36 185 212
Embarq Corp.
7.995% due 06/01/36 25 26
Energy Transfer Partners, LP
5.950% due 02/01/15 200 201
Enterprise Products Operating, LP
4.950% due 06/01/10 125 123
8.375% due 08/01/66 100 108
FedEx Corp.
7.600% due 07/01/97 75 87
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Financing Corp.
Principal Only STRIP
Series 10P
Zero coupon due 11/30/17 510 294
Series 15P
Zero coupon due 03/07/19 70 38
Series 2P
Zero coupon due 11/30/17 60 35
Series 6P
Zero coupon due 08/03/18 300 166
FirstEnergy Corp.
Series B
6.450% due 11/15/11 415 433
Series C
7.375% due 11/15/31 150 171
Ford Motor Credit Co.
7.875% due 06/15/10 200 202
FTI Consulting, Inc. (p)
7.750% due 10/01/16 160 166
General Electric Capital Corp.
5.500% due 04/28/11 220 223
Series MTN (E)
5.410% due 10/26/09 500 500
Series MTNA
5.476% due 07/28/08 (E) 700 701
5.450% due 01/15/13 (N) 260 262
General Electric Co. (E)
5.393% due 12/09/08 200 200
Genworth Financial, Inc.
6.150% due 11/15/66 75 75
Glencore Funding LLC (p)
6.000% due 04/15/14 135 132
Goldman Sachs Group, Inc.
5.405% due 12/23/08 (E) 600 600
6.875% due 01/15/11 425 450
5.350% due 01/15/16 (N) 320 316
Series MTNB (E)
5.477% due 12/22/08 300 300
Greater Bay Bancorp
Series B
5.250% due 03/31/08 150 150
Harrah's Operating Co., Inc.
5.500% due 07/01/10 125 123
HCA, Inc. (A)
9.125% due 11/15/14 125 134
9.250% due 11/15/16 190 204
</Table>
Core Bond Fund 67
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Health Care Property Investors, Inc. (N)
5.950% due 09/15/11 300 303
Hess Corp.
6.650% due 08/15/11 (N) 45 47
7.300% due 08/15/31 80 89
Historic TW, Inc.
8.050% due 01/15/16 170 193
Host Marriott, LP (o)
Series Q
6.750% due 06/01/16 215 215
HSBC Finance Corp.
5.435% due 10/21/09 (E) 100 100
6.375% due 11/27/12 175 184
5.000% due 06/30/15 110 107
Idearc, Inc. (A)
8.000% due 11/15/16 315 320
Innophos Investments Holdings, Inc. (E)
13.374% due 02/15/15 110 115
Innophos, Inc.
8.875% due 08/15/14 10 10
International Business Machines Corp.
7.125% due 12/01/96 165 190
International Lease Finance Corp.
5.750% due 06/15/11 (N) 80 81
5.625% due 09/20/13 80 81
International Steel Group, Inc.
6.500% due 04/15/14 65 67
iStar Financial, Inc. (N)
Series B
5.125% due 04/01/11 200 196
ITT Corp.
7.400% due 11/15/25 100 116
Joy Global, Inc. (A)
6.625% due 11/15/36 40 40
JP Morgan Chase Bank
Series EMTN
6.000% due 05/22/45 1,819 1,155
JPMorgan Chase & Co.
5.600% due 06/01/11 (N) 65 66
5.150% due 10/01/15 150 147
Kellogg Co.
Series B
6.600% due 04/01/11 320 336
Kerr-McGee Corp.
6.950% due 07/01/24 125 133
KeySpan Corp.
7.625% due 11/15/10 150 161
Kraft Foods, Inc.
5.625% due 11/01/11 425 430
Kroger Co. (The)
8.000% due 09/15/29 15 17
7.500% due 04/01/31 (N) 10 11
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.
5.464% due 01/23/09 (E) 600 601
5.460% due 04/03/09 (E) 400 400
5.000% due 01/14/11 175 173
5.500% due 04/04/16 85 85
Level 3 Financing, Inc.
12.250% due 03/15/13 85 96
Mandalay Resort Group (N)
6.500% due 07/31/09 90 91
Manufacturers & Traders Trust Co.
5.585% due 12/28/20 84 83
Merrill Lynch & Co., Inc.
5.450% due 12/04/09 (E) 200 200
Series MTNC
4.250% due 02/08/10 450 437
Metlife, Inc.
6.400% due 12/15/36 100 100
Midamerican Energy Holdings Co.
6.125% due 04/01/36 175 176
Miller Brewing Co. (p)
5.500% due 08/15/13 110 109
Monumental Global Funding II (p)
4.625% due 03/15/10 95 93
Morgan Stanley
5.375% due 10/15/15 100 99
Series GMTN (E)
5.485% due 02/09/09 500 501
Natexis Ambs Co. LLC (f)(p)
8.440% due 12/29/49 120 125
National Rural Utilities Cooperative Finance
Corp.
5.750% due 08/28/09 45 46
Nelnet, Inc.
7.400% due 09/29/36 125 129
News America Holdings, Inc.
7.900% due 12/01/95 90 101
8.250% due 10/17/96 20 23
Nisource Finance Corp.
7.875% due 11/15/10 100 108
Norfolk Southern Corp.
7.700% due 05/15/17 20 23
7.050% due 05/01/37 40 46
7.900% due 05/15/97 315 390
6.000% due 03/15/05 125 118
Occidental Petroleum Corp. (N)
9.250% due 08/01/19 95 125
</Table>
68 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ohio Power Co. (N)
Series F
5.500% due 02/15/13 20 20
Pacific Gas & Electric Co.
4.200% due 03/01/11 60 57
6.050% due 03/01/34 65 66
PartnerRe Finance II
6.440% due 12/01/66 50 50
Peabody Energy Corp. (N)
7.875% due 11/01/26 100 107
Pemex Project Funding Master Trust (N)
5.750% due 12/15/15 100 99
PetroHawk Energy Corp.
9.125% due 07/15/13 40 42
Phoenix Life Insurance Co. (p)
7.150% due 12/15/34 150 159
Pinnacle Entertainment, Inc.
8.250% due 03/15/12 255 258
Popular North America, Inc. (N)
Series MTNE
3.875% due 10/01/08 275 268
Progress Energy, Inc.
7.100% due 03/01/11 47 50
7.000% due 10/30/31 80 89
Qwest Corp.
7.625% due 06/15/15 200 214
RBS Capital Trust III (f)
5.512% due 09/29/49 200 198
Reckson Operating Partnership, LP
7.750% due 03/15/09 25 26
5.150% due 01/15/11 92 90
Reinsurance Group of America, Inc.
6.750% due 12/15/65 75 75
Rental Services Corp. (A)
9.500% due 12/01/14 70 72
Residential Capital LLC
6.375% due 06/30/10 225 228
6.000% due 02/22/11 (N) 60 60
RH Donnelley, Inc.
10.875% due 12/15/12 205 223
Rural Cellular Corp.
8.250% due 03/15/12 40 42
Safeway, Inc. (N)
7.250% due 02/01/31 20 22
SB Treasury Co. LLC (f)(p)
(Step Up, 10.295%, 06/30/08)
9.400% due 12/29/49 350 368
SBC Communications, Inc.
6.150% due 09/15/34 75 74
Simon Property Group, LP (N)
5.600% due 09/01/11 200 202
Southern Copper Corp.
7.500% due 07/27/35 100 108
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Sprint Capital Corp.
7.625% due 01/30/11 350 375
8.750% due 03/15/32 70 84
Sprint Nextel Corp.
6.000% due 12/01/16 110 107
Symetra Financial Corp. (p)
6.125% due 04/01/16 150 152
Time Warner, Inc. (N)
5.875% due 11/15/16 475 474
6.500% due 11/15/36 75 75
Travelport, Ltd. (N)(A)
11.875% due 09/01/16 150 154
Trump Entertainment Resorts, Inc. (N)
8.500% due 06/01/15 195 194
Tyson Foods, Inc.
6.850% due 04/01/16 40 41
Unicredito Italiano NY (E)
Series YCD
5.370% due 05/29/08 200 200
Union Pacific Corp.
6.125% due 01/15/12 120 124
Union Planters Corp.
7.750% due 03/01/11 50 54
UnitedHealth Group, Inc.
5.250% due 03/15/11 75 75
VeraSun Energy Corp.
9.875% due 12/15/12 90 95
Verizon Global Funding Corp.
7.250% due 12/01/10 150 160
5.850% due 09/15/35 165 158
Wachovia Capital Trust III (f)
5.800% due 03/15/42 125 126
Wachovia Corp. (N)
5.625% due 10/15/16 100 101
WellPoint, Inc.
5.850% due 01/15/36 40 39
Wells Fargo & Co.
4.950% due 10/16/13 65 63
Wells Fargo Bank NA (N)
5.750% due 05/16/16 80 82
West Corp. (A)
9.500% due 10/15/14 185 185
Windstream Corp. (p)
8.625% due 08/01/16 125 137
Wisconsin Central Transport
6.625% due 04/15/08 325 330
</Table>
Core Bond Fund 69
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
World Savings Bank FSB (E)
Series BKNT
5.415% due 05/08/09 1,000 1,000
Wyeth
6.950% due 03/15/11 390 414
Zurich Capital Trust I (p)
8.376% due 06/01/37 245 257
------------
37,320
------------
International Debt - 5.8%
Abbey National PLC (f)
(Step Up, 7.570%, 06/15/08)
6.700% due 06/29/49 150 152
America Movil SA de CV
5.500% due 03/01/14 100 98
Aspen Insurance Holdings, Ltd.
6.000% due 08/15/14 50 49
AXA SA
8.600% due 12/15/30 35 45
6.379% due 12/14/49 (f)(A) 100 99
6.463% due 12/31/49 (f)(A) 100 99
BNP Paribas (f)(p)
5.186% due 06/29/49 300 288
Brazilian Government International Bond
7.875% due 03/07/15 100 111
8.875% due 04/15/24 305 380
British Telecommunications PLC
8.875% due 12/15/30 150 205
Canadian Natural Resources, Ltd.
6.500% due 02/15/37 75 75
CIT Group Funding Co. of Canada (N)
5.600% due 11/02/11 80 81
Conoco Funding Co.
6.350% due 10/15/11 310 324
Deutsche Telekom International Finance BV
5.569% due 03/23/09 (E)(N) 300 300
5.375% due 03/23/11 (N) 75 75
8.250% due 06/15/30 155 191
DNB Nor Bank ASA (E)(p)
5.443% due 10/13/09 1,000 1,000
Egypt Government AID Bonds
4.450% due 09/15/15 390 377
Endurance Specialty Holdings, Ltd.
6.150% due 10/15/15 100 100
Export-Import Bank of China (p)
4.875% due 07/21/15 110 106
Export-Import Bank of Korea
4.125% due 02/10/09 120 117
5.125% due 02/14/11 100 99
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Falconbridge, Ltd.
7.250% due 07/15/12 50 54
6.000% due 10/15/15 175 178
Gaz Capital SA (p)
6.212% due 11/22/16 (A) 115 116
8.625% due 04/28/34 80 103
HBOS Treasury Services PLC (E)(p)
Series MTN
5.414% due 07/17/09 300 300
HSBC Holdings PLC
6.500% due 05/02/36 145 156
Inco, Ltd. (N)
5.700% due 10/15/15 175 171
Intelsat Bermuda, Ltd. (p)
11.250% due 06/15/16 170 187
Intelsat Subsidiary Holding Co., Ltd. (E)
10.484% due 01/15/12 140 141
Ispat Inland ULC
9.750% due 04/01/14 209 234
Korea Electric Power Corp. (p)
5.125% due 04/23/34 60 60
Majapahit Holding BV (A)
7.250% due 10/17/11 55 57
Mexico Government International Bond (N)
8.300% due 08/15/31 180 230
Mizuho Financial Group Cayman, Ltd. (p)
5.790% due 04/15/14 100 101
Navios Maritime Holdings, Inc. (A)
9.500% due 12/15/14 95 94
Panama Government International Bond
9.375% due 07/23/12 100 117
Peru Enhanced Pass-Through Finance, Ltd. (A)
Zero coupon due 05/31/18 535 357
Zero coupon due 05/31/25 320 121
Poland Government International Bond
Series RSTA
(Step Up, 5.000%, 10/27/14)
4.750% due 10/27/24 200 188
Province of Quebec Canada (N)
Series PJ
6.125% due 01/22/11 375 387
Ras Laffan Liquefied Natural Gas Co., Ltd. II
(p)
5.298% due 09/30/20 75 72
</Table>
70 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Ras Laffan Liquefied Natural Gas Co., Ltd. III
(p)
5.838% due 09/30/27 250 240
Resona Bank, Ltd. (f)(p)
5.850% due 09/29/49 255 249
Royal Bank of Scotland Group PLC (f)
Series 1
9.118% due 03/31/49 700 775
Royal Bank of Scotland PLC (E)
5.770% due 07/06/12 600 601
Russia Government International Bond (p)
5.000% due 03/31/30 315 356
Santander Financial Issuances
6.375% due 02/15/11 110 114
Santander US Debt SA Unipersonal (E)(p)
5.376% due 11/20/08 500 500
Sanwa Finance Aruba AEC
8.350% due 07/15/09 135 144
Shimao Property Holdings, Ltd. (A)
8.000% due 12/01/16 200 199
SMFG Preferred Capital (f)(p)
Series 144A
6.078% due 01/29/49 100 99
Sumitomo Mitsui Banking Corp. (f)(p)
5.625% due 07/29/49 400 391
Systems 2001 Asset Trust LLC (p)
7.156% due 12/15/11 106 110
Telecom Italia Capital SA
4.875% due 10/01/10 150 146
5.250% due 10/01/15 155 145
Telefonica Emisiones SAU (E)
5.690% due 06/19/09 300 300
Telefonica Europe BV
7.750% due 09/15/10 270 290
TELUS Corp.
8.000% due 06/01/11 250 273
Transocean, Inc. (E)
5.591% due 09/05/08 200 200
Tyco International Group SA (N)
6.750% due 02/15/11 410 432
UFJ Finance Aruba AEC
6.750% due 07/15/13 35 37
Unicredit Luxembourg Finance SA (E)(p)
5.426% due 10/24/08 1,000 1,000
Vale Overseas, Ltd.
6.250% due 01/11/16 35 35
6.250% due 01/23/17 115 116
Vedanta Resources PLC (p)
6.625% due 02/22/10 160 158
VTB Capital SA (E)(A)
5.970% due 08/01/08 230 230
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Westfield Capital Corp., Ltd. (A)
5.125% due 11/15/14 125 121
Westfield Group (A)
5.400% due 10/01/12 125 125
Xstrata Finance Canada, Ltd. (A)
5.500% due 11/16/11 (N) 195 195
5.800% due 11/15/16 45 45
------------
15,421
------------
Loan Agreements - 0.6%
Starbound Reinsurance, Ltd.
7.400% due 03/31/08 1,500 1,500
------------
Mortgage-Backed Securities - 48.4%
ABN Amro Mortgage Corp.
Series 2003-13 Class A3
5.500% due 01/25/34 1,519 1,474
Adjustable Rate Mortgage Trust (E)
Series 2005-3 Class 8A2
5.560% due 07/25/35 292 293
American Home Mortgage Investment Trust (E)
Series 2004-4 Class 4A
4.390% due 02/25/45 165 162
Series 2005-2 Class 5A2
5.470% due 09/25/35 80 80
Banc of America Commercial Mortgage, Inc.
Series 2004-3 Class A3
4.875% due 06/10/39 465 460
Series 2004-4 Class A3
4.128% due 07/10/42 300 292
Series 2005-2 Class A4
4.783% due 07/10/43 333 326
Series 2005-3 Class A2
4.501% due 07/10/43 150 146
Series 2005-5 Class A4
5.115% due 10/10/45 500 492
Series 2006-4 Class A4
5.634% due 07/10/46 1,000 1,021
Banc of America Funding Corp.
Series 2005-D Class A1 (E)
4.114% due 05/25/35 159 155
Series 2006-3 Class 5A8
5.500% due 03/25/36 475 471
Series 2006-A Class 3A2
5.917% due 02/20/36 217 218
</Table>
Core Bond Fund 71
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Series 2006-A Class 4A1 (E)
5.567% due 02/20/36 514 513
Banc of America Mortgage Securities, Inc.
Series 2003-9 Class 1A12 (E)
5.770% due 12/25/33 510 512
Series 2004-1 Class 5A1
6.500% due 09/25/33 19 19
Series 2004-11 Class 2A1
5.750% due 01/25/35 438 433
Series 2005-L Class 3A1 (E)
5.453% due 01/25/36 255 254
Series 2006-2 Class A15
6.000% due 07/25/36 325 327
Bank of America Alternative Loan Trust
Series 2003-10 Class 2A2 (E)
5.770% due 12/25/33 255 257
Series 2003-2 Class CB2 (E)
5.820% due 04/25/33 111 112
Series 2006-5 Class CB17
6.000% due 06/25/36 242 243
Bear Stearns Adjustable Rate Mortgage Trust
Series 2003-1 Class 6A1
5.056% due 04/25/33 80 80
Series 2003-8 Class 4A1
4.640% due 01/25/34 157 157
Bear Stearns Alt-A Trust
Series 2005-4 Class 23A1
5.392% due 05/25/35 306 307
Bear Stearns Mortgage Funding Trust (E)
Series 2006-AR2 Class 1A1
5.520% due 09/25/36 991 990
Series 2006-AR2 Class 2A1
5.550% due 10/25/36 984 984
Chase Mortgage Finance Corp.
Series 2003-S8 Class A1
4.500% due 09/25/18 179 171
Series 2006-S4 Class A3
6.000% due 12/25/36 270 272
Series 2006-S4 Class A4
6.000% due 12/25/36 145 146
Citigroup Mortgage Loan Trust, Inc.
Series 2005-11 Class A2A (E)
4.700% due 12/25/35 90 89
Series 2006-WF1 Class A2F
5.657% due 03/01/36 325 321
Series 2006-WFH Class A2 (E)
5.420% due 11/25/36 1,000 1,000
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Citigroup/Deutsche Bank Commercial Mortgage
Trust
Series 2005-CD1 Class A4
5.400% due 07/15/44 1,000 998
Series 2006-CD2 Class A4
5.362% due 01/15/46 500 503
Series 2006-CD3 Class A5
5.617% due 10/15/48 190 194
Citimortgage Alternative Loan Trust
Series 2006-A3 Class 1A5
6.000% due 07/25/36 181 181
Countrywide Alternative Loan Trust
Series 2005-J13 Class 2A3
5.500% due 11/25/35 155 155
Series 2005-J8 Class 1A3
5.500% due 07/25/35 227 226
Series 2006-43C Class 1A7
6.000% due 02/25/37 395 398
Series 2006-9T1 Class A7
6.000% due 05/25/36 131 131
Series 2006-J2 Class A3
6.000% due 04/25/36 197 198
Series 2006-OA1 Class 4A1 (E)
5.520% due 08/25/46 959 959
Series 2006-OA1 Class A1 (E)
5.500% due 02/20/47 999 999
Countrywide Home Loan Mortgage Pass Through
Trust (E)
Series 2004-16 Class 1A1
5.720% due 09/25/34 366 368
Series 2005-3 Class 1A2
5.610% due 04/25/35 48 48
Series 2005-HYB Class 3A2A
5.250% due 02/20/36 85 84
Series 2006-OA5 Class 2A1
5.520% due 04/25/46 909 908
Credit Suisse First Boston Mortgage Securities
Corp.
Series 1998-C1 Class A1B
6.480% due 05/17/40 56 57
Series 1998-C2 Class A2
6.300% due 11/15/30 99 100
Deutsche ALT-A Securities, Inc. Alternate Loan
Trust
Series 2005-AR1 Class 2A3
5.023% due 08/25/35 465 472
DLJ Commercial Mortgage Corp.
Series 1998-CF1 Class A1B
6.410% due 02/18/31 293 295
</Table>
72 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Series 1999-CG1 Class S
Interest Only STRIP
0.822% due 03/10/32 3,498 64
Fannie Mae
5.190% due 2012 (E) 213 213
6.000% due 2016 21 21
5.000% due 2017 628 620
5.427% due 2017 (E) 61 61
6.000% due 2017 109 111
4.000% due 2018 931 879
4.500% due 2018 2,605 2,521
5.000% due 2018 278 274
4.500% due 2019 388 375
5.000% due 2019 1,410 1,387
4.500% due 2020 564 546
5.000% due 2020 1,938 1,904
5.000% due 2021 1,593 1,565
6.500% due 2024 594 608
6.000% due 2028 40 40
5.500% due 2029 97 96
6.000% due 2032 630 636
7.000% due 2032 259 266
3.905% due 2033 (E) 345 341
4.642% due 2033 (E) 203 204
5.000% due 2033 644 623
5.500% due 2033 3,077 3,044
6.000% due 2033 233 235
5.000% due 2034 742 717
5.500% due 2034 4,777 4,727
5.000% due 2035 492 475
5.500% due 2035 22,667 22,414
6.000% due 2035 206 207
5.000% due 2036 49 47
5.500% due 2036 985 973
5.555% due 2036 (E) 538 542
6.000% due 2036 900 906
6.500% due 2036 122 123
7.000% due 2036 30 31
7.500% due 2036 1,629 1,690
Series 1992-10 Class ZD
8.000% due 11/25/21 214 216
Series 1999-56 Class Z
7.000% due 12/18/29 124 129
Series 2003-32 Class FH (E)
5.720% due 11/25/22 383 385
Series 2003-337 Class 1
Principal Only STRIP
Zero coupon due 07/01/33 307 226
Series 2003-343 Class 6
Interest Only STRIP
5.000% due 10/01/33 301 65
Series 2003-78 Class FI (E)
5.720% due 01/25/33 372 373
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Series 2004-21 Class FL (E)
5.670% due 11/25/32 194 195
15 Year TBA (I)
4.500% 125 121
5.000% 445 437
30 Year TBA (I)
4.500% 530 497
5.000% 1,790 1,728
5.500% 1,880 1,858
6.000% 8,735 8,792
6.500% 1,365 1,391
Fannie Mae REMIC
Series 1993-41 Class ZQ
7.000% due 12/25/23 465 484
Series 1993-42 Class ZQ
6.750% due 04/25/23 527 539
Series 2005-36 Class AI
Interest Only STRIP
5.500% due 10/25/26 375 30
Fannie Mae Whole Loan
Series 2003-W1 Class 1A1
6.500% due 12/25/42 50 51
Federal Home Loan Mortgage Corp. Structured Pass
Through Securities (E)
Series 2005-63 Class 1A1
5.864% due 02/25/45 58 58
First Horizon Alternative Mortgage Securities
Series 2006-AA5 Class A2 (E)
6.609% due 09/25/36 187 191
Series 2006-FA3 Class A6
6.000% due 07/25/36 265 267
First Horizon Asset Securities, Inc. (E)
Series 2005-AR5 Class 3A1
5.527% due 10/25/35 123 123
Freddie Mac
5.000% due 2018 458 452
4.000% due 2019 1,874 1,764
5.000% due 2019 869 855
4.684% due 2034 (E) 225 227
5.971% due 2036 (E) 145 147
Series 2000-226 Class F (E)
5.770% due 11/15/30 19 19
Series 2003-262 Class AB
2.900% due 11/15/14 354 344
</Table>
Core Bond Fund 73
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Series 2003-263 Class YH
3.500% due 08/15/22 -- --
Series 2004-276 Class IP
Interest Only STRIP
5.500% due 07/15/23 312 14
Series 2004-281 Class DF (E)
5.770% due 06/15/23 145 145
Series 2005-292 Class IG
Interest Only STRIP
5.000% due 04/15/23 199 31
Series 2005-294 Class FA (E)
5.520% due 03/15/20 282 282
Series 2006-313 Class FP (E)
Zero coupon due 04/15/36 227 231
30 Year TBA (I)
5.000% 1,460 1,408
5.500% 1,520 1,503
6.000% 1,270 1,279
Freddie Mac Gold
6.000% due 2016 34 34
5.000% due 2018 297 293
5.500% due 2020 953 954
7.188% due 2030 (E) 2 2
5.000% due 2033 232 225
Freddie Mac REMIC
Series 2003-256 Class FJ (E)
5.720% due 02/15/33 170 172
Series 2004-277 Class KE
3.500% due 12/15/17 34 34
Series 2005-299 Class KF (E)
5.750% due 06/15/35 100 100
Series 2006-323 Class PA
6.000% due 03/15/26 290 293
Ginnie Mae I
6.000% due 2029 16 16
30 Year TBA (I)
5.500% 1,650 1,642
Ginnie Mae II (E)
5.375% due 2026 250 252
5.750% due 2027 17 17
4.750% due 2032 152 152
Government National Mortgage Association (E)
Series 1999-40 Class FE
5.900% due 11/16/29 148 150
Series 2000-29 Class F
5.820% due 09/20/30 29 29
Greenwich Capital Commercial Funding Corp.
Series 2004-GG1 Class A7
5.317% due 06/10/36 465 465
Series 2006-RR1 Class A1 (A)
5.781% due 03/18/49 205 211
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
GS Mortgage Securities Corp. II
Series 2006-FL8 Class A1 (E)(p)
5.450% due 01/06/08 140 140
Series 2006-GG6 Class A4
5.553% due 04/10/38 115 117
Series 2006-GG8 Class AAB
5.535% due 11/10/39 200 202
Harborview Mortgage Loan Trust
Series 2005-14 Class 3A1A
5.319% due 12/19/35 126 126
Series 2005-16 Class 3A1A (E)
5.570% due 01/19/36 791 793
Series 2006-12 Class 2A2A (E)
5.510% due 12/19/37 999 1,000
Indymac Index Mortgage Loan Trust (E)
Series 2006-AR2 Class A2
5.073% due 11/25/36 168 168
JP Morgan Chase Commercial Mortgage Securities
Corp.
Series 2001-CIB Class A2
6.244% due 04/15/35 181 183
Series 2004-LN2 Class A1
4.475% due 07/15/41 362 352
Series 2005-LDP Class A3A1
4.871% due 10/15/42 210 206
Series 2005-LDP Class A4
4.918% due 10/15/42 325 316
Series 2006-CB1 Class A4
5.552% due 05/12/45 220 223
Series 2006-LDP Class A4
5.876% due 04/15/45 270 282
5.399% due 05/15/45 290 291
LB-UBS Commercial Mortgage Trust
Series 2006-C1 Class A4
5.156% due 02/15/31 1,000 988
Series 2006-C4 Class A4
5.899% due 06/15/38 105 110
Lehman Mortgage Trust
Series 2005-3 Class 1A3
5.500% due 01/25/36 685 686
Lehman XS Trust (E)
Series 2005-5N Class 3A1A
5.620% due 11/25/35 714 714
Series 2006-16N Class A4A
5.510% due 11/25/46 980 980
</Table>
74 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Mastr Adjustable Rate Mortgages Trust (E)
Series 2006-OA2 Class 4A1A
5.514% due 12/25/46 993 993
Mastr Alternative Loans Trust
Series 2003-4 Class B1
5.662% due 06/25/33 204 204
Series 2004-10 Class 5A6
5.750% due 09/25/34 170 168
Mastr Asset Securitization Trust (E)
Series 2003-7 Class 4A35
5.720% due 09/25/33 276 276
Series 2004-4 Class 2A2
5.770% due 04/25/34 107 107
Mellon Residential Funding Corp. (E)
Series 2000-TBC Class A1
5.800% due 06/15/30 240 240
Merrill Lynch Floating Trust (E)(p)
Series 2006-1 Class A1
5.390% due 06/15/22 908 908
MLCC Mortgage Investors, Inc. (E)
Series 2004-HB1 Class A2
5.930% due 04/25/29 77 78
Morgan Stanley Capital I
Series 2005-IQ1 Class AAB
5.178% due 09/15/42 415 413
Series 2006-HQ8 Class A4
5.561% due 03/12/44 160 162
Series 2006-HQ9 Class A4
5.731% due 07/20/44 200 206
Morgan Stanley Mortgage Loan Trust
Series 2006-11 Class 1A6
6.231% due 08/25/36 220 225
MortgageIT Trust (E)
Series 2005-AR1 Class 1A1
5.570% due 11/25/35 683 685
Prime Mortgage Trust (E)
Series 2004-CL1 Class 1A2
5.720% due 02/25/34 50 50
Residential Accredit Loans, Inc.
Series 2004-QS5 Class A6 (E)
5.950% due 04/25/34 72 73
Series 2004-QS8 Class A4 (E)
5.750% due 06/25/34 374 376
Series 2005-QA8 Class NB3
5.500% due 07/25/35 272 273
Series 2006-QS6 Class 1A13
6.000% due 06/25/36 445 447
Residential Asset Securities Corp. (E)
Series 2003-KS4 Class AIIB
5.610% due 06/25/33 91 91
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Residential Asset Securitization Trust (E)
Series 2003-A15 Class 1A2
5.770% due 02/25/34 426 428
Residential Funding Mortgage Securities I (E)
Series 2003-S14 Class A5
5.720% due 07/25/18 230 231
Series 2003-S20 Class 1A7
5.820% due 12/25/33 90 90
Series 2003-S5 Class 1A2
5.770% due 11/25/18 217 218
Sequoia Mortgage Trust (E)
Series 2001-5 Class A
5.670% due 10/19/26 101 101
Small Business Administration Participation
Certificates
Series 2005-20G Class 1
4.750% due 07/01/25 949 922
Structured Asset Mortgage Investments, Inc. (E)
Series 2006-AR2 Class A1
5.550% due 02/25/36 844 845
Series 2006-AR8 Class A1A
5.520% due 10/25/36 990 990
Structured Asset Securities Corp.
Series 2004-21X Class 1A3
4.440% due 12/25/34 650 642
Thornburg Mortgage Securities Trust (E)
Series 2003-2 Class A1
5.660% due 04/25/43 167 167
Series 2006-5 Class A1
5.440% due 08/25/36 949 948
Series 2006-6 Class A1
5.430% due 12/25/36 198 198
Wachovia Bank Commercial Mortgage Trust
Series 2005-C21 Class A4
5.371% due 10/15/44 1,000 995
Washington Mutual Alternative Mortgage
Pass-Through Certificates
Series 2005-4 Class CB11
5.500% due 06/25/35 90 88
Series 2006-AR7 Class A1A (E)
5.483% due 09/25/46 877 880
Series 2006-AR8 Class 2A (E)
5.510% due 09/25/46 960 961
Series 2006-AR9 Class 2A (E)
5.667% due 11/25/46 992 993
</Table>
Core Bond Fund 75
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Washington Mutual, Inc.
Series 2003-S9 Class A2 (E)
5.870% due 10/25/33 399 401
Series 2005-AR1 Class 1A1
4.838% due 10/25/35 342 338
Series 2005-AR1 Class A1A1 (E)
5.610% due 10/25/45 64 64
5.590% due 12/25/45 721 723
Series 2005-AR6 Class B3 (E)
6.010% due 04/25/45 254 254
Series 2006-AR1 Class 3A1A (E)
5.678% due 09/25/46 972 974
Wells Fargo Mortgage Backed Securities Trust
Series 2006-2 Class 2A3
5.500% due 03/25/36 500 499
Series 2006-AR2 Class 2A1
4.950% due 03/25/36 364 360
------------
128,597
------------
Municipal Bonds - 0.2%
Golden State Tobacco Securitization Corp.
Revenue Bonds, weekly demand
6.750% due 06/01/39 400 458
Tobacco Settlement Financing Corp. Revenue
Bonds, weekly demand
6.250% due 06/01/43 200 223
------------
681
------------
Non-US Bonds - 0.4%
Bombardier, Inc. (A)
7.250% due 11/15/16 EUR 125 167
Province of Quebec Canada
5.000% due 12/01/38 CAD 200 180
Quebec Residual
Zero coupon due 12/01/36 CAD 370 80
United Kingdom Gilt
5.750% due 12/07/09 GBP 400 796
------------
1,223
------------
United States Government Agencies - 6.9%
Fannie Mae
4.200% due 03/24/08 (N) 2,000 1,975
4.150% due 09/10/09 (N) 2,200 2,155
3.875% due 02/15/10 (N) 710 688
4.750% due 04/20/10 1,400 1,392
4.125% due 05/12/10 1,500 1,463
5.050% due 02/07/11 (N) 1,200 1,205
Federal Home Loan Bank
4.800% due 05/02/08 3,100 3,087
Series 577 (N)
4.500% due 09/26/08 900 892
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
Federal Home Loan Bank System
5.375% due 08/19/11 (N) 295 300
5.310% due 12/28/12 1,000 1,018
Series IY08
3.400% due 03/18/08 1,000 980
Financing Corp.
Principal Only STRIP
Series 1
Zero coupon due 05/11/16 80 50
Series 12P
Zero coupon due 12/06/18 245 133
Series 13
Zero coupon due 12/27/16 275 166
Series 13P
Zero coupon due 12/27/18 670 363
Series 16P
Zero coupon due 04/05/19 380 203
Series 19
Zero coupon due 06/06/16 230 143
Series 1P
Zero coupon due 05/11/18 95 53
Series 3P
Zero coupon due 11/30/17 170 98
Series 5P
Zero coupon due 02/08/18 65 37
Series 8P
Zero coupon due 08/03/18 605 335
Series 9P
Zero coupon due 10/06/17 310 180
Freddie Mac
3.450% due 03/12/08 1,000 980
2.750% due 03/15/08 (N) 210 204
5.500% due 06/12/08 200 200
------------
18,300
------------
United States Government Treasuries - 13.3%
United States Treasury Inflation Indexed Bonds
3.375% due 01/15/12 (N) 1,063 1,110
1.875% due 07/15/13 (N) 220 212
2.000% due 01/15/14 -- --
2.000% due 07/15/14 (N) 1,756 1,704
1.875% due 07/15/15 (N) 934 895
2.000% due 01/15/16 -- --
2.500% due 07/15/16 -- --
2.375% due 01/15/25 (N) 428 426
2.000% due 01/15/26 (N) 1,119 1,052
</Table>
76 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
United States Treasury Notes
4.875% due 10/31/08 (N) 3,000 3,001
2.000% due 12/31/08 14,000 13,984
4.375% due 12/15/10 (N) 955 944
4.500% due 09/30/11 (N) 1,500 1,487
4.500% due 12/31/11 4,400 4,385
4.250% due 08/15/15 415 402
Zero coupon due 11/15/21 (N) 2,545 1,225
6.000% due 02/15/26 (N) 2,960 3,357
4.500% due 02/15/36 (N) 1,150 1,094
------------
35,278
------------
TOTAL LONG-TERM INVESTMENTS
(cost $250,438) 251,530
------------
PREFERRED STOCKS - 0.2%
Financial Services - 0.2%
DG Funding Trust (E)(A) 49 513
------------
TOTAL PREFERRED STOCKS
(cost $515) 513
------------
WARRANTS & RIGHTS - 0.0%
Miscellaneous - 0.0%
Mexico Government International Bond Value
Recovery Rights (AE)
Series E 1,900,000 25
------------
TOTAL WARRANTS & RIGHTS
(cost $1) 25
------------
</Table>
<Table>
<Caption>
NOTIONAL
AMOUNT
$
------------
OPTIONS PURCHASED - 0.1%
(Number of Contracts)
Eurodollar Futures
Mar 2007 92.00 Put (9) 2,070 --
Mar 2007 92.25 Put (49) 11,301 --
Mar 2007 92.50 Put (5) 1,156 --
Jun 2007 91.00 Put (59) 13,423 --
Jun 2007 91.25 Put (71) 16,197 1
Sep 2007 90.75 Put (37) 8,394 --
Sep 2007 91.25 Put (46) 10,494 --
Dec 2007 91.25 Put (38) 8,669 --
Mar 2008 91.75 Put (241) 55,279 2
Swaptions
(Fund Pays/Fund Receives)
EUR Six Month LIBOR/ EUR 3.960%
Jul 2007 0.00 Call (2) 5,280 7
</Table>
<Table>
<Caption>
NOTIONAL MARKET
AMOUNT VALUE
$ $
- -----------------------------------------------------------------------------
EUR Six Month LIBOR/ EUR 4.100%
Jul 2007 0.00 Call (1) 2,640 3
GBP Six Month LIBOR/ GBP 5.080%
Jun 2007 0.00 Call (2) 1,370 --
USD Three Month LIBOR/ USD 5.170%
Feb 2007 0.00 Call (1) 2,300 4
USD Three Month LIBOR/ USD 5.000%
Mar 2007 0.00 Call (2) 4,000 6
USD Three Month LIBOR/ USD 5.080%
Apr 2007 0.00 Call (1) 2,300 7
USD Three Month LIBOR/ USD 5.200%
May 2007 0.00 Call (2) 10,000 48
USD Three Month LIBOR/ USD 5.250%
Jun 2007 0.00 Call (1) 5,000 29
USD Three Month LIBOR/ USD 5.500%
Jun 2007 0.00 Call (1) 4,000 39
USD Three Month LIBOR/ USD 4.750%
Jul 2007 0.00 Call (1) 5,000 23
USD Three Month LIBOR/ USD 4.900%
Jul 2007 0.00 Call (1) 6,000 35
USD Three Month LIBOR/ USD 5.250%
Jul 2007 0.00 Call (1) 11,000 76
USD Three Month LIBOR/ USD 5.370%
Jul 2007 0.00 Call (1) 3,300 26
USD Three Month LIBOR/ USD 4.800%
Aug 2007 0.00 Call (1) 2,000 15
USD Three Month LIBOR/ USD 4.900%
Oct 2007 0.00 Call (1) 3,000 19
------------
TOTAL OPTIONS PURCHASED
(cost $283) 340
------------
</Table>
Core Bond Fund 77
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands (except share amounts)
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 19.1%
American General Finance Corp. (E)
Series MTNG
5.429% due 03/23/07 100 100
AT&T Wireless Services, Inc.
7.500% due 05/01/07 475 478
Bank of America Corp. (z)
5.250% due 03/15/07 1,200 1,184
Barclays Bank PLC (c)(z)
5.343% due 01/29/07 1,100 1,100
Bundesobligation
Series 139
4.000% due 02/16/07 EUR 6,100 8,055
Caesars Entertainment, Inc.
9.375% due 02/15/07 140 140
Citigroup Funding, Inc.
Zero Coupon due 11/15/07 520 523
Ford Motor Credit Co. (E)
6.340% due 03/21/07 500 500
France Treasury Bill BTF
Zero Coupon due 01/11/07 EUR 1,000 1,319
Harrah's Operating Co., Inc.
7.125% due 06/01/07 150 151
Hilton Hotels Corp.
7.950% due 04/15/07 45 45
HSBC Bank USA NA (E)
Series BKNT
5.460% due 09/21/07 500 500
Mandalay Resort Group
Series B
10.250% due 08/01/07 410 420
MGM Mirage
9.750% due 06/01/07 170 172
Mirage Resorts, Inc. (z)
6.750% due 08/01/07 85 85
Russell Investment Company Money Market Fund 24,793,000 24,793
Societe Generale NA (c)(z)
5.245% due 01/08/07 2,200 2,198
TELUS Corp.
7.500% due 06/01/07 270 272
Total Fina ELF Capital (z)
5.300% due 01/02/07 2,800 2,800
UBS Financial Del LLC (z)
5.270% due 01/02/07 2,100 2,100
5.160% due 06/12/07 1,000 974
United States Treasury Bills (sec.)(z)
5.020% due 02/15/07 (c) 65 65
5.134% due 02/15/07 (c) 50 50
</Table>
<Table>
<Caption>
PRINCIPAL MARKET
AMOUNT ($) VALUE
OR SHARES $
- -----------------------------------------------------------------------------
5.036% due 03/01/07 185 183
4.933% due 03/15/07 180 178
4.936% due 03/15/07 225 223
3.051% due 05/15/07 25 25
United States Treasury Inflation Indexed Bonds
(sec.)
3.375% due 01/15/07 127 127
United States Treasury Notes (N)
4.375% due 12/31/07 1,870 1,859
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $50,318) 50,619
------------
OTHER SECURITIES - 12.2%
State Street Securities Lending Quality Trust
(X) 32,516,759 32,517
------------
TOTAL OTHER SECURITIES
(cost $32,517) 32,517
------------
TOTAL INVESTMENTS - 126.2%
(identified cost $334,072) 335,544
OTHER ASSETS AND LIABILITIES,
NET - (26.2%) (69,761)
------------
NET ASSETS - 100.0% 265,783
============
</Table>
See accompanying notes which are an integral part of the financial statements.
78 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
UNREALIZED
NOTIONAL APPRECIATION
FUTURES CONTRACTS AMOUNT (DEPRECIATION)
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Long Positions
Australian 3 Year Treasury
Bond (Australia)
expiration date 03/07 (19) 3,814 (7)
Australian 10 Year Treasury Bond
(Australia)
expiration date 03/07 (10) 5,647 (15)
Euribor Futures
expiration date 06/07 (7) 2,217 (4)
expiration date 09/07 (13) 4,114 (12)
expiration date 12/07 (7) 2,215 (7)
expiration date 03/08 (2) 633 (1)
expiration date 06/08 (1) 317 (1)
Euro-Bund Futures (Germany)
expiration date 03/07 (8) 1,224 (28)
Euro-Schatz Bond Futures (Germany)
expiration date 03/07 (10) 1,364 (8)
Eurodollar Futures (CME)
expiration date 01/07 (20) 4,732 --
expiration date 03/07 (71) 16,806 (58)
expiration date 06/07 (132) 31,274 (79)
expiration date 09/07 (286) 67,864 (129)
expiration date 12/07 (279) 66,297 (69)
expiration date 03/08 (62) 14,742 (33)
LIBOR Futures
expiration date 06/07 (4) 925 (2)
expiration date 09/07 (6) 1,388 (3)
expiration date 12/07 (2) 463 (1)
expiration date 03/08 (2) 463 (1)
expiration date 06/08 (2) 463 (2)
expiration date 09/08 (2) 463 (2)
Long Gilt Futures (UK)
expiration date 03/07 (5) 1,058 (17)
Three Month Short Sterling Interest
Rate Futures (UK)
expiration date 03/07 (19) 4,395 (9)
United States Treasury 2 Year Notes
expiration date 03/07 (25) 5,101 (20)
United States Treasury 5 Year Notes
expiration date 03/07 (108) 11,347 (86)
United States Treasury 10 Year Notes
expiration date 03/07 (28) 3,009 (26)
</Table>
<Table>
- ------------------------------------------------------------------------------------
<Caption>
UNREALIZED
NOTIONAL APPRECIATION
FUTURES CONTRACTS AMOUNT (DEPRECIATION)
(NUMBER OF CONTRACTS) $ $
United States Treasury Bonds
expiration date 03/07 (23) 2,563 (44)
Short Positions
Bankers Acceptance Futures (Canada)
expiration date 03/07 (19) 3,906 3
Euro-Bobl Futures (Germany)
expiration date 03/07 (53) 7,605 101
Japanese 10 Year Bond (Japan)
expiration date 03/07 (6) 6,750 1
United States Treasury 2 Year Notes
expiration date 03/07 (4) 816 2
United States Treasury 5 Year Notes
expiration date 03/07 (123) 12,923 73
United States Treasury 10 Year Notes
expiration date 03/07 (126) 13,541 144
---------------
Total Unrealized Appreciation (Depreciation) on
Open Futures Contracts (340)
===============
</Table>
See accompanying notes which are an integral part of the financial statements.
Core Bond Fund 79
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
NOTIONAL MARKET
OPTIONS WRITTEN AMOUNT VALUE
(NUMBER OF CONTRACTS) $ $
- ------------------------------------------------------------------------------------
Eurodollar Futures
Mar 2007 94.75 Put (4) 948 (1)
Mar 2007 95.25 Put (4) 953 (6)
Swaptions
(Fund Receives/Fund Pays)
EUR Six Month LIBOR/
EUR 4.100%
Jul 2007 0.00 Call (2) 2,640 (9)
EUR Six Month LIBOR/
EUR 4.230%
Jul 2007 0.00 Call (1) 1,320 (6)
GBP Six Month LIBOR/GBP 4.850%
Jun 2007 0.00 Call (2) 392 (1)
USD Three Month LIBOR/
USD 5.240%
Feb 2007 0.00 Call (1) 1,000 (8)
USD Three Month LIBOR/
USD 5.040%
Mar 2007 0.00 Call (2) 2,000 (10)
USD Three Month LIBOR/
USD 5.220%
Apr 2007 0.00 Call (1) 1,000 (11)
USD Three Month LIBOR/
USD 5.300%
May 2007 0.00 Call (1) 2,000 (29)
USD Three Month LIBOR/
USD 5.315%
May 2007 0.00 Call (1) 2,000 (32)
USD Three Month LIBOR/
USD 5.340%
Jun 2007 0.00 Call (1) 2,000 (32)
USD Three Month LIBOR/
USD 5.600%
Jun 2007 0.00 Call (1) 2,000 (50)
USD Three Month LIBOR/
USD 4.750%
Jul 2007 0.00 Call (1) 1,000 (4)
USD Three Month LIBOR/
USD 5.000%
Jul 2007 0.00 Call (1) 3,000 (24)
USD Three Month LIBOR/
USD 5.370%
Jul 2007 0.00 Call (1) 5,000 (87)
USD Three Month LIBOR/
USD 5.500%
Jul 2007 0.00 Call (1) 1,100 (30)
</Table>
<Table>
- ------------------------------------------------------------------------------------
<Caption>
NOTIONAL MARKET
OPTIONS WRITTEN AMOUNT VALUE
(NUMBER OF CONTRACTS) $ $
USD Three Month LIBOR/
USD 4.900%
Aug 2007 0.00 Call (1) 1,000 (7)
USD Three Month LIBOR/
USD 5.010%
Oct 2007 0.00 Call (1) 1,000 (11)
United States Treasury Bonds
Feb 2007 116.00 Call (8) 928 (1)
Feb 2007 110.00 Put (8) 880 (4)
United States Treasury Notes
2 Year Futures
Feb 2007 102.00 Call (168) 34,272 (73)
5 Year Futures
Feb 2007 106.50 Call (42) 4,473 (3)
---------------
Total Liability for Options Written
(premiums received $330) (439)
===============
</Table>
See accompanying notes which are an integral part of the financial statements.
80 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
USD 1,138 AUD 1,457 03/22/07 10
USD 1,142 AUD 1,457 03/22/07 5
USD 144 BRL 318 02/05/07 4
USD 132 CAD 149 01/11/07 (4)
USD 96 CAD 110 03/22/07 (1)
USD 496 CHF 592 03/22/07 (7)
USD 111 CNY 859 03/19/07 --
USD 36 EUR 27 01/30/07 --
USD 179 EUR 140 03/23/07 7
USD 193 EUR 150 03/23/07 6
USD 474 GBP 243 03/22/07 2
USD 1,394 GBP 712 03/22/07 1
USD 144 JPY 17,177 01/04/07 --
USD 1,951 JPY 227,520 02/15/07 (27)
USD 775 JPY 90,270 03/20/07 (9)
USD 474 NOK 2,906 03/22/07 (6)
USD 496 NOK 3,036 03/22/07 (7)
USD 759 NOK 4,640 03/22/07 (12)
USD 557 NZD 811 03/22/07 12
USD 145 PHP 7,071 03/30/07 (1)
USD 474 SEK 3,235 03/22/07 1
USD 495 SEK 3,409 03/22/07 5
USD 1,883 SEK 12,767 03/22/07 (9)
USD 42 SGD 65 01/29/07 1
USD 40 TWD 1,302 02/22/07 --
BRL 2,105 USD 956 02/02/07 (23)
CAD 131 USD 115 01/11/07 3
CAD 212 USD 184 01/11/07 2
CHF 567 USD 474 03/22/07 5
CHF 602 USD 495 03/22/07 (3)
CHF 1,883 USD 1,579 03/22/07 22
EUR 997 USD 1,330 01/23/07 13
EUR 6,867 USD 9,177 01/23/07 98
EUR 125 USD 164 01/30/07 (1)
EUR 358 USD 474 03/22/07 --
EUR 373 USD 496 03/22/07 1
EUR 2,075 USD 2,760 03/22/07 10
GBP 6 USD 12 01/11/07 --
GBP 254 USD 495 03/22/07 (3)
JPY 17,177 USD 145 01/04/07 --
JPY 17,177 USD 145 01/25/07 --
JPY 18,027 USD 155 01/25/07 3
JPY 71,049 USD 608 01/25/07 9
JPY 5,678 USD 50 01/31/07 2
JPY 17,234 USD 147 02/15/07 2
</Table>
<Table>
<Caption>
FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
AMOUNT AMOUNT SETTLEMENT (DEPRECIATION)
SOLD BOUGHT DATE $
- ------------------- -------------------- ----------- --------------
JPY 23,561 USD 204 03/22/07 4
JPY 54,767 USD 474 03/22/07 9
JPY 57,342 USD 496 03/22/07 9
JPY 57,819 USD 495 03/22/07 4
--------------
Total Unrealized Appreciation (Depreciation) on Open
Foreign Currency Exchange Contracts 137
==============
</Table>
See accompanying notes which are an integral part of the financial statements.
Core Bond Fund 81
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
INDEX SWAP CONTRACTS
- --------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL APPRECIATION
FUND RECEIVES COUNTER AMOUNT FUND PAYS TERMINATION (DEPRECIATION)
UNDERLYING SECURITY PARTY $ FLOATING RATE DATE $
- ------------------------------ ---------------- --------- ---------------------------- -------------- ----------------
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 2,000 05/31/07 3
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 1,000 minus 0.075% 06/15/07 --
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 700 minus 0.050% 06/29/07 1
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 1,000 minus 0.025% 07/16/07 1
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 1,000 minus 0.050% 07/31/07 1
CMBS AAA CMBS AAA 10 Year Index
10 Year Index Bank of America 1,250 minus 0.025% 09/28/07 3
CMBS AAA CMBS AAA 10 Year Index
10 Year Index JP Morgan 1,000 minus 0.075% 03/31/07 1
CMBS AAA CMBS AAA 10 Year Index
10 Year Index JP Morgan 800 minus 0.025% 05/31/07 1
Turkish Government Turkish Overnight Index
Bond Citibank 2,768 Tuibon plus 0.750% 07/17/08 9
----------------
Total Unrealized Appreciation (Depreciation) on Open Index Swap Contracts 20
================
</Table>
See accompanying notes which are an integral part of the financial statements.
82 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
INTEREST RATE SWAPS CONTRACTS
- -------------------------------------------------------------------------------------------------------------------
MARKET
COUNTER NOTIONAL TERMINATION VALUE
PARTY AMOUNT FUND RECEIVES FUND PAYS DATE $
- ------------------------- -------------- -------------------- -------------------- ------------ ---------
Bank of America USD 7,000 5.000% Three Month LIBOR 06/21/10 (7)
Bank of America USD 6,500 5.470% Three Month LIBOR 06/14/11 95
Bank of America USD 1,800 5.550% Three Month LIBOR 06/14/16 51
Bank of America USD 1,500 5.630% Three Month LIBOR 06/16/36 71
Barclays Bank PLC EUR 3,020 3.900% Six Month LIBOR 03/20/09 (19)
Barclays Bank PLC EUR 3,800 4.250% Six Month LIBOR 07/20/16 49
Barclays Bank PLC EUR 280 Six Month LIBOR 4.000% 03/20/37 17
Barclays Bank PLC GBP 250 5.100% Six Month LIBOR 03/20/12 (6)
Barclays Bank PLC SEK 35,000 Three Month LIBOR 4.323% 07/20/16 (424)
Barclays Bank PLC USD 1,500 5.000% Three Month LIBOR 06/20/09 (1)
BNP Paribas EUR 500 2.090% Consumer Price Index
(France) 10/15/10 8
BNP Paribas EUR 260 Six Month LIBOR 4.000% 03/20/37 16
Citibank EUR 1,690 Six Month LIBOR 3.900% 03/20/12 23
Citibank JPY 485,000 1.500% Six Month LIBOR 03/20/12 12
Citibank JPY 448,000 Six Month LIBOR 1.500% 03/20/12 (6)
Citibank JPY 192,000 1.900% Six Month LIBOR 03/20/17 5
Credit Suisse First
Boston EUR 10,670 Six Month LIBOR 3.970% 02/23/09 46
Credit Suisse First
Boston EUR 11,830 3.950% Six Month LIBOR 02/22/12 (126)
Credit Suisse First
Boston EUR 510 4.000% Six Month LIBOR 03/20/17 (11)
Credit Suisse First
Boston EUR 12,340 Three Month LIBOR 4.000% 03/20/17 43
Credit Suisse First
Boston EUR 3,680 Six Month LIBOR 4.080% 02/22/22 98
Credit Suisse First
Boston EUR 20 Six Month LIBOR 4.000% 03/20/37 1
Credit Suisse First
Boston GBP 250 Six Month LIBOR 5.100% 03/20/12 --
Credit Suisse First
Boston GBP 500 Six Month LIBOR 4.900% 03/20/17 15
Credit Suisse First
Boston USD 640 5.820% Three Month LIBOR 09/22/36 57
Credit Suisse First
Boston USD 660 Three Month LIBOR 5.250% 03/20/37 6
Deutsche Bank AUD 1,380 6.200% Six Month LIBOR 03/20/12 3
Deutsche Bank USD 790 Three Month LIBOR 5.000% 03/20/12 3
Deutsche Bank USD 8,000 5.000% Three Month LIBOR 06/20/12 (24)
Deutsche Bank USD 12,100 5.100% Three Month LIBOR 06/20/14 (8)
HSBC GBP 1,700 4.500% Six Month LIBOR 12/20/07 (31)
JP Morgan GBP 100 Six Month LIBOR 4.000% 12/15/36 16
JP Morgan USD 2,600 5.000% Three Month LIBOR 06/20/09 (2)
JP Morgan USD 1,100 5.000% Three Month LIBOR 06/20/37 (49)
Lehman Brothers GBP 60 Six Month LIBOR 4.300% 03/20/37 4
Merrill Lynch BRL 200 12.948% BRCDDEFT Index 01/04/10 1
Merrill Lynch GBP 100 4.000% Six Month LIBOR 12/15/35 --
Morgan Stanley EUR 500 6.000% Six Month LIBOR 06/18/34 105
Salomon Smith Barney MXN 33,000 8.100% Mexico Interbank 28
Day Deposit Rate 07/04/08 35
UBS Securities USD 900 5.000% Three Month LIBOR 06/20/09 (1)
---------
Total Market Value of Open Interest Rate Swap Contracts Premiums Paid (Received) - $373 65
=========
</Table>
See accompanying notes which are an integral part of the financial statements.
Core Bond Fund 83
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
SCHEDULE OF INVESTMENTS, CONTINUED -- DECEMBER 31, 2006
Amounts in thousands
<Table>
<Caption>
CREDIT DEFAULT SWAP CONTRACTS
- ----------------------------------------------------------------------------------------------------------------------
NOTIONAL FUND MARKET
REFERENCE COUNTER AMOUNT (PAYS)/RECEIVES TERMINATION VALUE
ENTITY PARTY $ FIXED RATE DATE $
- ------------------------------ ---------------- --------- ---------------- ---------------- ----------------
Anadarko Petroleum Corp. Goldman Sachs 100 0.150% 03/20/08 --
Brazilian Government Salomon Smith
International Bond Barney 800 (1.500%) 08/22/11 14
Core Investment Grade Bond Bank of America 3,000 (0.650%) 12/20/16 22
Dow Jones CDX NA High Yield
Index Lehman Brothers 750 (3.250%) 12/20/11 16
Ford Motor Company Merrill Lynch 800 1.700% 06/20/07 6
GAP, Inc. (The) Lehman Brothers 160 (1.240%) 12/20/11 1
Gaz Capital SA Morgan Stanley 200 0.570% 07/20/07 1
Republic of Indonesia Lehman Brothers 100 0.400% 12/20/08 --
Russian Federation Deutsche Bank 1,000 0.260% 12/20/07 --
Russian Federation Morgan Stanley 100 0.460% 06/20/10 --
SoftBank Corp. Deutsche Bank 7,000 2.300% 09/20/07 1
----------------
Total Market Value of Open Credit Default Contracts Premiums Paid (Received) - ($29) 61
================
</Table>
See accompanying notes which are an integral part of the financial statements.
84 Core Bond Fund
RUSSELL INVESTMENT FUNDS
CORE BOND FUND
PRESENTATION OF PORTFOLIO HOLDINGS -- DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
% OF
NET
CATEGORIES ASSETS
- -------------------------------------------------------------
Asset-Backed Securities 4.7
Certificates of Deposit 0.3
Corporate Bonds and Notes 14.0
International Debt 5.8
Loan Agreements 0.6
Mortgage-Backed Securities 48.4
Municipal Bonds 0.2
Non-US Bonds 0.4
United States Government Agencies 6.9
United States Government Treasuries 13.3
Preferred Stocks 0.2
Warrants & Rights --*
Options Purchased 0.1
Short-Term Investments 19.1
Other Securities 12.2
---------------
Total Investments 126.2
Other Assets and Liabilities, Net (26.2)
---------------
100.0
===============
Futures Contracts (0.1)
Options Written (0.2)
Foreign Currency Exchange Contracts 0.1
Index Swap Contracts --*
Interest Rate Swaps Contracts --*
Credit Default Swaps --*
</Table>
* Less than .05% of net assets
See accompanying notes which are an integral part of the financial statements.
Core Bond Fund 85
RUSSELL INVESTMENT FUNDS
NOTES TO SCHEDULES OF INVESTMENTS -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
FOOTNOTES:
(AE) Nonincome-producing security.
(o) Real Estate Investment Trust (REIT).
(sec.)All or a portion of the shares of this security are held as collateral in
connection with futures contracts purchased (sold), options written, or
swaps entered into by the Fund.
(z) Rate noted is yield-to-maturity from date of acquisition.
(c) At amortized cost, which approximates market.
(E) Adjustable or floating rate security. Rate shown reflects rate in effect
at period end.
(I) Forward commitment.
(f) Perpetual floating rate security. Rate shown reflects rate in effect at
period end.
(u) Bond is insured by a guarantor.
(ae) Pre-refunded: These bonds are collateralized by US Treasury securities,
which are held in escrow by a trustee and used to pay principal and
interest in the tax-exempt issue and to retire the bonds in full at the
earliest refunding date. The rate noted is for descriptive purposes;
effective yield may vary.
(ffl) In default.
(B) Illiquid security.
(X) The security is purchased with the cash collateral from the securities
loaned.
(N) All or a portion of the shares of this security are on loan.
(p) Restricted security. Security may have contractual restrictions on resale,
may have been offered in a private placement transaction, and may not be
registered under the Securities Act of 1933.
(A) Illiquid and restricted security.
(a) Currency balances were held in connection with futures contracts purchased
(sold), options written, or swaps entered into by the Fund. See Note 2.
ABBREVIATIONS:
144A - Represents private placement security for qualified buyers according to
rule 144A of the Securities Act of 1933.
ADR - American Depositary Receipt
ADS - American Depositary Share
CIBOR - Copenhagen Interbank Offered Rate
CME - Chicago Mercantile Exchange
CMO - Collateralized Mortgage Obligation
CVO - Contingent Value Obligation
FDIC - Federal Deposit Insurance Company
GDR - Global Depositary Receipt
GDS - Global Depositary Share
LIBOR - London Interbank Offered Rate
NIBOR - Norwegian Interbank Offered Rate
PIK - Payment in Kind
REMIC - Real Estate Mortgage Investment Conduit
STRIP - Separate Trading of Registered Interest and Principal of Securities
TBA - To Be Announced Security
FOREIGN CURRENCY ABBREVIATIONS:
<Table>
ARS - Argentine peso GBP - British pound sterling PHP - Philippine peso
AUD - Australian dollar HKD - Hong Kong dollar PLN - Polish zloty
BRL - Brazilian real HUF - Hungarian forint RUB - Russian ruble
CAD - Canadian dollar IDR - Indonesian rupiah SEK - Swedish krona
CHF - Swiss franc ILS - Israeli shekel SGD - Singapore dollar
CLP - Chilean peso INR - Indian rupee SKK - Slovakian koruna
CNY - Chinese renminbi yuan JPY - Japanese yen THB - Thai baht
COP - Colombian peso KES - Kenyan schilling TRY - Turkish lira
CRC - Costa Rica colon KRW - South Korean won TWD - Taiwanese dollar
CZK - Czech koruna MXN - Mexican peso USD - United States dollar
DKK - Danish krone MYR - Malaysian ringgit VEB - Venezuelan bolivar
EGP - Egyptian pound NOK - Norweigian krone VND - Vietnamese dong
EUR - Euro NZD - New Zealand dollar ZAR - South African rand
PEN - Peruvian nouveau sol
</Table>
86 Notes to Schedules of Investments
RUSSELL INVESTMENT FUNDS
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 2006
<Table>
<Caption>
MULTI-STYLE AGGRESSIVE NON-U.S. REAL ESTATE CORE BOND
AMOUNTS IN THOUSANDS EQUITY FUND EQUITY FUND FUND SECURITIES FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at identified cost $ 410,692 $ 269,978 $ 367,270 $ 473,788 $ 334,072
- -----------------------------------------------------------------------------------------------------------------------
Investments, at market*** 460,779 292,392 430,286 701,533 335,544
Cash -- -- 86 -- --
Cash (restricted) -- -- 1,521 -- --
Foreign currency holdings* -- -- 1,084 -- 1,218
Unrealized appreciation on foreign
currency exchange contracts -- -- 838 -- 250
Receivables:
Dividends and interest 488 220 250 3,691 1,498
Dividends from affiliated
money market funds 84 64 130 89 108
Investments sold 1,854 1,206 1,360 2,069 13,881
Fund shares sold 47 4 320 682 534
Foreign taxes recoverable -- -- 29 -- --
From Manager 2 14 2 2 14
Variation margin on futures
contracts -- -- -- -- 524
Prepaid expenses 2 1 19 2 --
Unrealized appreciation on index
swap contracts -- -- -- -- 20
Interest rate swap contracts, at
market value**** -- -- -- -- 780
Credit default swap contracts, at
market value***** -- -- -- -- 61
------------ ------------ ------------ ------------ --------------
Total assets 463,256 293,901 435,925 708,068 354,432
------------ ------------ ------------ ------------ --------------
LIABILITIES
Payables:
Due to Custodian -- -- -- -- 25
Investments purchased 2,927 1,799 1,446 2,343 54,596
Fund shares redeemed 73 146 20 660 11
Accrued fees to affiliates 279 192 309 456 137
Other accrued expenses 84 78 173 66 62
Variation margin on futures
contracts 115 69 49 -- 34
Unrealized depreciation on foreign
currency exchange contracts -- -- 958 -- 113
Options written, at market value** -- -- 317 -- 439
Payable upon return of securities
loaned 42,271 67,971 62,769 79,066 32,517
Interest rate swap contracts, at
market value**** -- -- -- -- 715
------------ ------------ ------------ ------------ --------------
Total liabilities 45,749 70,255 66,041 82,591 88,649
------------ ------------ ------------ ------------ --------------
NET ASSETS $ 417,507 $ 223,646 $ 369,884 $ 625,477 $ 265,783
============ ============ ============ ============ ==============
</Table>
See accompanying notes which are an integral part of the financial statements.
Statement of Assets and Liabilities 87
RUSSELL INVESTMENT FUNDS
STATEMENT OF ASSETS AND LIABILITIES, CONTINUED -- DECEMBER 31, 2006
<Table>
<Caption>
MULTI-STYLE AGGRESSIVE NON-U.S. REAL ESTATE CORE BOND
AMOUNTS IN THOUSANDS EQUITY FUND EQUITY FUND FUND SECURITIES FUND FUND
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets Consist of:
Undistributed (overdistributed)
net investment income $ 1,142 $ -- $ (687) $ -- $ 54
Accumulated net realized gain
(loss) (23,297) 8,371 33,063 8,325 (3,238)
Unrealized appreciation
(depreciation) on:
Investments 50,087 22,414 63,016 227,745 1,472
Futures contracts (153) (67) 451 -- (340)
Options written -- -- (11) -- (109)
Credit default swap
contracts -- -- -- -- 90
Index swap contracts -- -- -- -- 20
Interest rate swap contracts -- -- -- -- (308)
Foreign currency-related
transactions -- -- (107) -- 103
Shares of beneficial interest 280 155 246 293 262
Additional paid-in capital 389,448 192,773 273,913 389,114 267,777
-------------- -------------- -------------- -------------- ----------------
NET ASSETS $ 417,507 $ 223,646 $ 369,884 $ 625,477 $ 265,783
============== ============== ============== ============== ================
NET ASSET VALUE, offering and
redemption price per share:
Net asset value per share****** $ 14.93 $ 14.45 $ 15.01 $ 21.34 $ 10.14
Net assets $ 417,507,065 $ 223,645,757 $ 369,883,547 $ 625,477,130 $ 265,782,527
Shares outstanding ($.01 par
value) 27,968,198 15,482,422 24,639,479 29,308,364 26,223,612
- -------------------------------------------------------------------------------------------------------------------------------
Amounts in thousands
* Foreign currency holdings - cost $ -- $ -- $ 1,074 $ -- $ 1,229
** Premiums received on options
written $ -- $ -- $ 306 $ -- $ 330
*** Securities on loan included in
investments $ 41,070 $ 65,667 $ 60,540 $ 77,419 $ 31,820
**** Interest rate swap contracts
- premiums paid (received) $ -- $ -- $ -- $ -- $ 373
***** Credit default swap
contracts - premiums paid
(received) $ -- $ -- $ -- $ -- $ (29)
****** Net asset value per share equals net assets divided by shares of beneficial
interest outstanding
</Table>
See accompanying notes which are an integral part of the financial statements.
88 Statement of Assets and Liabilities
RUSSELL INVESTMENT FUNDS
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 2006
<Table>
<Caption>
AGGRESSIVE
MULTI-STYLE EQUITY NON-U.S. REAL ESTATE CORE BOND
AMOUNTS IN THOUSANDS EQUITY FUND FUND FUND SECURITIES FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 6,132 $ 1,868 $ 8,327 $ 13,697 $ 105
Dividends from affiliated
money market funds 955 581 1,307 867 1,323
Interest 50 30 122 -- 10,717
Securities lending income 45 211 382 63 12
Less foreign taxes withheld -- -- (607) -- --
------------ ------------ ------------ ------------ --------------
Total investment income 7,182 2,690 9,531 14,627 12,157
------------ ------------ ------------ ------------ --------------
EXPENSES
Management fees 2,956 2,121 3,250 4,497 1,431
Custodian fees 235 290 768 167 229
Transfer agent fees 17 10 15 23 10
Professional fees 73 57 85 69 46
Trustees' fees 10 6 9 13 6
Printing fees 7 3 6 8 4
Miscellaneous 15 8 18 20 9
------------ ------------ ------------ ------------ --------------
Expenses before reductions 3,313 2,495 4,151 4,797 1,735
Expense reductions (27) (157) (231) (11) (77)
------------ ------------ ------------ ------------ --------------
Net expenses 3,286 2,338 3,920 4,786 1,658
------------ ------------ ------------ ------------ --------------
Net investment income (loss) 3,896 352 5,611 9,841 10,499
------------ ------------ ------------ ------------ --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investments 26,919 35,391 63,853 48,221 (465)
Futures contracts 1,318 793 512 -- (587)
Options written -- -- (258) -- 309
Credit default swap
contracts -- -- -- -- (54)
Index swap contracts -- -- 469 -- (1)
Interest rate swap contracts -- -- -- -- (552)
Foreign currency-related
transactions -- -- 1,393 -- (666)
------------ ------------ ------------ ------------ --------------
Net realized gain (loss) 28,237 36,184 65,969 48,221 (2,016)
------------ ------------ ------------ ------------ --------------
Net change in unrealized
appreciation (depreciation) on:
Investments 13,777 (6,896) (655) 101,743 1,145
Futures contracts 24 94 130 -- (414)
Options written -- -- (12) -- (150)
Credit default swap
contracts -- -- -- -- 90
Index swap contracts -- -- (45) -- 20
Interest rate swap contracts -- -- -- -- (344)
Foreign currency-related
transactions -- -- 59 -- 92
------------ ------------ ------------ ------------ --------------
Net change in unrealized
appreciation
(depreciation) 13,801 (6,802) (523) 101,743 439
------------ ------------ ------------ ------------ --------------
Net realized and unrealized
gain (loss) 42,038 29,382 65,446 149,964 (1,577)
------------ ------------ ------------ ------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 45,934 $ 29,734 $ 71,057 $ 159,805 $ 8,922
============ ============ ============ ============ ==============
</Table>
See accompanying notes which are an integral part of the financial statements.
Statement of Operations 89
RUSSELL INVESTMENT FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31,
<Table>
<Caption>
MULTI-STYLE
EQUITY FUND
------------------------------
AMOUNTS IN THOUSANDS 2006 2005
- ----------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS
Net investment income
(loss) $ 3,896 $ 3,158
Net realized gain (loss) 28,237 29,276
Net change in unrealized
appreciation
(depreciation) 13,801 (8,211)
------------ --------------
Net increase (decrease) in net
assets from operations 45,934 24,223
------------ --------------
DISTRIBUTIONS
From net investment
income (3,606) (3,627)
From net realized gain -- --
------------ --------------
Net decrease in net assets
from distributions (3,606) (3,627)
------------ --------------
SHARE TRANSACTIONS
Net increase (decrease)
in net assets from
share transactions 25,520 (3,696)
------------ --------------
TOTAL NET INCREASE (DECREASE)
IN NET ASSETS 67,848 16,900
NET ASSETS
Beginning of period 349,659 332,759
------------ --------------
End of period $ 417,507 $ 349,659
============ ==============
Undistributed
(overdistributed) net
investment income
included in net assets $ 1,142 $ 852
</Table>
See accompanying notes which are an integral part of the financial statements.
90 Statements of Changes in Net Assets
<Table>
<Caption>
AGGRESSIVE EQUITY NON-U.S. REAL ESTATE
FUND FUND SECURITIES FUND
------------------------------------------------ -------------------------------- --------------------------------
2006 2005 2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
$ 352 $ 404 $ 5,611 $ 3,842 $ 9,841 $ 7,632
36,184 16,846 65,969 23,903 48,221 38,341
(6,802) (4,751) (523) 9,254 101,743 7,220
------------------------------ -------------- -------------- -------------- -------------- --------------
29,734 12,499 71,057 36,999 159,805 53,193
------------------------------ -------------- -------------- -------------- -------------- --------------
(423) (355) (8,763) (4,388) (10,448) (8,794)
(30,314) (18,690) (7,690) -- (44,446) (38,314)
------------------------------ -------------- -------------- -------------- -------------- --------------
(30,737) (19,045) (16,453) (4,388) (54,894) (47,108)
------------------------------ -------------- -------------- -------------- -------------- --------------
20,357 15,255 13,019 10,884 77,474 57,274
------------------------------ -------------- -------------- -------------- -------------- --------------
19,354 8,709 67,623 43,495 182,385 63,359
204,292 195,583 302,261 258,766 443,092 379,733
------------------------------ -------------- -------------- -------------- -------------- --------------
$ 223,646 $ 204,292 $ 369,884 $ 302,261 $ 625,477 $ 443,092
============================== ============== ============== ============== ============== ==============
$ -- $ -- $ (687) $ (1,442) $ -- $ --
<Caption>
CORE BOND
FUND
--------------------------------
2006 2005
- -------------------------------------
$ 10,499 $ 7,313
(2,016) (1,000)
439 (2,319)
-------------- --------------
8,922 3,994
-------------- --------------
(10,963) (7,205)
-- (1,809)
-------------- --------------
(10,963) (9,014)
-------------- --------------
51,050 45,943
-------------- --------------
49,009 40,923
216,774 175,851
-------------- --------------
$ 265,783 $ 216,774
============== ==============
$ 54 $ 299
</Table>
See accompanying notes which are an integral part of the financial statements.
Statements of Changes in Net Assets 91
RUSSELL INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS -- FOR THE YEARS ENDED
For a Share Outstanding Throughout Each Period.
<Table>
<Caption>
$ $ $ $
NET ASSET VALUE, NET NET REALIZED TOTAL INCOME
BEGINNING OF INVESTMENT AND UNREALIZED (LOSS) FROM
PERIOD INCOME (LOSS)(A) GAIN (LOSS) OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
MULTI-STYLE EQUITY FUND
December 31, 2006 13.37 .14 1.55 1.69
December 31, 2005 12.60 .12 .79 .91
December 31, 2004 11.56 .11 1.02 1.13
December 31, 2003 9.04 .08 2.51 2.59
December 31, 2002 11.84 .06 (2.80) (2.74)
- --------------------------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
December 31, 2006 14.40 .03 2.10 2.13
December 31, 2005 14.90 .03 .90 .93
December 31, 2004 13.47 .02 1.95 1.97
December 31, 2003 9.26 .01 4.21 4.22
December 31, 2002 11.44 (.02) (2.16) (2.18)
- --------------------------------------------------------------------------------------------------------------------
NON-U.S. FUND
December 31, 2006 12.68 .23 2.75 2.98
December 31, 2005 11.33 .16 1.38 1.54
December 31, 2004 9.76 .11 1.66 1.77
December 31, 2003 7.20 .09 2.69 2.78
December 31, 2002 8.64 .06 (1.37) (1.31)
- --------------------------------------------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
December 31, 2006 17.28 .37 5.72 6.09
December 31, 2005 17.09 .32 1.82 2.14
December 31, 2004 13.71 .36 4.33 4.69
December 31, 2003 10.51 .55 3.28 3.83
December 31, 2002 10.75 .54 (.13) .41
- --------------------------------------------------------------------------------------------------------------------
CORE BOND FUND
December 31, 2006 10.23 .45 (.08) .37
December 31, 2005 10.50 .38 (.17) .21
December 31, 2004 10.47 .24 .24 .48
December 31, 2003 10.43 .31 .31 .62
December 31, 2002 10.13 .36 .52 .88
- --------------------------------------------------------------------------------------------------------------------
<Caption>
$ $
DISTRIBUTIONS DISTRIBUTIONS $
FROM NET FROM NET RETURN OF
INVESTMENT INCOME REALIZED GAIN CAPITAL
- --------------------------------------------------------------------------------------------
MULTI-STYLE EQUITY FUND
December 31, 2006 (.13) -- --
December 31, 2005 (.14) -- --
December 31, 2004 (.09) -- --
December 31, 2003 (.07) -- --
December 31, 2002 (.06) -- --
- --------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
December 31, 2006 (.03) (2.05) --
December 31, 2005 (.03) (1.40) --
December 31, 2004 (.02) (.52) --
December 31, 2003 (.01) -- --
December 31, 2002 -- -- --
- --------------------------------------------------------------------------------------------
NON-U.S. FUND
December 31, 2006 (.35) (.30) --
December 31, 2005 (.19) -- --
December 31, 2004 (.20) -- --
December 31, 2003 (.22) -- --
December 31, 2002 (.13) -- --
- --------------------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
December 31, 2006 (.39) (1.64) --
December 31, 2005 (.37) (1.58) --
December 31, 2004 (.36) (.95) --
December 31, 2003 (.61) -- (.02)
December 31, 2002 (.57) (.08) --
- --------------------------------------------------------------------------------------------
CORE BOND FUND
December 31, 2006 (.46) -- --
December 31, 2005 (.37) (.11) --
December 31, 2004 (.26) (.19) --
December 31, 2003 (.38) (.20) --
December 31, 2002 (.30) (.28) --
- --------------------------------------------------------------------------------------------
</Table>
(a) Average month-end shares were used for this calculation.
(b) May reflect amounts waived and/or reimbursed by RIMCo as the manager and
transfer agent, and custody credit arrangements.
See accompanying notes which are an integral part of the financial statements.
92 Financial Highlights
<Table>
<Caption>
% %
$ RATIO OF EXPENSES RATIO OF EXPENSES
$ $ % NET ASSETS, END TO AVERAGE TO AVERAGE
TOTAL NET ASSET VALUE, TOTAL OF PERIOD NET ASSETS, NET ASSETS,
DISTRIBUTIONS END OF PERIOD RETURN (000) NET(B) GROSS
- ---------------------------------------------------------------------------------------------------------------------
(.13) 14.93 12.75 417,507 .87 .87
(.14) 13.37 7.27 349,659 .83 .87
(.09) 12.60 9.81 332,759 .87 .88
(.07) 11.56 28.86 296,767 .87 .95
(.06) 9.04 (23.19) 206,794 .92 .99
- ---------------------------------------------------------------------------------------------------------------------
(2.08) 14.45 14.79 223,646 1.05 1.12
(1.43) 14.40 6.36 204,292 .99 1.13
(.54) 14.90 14.73 195,583 1.05 1.17
(.01) 13.47 45.60 166,385 1.06 1.26
-- 9.26 (19.06) 97,794 1.25 1.36
- ---------------------------------------------------------------------------------------------------------------------
(.65) 15.01 23.64 369,884 1.15 1.21
(.19) 12.68 13.69 302,261 1.12 1.26
(.20) 11.33 18.30 258,766 1.15 1.28
(.22) 9.76 38.78 206,619 1.16 1.41
(.13) 7.20 (15.15) 137,840 1.30 1.48
- ---------------------------------------------------------------------------------------------------------------------
(2.03) 21.34 35.84 625,477 .90 .91
(1.95) 17.28 12.96 443,092 .91 .91
(1.31) 17.09 34.88 379,733 .92 .92
(.63) 13.71 37.21 254,691 .95 .95
(.65) 10.51 3.80 160,176 .99 .99
- ---------------------------------------------------------------------------------------------------------------------
(.46) 10.14 3.72 265,783 .70 .73
(.48) 10.23 2.01 216,774 .70 .72
(.45) 10.50 4.66 175,851 .70 .73
(.58) 10.47 6.15 147,202 .71 .78
(.58) 10.43 8.84 140,280 .80 .80
- ---------------------------------------------------------------------------------------------------------------------
<Caption>
%
RATIO OF NET
INVESTMENT INCOME %
TO AVERAGE PORTFOLIO
NET ASSETS(B) TURNOVER RATE
- ---------------------------------------
1.03 128.33
.94 130.00
.96 123.29
.82 107.67
.61 145.90
- ---------------------------------------
.16 183.55
.21 130.09
.17 150.26
.10 138.95
(.17) 139.24
- ---------------------------------------
1.64 110.77
1.41 87.98
1.11 73.45
1.14 50.29
.77 60.98
- ---------------------------------------
1.86 52.63
1.86 64.24
2.43 47.21
4.66 38.84
5.01 55.43
- ---------------------------------------
4.40 452.50
3.70 192.66
2.41 216.23
2.86 232.64
3.52 207.60
- ---------------------------------------
</Table>
See accompanying notes which are an integral part of the financial statements.
Financial Highlights 93
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
1. ORGANIZATION
Russell Investment Funds (the "Investment Company") is a series investment
company with five different investment portfolios referred to as Funds. These
financial statements report on all five of the Funds. The Investment Company
provides the investment base for one or more variable insurance products
issued by one or more insurance companies. These Funds are offered at net
asset value to qualified insurance company separate accounts offering
variable insurance products. The Investment Company is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. It is organized and operates as a Massachusetts business
trust under a master trust agreement dated July 11, 1996. The Investment
Company's master trust agreement permits the Board of Trustees (the "Board")
to issue an unlimited number of shares of beneficial interest at a $.01 par
value per share.
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds' financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") which
require the use of management estimates and assumptions at the date of the
financial statements. Actual results could differ from those estimates. The
following is a summary of the significant accounting policies consistently
followed by each Fund in the preparation of its financial statements.
Security Valuation
The Funds value portfolio securities according to Board-approved Securities
Valuation Procedures, including Market Value Procedures, Fair Value
Procedures and Pricing Services. Debt obligation securities maturing within
60 days of the time of purchase are priced using the amortized cost method of
valuation, unless the Board determines that amortized cost does not represent
market value of short-term debt obligations. The Board has delegated the
responsibility for administration of the Securities Valuation Procedures to
Russell Investment Management Company ("RIMCo" or "Manager"). On July 1,
2006, Frank Russell Investment Management Company changed its name to RIMCo.
Ordinarily, the Funds value each portfolio security based on market
quotations provided by Pricing Services or alternative pricing services or
dealers (when permitted by the Market Value Procedures). Generally, Fund
securities are valued at the close of the market on which they are traded as
follows:
- US listed equities; equity and fixed income options: Last sale price; last
bid price if no last sale price;
- US over-the-counter equities: Official closing price; last bid price if no
closing price;
- Listed ADRs/GDRs: Last sale price; last bid price if no sales;
- Municipal bonds, US bonds, Eurobonds/foreign bonds: Evaluated bid price;
broker quote if no evaluated bid price;
- Futures: Settlement price.
- Investments in other mutual funds are valued at their net asset value per
share, calculated at 4 p.m. Eastern time or as of the close of the New York
Stock Exchange, whichever is earlier.
- The value of swap agreements are equal to the Funds' obligation (or rights)
under swap contracts which will generally be equal to the net amounts to be
paid or received under the contracts based upon the relative values of the
positions held by each party to the contracts.
- Equity securities traded on a national securities foreign exchange or an
over-the-counter market (foreign or domestic) are valued on the basis of
the official closing price, or lacking the official closing price, at the
last sale price of the primary exchange on which the security is traded.
If market quotations are not readily available for a security or if
subsequent events suggest that a market quotation is not reliable, the Funds
will use the security's fair value, as determined in accordance with the Fair
Value Procedures. This generally means that equity securities and fixed
income securities listed and traded principally on any national securities
exchange are valued on the basis of the last sale price or, lacking any
sales, at the closing bid price, on the primary exchange on which the
security is traded. The Fair Value Procedures may involve subjective
judgments as to the fair value of securities. The effect of fair value
pricing is that securities may not be priced on the basis of quotations from
the primary market in which they are traded, but rather may be priced by
another method that the Funds' Board of Trustees believes reflects fair
value. The use of fair value pricing by a Fund may cause the net asset value
of its shares to differ significantly from the net asset value that would
94 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
be calculated using normal pricing methods. Fair value pricing could also
cause discrepancies between the daily movement of the value of Fund shares
and the daily movement of the benchmark index if the index is valued using
another pricing method.
This policy is intended to assure that the Funds' net asset values fairly
reflect security values as of the time of pricing. Events or circumstances
affecting the values of Fund securities that occur between the closing of the
principal markets on which they trade and the time the net asset value of
Fund shares is determined may be reflected in the calculation of net asset
values for each applicable Fund when the Funds deem that the particular event
or circumstance would materially affect such Fund's net asset value. Funds
that invest primarily in frequently traded exchange listed securities will
use fair value pricing in limited circumstances since reliable market
quotations will often be readily available. Funds that invest in foreign
securities are likely to use fair value pricing more often since significant
events may occur between the close of foreign markets and the time of pricing
which would trigger fair value pricing of the foreign securities. Funds that
invest in low rated debt securities are also likely to use fair value pricing
more often since the markets in which such securities are traded are
generally thinner, more limited and less active than those for higher rated
securities. Examples of events that could trigger fair value pricing of one
or more securities are: a material market movement of the US securities
market (defined in the Fair Value Procedures as the movement by any two of
four major US Indexes greater than a certain percentage) or other significant
event; foreign market holidays if on a daily basis, Fund exposure exceeds 20%
in aggregate (all closed markets combined); a company development; a natural
disaster; or an armed conflict.
Because foreign securities can trade on non-business days, the net asset
value of a Fund's portfolio that includes foreign securities may change on
days when shareholders will not be able to purchase or redeem fund shares.
In September 2006, Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), was issued and is effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. Management is currently evaluating the impact the adoption of
SFAS 157 will have on the Funds' financial statement disclosure.
Investment Transactions
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions, if any, are recorded on the basis of
specific identified cost incurred by each money manager within a particular
Fund.
Investment Income
Dividend income is recorded net of applicable withholding taxes on the
ex-dividend date, except that certain dividends from foreign securities are
recorded as soon thereafter as the Funds are informed of the ex-dividend
date. Interest income is recorded daily on the accrual basis. The Core Bond
Fund classifies gains and losses realized on prepayments received on
mortgage-backed securities as part of interest income. All premiums and
discounts, including original issue discounts, are amortized/accreted using
the interest method.
Federal Income Taxes
Since the Investment Company is a Massachusetts business trust, each Fund is
a separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income and capital gains. Therefore, no federal
income tax provision was required for the Funds.
In July 2006, Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement 109 (FIN 48) was issued and is effective for fiscal years beginning
after December 15, 2006. FIN 48 sets forth a threshold for financial
statement recognition, measurement and disclosure of a tax position taken or
expected to be taken on a tax return. Management is currently evaluating the
impact, if any, the adoption of FIN 48 will have on the Fund's net assets and
results of operations.
Dividends and Distributions to Shareholders
For all Funds, income and capital gain distributions, if any, are recorded on
the ex-dividend date. Income distributions are generally declared and paid
quarterly, except for the Non-U.S. Fund, which generally declares and pays
income distributions annually. Capital gain distributions are generally
declared and paid annually. An additional distribution may be paid by the
Notes to Financial Statements 95
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
Funds to avoid imposition of federal income and excise tax on any remaining
undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from GAAP. As a result, net investment income and net realized
gain (or loss) on investment and foreign currency-related transactions for a
reporting period may differ significantly from distributions during such
period. The differences between tax regulations and GAAP primarily relate to
investments in options, futures, forward contracts, swap contracts, passive
foreign investment companies, foreign-denominated investments,
mortgage-backed securities, certain securities sold at a loss and capital
loss carryforwards.
Expenses
The Funds will pay their own expenses other than those expressly assumed by
RIMCo. Most expenses can be directly attributed to the individual Funds.
Expenses which cannot be directly attributed to a specific Fund are allocated
among all Funds principally based on their relative net assets.
Foreign Currency Translations
The books and records of the Funds are maintained in US dollars. Foreign
currency amounts and transactions of the Funds are translated into US dollars
on the following basis:
(a) Market value of investment securities, other assets and liabilities at
the closing rate of exchange on the valuation date.
(b) Purchases and sales of investment securities and income at the closing
rate of exchange prevailing on the respective trade dates of such
transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities; sales
of foreign currencies; currency gains or losses realized between the trade
and settlement dates on securities transactions; the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Non-U.S. Fund's books and the US dollar equivalent of the amounts actually
received or paid. Net unrealized gains or losses from foreign
currency-related transactions arise from changes in the value of assets and
liabilities, other than investments in securities, at year-end, as a result
of changes in the exchange rates.
The Funds do not isolate that portion of the results of operations of the
Funds that arises as a result of changes in exchange rates from that portion
that arises from changes in market prices of investments during the year.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments. However, for federal income tax purposes the Funds do
isolate the effects of changes in foreign exchange rates from the
fluctuations arising from changes in market prices for realized gain (or
loss) on debt obligations.
Capital Gains Taxes
The Non-U.S. Fund may be subject to capital gains taxes and repatriation
taxes imposed by certain countries in which it invests. The Non-U.S. Fund may
record a deferred tax liability in respect of unrealized appreciation on
foreign securities for potential capital gains and repatriation taxes at
December 31, 2006. The accrual for capital gains and repatriation taxes is
included in net unrealized appreciation (depreciation) on investments in the
Statement of Assets and Liabilities for the Non-U.S. Fund, if applicable. The
amounts related to capital gains taxes are included in net realized gain
(loss) on investments in the Statement of Operations for the Fund. The
Non-U.S. Fund had no deferred tax liability or capital gains taxes for the
period ended December 31, 2006.
Derivatives
To the extent permitted by the investment objectives, restrictions and
policies set forth in the Funds' Prospectus and Statement of Additional
Information, the Funds may participate in various derivative-based
transactions. Derivative securities are instruments or agreements whose value
is derived from an underlying security or index. They include options,
futures, swaps, swaptions, forwards, structured notes and stripped
securities. These instruments offer unique characteristics and risks that
assist the Funds in meeting their investment strategies.
The Funds typically use derivatives in two ways: hedging and return
enhancement. The Funds may use a hedging strategy for their cash reserves to
achieve a strategy of being fully invested by exposing those reserves to the
performance of appropriate markets by purchasing equity or fixed income
securities, as appropriate, and/or derivatives. Hedging is also used by some
96 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
Funds to limit or control risks, such as adverse movements in exchange rates
and interest rates. Return enhancement can be accomplished through the use of
derivatives in a Fund. By purchasing certain instruments, Funds may more
effectively achieve the desired portfolio characteristics that assist them in
meeting their investment objectives. Depending on how the derivatives are
structured and utilized, the risks associated with them may vary widely.
These risks are generally categorized as market risk, liquidity risk and
counterparty or credit risk.
Foreign Currency Exchange Contracts
In connection with portfolio purchases and sales of securities denominated in
a foreign currency, the Non-U.S. and Core Bond Funds may enter into foreign
currency exchange spot contracts and forward foreign currency exchange
contracts ("contracts"). The Non-U.S. and Core Bond Funds may enter into
foreign currency forward overlays on liquidity reserve balances.
Additionally, from time to time the Non-U.S. and Core Bond Funds may enter
into contracts to hedge certain foreign currency-denominated assets.
Contracts are recorded at market value. Certain risks may arise upon entering
into these contracts from the potential inability of counterparties to meet
the terms of their contracts and are generally limited to the amount of
unrealized gain on the contracts, if any, that are recognized in the
Statement of Assets and Liabilities. Realized gains or losses arising from
such transactions are included in net realized gain (or loss) from foreign
currency-related transactions. Open contracts at December 31, 2006 are
presented on the Schedule of Investments for the Non-U.S. and Core Bond
Funds.
Forward Commitments
The Funds may contract to purchase securities for a fixed price at a future
date beyond customary settlement time consistent with a Fund's ability to
manage its investment portfolio and meet redemption requests. The price of
the underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The Funds
may dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such sale.
When effecting such transactions, cash or liquid high-grade debt obligations
of the Fund in a dollar amount sufficient to make payment for the portfolio
securities to be purchased will be segregated on the Fund's records at the
trade date and maintained until the transaction is settled. A forward
commitment transaction involves a risk of loss if the value of the security
to be purchased declines prior to the settlement date or the other party to
the transaction fails to complete the transaction.
Loan Agreements
The Core Bond Fund may invest in direct debt instruments which are interests
in amounts owed by corporate, governmental, or other borrowers to lenders or
lending syndicates. A Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, a Fund has the right to receive payments
of principal, interest and any fees to which it is entitled only from the
lender selling the loan agreement and only upon receipt by the lender of
payments from the borrower. A Fund generally has no right to enforce
compliance with the terms of the loan agreement with the borrower. As a
result, a Fund may be subject to the credit risk of both the borrower and the
lender that is selling the loan agreement. When a Fund purchases assignments
from lenders it acquires direct rights against the borrower on the loan. For
the period ended December 31, 2006, there were no unfunded loan commitments
in the Core Bond Fund.
Options
The Funds may purchase and sell (write) call and put options on securities
and securities indices, provided such options are traded on a national
securities exchange or in an over-the-counter market. The Funds may also
purchase and sell call and put options on foreign currencies. The domestic
equity Funds may utilize options to equitize liquidity reserve balances.
When a Fund writes a covered call or a put option, an amount equal to the
premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. The Fund receives a premium on the sale of a
call option but gives up the opportunity to profit from any increase in stock
value above the exercise price of the option, and when the Fund writes a put
option it is exposed to a decline in the price of the underlying security.
Whether an option which the Fund has written either expires on its stipulated
expiration date or the Fund enters into a closing purchase transaction, the
Fund realizes a gain (or loss, if the cost of a closing purchase transaction
exceeds the premium received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the liability related
to such option is extinguished. If a call option which the Fund has written
is exercised, the Fund realizes a capital gain
Notes to Financial Statements 97
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
or loss from the sale of the underlying security, and the proceeds from such
sale are increased by the premium originally received. When a put option
which a Fund has written is exercised, the amount of the premium originally
received will reduce the cost of the security which a Fund purchases upon
exercise of the option. Realized gains (losses) on purchased options are
included in net realized gain (loss) from investments.
The Funds' use of written options involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The face or contract amounts of these instruments reflect the
extent of the Funds' exposure to market risk. The risks may be caused by an
imperfect correlation between movements in the price of the instrument and
the price of the underlying securities and interest rates.
Futures Contracts
The Funds may invest in futures contracts (i.e., interest rate, foreign
currency and index futures contracts) to a limited extent. The face or
contract amounts of these instruments reflect the extent of the Funds'
exposure to off balance sheet risk. The primary risks associated with the use
of futures contracts are an imperfect correlation between the change in
market value of the securities held by the Fund and the prices of futures
contracts and the possibility of an illiquid market. Upon entering into a
futures contract, the Funds are required to deposit with a broker an amount,
termed the initial margin, which typically represents 5% of the purchase
price indicated in the futures contract. Payments to and from the broker,
known as variation margin, are made as the price of the futures contract
fluctuates. Changes in initial settlement value are accounted for as
unrealized appreciation (depreciation) until the contracts are terminated, at
which time realized gains and losses are recognized. As of December 31, 2006,
included in the Statement of Assets and Liabilities, the Non-U.S. Fund had
cash collateral balances of $1,520,911 in connection with futures contracts
purchased (sold).
Swap Agreements
The Funds may enter into several different types of agreements including
interest rate, index, credit default and currency swaps.
The Funds may enter into index swap agreements as an additional hedging
strategy for cash reserves held by those Funds or to effect investment
transactions consistent with these Funds' investment objectives and
strategies. Swap agreements are two party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard swap transaction, the two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on
particular investments or instruments. The returns to be exchanged between
the parties are calculated with respect to a "notional amount" (i.e. a
specified dollar amount that is hypothetically invested in a "basket" of
securities representing a particular index). Amounts paid to and received
from the swap counterparties representing capital appreciation and
depreciation on the underlying securities and accrued interest expense and
interest income are recorded as net realized gain (loss). The Funds are
exposed to credit risk in the event of non-performance by the swap
counterparties; however, the Funds do not anticipate non-performance by the
counterparties.
The Funds may enter into swap agreements, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities, and will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the Funds receiving or paying, as the
case may be, only the net amount of the two payments. When the Fund engages
in a swap, it exchanges its obligations to pay or rights to receive payments
for the obligations or rights to receive payments of another party (i.e., an
exchange of floating rate payments for fixed rate payments).
Interest rate swaps are a counterparty agreement and can be customized to
meet each party's needs and involves the exchange of a fixed payment per
period for a payment that is not fixed. Currency swaps are an agreement where
two parties exchange specified amounts of different currencies which are
followed by a series of interest payments that are exchanged based on the
principal cash flow. At maturity the principal amounts are exchanged back.
Credit default swaps are a counterparty agreement which allows the transfer
of third party credit risk (the possibility that an issuer will default on
their obligation by failing to pay principal or interest in a timely manner)
from one party to another. The lender faces the credit risk from a third
party and the counterparty in the swap agrees to insure this risk in exchange
for regular periodic payments.
The Funds expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The net amount of the excess, if any, of the
Funds' obligations over its entitlements with respect to each swap will be
accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Funds' custodian. To
the extent that the Funds enters into swaps on other than a net basis, the
amount maintained in a segregated account will be the full amount of the
Funds'
98 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis. If there is a default by the other party to such a transaction,
the Funds will have contractual remedies pursuant to the agreement related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.
Investments in Emerging Markets
Investing in emerging markets may involve special risks and considerations
not typically associated with investing in the United States markets. These
risks include revaluation of currencies, high rates of inflation,
repatriation, restrictions on income and capital, and future adverse
political and economic developments. Moreover, securities issued in these
markets may be less liquid, subject to government ownership controls, delayed
settlements, and their prices may be more volatile than those of comparable
securities in the United States.
Mortgage-Related and Other Asset-Backed Securities
The Core Bond Fund may invest in mortgage or other asset-backed securities.
Theses securities include mortgage pass-through securities, collateralized
mortgage obligations ("CMOs"), commercial mortgage-backed securities,
mortgage dollar rolls, CMO residuals, stripped mortgage backed securities
("SMBSs") and other securities that directly or indirectly represent a
participation in, or are secured by a payable from, mortgage loans on real
property. The value of some mortgage or asset-backed securities may be
particularly sensitive to changes in prevailing interest rates. Early
repayment of principal on some mortgage-related securities may expose a Fund
to a lower rate of return upon reinvestment of principal. The value of these
securities may fluctuate in response to the market's perception of the
creditworthiness of the issuers. Additionally, although mortgages and
mortgage related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will meet their obligations.
One type of SMBS has one class receiving all of the interest from the
mortgage assets (the interest-only, or "IO" class), while the other class
will receive all of the principal (the principal-only, or "PO" class).
Payments received for the IOs are included in interest income on the
Statement of Operations. Because principal will not be received at the
maturity of an IO, adjustments are made to the book value of the security on
a daily basis until maturity. These adjustments are included in interest
income on the Statement of Operations. Payments received for POs are treated
as reductions to the cost and par value of the securities.
Inflation-Indexed Bonds
The Core Bond Fund may invest in inflation-indexed bonds. Inflation-indexed
bonds are fixed-income securities whose principal value is periodically
adjusted to the rate of inflation. The interest rate on these bonds is
generally fixed at issuance at a rate lower than typical bonds. Over the life
of an inflation-indexed bond, however, interest will be paid based on a
principal value, which is adjusted for inflation. Any increase in the
principal amount of an inflation-indexed bond will be included as interest
income in the Statement of Operations, even though investors do not receive
their principal until maturity.
Guarantees
In the normal course of business the Funds enter into contracts that contain
a variety of representations which provide general indemnifications. The
Funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Funds that have not yet
occurred. However, the Funds expect the risk of loss to be remote.
3. INVESTMENT TRANSACTIONS
Securities
During the period ended December 31, 2006, purchases and sales of investment
securities (excluding US Government and Agency obligations, short-term
investments, options, futures and repurchase agreements) were as follows:
<Table>
<Caption>
FUNDS PURCHASES SALES
--------------------------------------------------------------------------------
Multi-Style Equity $ 486,866,474 $ 459,995,990
Aggressive Equity 384,684,905 393,988,508
Non-U.S. 347,086,993 350,494,257
Real Estate Securities 298,237,259 270,627,617
Core Bond 745,080,018 642,421,139
</Table>
Notes to Financial Statements 99
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
Purchases and sales of US Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were as
follows:
<Table>
<Caption>
FUND PURCHASES SALES
--------------------------------------------------------------------------------
Core Bond $ 251,083,741 $ 273,936,652
</Table>
Written Options Contracts
Transactions in written options contracts for the period ended December 31,
2006 were as follows:
<Table>
<Caption>
NON-U.S. FUND CORE BOND FUND
------------------------------------------ ------------------------------------------
NUMBER OF PREMIUMS NUMBER OF PREMIUMS
CONTRACTS RECEIVED CONTRACTS RECEIVED
------------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 2005 11 $ 42,642 183 $ 184,555
Opened 519 2,592,472 856 497,825
Closed (465) (2,298,266) (554) (218,211)
Expired (5) (30,794) (232) (134,373)
------------------- ------------------- ------------------- -------------------
Outstanding December 31, 2006 60 $ 306,054 253 $ 329,796
=================== =================== =================== ===================
</Table>
Securities Lending
The Investment Company has a securities lending program whereby each Fund can
loan securities with a value up to 33 1/3% of its total assets. The Fund
receives cash (US currency), US Government or US Government agency
obligations as collateral against the loaned securities. To the extent that a
loan is collateralized by cash, such collateral is invested by the securities
lending agent, State Street Corporation ("State Street") in short-term
instruments, money market mutual funds and other short-term investments that
meet certain quality and diversification requirements. Cash collateral
invested in money market funds is included in the Schedule of Investments.
The collateral received is recorded on a lending Fund's statement of assets
and liabilities along with the related obligation to return the collateral.
Income generated from the investment of cash collateral, less negotiated
rebate fees paid to participating brokers and transaction costs, is divided
between the Fund and State Street and is recorded as income for the Fund. To
the extent that a loan is secured by non-cash collateral, brokers pay the
Fund negotiated lenders' fees, which are divided between the Fund and State
Street and are recorded as securities lending income for the Fund. All
collateral received will be in an amount at least equal to 102% (for loans of
US securities) or 105% (for Non-U.S. securities) of the market value of the
loaned securities at the inception of each loan. The market value of the
loaned securities is determined at the close of business of the Funds and any
additional required collateral is delivered to the Fund the next day. Should
the borrower of the securities fail financially, there is a risk of delay in
recovery of the securities or loss of rights in the collateral. Consequently,
loans are made only to borrowers which are deemed to be of good financial
standing.
As of December 31, 2006, the non-cash collateral received for the securities
on loan in the Non-U.S. Fund was $464,428. The non-cash collateral consists
of a pool of US Government securities.
4. RELATED PARTY TRANSACTIONS, FEES AND EXPENSES
Manager
RIMCo manages all of the Funds which comprise the Investment Company. RIMCo
is a wholly-owned subsidiary of Frank Russell Company (a subsidiary of The
Northwestern Mutual Life Insurance Company). Frank Russell Company provides
money manager evaluation services to RIMCo.
The Funds are permitted to invest their cash reserves (i.e., cash awaiting
investment or cash held to meet redemption requests or to pay expenses), and
also may invest a portion of the collateral received from the Investment
Company's securities lending program in the Russell Investment Company
("RIC") Money Market Fund. RIC is a registered investment company that
employs the same investment adviser as the Investment Company. On July 1,
2006, Frank Russell Investment Company changed its name to Russell Investment
Company ("RIC"). As of December 31, 2006, $98,832,000 of the Money Market
Fund's net assets represents investments by the Funds.
The management fees are based upon the average daily net assets of each Fund
and the rates specified in the table below are payable monthly and total
$14,254,592 for the period ended December 31, 2006.
100 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
<Table>
<Caption>
FUNDS ANNUAL RATE
-----------------------------------------------------
Multi-Style Equity 0.78%
Aggressive Equity 0.95
Non-U.S. 0.95
Real Estate Securities 0.85
Core Bond 0.60
</Table>
RIMCo has contractually agreed to waive, at least until April 30, 2007, a
portion of its management fee for each Fund, up to the full amount of its
fee, equal to the amount by which the Fund's total operating expenses exceed
a specified percentage of a Fund's average net assets on an annual basis and
to reimburse each Fund for all remaining expenses, after fee waivers, that
exceed such percentages. There were no contractual reimbursements for the
period ended December 31, 2006. The expense caps and management fees waived
for the period ended December 31, 2006 were as follows:
<Table>
<Caption>
MANAGEMENT
FUNDS EXPENSE CAP FEES WAIVED
----------------------------------------------------------------------
Multi-Style Equity 0.87% $ 17,280
Aggressive Equity 1.05 150,505
Non-U.S. 1.15 217,375
Real Estate Securities 1.10 --
Core Bond 0.70 50,844
</Table>
RIMCo does not have the ability to recover amounts waived or reimbursed from
previous periods.
Effective August 1, 2006, the Manager has voluntarily agreed to temporarily
waive a portion of the Fund's advisory fee equal to the advisory fee paid by
the Fund to the Money Market Fund. For the period ended December 31, 2006,
the advisory fees waived are as follows:
<Table>
<Caption>
FUNDS AMOUNT
-------------------------------------------------------
Multi-Style Equity $ 8,701
Aggressive Equity 5,140
Non-U.S. 12,146
Real Estate Securities 7,952
Core Bond 10,881
</Table>
Custodian
The Funds have entered into arrangements with their Custodian whereby custody
credits realized as a result of uninvested cash balances were used to reduce
a portion of the Funds' expenses. For the period ended December 31, 2006, the
Funds' custodian fees were reduced by the following amounts under these
arrangements:
<Table>
<Caption>
CUSTODY CREDIT
FUNDS AMOUNT
-------------------------------------------------------
Multi-Style Equity $ 1,488
Aggressive Equity 1,725
Non-U.S. 1,728
Real Estate Securities 3,041
Core Bond 15,311
</Table>
Transfer Agent
RIMCo serves as Transfer and Dividend Disbursing Agent for the Investment
Company. For this service, RIMCo is paid a fee for transfer agency and
dividend disbursing services provided to the Funds. RIMCo retains a portion
of this fee for its services provided to the Funds and pays the balance to
unaffiliated agents who assist in providing these services. Total fees for
the Funds for the period ended December 31, 2006 were $75,322.
Distributor
Russell Fund Distributors, Inc. (the "Distributor"), a wholly-owned
subsidiary of RIMCo, is the principal underwriter for Investment Company
shares. The Distributor receives no compensation from the Investment Company
for its services.
Notes to Financial Statements 101
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
Brokerage Commissions
The Funds will effect certain transactions through Russell Implementation
Services Inc. ("RIS") (On July 1, 2006 Frank Russell Securities, Inc. ("FRS")
changed its name to Russell Implementation Services) and its global network
of unaffiliated correspondent brokers. RIS is a registered broker and
investment adviser and an affiliate of RIMCo. Trades placed through RIS and
its correspondents are used (i) to manage trading associated with changes in
managers, rebalancing across existing managers, cash flows and other
portfolio transitions, (ii) to execute portfolio securities transactions
selected by money managers or (iii) beginning in early 2006, to execute
portfolio securities transactions for each Fund's assets that RIMCo
determines not to allocate to money managers, including assets allocated to
the "select holdings" strategy, and for each Fund's cash reserves. Effective
January 1, 2006, the Funds began transitioning trades used to obtain research
services and to generate commission rebates from RIS and LJR (as defined and
described more fully below). During the transition, some of these trades may
continue to be executed through RIS. For purposes of trading to obtain
research services for RIMCo or to generate commission rebates to the Funds,
the Funds' money managers are requested to and RIMCo may, with respect to
transactions it places, effect transactions with or through RIS and its
correspondents or other brokers only to the extent that the Funds will
receive competitive execution, price and commissions. Research services
provided to RIMCo by RIS or other brokers include performance measurement
statistics, fund analytics systems and market monitoring systems. Research
services will generally be obtained from unaffiliated third parties at market
rates. Research provided to RIMCo may benefit the particular Funds generating
the trading activity and may also benefit other Funds within the Investment
Company and other funds and clients managed or advised by RIMCo or its
affiliates. Similarly, the Funds may benefit from research provided with
respect to trading by those other funds and clients. In some cases, research
may also be provided by non-affiliated brokers.
The Funds effect transactions though Lynch, Jones & Ryan, Inc. ("LJR") and
its global network of correspondent brokers. LJR is a registered broker and
is not an affiliate of the Funds or RIMCo. Trades placed through LJR and its
correspondents are used (i) to obtain research services for RIMCo to assist
it in its capacity as a manager of managers and (ii) to generate commission
rebates to the Funds on whose behalf the trades were made. For purposes of
trading to obtain research services for RIMCo or to generate commission
rebates to the Funds, the Funds' money managers are requested to and RIMCo
may, with respect to transactions it places, effect transactions with or
through LJR and its correspondents or other brokers only to the extent that
the Funds will receive competitive execution, price and commissions. In
addition, RIMCo recommends targets for the amount of trading that money
managers allocate through LJR based upon asset class, investment style and
other factors. Research services provided to RIMCo by LJR or other brokers
include performance measurement statistics, fund analytics systems and market
monitoring systems. Research services will generally be obtained from
unaffiliated third parties at market rates. Research provided to RIMCo may
benefit the particular Funds generating the trading activity and may also
benefit other Funds within the Investment Company and other funds and clients
managed or advised by RIMCo or its affiliates. Similarly, the Funds may
benefit from research provided with respect to trading by those other funds
and clients.
LJR also may rebate to the Funds a portion of commissions earned on certain
trading by the Funds through RIS, LJR and their correspondents in the form of
commission recapture. Commission recapture is paid solely to those Funds
generating the applicable trades. Commission recapture is generated on the
instructions of the Soft Dollar Committee once RIMCo's research budget has
been met, as determined annually in the Soft Dollar Committee budgeting
process.
Amounts retained by RIS for the period ended December 31, 2006 were as
follows:
<Table>
<Caption>
FUNDS AMOUNT
-------------------------------------------------------
Multi-Style Equity $ 118
Aggressive Equity 426
Real Estate Securities 42
</Table>
Additionally, the Funds paid brokerage commissions to non-affiliated brokers
who provided brokerage and research services to RIMCo.
Accrued fees payable to affiliates as of December 31, 2006 were as follows:
<Table>
<Caption>
REAL ESTATE
MULTI-STYLE EQUITY AGGRESSIVE EQUITY NON-U.S. SECURITIES CORE BOND
------------------------------------------------------------------------------------------------------------------------------
Management fees $ 275,650 $ 189,488 $ 305,433 $ 450,658 $ 134,687
Transfer agent fees 1,540 869 1,389 2,284 966
Trustee fees 2,112 1,238 1,866 2,898 1,331
---------------- ---------------- ---------------- ---------------- ----------------
$ 279,302 $ 191,595 $ 308,688 $ 455,840 $ 136,984
================ ================ ================ ================ ================
</Table>
102 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
Board of Trustees
The Russell Fund Complex consists of Russell Investment Company ("RIC"),
which has 34 Funds, and Russell Investment Funds ("RIF"), which has five
Funds. Each of the Trustees is a Trustee of both RIC and RIF. During the
period, the Russell Fund Complex paid each of its independent Trustees a
retainer of $52,000 per year, $6,500 ($5,000 prior to January 1, 2006) for
each regular quarterly meeting attended in person, $2,000 for each special
meeting attended in person, and $2,000 for each Audit Committee meeting,
Nominating and Governance Committee meeting, Investment Committee meeting or
any other committee meeting established and approved by the Board that is
attended in person. Each Trustee receives a $500 fee for attending the
meetings (quarterly, special, committee) by phone instead of receiving the
full fee had the member attended in person. Trustees' out of pocket expenses
are also paid by the Russell Fund Complex. During the period, the Audit
Committee Chair was paid a fee of $12,000 per year and the Nominating and
Governance Committee chair and Investment Committee chair were each paid a
fee of $6,000 per year. The chair person of the Board receives additional
annual compensation of $52,000.
5. FEDERAL INCOME TAXES
At December 31, 2006, the following Funds had net tax basis capital loss
carryforwards which may be applied against any net realized taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<Table>
<Caption>
FUNDS 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14
-------------------------------------------------------------------------------------------------------------------------
Multi-Style Equity $ 17,458,223 $ 3,302,725 $ -- $ --
Core Bond -- -- -- 305,131 3,005,117
<Caption>
FUNDS TOTALS
-----------------------------------------------------
Multi-Style Equity $ 20,760,948
Core Bond 3,310,248
</Table>
At December 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
<Table>
<Caption>
REAL ESTATE
MULTI-STYLE EQUITY AGGRESSIVE EQUITY NON-U.S. SECURITIES CORE BOND
------------------------------------------------------------------------------------------------------------------------------
Cost of Investments $ 413,380,891 $ 271,664,069 $ 370,960,839 $ 474,561,313 $ 334,174,455
================ ================ ================ ================ ================
Unrealized Appreciation 51,850,425 25,227,599 61,607,464 228,322,546 5,682,075
Unrealized Depreciation (4,452,278) (4,499,573) (2,282,368) (1,351,252) (4,312,768)
---------------- ---------------- ---------------- ---------------- ----------------
Net Unrealized Appreciation
(Depreciation) $ 47,398,147 $ 20,728,026 $ 59,325,096 $ 226,971,294 $ 1,369,307
================ ================ ================ ================ ================
Undistributed Ordinary Income $ 1,142,085 $ 4,914,720 $ 1,126,062 $ 1,403,817 $ 5,986
Undistributed Long-Term
Capital Gains (Capital Loss
Carryforward) $ (20,760,948) $ 5,075,450 $ 34,804,823 $ 7,694,800 $ (3,310,248)
Tax Composition of
Distributions
Ordinary Income $ 3,605,269 $ 6,356,407 $ 8,763,076 $ 20,003,671 $ 10,962,338
Long-Term Capital Gains $ -- $ 24,380,742 $ 7,689,262 $ 34,889,975 $ --
</Table>
As permitted by tax regulations, the Core Bond Fund intends to defer a net
realized capital loss of $191,798 incurred from November 1, 2006 to December
31, 2006.
Notes to Financial Statements 103
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
6. FUND SHARE TRANSACTIONS (amounts in thousands)
Share transactions for the periods ended December 31, 2006 and December 31,
2005 were as follows:
<Table>
<Caption>
SHARES DOLLARS
------------------------------------- -------------------------------------
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
Multi-Style Equity Fund
Proceeds from shares sold 3,072 3,229 $ 43,060 $ 41,168
Proceeds from reinvestment of
distributions 259 288 3,605 3,627
Payments for shares redeemed (1,514) (3,769) (21,145) (48,491)
----------------- ----------------- ----------------- -----------------
Total net increase (decrease) 1,817 (252) $ 25,520 $ (3,696)
================= ================= ================= =================
Aggressive Equity Fund
Proceeds from shares sold 2,111 1,195 $ 32,794 $ 17,241
Proceeds from reinvestment of
distributions 2,097 1,312 30,737 19,045
Payments for shares redeemed (2,910) (1,447) (43,174) (21,031)
----------------- ----------------- ----------------- -----------------
Total net increase (decrease) 1,298 1,060 $ 20,357 $ 15,255
================= ================= ================= =================
Non-U.S. Fund
Proceeds from shares sold 4,156 3,350 $ 58,314 $ 38,487
Proceeds from reinvestment of
distributions 1,115 372 16,452 4,388
Payments for shares redeemed (4,464) (2,719) (61,747) (31,991)
----------------- ----------------- ----------------- -----------------
Total net increase (decrease) 807 1,003 $ 13,019 $ 10,884
================= ================= ================= =================
Real Estate Securities Fund
Proceeds from shares sold 3,955 4,011 $ 78,527 $ 68,272
Proceeds from reinvestment of
distributions 2,646 2,759 54,893 47,108
Payments for shares redeemed (2,929) (3,350) (55,946) (58,106)
----------------- ----------------- ----------------- -----------------
Total net increase (decrease) 3,672 3,420 $ 77,474 $ 57,274
================= ================= ================= =================
Core Bond Fund
Proceeds from shares sold 5,342 4,891 $ 54,242 $ 50,716
Proceeds from reinvestment of
distributions 1,088 875 10,962 9,014
Payments for shares redeemed (1,397) (1,326) (14,154) (13,787)
----------------- ----------------- ----------------- -----------------
Total net increase (decrease) 5,033 4,440 $ 51,050 $ 45,943
================= ================= ================= =================
</Table>
7. INTERFUND LENDING PROGRAM
The Investment Company Funds have been granted permission from the Securities
and Exchange Commission to participate in a joint lending and borrowing
facility (the "Credit Facility"). Portfolios of the Funds may borrow money
from the RIC Money Market Fund for temporary purposes. All such borrowing and
lending will be subject to a participating Fund's fundamental investment
limitations. The RIC Money Market Fund will lend through the program only
when the returns are higher than those available from an investment in
repurchase agreements or short-term reserves. The Investment Company Funds
will borrow through the program only when the costs are equal to or lower
than the cost of bank loans. Interfund loans and borrowings normally extend
overnight, but can have a maximum duration of seven days. Loans may be called
on one business day's notice. A participating fund may have to borrow from a
bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to the RIC Money Market Fund could result in a lost
investment opportunity or additional borrowing costs.
104 Notes to Financial Statements
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
8. RECORD OWNERSHIP
As of December 31, 2006, the following table includes shareholders of record
with greater than 10% of the total outstanding shares of each respective
Fund. Northwestern Mutual Life Insurance Company separate accounts were the
largest shareholder in each Fund.
<Table>
<Caption>
FUNDS # OF SHAREHOLDERS %
--------------------------------------------------------------------------------
Multi-Style Equity 2 84.6
Aggressive Equity 3 87.7
Non-U.S. 3 91.8
Real Estate Securities 2 82.6
Core Bond 2 87.6
</Table>
9. RESTRICTED SECURITIES
Restricted securities are subject to contractual limitations on resale, are
often issued in private placement transactions, and are not registered under
the Securities Act of 1933 (the "Act"). The most common types of restricted
securities are those sold under Rule 144A of the Act and commercial paper
sold under Section 4(2) of the Act.
A Fund may invest a portion of its net assets not to exceed 15% in securities
that are illiquid. Illiquid securities are securities that may not be readily
marketable, and that cannot be sold within seven days in the ordinary course
of business at the approximate amount at which the Fund has valued the
securities. Restricted securities are generally considered to be illiquid.
Notes to Financial Statements 105
RUSSELL INVESTMENT FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED -- DECEMBER 31, 2006
- --------------------------------------------------------------------------------
The following table lists restricted securities held by a Fund that are
illiquid. The following table does not include (1) securities deemed liquid
by RIMCo or a money manager pursuant to Board approved policies and
procedures or (2) illiquid securities that are not restricted securities as
designated on the Fund's Schedule of Investments.
<Table>
<Caption>
PRINCIPAL COST MARKET VALUE
FUND - % OF NET ASSETS ACQUISITION AMOUNT ($) COST PER UNIT (000) (000)
SECURITIES DATE OR SHARES $ $ $
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund -- 1.7%
AXA SA 12/07/06 100,000 100.00 100 99
AXA SA 12/07/06 100,000 100.00 100 99
BNP Paribas Capital Trust 06/01/06 450,000 112.21 505 503
Bombardier, Inc. 11/10/06 125,000 128.47 161 167
COX Communications, Inc. 11/28/06 75,000 99.96 75 74
DG Funding Trust 11/04/03 49 10,537.12 516 513
Gaz Capital SA 11/17/06 115,000 100.00 115 116
Greenwich Capital Commercial
Funding Corp. 11/02/06 205,000 103.20 212 211
HCA, Inc. 11/09/06 125,000 100.00 125 134
HCA, Inc. 11/09/06 190,000 100.00 190 204
Idearc, Inc. 11/01/06 315,000 100.80 318 320
Joy Global, Inc. 11/07/06 40,000 99.77 40 40
Majapahit Holding BV 10/11/06 55,000 99.40 55 57
Navios Maritime Holdings, Inc. 12/13/06 95,000 99.32 94 94
Parker Hannifin Employee Stock
Ownership Trust 03/09/99 111,012 100.00 111 111
Peru Enhanced Pass-Through Finance,
Ltd. 12/14/06 535,000 64.10 343 357
Peru Enhanced Pass-Through Finance,
Ltd. 12/14/06 320,000 35.20 113 121
Rental Services Corp. 11/17/06 70,000 100.00 70 72
Shimao Property Holdings, Ltd. 11/21/06 200,000 101.00 202 199
Travelport, Ltd. 09/21/06 150,000 97.65 146 154
VTB Capital SA 10/27/06 230,000 100.00 230 230
Westfield Group 11/15/06 125,000 99.76 125 125
West Corp. 10/26/06 185,000 99.91 185 185
Westfield Capital Corp., Ltd./WT
Finance Aust Pty Ltd/WEA Finance
LLC 11/10/06 125,000 97.53 122 121
Xstrata Finance Canada, Ltd. 11/08/06 195,000 99.99 195 195
Xstrata Finance Canada, Ltd. 11/08/06 45,000 99.76 45 45
--------------
4,546
==============
</Table>
Illiquid securities and restricted securities may be priced by the Funds
using fair value procedures approved by the Board of Trustees.
106 Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders
of the Russell Investment Funds:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Multi-Style Equity Fund, Aggressive
Equity Fund, Non-U.S. Fund, Real Estate Securities Fund, and Core Bond Fund
(constituting the Russell Investment Funds, hereafter referred to as the
'Funds') at December 31, 2006, the results of each of their operations for the
year then ended, the changes in each of 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, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2006 by correspondence with the
custodian, brokers, and transfer agent provide a reasonable basis for our
opinion.
(-s- PricewaterhouseCoopers LLP)
Seattle, Washington
February 15, 2007
Report of Independent Registered Public Accounting Firm 107
RUSSELL INVESTMENT FUNDS
TAX INFORMATION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
For the tax year ended December 31, 2006, the Funds hereby designate 100% or the
maximum amount allowable, of its net taxable income as qualified dividends taxed
at individual net capital gain rates.
The Form 1099 you receive in January 2007 will show the tax status of all
distributions paid to your account in calendar year 2006.
The Funds designate dividends distributed during the fiscal year as qualifying
for the dividends received deduction for corporate shareholders as follows:
<Table>
Multi-Style Equity 100.0%
Aggressive Equity 18.7%
Non-U.S 3.4%
Real Estate Securities 1.7%
Core Bond 1.0%
</Table>
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as long-term capital gain dividends for their taxable year
ended December 31, 2006:
<Table>
<Caption>
LONG-TERM
CAPITAL GAINS
-------------------
Aggressive Equity 24,380,742
Non-U.S 7,689,262
Real Estate Securities 34,889,975
</Table>
Please consult a tax adviser for any questions about federal or state income tax
laws.
The Non-U.S Fund paid foreign taxes of $607,869 and recognized $7,839,372 of
foreign source income during the taxable year ended December 31, 2006. Pursuant
to Section 853 of the Internal Revenue Code, the Fund designates $.0247 per
share of foreign taxes paid and $.3182 of gross income per share earned from
foreign sources in the taxable year ended December 31, 2006.
108 Tax Information
RUSSELL INVESTMENT FUNDS
BASIS FOR APPROVAL OF INVESTMENT ADVISORY CONTRACTS (UNAUDITED)
- --------------------------------------------------------------------------------
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
The Board of Trustees, including all of the Independent Trustees, last
considered and approved the continuation of the management agreement with RIMCo
(the "RIMCo Agreement") and the portfolio management contract with each Money
Manager of the Funds (collectively, the "portfolio management contracts") at a
meeting held on April 18, 2006. During the course of a year, the Trustees
receive a wide variety of materials regarding the investment performance of the
Funds, sales and redemptions of the Funds' shares, and the management of the
Funds by RIMCo. In preparation for the annual review, the Independent Trustees,
with the advice and assistance of independent counsel, also requested and the
Board considered (1) information and reports prepared by RIMCo relating to the
services provided by RIMCo (and its affiliates) to the Funds, including
information requested by the Independent Trustees; (2) information (the
"Third-Party Information") received from an independent, nationally recognized
provider of investment company information comparing the performance of each of
the Funds and their respective operating expenses over various periods of time
with other peer funds ("Comparable Funds") not managed by RIMCo believed by the
provider to be generally comparable in investment objectives and size to the
Funds; and (3) an analysis of the Third-Party Information prepared by RIMCo (the
"RIMCo Analysis" and, with the other information requested by the Independent
Trustees or provided by RIMCo in connection with the Board's consideration of
the portfolio management contracts, the "Agreement Renewal Information")
addressing, among other things, performance and expense differentials between
certain Funds and their respective Comparable Funds. The Independent Trustees
also received a memorandum from independent counsel discussing the legal
standards for their consideration of the proposed continuances.
On April 17, 2006, the Independent Trustees met in person to review the
Agreement Renewal Information in a private session with independent counsel at
which no representatives of RIMCo or management were present. At the April 18
meeting of the Board of Trustees, the Board, including the Independent Trustees,
reviewed the proposed continuance of the RIMCo Agreement and the portfolio
management contracts with management and independent counsel to the Independent
Trustees. Following this review, but prior to voting, the Independent Trustees
again met in a private session with their independent counsel to evaluate
additional information and analysis received from RIMCo and management at the
Board meeting. The discussion below reflects all of these reviews.
In evaluating the portfolio management contracts, the Board considered that the
Funds, in employing a manager-of-managers method of investment, operate in a
manner that is distinctly different from most other investment companies. In the
case of most other investment companies, an advisory fee is paid by the
investment company to its adviser which in turn employs and compensates
individual portfolio managers to make specific securities selections consistent
with the adviser's style and investment philosophy. RIMCo has engaged multiple
Money Managers for all Funds.
The Board considered that RIMCo (rather than any Money Manager) is responsible
under the RIMCo Agreement for determining, implementing and maintaining the
investment program for each Fund. Assets of each Fund have been allocated among
the multiple Money Managers selected by RIMCo, subject to Board approval, for
that Fund. RIMCo manages directly a portion of certain Fund's assets as
described below and otherwise exercises investment discretion over the portion
of each Fund's assets that RIMCo determines not to allocate to the money
managers and for each Fund's cash reserves by selecting the individual portfolio
securities for those portions of assets. RIMCo may also directly manage portions
of a Fund during transitions between money managers.
RIMCo is responsible for selecting Money Managers for each Fund and for
determining allocations and reallocations of assets among the Money Managers.
Each Money Manager for a Fund in effect performs the function of an individual
portfolio manager who is responsible for selecting portfolio securities for the
portion of the Fund assigned to it by RIMCo in accordance with the Fund's
applicable investment objective, policies and restrictions (each, a "segment").
RIMCo is responsible for communicating performance expectations to each Money
Manager; supervising compliance by each Money Manager with each Fund's
investment objective and policies; authorizing Money Managers to engage in
certain investment strategies for a Fund; and recommending annually to the Board
whether portfolio management contracts should be renewed, modified or
terminated. In addition to its annual recommendation as to the renewal,
modification or termination of portfolio management contracts, RIMCo is
responsible for recommending to the Board the restructuring of Fund segments and
additions of new Money Managers or replacements of existing Money Managers at
any time when, based on RIMCo's research and analysis, such actions are
appropriate. RIMCo may develop specific constraints from time to time for each
Money Manager intended to capitalize on the strengths of that Money Manager or
to coordinate the investment activities of Money Managers for a Fund in a
complementary manner. Therefore, RIMCo's selection of Money Managers is made not
only on the basis of performance considerations but anticipated compatibility
with other Money Managers in the same Fund. The performance of individual Money
Managers for a Fund may reflect the roles assigned to them by RIMCo in the
Fund's investment activities and any constraints placed by RIMCo upon their
selection of portfolio securities. In light of the foregoing, the overall
performance of each Fund over appropriate periods reflects in great part the
performance of RIMCo in designing the Fund's investment program, structuring
Fund segments, selecting an effective Money Manager for each segment with
Basis for Approval of Investment Advisory Contracts 109
RUSSELL INVESTMENT FUNDS
BASIS FOR APPROVAL OF INVESTMENT ADVISORY CONTRACTS, CONTINUED (UNAUDITED)
- --------------------------------------------------------------------------------
a style that is complementary to the styles of the Money Managers of other Fund
segments, and allocating assets among the Money Managers in a manner designed to
achieve the objectives of the Fund.
The Board also considered that the prospectus for the Funds and other public
disclosures emphasize to investors RIMCo's role as the principal investment
manager for each Fund, rather than the investment selection role of the Funds'
Money Managers, and describe the manner in which the Funds operate so that
investors may take the information into account when deciding to purchase shares
of any such Fund.
The Board also considered the special expertise of RIMCo with respect to the
manager-of-managers structure of the Funds and the likelihood that, at the
current expense ratio of each such Fund, there would be no acceptable
alternative investment managers to replace RIMCo on comparable terms given the
need to conduct the manager-of-managers strategy of each such Fund selected by
shareholders in purchasing their shares.
In addition to these general factors relating to the manager-of-managers
structure of the Funds, the Trustees considered, with respect to each Fund,
various specific factors in evaluating renewal of the RIMCo Agreement, including
the following:
1. The nature, scope and quality of the services provided to the Fund by RIMCo;
2. The management fee paid by the Fund to RIMCo and the fact that it encompasses
all investment advisory fees paid by the Fund, including the fees for any
Money Managers of such Fund;
3. Information provided by RIMCo as to other fees and benefits received by RIMCo
or its affiliates from the Fund, including any administrative, transfer
agent, cash management and securities lending fees, soft dollar arrangements
and commissions in connection with portfolio securities transactions;
4. Information provided by RIMCo as to expenses incurred by the Fund; and
5. Information provided by RIMCo as to the profits that RIMCo derives from its
mutual fund operations generally and from each Fund.
At the April 18 Board meeting, RIMCo and management reviewed the reasonableness
of the Funds' management fees. In discussing whether the Funds' performance
supported these fees, RIMCo noted differences between the investment strategies
of certain Funds and their respective Comparable Funds in pursuing their
investment objectives, including strategies which seek to achieve a lower
tracking error (i.e. the difference, whether positive or negative, between the
return of a fund and its benchmark) and resulting lower return volatility than
Comparable Funds. According to RIMCo, these strategies may be expected to
result, and for certain Funds during the periods covered by the Third-Party
Information did result, in lower relative performance than that of some of their
respective Comparable Funds. RIMCo stated that the strategies pursued by the
Funds are intended to result in less volatile, more moderate returns relative to
each Fund's performance benchmark rather than more volatile, more extreme
returns that its Comparable Funds may experience over time.
On the basis of the Agreement Renewal Information, including the RIMCo Analysis,
and other information previously received by the Board from RIMCo during the
course of the year or presented at the Board meeting by RIMCo, at the April 18
Board meeting, the Board, in respect of each Fund, found the management fee
charged by RIMCo to be reasonable in light of the nature, scope and quality of
the services provided to the Funds, after giving effect to waivers and/or
reimbursements and considering differences in the composition and investment
strategies of their respective Comparable Funds. The Board also determined that
the relative expense ratio of each Fund was comparable to those of its
Comparable Funds; RIMCo's methodology of allocating expenses of operating funds
in the complex was reasonable; and RIMCo's profitability with respect to each
Fund was not excessive in light of the nature, scope and quality of the services
provided by RIMCo.
At the April 18 Board meeting, the Board concluded that the performance of the
Funds supported continuation of the RIMCo Agreement, again based upon the
Agreement Renewal Information, including the RIMCo Analysis, and other
information previously received by the Board from RIMCo during the course of the
year or presented at the Board meeting by RIMCo. In evaluating performance, the
Board considered each Fund's absolute performance and its performance relative
to appropriate benchmarks and indices and its Comparable Funds. In evaluating
the Funds' performance, the Board also considered RIMCo's investment strategy of
managing the Funds in a risk aware manner.
At the April 18 Board meeting, the Board considered for each Fund whether
economies of scale have been realized and whether the fees for such Fund
appropriately reflect or should be revised to reflect any such economies. In its
deliberations, the Board noted its findings reached at a meeting held on
February 28, 2006 that the management fees for each Fund appropriately reflect
any economies of scale realized by that Fund. Its findings at the earlier
meeting were based upon information and analyses prepared by
110 Basis for Approval of Investment Advisory Contracts
RUSSELL INVESTMENT FUNDS
BASIS FOR APPROVAL OF INVESTMENT ADVISORY CONTRACTS, CONTINUED (UNAUDITED)
- --------------------------------------------------------------------------------
RIMCo, including information as to variability of Money Manager investment
advisory fees and other factors associated with the manager-of-managers
structure employed by the Funds. The Trustees considered that fees payable to
RIMCo by institutional clients with investment objectives similar to those of
the Funds are lower, and may, in some cases, be substantially lower, than the
rates paid by the Funds. RIMCo reviewed with the Trustees the differences in the
scope of services it provides to institutional clients and the Funds. For
example, institutional clients have fewer administrative needs than the Funds.
It was further noted that since the Funds must constantly issue and redeem their
shares, they are more difficult to manage than institutional accounts, where
assets are relatively stable. Accordingly, the Trustees did not regard these fee
differences as relevant to their deliberations.
At the April 18 Board meeting, in voting to approve the continuation of the
RIMCo Agreement on its current terms and conditions for each Fund, the Board,
after considering the foregoing and other relevant factors, determined that
continuation of the RIMCo Agreement was in the best interests of the Funds and
their respective shareholders.
At the April 18 Board meeting, with respect to the evaluation of the terms of
portfolio management contracts with Money Managers, the Board received and
considered information from RIMCo reporting for each Money Manager, among other
things, the Money Manager's performance over various periods; RIMCo's assessment
of the performance of each Money Manager; any significant business relationships
between the Money Manager and RIMCo or Russell Fund Distributors, Inc., the
Funds' underwriter; and RIMCo's recommendation to retain the Money Manager at
the current fee rate, to retain the Money Manager at a reduced fee rate or to
terminate the Money Manager. RIMCo recommended that each Money Manager be
retained at its current fee rate. RIMCo has advised the Board that it does not
regard Money Manager profitability as relevant to its evaluation of the
portfolio management contracts with Money Managers because the willingness of
Money Managers to serve in such capacity depends upon arm's-length negotiations
with RIMCo; RIMCo is aware of the fees charged by Money Managers to other
clients; and RIMCo believes that the fees agreed upon with Money Managers are
reasonable in light of the anticipated quality of investment advisory services
to be rendered. The Board accepted RIMCo's explanation in light of the Board's
findings as to the aggregate management fees paid by each Fund and the fact that
each Money Manager's fee is paid by RIMCo.
Based substantially upon RIMCo's recommendations together with the information
received from RIMCo in support of its recommendations, at the April 18 meeting
the Board concluded that the fees paid to the Money Managers of each Fund were
reasonable in light of the quality of the investment advisory services provided
and that continuation of the portfolio management agreement with each Money
Manager of each Fund was in the best interests of the Fund and its shareholders.
During 2005 and 2006, the Trustees received proposals from RIMCo to manage
directly approximately up to 10% of the assets of the Multi-Style Equity Fund (a
"Participating Fund") utilizing a "select holdings strategy" pursuant to the
terms of the RIMCo Agreement, the actual allocation to be determined by the
Participating Fund's RIMCo portfolio manager. Under this strategy, RIMCo
analyzes the holdings of the Participating Fund's Money Managers in their Fund
segments to identify particular stocks that have been selected by multiple Money
Managers. RIMCo uses a proprietary model to rank these stocks. Based on this
ranking, RIMCo will purchase additional shares of certain stocks for the
Participating Fund. The strategy is designed to increase the Participating
Fund's exposure to stocks that are viewed as attractive by multiple Money
Managers of the Participating Fund. Implementation of this strategy includes
periodic rebalancing of the Participating Fund's holdings. In connection with
RIMCo's proposals, the Trustees received and considered information from RIMCo
regarding the potential enhancements to the Participating Fund's performance
based upon RIMCo's experience in employing the same strategy for other types of
investment accounts under its management. The Trustees also considered that
RIMCo would not be required to pay investment advisory fees to a Money Manager
with respect to assets for which the select holdings strategy is utilized and
that the profits derived by RIMCo generally and from the Participating Fund
consequently may increase incrementally. The Board, however, considered RIMCo's
advice that it will pay certain Money Managers additional fees for providing
information and other services in connection with the select holdings strategy
and expects to incur additional costs in implementing and carrying out the
select holdings strategy; the limited amount of assets that would be managed
directly by RIMCo pursuant to the select holdings strategy; the fact that the
aggregate management fees paid by the Participating Fund would not increase as a
result of the implementation of the select holdings strategy. At the April 18,
2006 meeting, RIMCo advised the Board that the select holdings strategy has been
implemented for the Multi-Style Equity Fund, although a reasonable period of
time is needed to evaluate fairly its impact on the Participating Fund's
performance. Based upon the information received from RIMCo during 2005 and 2006
in connection with its select holdings strategy proposals, the Agreement Renewal
Information and additional discussion at the April 18 meeting concerning the
select holdings strategy, the Board in the case of the Participating Fund
concluded that the management fees paid to RIMCo by each such Fund under the
RIMCo Agreement in connection with the select holdings strategy continue to be
reasonable in light of the nature and anticipated quality of the management
services to be rendered by RIMCo.
In their deliberations, the Trustees did not identify any particular information
as to the RIMCo Agreement or, other than RIMCo's recommendation, the portfolio
management agreement with any Money Manager that was all-important or
controlling and each
Basis for Approval of Investment Advisory Contracts 111
RUSSELL INVESTMENT FUNDS
BASIS FOR APPROVAL OF INVESTMENT ADVISORY CONTRACTS, CONTINUED (UNAUDITED)
- --------------------------------------------------------------------------------
Trustee attributed different weights to the various factors considered. The
Trustees evaluated all information available to them on a Fund-by-Fund basis and
their determinations were made in respect of each Fund.
At a meeting held on May 23, 2006, the Board of Trustees received a proposal
from RIMCo to effect a money manager change for the Core Bond Fund. At that same
meeting, the Board of Trustees received a proposal from RIMCo to effect a money
manager change for the Multi-Style Equity Fund resulting from a change of
control of one of this Fund's Money Managers. At a meeting held on October 27,
2006, the Board of Trustees received a proposal from RIMCo to effect a money
manager change for the Non-U.S. Fund and the Aggressive Equity Fund. In the case
of each such Fund, the Trustees approved the terms of the proposed portfolio
management contract with the successor Money Manager based substantially upon
RIMCo's recommendation to hire the Money Manager at the proposed fee rate; any
significant business relationships between the Money Manager and RIMCo or
Russell Fund Distributors, Inc., the Fund's underwriter; RIMCo's explanation as
to the lack of relevance of profitability to the evaluation of portfolio
management contracts with money managers because the willingness of Money
Managers to serve in such capacity depends upon arm's-length negotiations with
RIMCo; RIMCo's awareness of the fees charged by the Money Manager to other
clients; and RIMCo's belief that the proposed investment advisory fees would be
reasonable in light of the anticipated quality of investment advisory services
to be rendered. The Trustees also considered their findings at their April 18,
2006 meeting as to the reasonableness of the aggregate investment advisory fees
paid by the Fund, and the fact that the aggregate investment advisory fees paid
by the Fund would not increase as a result of the implementation of the proposed
money manager change because the money managers' investment advisory fee is paid
by RIMCo.
112 Basis for Approval of Investment Advisory Contracts
RUSSELL INVESTMENT FUNDS
SHAREHOLDER REQUESTS FOR ADDITIONAL INFORMATION -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
As a courtesy to Fund shareholders, a complete unaudited schedule of investments
is made available generally no later than 60 days after the end of the first and
third quarters of each year. These reports are available (i) free of charge,
upon request, by calling the Fund at (800) 787-7354, (ii) on the Securities and
Exchange Commission's website at www.sec.gov, and (iii) at the Securities and
Exchange Commission's public reference room.
The Board has delegated to RIMCo, as RIF's investment manager, the primary
responsibility for monitoring, evaluating and voting proxies solicited by or
with respect to issuers of securities in which assets of the Funds may be
invested. RIMCo has established a proxy voting committee ("Committee") and has
adopted written proxy voting policies and procedures ("P&P") and proxy voting
guidelines ("Guidelines"). The Funds maintain a Portfolio Holdings Disclosure
Policy that governs the timing and circumstances of disclosure to shareholders
and third parties of information regarding the portfolio investments held by a
Fund. A description of the P&P, Guidelines and Portfolio Holdings Disclosure
Policy are contained in the Funds' Statement of Additional Information ("SAI").
The SAI is available (i) free of charge, upon request, by calling the Fund at
(800) 787-7354, and (ii) on the Securities and Exchange Commission's website at
www.sec.gov.
To reduce expenses, we may mail only one copy of the RIF prospectus and each
annual and semi-annual report to those addresses shared by two or more accounts.
If you wish to receive individual copies of these documents, please call us at
(800) 787-7354 or contact your financial institution and we will begin sending
you individual copies thirty days after receiving your request.
If you wish to receive the RIF prospectus and each annual and semi-annual report
electronically, please call us at (800) 787-7354 or contact your financial
institution.
Shareholder Requests for Additional Information 113
RUSSELL INVESTMENT FUNDS
DISCLOSURE OF INFORMATION ABOUT FUND DIRECTORS -- DECEMBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The following tables provide information for each officer and trustee of the
Russell Fund complex. The Russell Fund Complex consists of Russell Investment
Company ("RIC"), which has 34 funds, and Russell Investment Funds ("RIF"), which
has five funds. Each of the trustees is a trustee of both RIC and RIF. The first
table provides information for trustees who are interested trustees. The second
table provides information for the independent trustees. The third table
provides information for the trustees emeritus. The fourth table provides
information for the officers.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
No. of
Portfolios
in Russell
Position(s) Held Fund
Name, with Fund and Term Principal Occupation(s) Complex Other
Age, Length of of During the Overseen Directorships Held
Address Time Served Office Past 5 Years by Trustee by Trustee
- ----------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------------
*Michael J.A. **Trustee Since Appointed until - Chairman of the Board, FRC 39 None
Phillips, 2002 successor is - 1990 - 2003, President, FRC
Born January 20, duly elected - 1993 - 2003, CEO, FRC
1948 and qualified. - Trustee, RIC and RIF
- Director, RTC; Russell
909 A Street Investments (Suisse) S.A.
Tacoma, Washington (global investment
98402-1616 services); Russell
Investments Limited
(consultant to institutional
investors in Europe and the
UK)
- Chairman of the Board and
President, Russell 20-20
Association; and Russell
Investments Delaware Inc.
(general partner in various
limited partnerships ("
RIDI"))
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------------
Thaddas L. Alston Trustee since Appointed until - Senior Vice President, Larco 39 None
Born April 7, 1945 2006 successor is Investments, Ltd.
909 A Street duly elected
and qualified
Tacoma, Washington
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Paul E. Anderson, # Trustee since Appointed until - President, Anderson 39 None
Born October 15, 1984 successor is Management Group LLC
1931 duly elected (private investments
# Chairman of and qualified consulting)
909 A Street the Nominating - February 2002 to June 2005,
Tacoma, Washington and Governance Appointed until Lead Trustee, RIC and RIF
98402-1616 Committee since successor is
2006 duly elected
and qualified
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* Mr. Phillips is also an officer and/or director of one or more affiliates of
RIC and RIF and is therefore an interested trustee.
** Effective December 31, 2006 Mr. Phillips retired from the Board of Trustees.
# Effective December 31, 2006 Mr. Anderson retired from the Board of Trustees.
Effective January 1, 2007 Mr. Anderson was elected a Trustee Emeritus.
114 Disclosure of Information about Fund Directors
RUSSELL INVESTMENT FUNDS
DISCLOSURE OF INFORMATION ABOUT FUND DIRECTORS, CONTINUED -- DECEMBER 31, 2006
(UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
No. of
Portfolios
in Russell
Position(s) Held Fund
Name, with Fund and Term Principal Occupation(s) Complex Other
Age, Length of of During the Overseen Directorships Held
Address Time Served Office Past 5 Years by Trustee by Trustee
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
Kristianne Blake, Trustee since Appointed until - President, Kristianne Gates 39 - Trustee WM Group
Born January 22, 2000 successor is Blake, P.S. (accounting of Funds
1954 duly elected services) (investment
Chairperson and qualified - Director and Chairman of the company
909 A Street since 2005 Audit Committee, Avista - Director, Avista
Tacoma, Washington Annual Corp. Corp
98402-1616 - Trustee and Chairman of the - Director,
Operations and Distribution Advantage IQ
Committee, WM Group of Funds - Director, Laird
- February 2002 to June 2005, Norton Tyee
Chairman of the Audit Trust
Committee, RIC and RIF - Director, Laird
- Regent, University of Norton Wealth
Washington Management
- Trustee,
Principal
Investors Fund
- Trustee,
Principal
Variable
Contracts Fund
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Daniel P. Connealy Trustee since Appointed until - June 2004 to present, Senior 39 None
Born June 6, 1946 2003 successor is Vice President and Chief
duly elected Financial Officer, Waddell &
909 A Street Chairman of and qualified Reed Financial, Inc.
Tacoma, Washington Audit Committee - 2003, Retired
98402-1616 since 2005 Appointed until - 2001 - 2003, Vice President
successor is and Chief Financial Officer,
duly elected Janus Capital Group Inc.
and qualified - 1979 - 2001, Audit and
Accounting Partner,
PricewaterhouseCoopers LLP
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Jonathan Fine Trustee since Appointed until - President and Chief 39 None
Born July 8, 1954 2004 successor is Executive Officer, United
duly elected Way of King County, WA
909 A Street and qualified
Tacoma, Washington
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
Disclosure of Information about Fund Directors 115
RUSSELL INVESTMENT FUNDS
DISCLOSURE OF INFORMATION ABOUT FUND DIRECTORS, CONTINUED -- DECEMBER 31, 2006
(UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
No. of
Portfolios
in Russell
Position(s) Held Fund
Name, with Fund and Term Principal Occupation(s) Complex Other
Age, Length of of During the Overseen Directorships Held
Address Time Served Office Past 5 Years by Trustee by Trustee
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
Raymond P. Trustee since Appointed until - President, Simpson 39 None
Tennison, Jr. 2000 successor is Investment Company and
Born December 21, duly elected several additional
1955 *Chairman of the and qualified. subsidiary companies,
Nominating and including Simpson Timber
909 A Street Governance Company, Simpson Paper
Tacoma, Washington Committee since Company and Simpson Tacoma
98402-1616 2007 Kraft Company
- ----------------------------------------------------------------------------------------------------------------------------
Jack R. Thompson, Trustee since Appointed until - September 2003 to present, 39 Director, Sparx
Born March 21, 1949 2005 successor is Independent Board Chair and Japan Fund
duly elected Chairman of the Audit
909 A Street and qualified Committee, Sparx Japan Fund
Tacoma, Washington - May 1999 to May 2003,
98402-1616 President, Chief Executive
Officer and Director, Berger
Financial Group, LLC
- May 1999 to May 2003,
President and Trustee,
Berger Funds
- Presently Director of the
Thompson Academic Fund
(non-profit)
- Presently President and
Director of the Kepner
Educational Excellence
Program (non-profit)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Julie W. Weston, Trustee since Appointed until - Retired since 2000 - 1987 to 39 None
Born October 2, 2002 successor is 2002, Director, Smith Barney
1943 duly elected Fundamental Value Fund
Chairperson of and qualified
909 A Street the Investment
Tacoma, Washington Committee since Appointed until
98402-1616 2006 successor is
duly elected
and qualified
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* Effective January 1, 2007, Mr. Tennison was elected Chairman of the
Nominating and Governance Committee.
116 Disclosure of Information about Fund Directors
RUSSELL INVESTMENT FUNDS
DISCLOSURE OF INFORMATION ABOUT FUND DIRECTORS, CONTINUED -- DECEMBER 31, 2006
(UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
No. of
Portfolios
in Russell
Position(s) Held Fund
Name, with Fund and Term Principal Occupation(s) Complex Other
Age, Length of of During the Overseen Directorships Held
Address Time Served Office Past 5 Years by Trustee by Trustee
- ----------------------------------------------------------------------------------------------------------------------------
TRUSTEES EMERITUS
- ----------------------------------------------------------------------------------------------------------------------------
*George F. Russell, Trustee Emeritus Until - Director Emeritus, Frank 39 None
Jr., and Chairman resignation or Russell Company (investment
Born July 3, 1932 Emeritus since removal consultant to institutional
1999 investors ("FRC")); and
909 A Street RIMCo
Tacoma, Washington - Chairman Emeritus, RIC and
98402-1616 RIF; Russell Implementation
Services Inc. (broker-dealer
and investment adviser
("RIS")); Russell 20-20
Association (non-profit
corporation); and Russell
Trust Company (non-
depository trust company
("RTC"))
- Chairman, Sunshine
Management Services, LLC
(investment adviser)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Paul Anton, Ph.D., Trustee Emeritus Five year term - Retired since 1997 39 None
Born December 1, since 2003 - Trustee of RIC and RIF Until
1919 2002
909 A Street
Tacoma, Washington
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
William E. Baxter, Trustee Emeritus Five year term - Retired since 1986 39 None
Born June 8, 1925 since 2004 - Trustee of RIC and RIF Until
2004
909 A Street
Tacoma, Washington
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Lee C. Gingrich, Trustee Emeritus Five year term - Retired since 1995 39 None
Born October 6, since 2006 - Trustee of RIC and RIF Until
1930 2005
- Chairman of the Nominating
909 A Street and Governance Committee
Tacoma, Washington 2001-2005
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Eleanor W. Palmer, Trustee Emeritus Five year term - Retired since 1981 39 None
Born May 5, 1926 since 2004 - Trustee of RIC and RIF Until
2004
909 A Street
Tacoma, Washington
98402-1616
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* Mr. Russell is also a director emeritus of one or more affiliates of RIC and
RIF.
Disclosure of Information about Fund Directors 117
RUSSELL INVESTMENT FUNDS
DISCLOSURE OF INFORMATION ABOUT FUND DIRECTORS, CONTINUED -- DECEMBER 31, 2006
(UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------
Position(s) Held
Name, with Fund and Term Principal Occupation(s)
Age, Length of of During the
Address Time Served Office Past 5 Years
- --------------------------------------------------------------------------------------------------------------------------
OFFICERS
- --------------------------------------------------------------------------------------------------------------------------
Cheryl Wichers Chief Compliance Until removed - Chief Compliance Officer, RIC
Born December 16, 1966 Officer since by Independent - Chief Compliance Officer, RIF
2005 Trustees - Chief Compliance Officer, RIMCo
909 A Street - April 2002-May 2005, Manager, Global Regulatory
Tacoma, Washington Policy
98402-1616 - 1998-2002, Compliance Supervisor, Russell Investment
Group
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Greg J. Stark, President and Until successor - President and CEO, RIC and RIF
Born May 3, 1968 Chief Executive is chosen and - Chairman of the Board, President and CEO, RIMCo
Officer since qualified by - Chairman of the Board, President and CEO, RFD
909 A Street 2004 Trustees - Chairman of the Board and President, Russell
Tacoma, Washington Insurance Agency, Inc. (insurance agency ("RIA"))
98402-1616 - Until 2004, Managing Director of Individual Investor
Services, FRC
- 2000 to 2004, Managing Director, Sales and Client
Service, RIMCo
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Mark E. Swanson, Treasurer and Until successor - Treasurer, Chief Accounting Officer and CFO, RIC and
Born November 26, 1963 Chief Accounting is chosen and RIF
Officer since qualified by - Director, Funds Administration, RIMCo, RTC and RFD
909 A Street 1998 Trustees - Treasurer and Principal Accounting Officer, SSgA
Tacoma, Washington Funds
98402-1616
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Thomas F. Hanly, Chief Investment Until removed - Chief Investment Officer, RIC, RIF, FRC, RTC
Born November 17, 1964 Officer since by Trustees - Director and Chief Investment Officer, RIMCo and RFD
2004 - 1999 to 2003, Chief Financial Officer, FRC, RIC and
909 A Street RIF
Tacoma, Washington
98402-1616
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Karl J. Ege, Secretary since Until successor - General Counsel and Managing Director of Law and
Born October 8, 1941 1994 is chosen and Government Affairs, Secretary, FRC
qualified by
909 A Street Trustees
Tacoma, Washington
98402-1616
- --------------------------------------------------------------------------------------------------------------------------
</Table>
118 Disclosure of Information about Fund Directors
RUSSELL INVESTMENT FUNDS
909 A Street, Tacoma, Washington 98402
(800) 787-7354
- --------------------------------------------------------------------------------
TRUSTEES
Thaddas L. Alston
Paul E. Anderson
Kristianne Blake
Daniel P. Connealy
Jonathan Fine
Michael J.A. Phillips
Raymond P. Tennison, Jr.
Jack R. Thompson
Julie W. Weston
TRUSTEES EMERITUS
George F. Russell, Jr.
Paul Anton, Ph.D.
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Gregory J. Stark, President and Chief Executive Officer
Cheryl Wichers, Chief Compliance Officer
Thomas F. Hanly, Chief Investment Officer
Mark E. Swanson, Treasurer and Chief Accounting Officer
Karl J. Ege, Secretary
MANAGER AND TRANSFER AND DIVIDEND DISBURSING AGENT
Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
Josiah Quincy Building
200 Newport Avenue
North Quincy, MA 02171
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, WA 98402
(800) 787-7354
LEGAL COUNSEL
Dechert LLP
200 Clarendon Street, 27th Floor
Boston, MA 02116-5021
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
1420 5th Avenue
Suite 1900
Seattle, WA 98101
MONEY MANAGERS AS OF DECEMBER 31, 2006
Multi-Style Equity Fund
Ark Asset Management Co., Inc., New York, NY
DePrince, Race & Zollo, Inc., Orlando, FL
Institutional Capital LLC, Chicago, IL
Jacobs Levy Equity Management, Inc., Florham Park, NJ
Montag & Caldwell, Inc., Atlanta, GA
Suffolk Capital Management, LLC, New York, NY
Turner Investment Partners, Inc., Berwyn, PA
Aggressive Equity Fund
CapitalWorks Investment Partners, LLC, San Diego, CA
ClariVest Asset Management, LLC, San Diego, CA
David J. Greene and Company, LLC, New York, NY
Geewax, Terker & Company, Chadds Ford, PA
Gould Investment Partners, LLC, Berwyn, PA
Jacobs Levy Equity Management, Inc., Florham Park, NJ
Nicholas-Applegate Capital Management LLC, San Diego, CA
PanAgora Asset Management, Inc., Boston, MA
Tygh Capital Management, Inc., Portland, OR
Non-U.S. Fund
AQR Capital Management, LLC, Greenwich, CT
MFS Institutional Advisors, Inc., Boston, MA
The Boston Company Asset Management, LLC, Boston, MA
Wellington Management Company, LLP, Boston, MA
Real Estate Securities Fund
AEW Management and Advisors, L.P., Boston, MA
Heitman Real Estate Securities, LLC, Chicago, IL
INVESCO Institutional (N.A.), Inc., through its INVESCO Real Estate Division,
Dallas, TX
RREEF America, L.L.C., Chicago, IL
Core Bond Fund
Bear Stearns Asset Management Inc., New York, NY
Goldman Sachs Asset Management, L.P., New York, NY
Pacific Investment Management Company, LLC,
Newport Beach, CA
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Russell Investment Funds.
Such offering is made only by Prospectus, which includes details as to offering
price and other material information.
Manager, Money Managers and Service Providers 119
(RUSSELL LOGO)
RUSSELL INVESTMENT FUNDS
909 A Street
Tacoma, Washington 98402
800-787-7354
Fax: 253-591-3495 36-08-023 (12/06)
ITEM 2. CODE OF ETHICS. [ANNUAL REPORT ONLY]
(a) As of the end of the period covered by the report, the registrant has
adopted a code of ethics that applies to the registrant's principal
executive officer and principal financial officer ("Code").
(b) That Code comprises written standards that are reasonably designed to deter
wrongdoing 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 Securities and Exchange Commission ("SEC") and in other
public communications made by each Mutual Fund;
3) compliance with applicable laws and governmental rules and
regulations;
4) the prompt internal reporting to an appropriate person or persons
identified in the Code of violations of the Code; and
5) accountability for adherence to the Code.
(c) The Code was restated as of December 6, 2004; the restatement did not
involve any material change.
(d) As of the end of the period covered by the report, there have been no
waivers granted from a provision of the Code that applies to the
registrant's principal executive officer and principal financial officer.
(e) Not applicable.
(f) The registrant has filed with the SEC, pursuant to Item 11(a)(1), a copy of
the Code that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, as an exhibit to its annual report on
this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. [ANNUAL REPORT ONLY]
Registrant's board of trustees has determined at a meeting held on February 23,
2005, that the Registrant has at least one audit committee financial expert
serving on its audit committee. Daniel P. Connealy was determined to be the
Audit Committee Financial Expert and is also determined to be "independent" for
purposes of Item 3, paragraph (a)(2)(i) and (ii) of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. [ANNUAL REPORT ONLY]
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the audit of the
registrant's annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were as follows:
2005 $143,759
2006 $154,500
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for assurance
and related services by the principal accountant that are reasonably related to
the performance of the audit of the registrant's financial statements and are
not reported under paragraph (a) of this Item and the nature of the services
comprising those fees were as follows:
Fees Nature of Services
---- ------------------
2005 $1,990 Performance of agreed-upon procedures with respect to
06/30/05 semi-annual reports
2006 $1,600 Performance of agreed-upon procedures with respect to
06/30/06 semi-annual reports
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning and the nature of the services comprising the fees
were as follows:
Fees Nature of Services
---- ------------------
2005 $48,086 Tax services
2006 $40,500 Tax services
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for products
and services provided by the principal accountant, other than the services
reported in paragraphs (a) through (c) of this Item and the nature of the
services comprising those fees were as follows:
Fees Nature of Services
---- ------------------
2005 $1,796 Review excise reconciliations
2006 $1,157 Transfer agent fee analysis
(e) (1) Registrant's audit committee has adopted the following pre-approval
policies and procedures for certain services provided by Registrant's
accountants:
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL INVESTMENT FUNDS
AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY
EFFECTIVE DATE: MAY 19, 2003
AS AMENDED THROUGH NOVEMBER 14, 2005
I. STATEMENT OF PURPOSE.
This Policy has been adopted by the Audit Committee (the "FRIC Audit Committee")
of the Board of Trustees of Frank Russell Investment Company ("FRIC") and the
Audit Committee (the "RIF Audit Committee") of the Russell Investment Funds
("RIF") to apply to any and all engagements of the independent auditor to FRIC
and RIF, respectively, for audit, non-audit, tax or other services. In the case
of FRIC, the term "Audit Committee" as used in this policy shall refer to the
FRIC Audit Committee and the term "Fund" shall refer to FRIC. In the case of
RIF, the term "Audit Committee" as used in this Policy shall refer to the RIF
Audit Committee and the term "Fund" shall refer to RIF. The term "Investment
Adviser" shall refer to Frank Russell Investment Management Company. This Policy
does not delegate to management the responsibilities set forth herein for the
pre-approval of services performed by the Funds' independent auditor.
II. STATEMENT OF PRINCIPLES.
Under the Sarbanes-Oxley Act of 2002 (the "Act"), the Audit Committee of the
Fund's Board of Trustees (the "Audit Committee") is charged with responsibility
for the appointment, compensation and oversight of the work of the independent
auditor for the Fund. As part of these responsibilities, the Audit Committee is
required to pre-approve the audit services and permissible non-audit services
("non-audit services") performed by the independent auditor for the Fund to
assure that the independence of the auditor is not in any way compromised or
impaired. In determining whether an auditor is independent, there are three
guiding principles under the Act that must be considered. In general, the
independence of the auditor to the Fund would be deemed impaired if the auditor
provides a service whereby it:
- Functions in the role of management of the Fund, the adviser of the
Fund or any other affiliate* of the Fund;
- Is in the position of auditing its own work; or
- Serves in an advocacy role for the Fund, the adviser of the Fund or
any other affiliate of the Fund.
Accordingly, it is the policy of the Fund that the independent auditor for the
Fund must not be engaged to perform any service that contravenes any of the
three guidelines set forth above, or
- ----------
* For purposes of this Policy, an affiliate of the Funds is defined as the
Funds' investment adviser (but not a sub-adviser whose role is primarily
portfolio management and whose activities are overseen by the principal
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the Fund.
which in any way could be deemed to impair or compromise the independence of the
auditor for the Fund. This Policy is designed to accomplish those requirements
and will henceforth be applied to all engagements by the Fund of its independent
auditor, whether for audit, audit-related, tax, or other non-audit services.
Rules adopted by the United States Securities and Exchange Commission (the
"SEC") establish two distinct approaches to the pre-approval of services by the
Audit Committee. The proposed services either may receive general pre-approval
through adoption by the Audit Committee of a list of authorized services for the
Fund, together with a budget of expected costs for those services ("general
pre-approval"), or specific pre-approval by the Audit Committee of all services
provided to the Fund on a case-by-case basis ("specific pre-approval"). The
Audit Committee believes that the combination of these two approaches reflected
in this Policy will result in an effective and efficient procedure for the
pre-approval of permissible services performed by the Fund's independent audit.
The appendices to this Policy list the audit, audit-related, tax and other
services that have the general pre-approval of the Audit Committee. As set forth
in this Policy, unless a particular service has received general pre-approval,
those services will require specific pre-approval by the Audit Committee before
any such services can be provided by the independent auditor. Any proposed
service to the Fund that exceeds the pre-approved budget for those services will
also require specific pre-approval by the appropriate Audit Committee.
In assessing whether a particular audit or non-audit service should be approved,
the Audit Committee will take into account the ratio between the total amounts
paid for audit, audit-related, tax and other services, based on historical
patterns at the Fund, with a view toward assuring that the level of fees paid
for non-audit services as they relate to the fees paid for audit services does
not compromise or impair the independence of the auditor. The Audit Committee
will review the list of general pre-approved services, including the
pre-approved budget for those services, at least annually and more frequently if
deemed appropriate by the Audit Committee, and may implement changes thereto
from time to time.
III. DELEGATION.
As provided in the Act and in the SEC's rules, the Audit Committee from time to
time may delegate either general or specific pre-approval authority to one or
more of its members. Any member to whom such authority is delegated must report,
for informational purposes only, any pre-approval decisions to the Audit
Committee at its next scheduled meeting.
IV. AUDIT SERVICES.
The annual audit services engagement terms and fees for the independent auditor
for the Fund require specific pre-approval of the Audit Committee. Audit
services include the annual financial statement audit and other procedures
required to be performed by the independent auditor in order to be able to form
an opinion on the financial statements for the Fund for that year. These other
procedures include reviews of information systems, procedural reviews and
testing performed in order to understand and rely on the Fund's systems of
internal control, and consultations relating to the audit. Audit services also
include the attestation engagement for the
independent auditor's report on the report from management on financial
reporting internal controls. The Audit Committee will review the audit services
engagement as necessary or appropriate in the sole judgment of the Audit
Committee.
In addition to the pre-approval by the Audit Committee of the annual engagement
of the independent auditor to perform audit services, the Audit Committee may
grant general pre-approval to other audit services, which are those services
that only the independent auditor reasonably can provide. These may include
statutory audits and services associated with the Fund's SEC registration
statement on Form N-1A, periodic reports and documents filed with the SEC or
other documents issued in connection with the Fund's securities offerings.
The Audit Committee has pre-approved the audit services set forth in Schedule A
of the Audit and Non-Audit Pre-Approved Services. All other audit services not
listed in Schedule A of the Audit and Non-Audit Pre-Approved Services must be
specifically pre-approved by the Audit Committee.
V. AUDIT-RELATED SERVICES.
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the financial statements
for the Fund, or the separate financial statements for a series of the Fund that
are traditionally performed by the independent auditor. Because the Audit
Committee believes that the provision of audit-related services does not
compromise or impair the independence of the auditor and is consistent with the
SEC's rules on auditor independence, the Audit Committee may grant pre-approval
to audit related services. "Audit related services" include, among others,
accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "audit services;" assistance with
understanding and implementing new accounting and financial report or disclosure
matters not classified as "audit services;" assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal
reporting requirements under Form N-SAR and Form N-CSR.
The Audit Committee has pre-approved the audit-related services set forth in
Schedule B of the Audit and Non-Audit Pre-Approved Services. All other
audit-related services not listed in Schedule B of the Audit and Non-Audit
Pre-Approved Services must be specifically pre-approved by the Audit Committee.
VI. TAX SERVICES.
The Audit Committee believes that the independent auditor can provide tax
services to the Fund, such as tax compliance, tax planning and tax advice,
without impairing the auditor's independence and the SEC has stated that the
independent auditor may provide such services. Consequently, the Audit Committee
believes that it may grant general pre-approval to those tax services that have
historically been provided by the auditor, that the Audit Committee has reviewed
and believes would not impair the independence of the auditor, and that are
consistent
with the SEC's rules on auditor independence. However, the Audit Committee will
not permit the retention of the independent auditor to provide tax advice in
connection with any transaction recommended by the independent auditor, the sole
business purpose of which may be tax avoidance and the tax treatment of which
may not be supported by the United States Internal Revenue Code and related
regulations or the applicable tax statutes and regulations that apply to the
Funds investments outside the United States. The Audit Committees will consult
with the Treasurer of the Fund or outside counsel to determine that the Fund's
tax planning and reporting positions are consistent with this policy. The Audit
Committee has pre-approved the tax services set forth in Schedule C of the Audit
and Non-Audit Pre-Approved Services. All other tax services not listed in
Schedule C of the Audit and Non-Audit Pre-Approved Services must be specifically
pre-approved by the Audit Committee.
VII. ALL OTHER SERVICES.
The Audit Committee believes, based on the SEC's rules prohibiting the
independent auditor from providing specific non-audit services, that other types
of non-audit services are permitted. Accordingly, the Audit Committee believes
that it may grant general pre-approval to those permissible non-audit services
classified as "all other" services that the Audit Committee believes are routine
and recurring services, would not impair or compromise the independence of the
auditor and are consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the permissible "all other services" set
forth in Schedule D of the Audit and Non-Audit Pre-Approved Services.
Permissible "all other services" not listed in Schedule D of the Audit and
Non-Audit Pre-Approved Services must be specifically pre-approved by the Audit
Committee.
A list of the SEC's prohibited non-audit services is attached to this Policy as
Schedule E of the Audit and Non-Audit Pre-Approved Services. The SEC's rules and
relevant official interpretations and guidance should be consulted to determine
the scope of these prohibited services and the applicability of any exceptions
to certain of the prohibitions. Under no circumstance may an executive, manager
or associate of the Fund, or the Investment Adviser, authorize the independent
auditor for the Fund to provide prohibited non-audit services.
VIII. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS.
Pre-Approval fee levels or budgeted amounts for all services to be provided by
the independent auditor will be established annually by the Audit Committee and
shall be subject to periodic subsequent review during the year if deemed
appropriate by the Audit Committee. (Separate amounts may be specified for the
Fund and for other affiliates in the investment company complex subject to
pre-approval). Any proposed services exceeding these levels or amounts will
require specific pre-approval by the Audit Committee. The Audit Committee will
be mindful of the overall relationship of fees for audit and non-audit services
in determining whether to pre-approve any such services. For each fiscal year,
the Audit Committee may determine the appropriateness of the ratio between the
total amount of fees for Audit, Audit-related, and Tax services for the Fund
(including any Audit-related or Tax services fees for affiliates subject to
pre-approval), and the total amount of fees for certain permissible non-audit
services classified as
"all other services" for the Fund (including any such services for affiliates
subject to pre-approval by the Audit Committee).
IX. PROCEDURES.
All requests or applications for services to be provided by the independent
auditor that do not require specific pre-approval by the Audit Committee will be
submitted to the "FRIC/RIF Clearance Committee" (the "Clearance Committee")
(which shall be comprised of not less than three members, including the
Treasurer of the Fund who shall serve as its Chairperson) and must include a
detailed description of the services to be rendered and the estimated costs of
those services. The Clearance Committee will determine whether such services are
included within the list of services that have received general pre-approval by
the Audit Committee. The Audit Committee will be informed not less frequently
than quarterly by the Chairperson of the Clearance Committee of any such
services rendered by the independent auditor for the Fund and the fees paid to
the independent auditors for such services.
Requests or applications to provide services that require specific pre-approval
by the Audit Committee will be submitted to the Audit Committee by both the
independent auditor and the Clearance Committee and must include a joint
certification by the engagement partner of the independent auditor and the
Chairperson of the Clearing Committee that, in their view, the request or
application is consistent with the SEC's rules governing auditor independence.
The Internal Audit Department of Frank Russell Company, the parent company of
FRIMCo, and the officers of FRIC and RIF will report to the Chairman of the
Audit Committee any breach of this Policy that comes to the attention of the
Internal Audit Department of Frank Russell Company or an officer of FRIC or RIF.
X. ADDITIONAL REQUIREMENTS.
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work performed by the
independent auditor and to assure the internal auditor's continuing independence
from the Fund and its affiliates, including Frank Russell Company. Such efforts
will include, but not be limited to, reviewing a written annual statement from
the independent auditor delineating all relationships between the independent
auditor and FRIC, RIF, and Russell and its subsidiaries and affiliates,
consistent with Independence Standards Board Standard No. 1, and discussing with
the independent auditor its methods and procedures for ensuring its
independence.
(e) (2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X is as follows:
AUDIT FEES 100%
AUDIT-RELATED FEES 100%
TAX FEES 100%
ALL OTHER FEES 100%
(f) For services, 50 percent or more of which were pre-approved, the percentage
of hours expended on the principal accountant's engagement to audit the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full-time, permanent employees was 0%.
(g) The aggregate non-audit fees billed by registrant's accountant for services
rendered to the registrant, and rendered to the registrant's investment adviser
(not including any sub-adviser whose role is primarily portfolio management and
is subcontracted with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the registrant for each of the last two fiscal
years of the registrant were as follows:
2005 $127,413
2006 $149,250
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of nonaudit services that were rendered to the
registrant's investment adviser (not including any subadviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. [NOT APPLICABLE]
ITEM 6. [SCHEDULES OF INVESTMENTS ARE INCLUDED AS PART OF THE REPORT TO
SHAREHOLDERS FILED UNDER ITEM 1 OF THIS FORM]
ITEMS 7-9. [NOT APPLICABLE]
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no changes to the procedures by which shareholders may
recommend nominees to the Registrant's Board of Trustees that would require
disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES
(a) Registrant's principal executive officer and principal financial
officer have concluded that Registrant's disclosure controls and procedures
(as defined in Rule 30a-2(c) under the Investment Company Act of 1940 (the
"Act")) are effective, based on their evaluation of these controls and
procedures as of a date within 90 days of the date this report is filed
with the Securities and Exchange Commission.
(b) There were no significant changes in Registrant's internal control over
financial reporting that occurred during the period covered by this report
that has materially affected or is likely to materially affect Registrant's
internal control over financial reporting.
ITEM 12. EXHIBIT LIST
(a) Registrant's code of ethics described in Item 2.
(b) Certification for principal executive officer of Registrant as required
by Rule 30a-2(a) under the Act and certification for principal financial
officer of Registrant as required by Rule 30a-2(a) under the Act.
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.
RUSSELL INVESTMENT FUNDS
By: /s/ Greg J. Stark
----------------------------------------------------------------------------
Greg J. Stark
Principal Executive Officer and Chief Executive Officer
Date: February 15, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Greg J. Stark
---------------------------------------------------------------------------
Greg J. Stark
Principal Executive Officer and Chief Executive Officer
Date: February 15, 2007
By: /s/ Mark E. Swanson
----------------------------------------------------------------------------
Mark E. Swanson
Principal Financial Officer, Principal Accounting Officer and Treasurer
Date: February 15, 2007