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: 811-5162
Exact name of registrant as specified in charter: Delaware VIP Trust
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: December 31
Date of reporting period: June 30, 2006
Item 1. Reports to Stockholders
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect. The expenses shown in the
table assume reinvestment of all dividends and distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,037.90 0.80% $4.04
Service Class 1,000.00 1,036.40 1.05% 5.30
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.83 0.80% $4.01
Service Class 1,000.00 1,019.59 1.05% 5.26
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
Balanced Series-1
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
SECTOR ALLOCATION AND CREDIT QUALITY BREAKDOWN
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
COMMON STOCK 60.43%
Consumer Discretionary 5.48%
Consumer Staples 7.37%
Energy 3.63%
Financials 14.43%
Health Care 11.10%
Industrials 3.74%
Information Technology 7.32%
Materials 1.77%
Telecommunications 3.73%
Utilities 1.86%
------
PREFERRED STOCK 0.06%
------
AGENCY ASSET-BACKED SECURITIES 0.02%
------
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 1.63%
------
AGENCY MORTGAGE-BACKED SECURITIES 6.42%
------
AGENCY OBLIGATIONS 2.29%
------
COMMERCIAL MORTGAGE-BACKED SECURITIES 1.71%
------
CORPORATE BONDS 13.51%
------
Banking 1.42%
Basic Industry 0.28%
Brokerage 0.53%
Capital Goods 0.22%
Communications 1.58%
Consumer Cyclical 0.92%
Consumer Non-Cyclical 0.93%
Electric 1.74%
Energy 0.68%
Finance Companies 1.53%
Industrial 0.03%
Insurance 1.41%
Natural Gas 0.94%
Real Estate 0.31%
Technology 0.27%
Transportation 0.72%
------
FOREIGN AGENCIES 0.09%
------
MUNICIPAL BONDS 0.92%
------
NON-AGENCY ASSET BACKED SECURITIES 2.61%
------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 7.42%
------
U.S. TREASURY OBLIGATIONS 4.72%
------
REPURCHASE AGREEMENTS 2.03%
------
SECURITIES LENDING COLLATERAL 4.28%
------
Fixed Rate Notes 0.76%
Variable Rate Notes 3.52%
------
TOTAL MARKET VALUE OF SECURITIES 108.14%
------
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (7.36%)
------
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.78%)
------
TOTAL NET ASSETS 100.00%
------
CREDIT RATING BREAKDOWN (AS A % OF FIXED INCOME INVESTMENTS)
- ------------------------------------------------------------
AAA 63.38%
AA 3.50%
A 12.01%
BBB 18.97%
BB 0.64%
B 1.01%
CCC 0.40%
NR 0.09%
------
TOTAL 100.00%
------
Balanced Series-2
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER MARKET
OF SHARES VALUE
--------- ----------
(U.S. $)
COMMON STOCK-60.43%
CONSUMER DISCRETIONARY-5.48%
Gap................................................... 37,400 $ 650,760
Limited Brands........................................ 24,200 619,278
Mattel................................................ 40,300 665,353
-----------
1,935,391
-----------
CONSUMER STAPLES-7.37%
B&G Foods............................................. 25 405
ConAgra Foods......................................... 28,500 630,135
Heinz (H.J.).......................................... 15,200 626,544
Kimberly-Clark........................................ 10,900 672,530
Safeway............................................... 25,800 670,800
-----------
2,600,414
-----------
ENERGY-3.63%
Chevron............................................... 10,300 639,218
ConocoPhillips........................................ 9,800 642,194
-----------
1,281,412
-----------
FINANCIALS-14.43%
Allstate.............................................. 11,700 640,341
Aon................................................... 16,300 567,566
Chubb................................................. 12,900 643,710
Hartford Financial Services Group..................... 7,500 634,500
Huntington Bancshares................................. 26,700 629,586
Morgan Stanley........................................ 10,500 663,705
Wachovia.............................................. 12,200 659,776
Washington Mutual..................................... 14,300 651,794
-----------
5,090,978
-----------
HEALTH CARE-11.10%
Abbott Laboratories................................... 14,800 645,428
Baxter International.................................. 17,500 643,300
Bristol-Myers Squibb.................................. 25,700 664,602
Merck & Co............................................ 19,700 717,671
Pfizer................................................ 25,900 607,873
Wyeth................................................. 14,400 639,504
-----------
3,918,378
-----------
INDUSTRIALS-3.74%
Donnelley (R.R.) & Sons............................... 20,800 664,560
Waste Management...................................... 18,300 656,604
----------
1,321,164
----------
INFORMATION TECHNOLOGY-7.32%
Hewlett-Packard....................................... 19,500 617,760
Intel................................................. 36,300 687,885
International Business Machines....................... 8,100 622,242
+Xerox................................................ 47,200 656,552
-----------
2,584,439
-----------
MATERIALS-1.77%
duPont (E.I.) deNemours............................... 15,000 624,000
-----------
624,000
-----------
TELECOMMUNICATIONS-3.73%
AT&T.................................................. 23,000 641,470
Verizon Communications................................ 20,200 676,498
-----------
1,317,968
-----------
UTILITIES-1.86%
*Progress Energy...................................... 15,300 655,911
-----------
655,911
-----------
TOTAL COMMON STOCK
(COST $20,097,373)................................. 21,330,055
-----------
PREFERRED STOCK-0.06%
Nexen 7.35%........................................... 790 $ 19,774
-----------
TOTAL PREFERRED STOCK
(COST $19,750)..................................... 19,774
-----------
PRINCIPAL
AMOUNT
---------
(U.S. $)
AGENCY ASSET-BACKED
SECURITIES-0.02%
oFannie Mae Whole Loan Series
2002-W11 AV1 5.663% 11/25/32....................... $ 6,166 6,167
-----------
TOTAL AGENCY ASSET-BACKED
SECURITIES (COST $6,169)........................... 6,167
-----------
AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS-1.63%
Fannie Mae
Series 1996-46 ZA 7.50% 11/25/26................... 22,468 23,721
Series 2003-122 AJ 4.50% 2/25/28................... 22,313 21,448
Series 2005-110 MB 5.50% 9/25/18................... 60,000 59,185
Fannie Mae Grantor Trust Series
2001-T8 A2 9.50% 7/25/41........................... 19,616 20,969
Fannie Mae Whole Loan
Series 2004-W9 2A1 6.50% 2/25/44................... 33,476 33,779
Series 2004-W11 1A2 5.663% 5/25/44................. 35,505 35,830
Freddie Mac
Series 1730 Z 7.00% 5/15/24........................ 18,814 19,554
Series 2326 ZQ 6.50% 6/15/31....................... 88,240 90,767
Series 2480 EH 6.00% 11/15/31...................... 3,958 3,955
Series 2662 MA 4.50% 10/15/31...................... 41,494 40,294
Series 2872 GC 5.00% 11/15/29...................... 40,000 38,319
Series 2890 PC 5.00% 7/15/30....................... 65,000 62,372
Series 3022 MB 5.00% 12/15/28...................... 30,000 29,073
Series 3063 PC 5.00% 11/1/35....................... 60,000 58,012
(D)Freddie Mac Structured Pass Through
Securities Series T-58 2A 6.50% 9/25/43 36,679 36,959
-----------
TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $592,199)........................ 574,237
-----------
AGENCY MORTGAGE-BACKED
SECURITIES-6.42%
Fannie Mae
6.50% 8/1/17....................................... 25,515 25,826
6.765% 1/1/07...................................... 4,404 4,394
Fannie Mae Relocation 30 yr
5.00% 11/1/33...................................... 60,579 57,323
5.00% 11/1/34...................................... 44,273 41,825
Fannie Mae S.F. 20 yr 5.50% 8/1/25 40,117 38,938
Fannie Mae S.F. 30 yr
5.50% 3/1/29....................................... 75,615 73,039
5.50% 4/1/29....................................... 85,539 82,626
7.50% 6/1/31....................................... 31,471 32,612
9.50% 6/1/19....................................... 9,000 9,543
Fannie Mae S.F. 30 yr TBA
5.00% 7/1/36....................................... 285,000 266,475
5.50% 7/1/36....................................... 1,035,000 994,246
6.50% 7/1/36....................................... 185,000 185,983
Balanced Series-3
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ----------
(U.S. $) (U.S. $)
AGENCY MORTGAGE-BACKED
SECURITIES (CONTINUED)
oFreddie Mac ARM 3.914% 4/1/34......................... $ 28,344 $ 28,140
Freddie Mac Relocation 30 yr 5.00% 9/1/33 ............. 104,604 99,145
Freddie Mac S.F. 15 yr 4.00% 2/1/14 ................... 65,004 61,592
Freddie Mac S.F. 20 yr 5.50% 9/1/24 ................... 75,636 73,532
Freddie Mac S.F. 30 yr
6.50% 10/1/33....................................... 19,428 19,592
7.00% 11/1/33....................................... 16,470 16,887
Freddie Mac S.F. 30 yr TBA 5.00% 7/1/36................ 155,000 144,780
GNMA I S.F. 30 yr 7.50% 1/15/32........................ 7,295 7,630
----------
TOTAL AGENCY MORTGAGE-BACKED
SECURITIES (COST $2,296,284)........................ 2,264,128
----------
AGENCY OBLIGATIONS-2.29%
Fannie Mae
*3.375% 12/15/08.................. 265,000 252,678
(Y)5.377% 10/9/19................. 230,000 104,969
6.25% 2/1/11..................... 105,000 107,645
6.625% 9/15/09................... 100,000 103,459
Federal Home Loan Bank 4.25% 9/14/07 145,000 142,930
(Y)Resolution Funding Interest Strip
5.226% 10/15/25................. 275,000 96,801
----------
TOTAL AGENCY OBLIGATIONS
(COST $842,240)................... 808,482
----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES- 1.71%
Bank of America Commercial Mortgage
Series 2006-2 AJ 5.776% 5/10/45..................... 25,000 24,617
#Bear Stearns Commercial Mortgage Securities
Series 2004-ESA E 144A 5.064% 5/14/16............... 40,000 39,413
(D)Commercial Mortgage Pass Through Certificates
#Series 2001-J1A A2 144A 6.457% 2/14/34............. 29,066 29,708
Series 2006-C7 A2 5.69% 6/10/46..................... 25,000 24,905
oCredit Suisse Mortgage Capital Certificates
Series 2006-C1 AAB 5.681% 2/15/39................... 15,000 14,741
#Crown Castle Towers Series 2005-1A C
144A 5.074% 6/15/35................................. 25,000 24,040
First Union-Lehman Brothers-Bank of
America Series 1998-C2 A2 6.56% 11/18/35............ 29,565 29,881
General Electric Capital Commercial Mortgage
Series 2002-1A A3 6.269% 12/10/35................... 75,000 76,786
#Hilton Hotel Pool Trust Series 2000-HLTA A1
144A 7.055% 10/6/15................................. 16,700 17,189
JPMorgan Chase Commercial Mortgage Securities
Series 2002-C1 A3 5.376% 7/12/37.................... 35,000 34,283
Series 2003-C1 A2 4.985% 1/12/37.................... 68,000 65,012
#oSeries 2006-RRA1 A1 144A 5.61% 10/18/52........... 25,000 24,062
Lehman Brothers-UBS Commercial Mortgage
Trust Series 2002-C1 A4 6.462% 3/15/31.............. 55,000 56,753
oMerrill Lynch Mortgage Trust Series
2004-BPC1 A3 4.467% 10/12/41........................ 25,000 23,512
oMerrill Lynch/Countrywide Commercial
Mortgage Trust Series 2006-2 AJ 5.917%
6/12/46............................................. 25,000 25,004
COMMERCIAL MORTGAGE-BACKED
SECURITIES (CONTINUED)
#Tower 144A
Series 2004-2A A 4.232% 12/15/14.................... $ 45,000 $ 43,024
Series 2006-1 B 5.588% 2/15/36...................... 25,000 24,493
Series 2006-1 C 5.707% 2/15/36...................... 25,000 24,524
----------
TOTAL COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $629,560).......................... 601,947
----------
CORPORATE BONDS-13.51%
BANKING-1.42%
o#Banco Santander 144A 5.633% 12/9/09.................. 40,000 40,037
oBarclays Bank 6.278% 12/29/49......................... 10,000 8,730
Citigroup 5.875% 2/22/33............................... 20,000 18,725
Credit Suisse First Boston USA
6.125% 11/15/11..................................... 55,000 55,799
Popular North America
4.25% 4/1/08........................................ 55,000 53,515
o5.41% 4/6/09....................................... 25,000 25,066
Popular North America Capital Trust
6.564% 9/15/34...................................... 50,000 45,653
o#Rabobank Capital Funding II
144A 5.26% 12/29/49................................. 35,000 32,889
oRBS Capital Trust I 4.709% 12/29/49................... 60,000 54,311
o#Resona Preferred Global Securities
Cayman 144A 7.191% 12/29/49......................... 80,000 80,378
#Wachovia Capital I 144A 7.64% 1/15/27................. 40,000 41,769
oWachovia Capital Trust III 5.80% 8/29/49.............. 45,000 43,712
----------
500,584
----------
BASIC INDUSTRY-0.28%
Abitibi-Consolidated 7.875% 8/1/09..................... 5,000 4,813
Barrick Gold Finance 7.50% 5/1/07...................... 15,000 15,212
Bowater 9.50% 10/15/12................................. 5,000 5,013
Lubrizol 4.625% 10/1/09................................ 30,000 28,905
Norske Skog Canada 8.625% 6/15/11...................... 5,000 4,900
Potlatch 13.00% 12/1/09................................ 5,000 5,870
*Rhodia 8.875% 6/1/11.................................. 4,000 4,005
*++Solutia 6.72% 10/15/37.............................. 5,000 4,644
Tembec Industries 8.625% 6/30/09....................... 5,000 2,763
Weyerhaeuser 7.125% 7/15/23............................ 25,000 24,636
----------
100,761
----------
BROKERAGE-0.53%
Amvescap 4.50% 12/15/09................................ 55,000 52,622
Goldman Sachs 6.345% 2/15/34........................... 25,000 23,379
JPMorgan Capital Trust I 7.54% 1/15/27................. 10,000 10,394
Merrill Lynch 6.05% 5/16/16............................ 100,000 99,524
----------
185,919
----------
CAPITAL GOODS-0.22%
Casella Waste Systems 9.75% 2/1/13 .................... 5,000 5,275
General Electric 5.00% 2/1/13..... .................... 40,000 38,366
*Geo Subordinate 11.00% 5/15/12... .................... 5,000 5,050
Interface 10.375% 2/1/10.......... .................... 5,000 5,494
Intertape Polymer 8.50% 8/1/14.... .................... 5,000 4,625
United Technologies 6.05% 6/1/36.. .................... 20,000 19,742
----------
78,552
----------
Balanced Series-4
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
(U.S. $) (U.S. $)
--------- --------
CORPORATE BONDS (CONTINUED)
COMMUNICATIONS-1.58%
(DS)Adelphia Communications 8.125% 12/15/06 ............. $ 5,000 $ 2,750
American Tower 7.125% 10/15/12 .......................... 5,000 5,013
AT&T
7.30% 11/15/11 ....................................... 40,000 42,508
8.00% 11/15/31 ....................................... 15,000 17,272
BellSouth 4.20% 9/15/09 ................................. 25,000 23,851
British Telecommunications 8.875% 12/15/30 .............. 15,000 18,487
*++Century Communications 9.50% 9/1/06 .................. 5,000 5,025
Charter Communications Holdings 13.50% 1/15/11 .......... 5,000 3,275
Comcast 6.50% 11/15/35 .................................. 15,000 14,204
Cox Communications 4.625% 1/15/10 ....................... 25,000 23,865
Embarq 6.738% 6/1/13 .................................... 20,000 19,967
(SS)Inmarsat Finance 10.375% 11/15/12 ................... 5,000 4,281
*Insight Midwest 10.50% 11/1/10 ......................... 5,000 5,238
*iPCS 11.50% 5/1/12 ..................................... 5,000 5,600
*Mediacom Capital 9.50% 1/15/13 ......................... 5,000 5,000
News America Holdings 7.75% 12/1/45 ..................... 20,000 21,095
#*RH Donnelley 144A 8.875% 1/15/16 ...................... 5,000 5,069
*Rural Cellular 9.875% 2/1/10 ........................... 5,000 5,169
Sprint Capital
*7.625% 1/30/11 ...................................... 35,000 37,291
8.75% 3/15/32 ........................................ 40,000 48,373
*Telefonica Emisiones 5.984% 6/20/11 .................... 75,000 74,804
Telefonos de Mexico 4.50% 11/19/08 ...................... 65,000 62,860
Thomson 5.75% 2/1/08 .................................... 30,000 29,963
Time Warner Entertainment 8.375% 3/15/23 ................ 10,000 11,146
oUS LEC 13.62% 10/1/09 .................................. 5,000 5,338
#Viacom 144A
o5.691% 6/16/09 ...................................... 30,000 30,010
5.75% 4/30/11 ........................................ 25,000 24,581
#XM Satellite Radio 144A 9.75% 5/1/14 ................... 5,000 4,600
--------
556,635
--------
CONSUMER CYCLICAL-0.92%
oCentex 5.399% 8/1/07 ................................... 40,000 40,028
Corrections Corporation of America 7.50% 5/1/11 ......... 5,000 5,063
oDaimlerChrysler NA Holding 5.74% 3/13/09 ............... 100,000 100,142
*General Motors Acceptance Corporation
6.875% 9/15/11 ....................................... 35,000 33,431
8.00% 11/1/31 ........................................ 10,000 9,637
Home Depot 5.40% 3/1/16 ................................. 20,000 19,207
*Mandalay Resort Group 9.50% 8/1/08 ..................... 5,000 5,313
*Metaldyne 10.00% 11/1/13 ............................... 5,000 4,863
Penney (JC) 8.00% 3/1/10 ................................ 15,000 15,994
*Playtex Products 9.375% 6/1/11 ......................... 5,000 5,231
Time Warner 8.18% 8/15/07 ............................... 75,000 76,964
(SS)Town Sports International 11.00% 2/1/14 ............. 5,000 4,013
*Warner Music Group 7.375% 4/15/14 ...................... 5,000 4,875
--------
324,761
--------
CONSUMER NON-CYCLICAL-0.93%
Anheuser Busch 5.75% 4/1/36 ............................. 15,000 14,115
Biovail 7.875% 4/1/10 ................................... 5,000 5,088
*Cott Beverages 8.00% 12/15/11 .......................... 5,000 5,013
#CRC Health 144A 10.75% 2/1/16 .......................... 5,000 5,113
Humana 6.45% 6/1/16 ..................................... 20,000 19,833
Kraft Foods 4.125% 11/12/09 ............................. $ 55,000 $ 52,316
Kroger 6.375% 3/1/08 .................................... 30,000 30,229
Marsh Supermarket 8.875% 8/1/07 ......................... 1,000 999
*Medco Health Solutions 7.25% 8/15/13 ................... 75,000 79,519
Medtronic 4.375% 9/15/10 ................................ 5,000 4,767
President and Fellows of Harvard College
6.30% 10/1/37 ........................................ 35,000 35,323
UST 6.625% 7/15/12 ...................................... 30,000 30,896
*Vanguard Health 11.25% 10/1/15 ......................... 10,000 7,100
*Warner Chilcott 8.75% 2/1/15 ........................... 5,000 5,175
Wyeth 5.50% 2/1/14 ...................................... 35,000 33,870
--------
329,356
--------
ELECTRIC-1.74%
oAlabama Power Capital Trust IV 4.75% 10/1/42 ........... 55,000 54,310
Avista 7.75% 1/1/07 ..................................... 130,000 131,127
#++Calpine 144A 9.90% 7/15/07 ........................... 196 189
Consolidated Edison of New York 6.20% 6/15/36 ........... 25,000 24,421
Dominion Resources
5.687% 5/15/08 ....................................... 20,000 19,947
o5.79% 9/28/07 ....................................... 30,000 30,029
Duke Capital 5.668% 8/15/14 ............................. 35,000 33,887
FPL Group Capital 4.086% 2/16/07 ........................ 40,000 39,612
#Midamerican Energy Holdings 144A 6.125% 4/1/36 ......... 20,000 18,757
*Midwest Generation 8.75% 5/1/34 ........................ 5,000 5,325
oNisource Finance 5.764% 11/23/09 ....................... 20,000 20,040
Northern State Power 6.25% 6/1/36 ....................... 25,000 24,918
NRG Energy 7.25% 2/1/14 ................................. 5,000 4,888
Pepco Holdings
5.50% 8/15/07 ........................................ 40,000 39,866
o5.856% 6/1/10 ....................................... 30,000 30,110
#Power Contract Financing 144A 6.256% 2/1/10 ............ 20,000 20,011
PSEG Funding Trust I 5.381% 11/16/07 .................... 40,000 39,725
Southern Capital Funding 5.30% 2/1/07 ................... 25,000 24,887
Tampa Electric 6.55% 5/15/36 ............................ 15,000 15,109
TXU Electric Delivery 7.00% 5/1/32 ...................... 25,000 26,025
Xcel Energy 6.50% 7/1/36 ................................ 10,000 9,839
--------
613,022
--------
ENERGY-0.68%
*Bluewater Finance 10.25% 2/15/12 ....................... 5,000 5,088
#Canadian Oil Sands 144A 4.80% 8/10/09 .................. 35,000 33,919
#Hilcorp Energy 144A 10.50% 9/1/10 ...................... 2,000 2,165
Nexen 5.875% 3/10/35 .................................... 20,000 17,713
oSecunda International 13.068% 9/1/12 ................... 5,000 5,250
Talisman Energy 5.125% 5/15/15 .......................... 15,000 13,996
USX 9.125% 1/15/13 ...................................... 40,000 46,704
Valero Energy 6.125% 4/15/07 ............................ 45,000 45,109
Weatherford International 4.95% 10/15/13 ................ 70,000 65,550
Whiting Petroleum 7.25% 5/1/13 .......................... 5,000 4,813
--------
240,307
--------
Balanced Series-5
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
(U.S. $) (U.S. $)
--------- ----------
CORPORATE BONDS (CONTINUED)
FINANCE COMPANIES-1.53%
American General Finance 4.875% 7/15/12 ............... $ 30,000 $ 28,418
oAmeriprise Financial 7.518% 6/1/66 ................... 25,000 25,195
FINOVA Group 7.50% 11/15/09 ........................... 5,763 1,729
*#Hughes Network Systems/ Finance
144A 9.50% 4/15/14 ................................. 5,000 4,925
#Kaupthing Bank 144A 7.125% 5/19/16 ................... 100,000 100,205
LaBranche & Co. 11.00% 5/15/12 ........................ 5,000 5,500
oMUFG Capital Finance 1 6.346% 7/29/49 ................ 100,000 96,636
o#Premium Asset Trust Series 2005-2
144A 5.191% 2/2/07 ................................. 50,000 49,969
Residential Capital
6.00% 2/22/11 ...................................... 30,000 29,098
6.125% 11/21/08 .................................... 30,000 29,668
6.375% 6/30/10 ..................................... 25,000 24,681
6.50% 4/17/13 ...................................... 35,000 34,393
*6.875% 6/30/15 ....................................... 90,000 89,761
Sovereign Capital Trust VI 7.908% 6/13/36 ............. 20,000 20,592
----------
540,770
----------
INDUSTRIAL-0.03%
#Knowledge Learning 144A 7.75% 2/1/15 ................. 10,000 9,200
----------
9,200
----------
INSURANCE-1.41%
AmerUs Group 6.583% 5/16/11 ........................... 35,000 35,029
#Farmers Insurance Exchange 144A
6.00% 8/1/14 ....................................... 10,000 9,634
8.625% 5/1/24 ...................................... 70,000 77,852
Marsh & McLennan
5.15% 9/15/10 ...................................... 35,000 33,814
o5.19% 7/13/07 ........................................ 10,000 9,997
*5.375% 3/15/07 ....................................... 40,000 39,799
MetLife
5.00% 6/15/15 ...................................... 20,000 18,534
5.70% 6/15/35 ...................................... 5,000 4,475
#Nationwide Mutual Insurance
144A 7.875% 4/1/33 ................................ 45,000 50,047
#Nippon Life Insurance 144A 4.875% 8/9/10 ............. 35,000 33,668
Safeco Capital I 8.072% 7/15/37 ....................... 45,000 47,317
St. Paul Travelers 5.01% 8/16/07 ...................... 30,000 29,666
UnitedHealth Group 5.80% 3/15/36 ...................... 15,000 13,471
WellPoint
4.25% 12/15/09 ..................................... 25,000 23,864
5.85% 1/15/36 ...................................... 20,000 17,930
Willis Group
5.125% 7/15/10 ..................................... 25,000 24,136
5.625% 7/15/15 ..................................... 30,000 27,909
----------
497,142
----------
NATURAL GAS-0.94%
oAtmos Energy 5.443% 10/15/07 ......................... 40,000 40,063
El Paso Production Holding 7.75% 6/1/13 ............... 5,000 5,063
Enterprise Products Operating
4.00% 10/15/07 ..................................... 50,000 48,664
4.625% 10/15/09 .................................... 40,000 38,350
Inergy Finance 6.875% 12/15/14 ........................ 5,000 4,675
ONEOK 5.51% 2/16/08 ................................... 25,000 24,848
Sempra Energy
4.621% 5/17/07 ..................................... $ 40,000 $ 39,619
o5.659% 5/21/08 .................................... 50,000 50,047
Valero Logistics Operations 6.05% 3/15/13 ............. 80,000 79,431
----------
330,760
----------
REAL ESTATE-0.31%
American Real Estate Partners 8.125% 6/1/12 ........... 4,000 4,010
BF Saul REIT 7.50% 3/1/14 ............................. 5,000 5,100
oBrandywine Operating Partnership 5.415% 4/1/09 ....... 35,000 35,043
*Developers Diversified Realty 4.625% 8/1/10 .......... 50,000 47,657
HRPT Properties Trust 5.75% 2/15/14 ................... 20,000 19,285
----------
111,095
----------
TECHNOLOGY-0.27%
*Magnachip Semiconductor 8.00% 12/15/14 ............... 5,000 4,175
Motorola 4.608% 11/16/07 .............................. 90,000 88,733
#Telcordia Technologies 144A 10.00% 3/15/13 ........... 5,000 4,250
----------
97,158
----------
TRANSPORTATION-0.72%
American Airlines 3.857% 7/9/10 ....................... 43,580 41,183
Continental Airlines 6.503% 6/15/11 ................... 95,000 94,815
oCSX 5.43% 8/3/06 ..................................... 20,000 20,000
#Erac USA Finance 144A 7.35% 6/15/08 .................. 80,000 82,147
(SS)H-Lines Finance Holdings 11.00% 4/1/13 ............ 5,000 4,313
#Hertz 144A 8.875% 1/1/14 ............................. 10,000 10,300
----------
252,758
----------
TOTAL CORPORATE BONDS
(COST $4,823,803) .................................. 4,768,780
----------
FOREIGN AGENCIES-0.09%
Pemex Project Funding Master Trust 6.625% 6/15/35 ..... 35,000 31,719
----------
TOTAL FOREIGN AGENCIES
(COST $31,014) ..................................... 31,719
----------
MUNICIPAL BONDS-0.92%
Augusta, Georgia Water & Sewer
Revenue 5.25% 10/1/39 (FSA) ........................ 55,000 57,103
California State 5.00% 2/1/33 ......................... 20,000 20,147
California State University Systemwide
Revenue 5.00% 11/1/30 (AMBAC) ...................... 20,000 20,436
Colorado Department of Transportation
Revenue 5.00% 12/15/12 (FGIC) ...................... 70,000 73,939
Illinois State Taxable Pension 5.10% 6/1/33 ........... 30,000 26,952
New Jersey Economic Development Authority
Revenue Cigarette Tax 5.75% 6/15/29 ................ 40,000 42,153
New York State Urban Development
Series A-1 5.25% 3/15/34 (FGIC) .................... 35,000 36,437
Oregon State Taxable Pension 5.892% 6/1/27 ............ 35,000 34,790
West Virginia Economic Development
Authority 5.37% 7/1/20 (MBIA) ...................... 15,000 14,382
----------
TOTAL MUNICIPAL BONDS
(COST $330,319) .................................... 326,339
----------
Balanced Series-6
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
(U.S. $) (U.S. $)
--------- --------
NON-AGENCY ASSET BACKED SECURITIES-2.61%
Citibank Credit Card Issuance Trust
Series 2003-A7 A7 4.15% 7/7/17 ....................... $45,000 $ 40,319
Countrywide Asset-Backed Certificates
Series 2004-S1 A2 3.872% 3/25/20 ..................... 50,000 49,080
oSeries 2005-12 2A2 4.898% 2/25/36 ................... 60,000 59,211
oSeries 2006-3 2A2 5.503% 6/25/36 .................... 70,000 70,123
Series 2006-S3 A2 6.085% 7/25/36 ..................... 40,000 39,996
Credit-Based Asset Service and Securitization
Series 2005-CB8 AF1B 5.451% 12/25/35 ................. 73,362 72,874
#GSAA Trust Series 2004-4N Note
144A 6.25% 5/25/34 ................................... 1,361 1,358
GSAMP Series 2006-S3 A1 6.085% 5/25/36 .................. 49,155 49,035
#MASTR Specialized Loan Trust Series
2005-2 A2 144A 5.15% 7/25/35 ......................... 33,673 32,905
oMerrill Lynch Mortgage Investors
Series 2005-NCB A1A 5.451% 7/25/36 ................... 15,571 15,476
Series 2006-AR1 A2C 5.483% 3/25/37 ................... 75,000 74,998
Mid-State Trust
Series 11 A1 4.864% 7/15/38 .......................... 20,136 18,762
Series 2004-1 A 6.005% 8/15/37 ....................... 10,889 10,831
oOption One Mortgage Loan Trust
Series 2005-4 A3 5.583% 11/25/35 ..................... 75,000 75,194
Ownit Mortgage Loan Asset Backed
Certificates Series 2006-2 A2B
5.633% 1/25/37 ....................................... 15,000 14,951
Renaissance Home Equity Loan Trust
Series 2004-4 AF2 3.856% 2/25/35 ..................... 34,242 34,012
Series 2005-4 A2 5.399% 12/1/35 ...................... 35,000 34,662
oResidential Asset Mortgage Products
Series 2004-RZ2 AI3 4.30% 1/25/31 .................... 40,000 39,472
oResidential Asset Securities Series
2006-KS3 AI3 5.493% 4/25/36 .......................... 85,000 85,151
oResidential Funding Mortgage Securities II
Series 2005-HI2 A1 5.463% 5/25/35 .................... 27,976 27,978
Structured Asset Securities
Series 2001-SB1 A2 3.375% 8/25/31 .................... 34,706 31,076
Series 2004-16XS A2 4.91% 8/25/34 .................... 45,043 44,769
--------
TOTAL NON-AGENCY ASSET BACKED SECURITIES
(COST $894,853) ...................................... 922,233
--------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS-7.42%
oAmerican Home Mortgage Investment
Trust Series 2005-2 5A1 5.064% 9/25/35 ............... 35,000 33,203
Bank of America Alternative Loan Trust
Series 2003-10 2A1 6.00% 12/25/33 .................... 71,103 69,659
Series 2004-2 1A1 6.00% 3/25/34 ...................... 38,885 38,095
Series 2005-3 2A1 5.50% 4/25/20 ...................... 41,745 40,793
Series 2005-5 2CB1 6.00% 6/25/35 ..................... 43,074 42,185
Series 2005-9 5A1 5.50% 10/25/20 ..................... 27,752 27,085
Bank of America Mortgage Securities
oSeries 2003-D 1A2 6.101% 5/25/33 .................... 1,490 1,493
Series 2005-9 2A1 4.75% 10/25/20 ..................... 47,280 45,516
oBear Stearns Adjustable Rate Mortgage
Trust Series 2005-7 1A2 4.75% 8/25/35 ................ 21,068 20,405
oBear Stearns Alternative A Trust
Series 2006-3 33A1 6.204% 5/25/36 .................... $53,486 $ 53,687
Series 2006-3 34A1 6.226% 5/25/36 .................... 56,428 56,670
Chase Mortgage Finance Series 2003-S8
A2 5.00% 9/25/18 ..................................... 85,228 82,356
Countrywide Alternative Loan Trust
Series 2004-28CB 6A1 6.00% 1/25/35 ................... 19,902 19,485
oSeries 2004-J7 1A2 4.673% 8/25/34 ................... 30,247 29,970
oSeries 2005-63 3A1 5.902% 11/25/35 .................. 55,997 55,490
Series 2006-2CB A3 5.50% 3/25/36 ..................... 42,187 41,921
(D)Countrywide Home Loan Mortgage Pass Through Trust
Series 2006-1 A2 6.00% 3/25/36 ....................... 42,797 41,824
oSeries 2006-HYB3 3A1A 6.143% 5/25/36 ................ 53,846 53,817
oSeries 2006-HYB4 1A2 5.75% 6/20/36 .................. 44,922 44,641
Credit Suisse First Boston Mortgage Securities
Series 2003-29 5A1 7.00% 12/25/33 .................... 19,953 20,015
Series 2004-1 3A1 7.00% 2/25/34 ...................... 12,931 13,039
First Horizon Alternative Mortgage Securities
Series 2004-FA1 1A1 6.25% 10/25/34 ................... 51,263 51,078
First Horizon Asset Securities
Series 2003-5 1A17 8.00% 7/25/33 ..................... 18,455 19,184
oSeries 2004-AR5 4A1 5.67% 10/25/34 .................. 34,985 34,348
oGeneral Motors Acceptance Corporation
Mortgage Loan Trust Series 2005-AR2 4A
5.187% 5/25/35 ....................................... 42,824 40,881
#GSMPS Mortgage Loan Trust 144A
Series 1998-3 A 7.75% 9/19/27 ........................ 36,918 38,137
Series 2005-RP1 1A4 8.50% 1/25/35 .................... 16,410 17,272
Series 2005-RP1 1A3 8.00% 1/25/35 .................... 27,467 28,623
oIndymac Index Mortgage Loan Trust
Series 2005-AR25 1A21 5.897% 12/25/35 ................ 46,762 46,324
Series 2006-AR2 1A1A 5.543% 4/25/46 .................. 68,102 68,156
Series 2006-AR7 5A1 6.167% 5/25/36 ................... 39,235 39,169
oJPMorgan Mortgage Trust Series
2005-A6 1A2 5.151% 9/25/35 ........................... 60,000 57,841
Lehman Mortgage Trust Series 2005-2
2A3 5.50% 12/25/35 ................................... 45,321 44,861
oMASTR Adjustable Rate Mortgages Trust
Series 2003-6 1A2 2.87% 12/25/33 ..................... 47,148 47,199
MASTR Alternative Loans Trust
Series 2003-6 3A1 8.00% 9/25/33 ...................... 8,988 9,096
Series 2005-3 7A1 6.00% 4/25/35 ...................... 49,162 48,485
#MASTR Reperforming Loan Trust 144A
Series 2005-1 1A5 8.00% 8/25/34 ...................... 41,480 43,160
Series 2005-2 1A4 8.00% 5/25/35 ...................... 20,531 21,301
Morgan Stanley Mortgage Loan Trust
Series 2006-2 6A 6.50% 2/25/36 ....................... 24,153 24,175
Nomura Asset Acceptance
Series 2005-WF1 2A2 4.786% 3/25/35 ................... 65,000 63,354
oSeries 2006-AF1 1A2 6.159% 5/25/36 .................. 60,000 59,681
Prime Mortgage Trust Series 2004-CL1
1A1 6.00% 2/25/34 .................................... 21,455 21,019
Residential Asset Mortgage Products
Series 2004-SL1 A3 7.00% 11/25/31 .................... 22,466 22,740
Series 2004-SL4 A3 6.50% 7/25/32 ..................... 31,686 31,946
Series 2005-SL1 A2 6.00% 5/25/32 ..................... 35,957 36,202
Balanced Series-7
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
(U.S. $) (U.S. $)
--------- -----------
NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS (CONTINUED)
oStructured Adjustable Rate Mortgage Loan Trust
Series 2004-18 5A 5.50% 12/25/34 .................. $ 39,664 $ 38,512
Series 2005-3XS A2 5.573% 1/25/35 ................. 69,929 69,985
Structured Asset Securities
oSeries 2002-22H 1A 6.977% 11/25/32 ............... 12,783 12,997
Series 2004-12H 1A 6.00% 5/25/34 .................. 44,771 43,847
Washington Mutual
oSeries 2003-AR4 A7 3.95% 5/25/33 ................. 24,353 23,369
Series 2004-CB3 4A 6.00% 10/25/19 ................. 69,893 69,915
oSeries 2006-AR7 1A 5.123% 7/25/46 ................ 35,000 34,934
(D)Washington Mutual Alternative Mortgage
Pass Through Certificates
Series 2005-9 3CB 5.50% 10/25/20 .................. 55,360 54,675
Series 2006-2 2CB 6.50% 3/25/36 ................... 37,655 37,631
oSeries 2006-AR5 3A 5.083% 7/25/46 ................ 30,000 29,981
Wells Fargo Mortgage Backed Securities Trust
oSeries 2004-I 1A1 3.383% 7/25/34 ................. 50,377 50,336
oSeries 2004-T A1 3.455% 9/25/34 .................. 39,277 39,354
Series 2005-17 1A1 5.50% 1/25/36 .................. 53,603 50,923
Series 2006-2 3A1 5.75% 3/25/36 ................... 54,287 52,235
oSeries 2006-AR4 1A1 5.87% 4/25/36 ................ 73,524 72,536
oSeries 2006-AR4 2A1 5.793% 4/25/36 ............... 107,250 105,169
Series 2006-7 2A1 6.00% 6/25/36 ................... 89,617 87,294
-----------
TOTAL NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS (COST $2,707,665) ............ 2,619,274
-----------
U.S. TREASURY OBLIGATIONS-4.72%
*U.S. Treasury Bonds
4.50% 2/15/36 ..................................... 235,000 210,784
5.375% 2/15/31 .................................... 75,000 76,318
6.25% 8/15/23 ..................................... 20,000 22,064
U.S. Treasury Inflation Index Notes
2.375% 4/15/11 .................................... 142,086 141,570
(OO)*3.00% 7/15/12 ................................. 78,426 80,785
3.875% 1/15/09 .................................... 61,416 63,632
*U.S. Treasury Notes
4.50% 2/15/16 ..................................... 15,000 14,276
4.875% 4/30/08 .................................... 250,000 248,721
4.875% 5/31/08 .................................... 65,000 64,657
4.875% 5/31/11 .................................... 260,000 257,441
5.125% 5/15/16 .................................... 335,000 334,712
^*U.S. Treasury Strip 4.202% 11/15/13 ................ 220,000 151,485
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $1,700,051) ................................. 1,666,445
-----------
REPURCHASE AGREEMENTS-2.03%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased at $378,142,
collateralized by $368,000 U.S. Treasury Notes
6.00% due 8/15/09, market value $385,786) ......... 378,000 378,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased at $97,036,
collateralized by $49,000 U.S. Treasury Notes
3.875% due 7/31/07, market value $48,673,
$49,000 U.S. Treasury Notes 3.875% due 5/15/09,
market value $47,187 and $3,000 U.S. Treasury
Notes 6.50% due 10/15/06, market value $3,342) .... 97,000 97,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased at $243,088,
collateralized by $131,000 U.S. Treasury Notes
3.875% due 5/15/09, market value $126,744
and $121,000 U.S. Treasury Notes 4.875% due
5/15/09, market value $121,451) ................... $243,000 $ 243,000
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $718,000) ................................... 718,000
-----------
TOTAL MARKET VALUE OF SECURITIES BEFORE SECURITIES
LENDING COLLATERAL-103.86%
(cost $35,689,280) ................................ 36,657,580
-----------
SECURITIES LENDING COLLATERAL**-4.28%
SHORT-TERM INVESTMENTS-4.28%
FIXED RATE NOTES-0.76%
Citigroup Global Markets 5.35% 7/3/06 ................ 265,909 265,909
-----------
265,909
-----------
oVARIABLE RATE NOTES-3.52%
American Honda Finance 5.32% 2/21/07 ................. 42,825 42,825
ANZ National 5.11% 7/31/07 ........................... 9,517 9,517
Australia New Zealand 5.28% 7/31/07 ................. 47,584 47,584
Bank of America 5.32% 2/23/07 ........................ 61,859 61,859
Bank of New York 5.16% 7/31/07 ....................... 38,067 38,067
Barclays New York 5.31% 5/18/07 ...................... 61,859 61,859
Bayerische Landesbank 5.37% 8/25/06 ................. 47,584 47,584
Bear Stearns 5.19% 1/2/07 ............................ 57,101 57,101
BNP Paribas 5.14% 7/31/07 ............................ 47,584 47,584
Canadian Imperial Bank
5.28% 7/31/07 ..................................... 23,792 23,792
5.32% 11/22/06 .................................... 47,584 47,584
CDC Financial Products 5.41% 7/31/06 ................. 61,589 61,859
Citigroup Global Markets 5.38% 7/7/06 ................ 61,859 61,859
Commonwealth Bank 5.29% 7/31/07 ...................... 47,584 47,584
Goldman Sachs 5.45% 7/2/07 ........................... 61,859 61,859
Manufacturers & Traders 5.31% 9/26/06 ................ 47,583 47,581
Marshall & Ilsley Bank 5.18% 7/31/07 ................. 52,342 52,342
Merrill Lynch Mortgage Capital 5.41% 8/3/06 .......... 42,825 42,825
National Australia Bank 5.10% 3/7/07 ................. 59,004 59,004
National City Bank 5.32% 3/2/07 ...................... 57,102 57,117
National Rural Utilities 5.10% 7/31/07 ............... 75,183 75,183
Nordea Bank New York 5.31% 5/16/07 ................... 23,791 23,791
Nordea Bank Norge 5.15% 7/31/07 ...................... 47,584 47,584
Royal Bank of Scotland 5.27% 7/31/07 ................. 47,584 47,584
Societe Generale 5.08% 7/31/07 ....................... 23,792 23,792
Wells Fargo 5.19% 7/31/07 ............................ 47,584 47,584
-----------
1,242,904
===========
TOTAL SECURITIES LENDING COLLATERAL
(COST $1,508,813) ................................. 1,508,813
-----------
Balanced Series-8
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-108.14% (cost $37,198,093)........... $ 38,166,393(y)
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL**-(7.36%).......... (2,597,175)
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.78%)............... (275,185)
------------
NET ASSETS APPLICABLE TO 2,588,751 SHARES OUTSTANDING-100.00%......... $ 35,294,033
============
NET ASSET VALUE-DELAWARE VIP BALANCED SERIES STANDARD CLASS
($35,288,743 / 2,588,363 SHARES)................................... $ 13.63
============
NET ASSET VALUE-DELAWARE VIP BALANCED SERIES SERVICE CLASS
($5,290 / 388 SHARES).............................................. $ 13.63
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par)........ $ 54,093,732
Undistributed net investment income................................... 549,883
Accumulated net realized loss on investments.......................... (20,314,785)
Net unrealized appreciation of investments............................ 965,203
------------
Total net assets...................................................... $ 35,294,033
============
* Fully or partially on loan.
** See Note 9 in "Notes to Financial Statements."
(y) Includes $2,634,017 of securities loaned.
+ Non-income producing security for the period ended June 30, 2006.
++ Non-income producing security. Security is currently in default.
(DS) Security is currently in default. The issue has missed the maturity date.
Bankruptcy proceedings are in process to determine distribution of assets.
The date listed is the estimate of when proceedings will be finalized.
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
o Variable rate security. The interest rate shown is the rate at June 30,
2006.
(SS) Step coupon bond. Indicates security that has a zero coupon that remains in
effect until a predetermined date at which time the stated interest rate
becomes effective.
(#) Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $1,180,893, which represented 3.35% of the Series' net
assets. See Note 10 in "Notes to Financial Statements."
(OO) Fully or partially pledged as collateral for financial futures contracts.
(D) Pass Through Agreement. Security represents the contractual right to
receive a proportionate amount of underlying payments due to the
counterparty pursuant to various agreements related to the rescheduling of
obligations and the exchange of certain notes.
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
ARM - Adjustable Rate Mortgage
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Government National Mortgage Association
GSMPS - Goldman Sachs Reperforming Mortgage Securities
MBIA - Insured by the Municipal Bond Insurance Association
REIT - Real Estate Investment Trust
S.F. - Single Family
TBA - To be announced
yr - Year
The following financial futures contracts and swap agreements were outstanding
at June 30, 2006:
FUTURES CONTRACTS(1)
UNREALIZED
NOTIONAL NOTIONAL APPRECIATION
CONTRACTS TO BUY (SELL) COST (PROCEEDS) VALUE EXPIRATION DATE (DEPRECIATION)
- ------------------------------ --------------- --------- --------------- --------------
(3) U.S. Treasury 10 year note $(316,211) $(314,578) 9/30/06 $1,633
1 U.S. Treasury long Bond 106,865 106,656 9/30/06 (209)
------
$1,424
======
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Series' total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Series' net assets.
Balanced Series-9
DELAWARE VIP BALANCED SERIES
STATEMENT OF NET ASSETS (CONTINUED)
SWAP AGREEMENTS(2)
UNREALIZED
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION DEPRECIATION
- --------------- --------------- --------------------------- ------------
$425,000 8/1/06 Agreement with State Street $4,521
to receive the notional
amount multiplied by the
return on the Lehman
Brothers Commercial MBS
Index AAA and to pay the
notional amount multiplied
by the 1 month BBA LIBOR
adjusted by a spread of
plus 0.10%.
Because there is no organized market for these swap agreements, the value of
open swaps may differ from that which would be realized in the event the Series'
terminated its position in the agreement. Risks of entering into these
agreements include the potential inability of the counterparty to meet the terms
of the agreements. This type of risk is generally limited to the amount of
favorable movements in the value of the underlying security, instrument, or
basket of instruments, if any, at the day of default. Risks also arise from
potential losses from adverse market movements and such losses could exceed the
related unrealized amounts shown above.
- ----------
(1) See Note 7 in "Notes to Financial Statements."
(2) See Note 8 in "Notes to Financial Statements."
SEE ACCOMPANYING NOTES
Balanced Series-10
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Interest ........................................................ $ 358,711
Dividends ....................................................... 306,081
Securities lending income ....................................... 2,516
----------
667,308
----------
EXPENSES:
Management fees ................................................. 120,463
Legal and professional fees ..................................... 8,302
Accounting and administration expenses .......................... 7,414
Pricing fees .................................................... 5,578
Reports and statements to shareholders .......................... 5,448
Custodian fees .................................................. 3,799
Dividend disbursing and transfer agent fees and expenses ........ 1,854
Trustees' fees .................................................. 947
Insurance fees .................................................. 602
Registration fees ............................................... 31
Distribution expenses - Service Class ........................... 8
Other ........................................................... 180
----------
154,626
Less expenses absorbed or waived ................................ (4,621)
Less waiver of distribution expenses - Service Class ............ (2)
Less expense paid indirectly .................................... (1,672)
----------
Total operating expenses ........................................ 148,331
----------
NET INVESTMENT INCOME ........................................... 518,977
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments .................................................. 726,539
Futures contracts ............................................ 8,205
Swap agreements .............................................. (9,315)
----------
Net realized gain ............................................... 725,429
Net change in unrealized appreciation/depreciation of
investments .................................................. 172,935
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................. 898,364
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $1,417,341
==========
See accompanying notes
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ........................................... $ 518,977 $ 1,063,172
Net realized gain on investments ................................ 725,429 3,661,335
Net change in unrealized appreciation/depreciation of
investments .................................................. 172,935 (3,243,861)
----------- -----------
Net increase in net assets resulting from operations ............ 1,417,341 1,480,646
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class ............................................... (1,122,023) (993,690)
Service Class ................................................ (144) (102)
----------- -----------
(1,122,167) (993,792)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................................... 402,320 672,726
Net asset value of shares issued upon reinvestment of dividends
and distributions:
Standard Class ............................................... 1,122,023 993,690
Service Class ................................................ 144 102
----------- -----------
1,524,487 1,666,518
----------- -----------
Cost of shares repurchased:
Standard Class ............................................... (4,757,878) (9,333,352)
----------- -----------
Decrease in net assets derived from capital share transactions .. (3,233,391) (7,666,834)
----------- -----------
NET DECREASE IN NET ASSETS ...................................... (2,938,217) (7,179,980)
NET ASSETS:
Beginning of period ............................................. 38,232,250 45,412,230
----------- -----------
End of period (including undistributed net investment income of
$549,883 and $1,113,970, respectively) ....................... $35,294,033 $38,232,250
=========== ===========
See accompanying notes
Balanced Series-11
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP BALANCED SERIES STANDARD CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..................... $13.530 $13.360 $12.890 $11.170 $13.730 $15.230
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) ................................. 0.190 0.341 0.245 0.211 0.258 0.329
Net realized and unrealized gain (loss)
on investments and foreign currencies ................. 0.324 0.135 0.493 1.872 (2.430) (1.494)
------- ------- ------- ------- ------- -------
Total from investment operations ......................... 0.514 0.476 0.738 2.083 (2.172) (1.165)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income .................................... (0.414) (0.306) (0.268) (0.363) (0.388) (0.335)
------- ------- ------- ------- ------- -------
Total dividends and distributions ........................ (0.414) (0.306) (0.268) (0.363) (0.388) (0.335)
------- ------- ------- ------- ------- -------
Net asset value, end of period ........................... $13.630 $13.530 $13.360 $12.890 $11.170 $13.730
======= ======= ======= ======= ======= =======
Total return(3) .......................................... 3.79% 3.68% 5.84% 19.21% (16.27%) (7.66%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) .................. $35,289 $38,227 $45,407 $53,233 $54,789 $90,377
Ratio of expenses to average net assets .................. 0.80% 0.80% 0.77% 0.77% 0.75% 0.73%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ............... 0.82% 0.85% 0.77% 0.77% 0.76% 0.73%
Ratio of net investment income to average net assets ..... 2.80% 2.57% 1.91% 1.80% 2.10% 2.37%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly .... 2.78% 2.52% 1.91% 1.80% 2.09% 2.37%
Portfolio turnover ....................................... 146% 200% 247% 231% 303% 336%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Balanced Series-12
DELAWARE VIP BALANCED SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP BALANCED SERIES SERVICE CLASS
--------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- ---------- -------- --------
Net asset value, beginning of period...................... $13.520 $13.340 $12.880 $11.170 $13.720 $15.230
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2).................................. 0.175 0.310 0.214 0.186 0.238 0.308
Net realized and unrealized gain (loss) on
investments and foreign currencies..................... 0.318 0.145 0.488 1.867 (2.421) (1.498)
------- ------- ------- ------- ------- -------
Total from investment operations.......................... 0.493 0.455 0.702 2.053 (2.183) (1.190)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income..................................... (0.383) (0.275) (0.242) (0.343) (0.367) (0.320)
------- ------- ------- ------- ------- -------
Total dividends and distributions......................... (0.383) (0.275) (0.242) (0.343) (0.367) (0.320)
------- ------- ------- ------- ------- -------
Net asset value, end of period............................ $13.630 $13.520 $13.340 $12.880 $11.170 $13.720
======= ======= ======= ======= ======= =======
Total return(3)........................................... 3.64% 3.51% 5.55% 18.90% (16.40%) (7.76%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)................... $ 5 $ 5 $ 5 $ 5 $ 4 $ 5
Ratio of expenses to average net assets .................. 1.05% 1.05% 1.02% 0.99% 0.90% 0.88%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid
indirectly............................................. 1.12% 1.15% 1.07% 1.02% 0.91% 0.88%
Ratio of net investment income to average net
assets................................................. 2.55% 2.32% 1.66% 1.58% 1.95% 2.22%
Ratio of net investment income to average net
assets prior to expense limitation and
expenses paid indirectly............................... 2.48% 2.22% 1.61% 1.55% 1.94% 2.22%
Portfolio turnover........................................ 146% 200% 247% 231% 303% 336%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
Balanced Series-13
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP
Balanced Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek a balance of capital
appreciation, income and preservation of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. U.S. government and agency securities are valued
at the mean between the bid and asked prices. Other long-term debt securities
are valued by an independent pricing service and such prices are believed to
reflect the fair value of such securities. Short-term debt securities having
less than 60 days to maturity are valued at amortized cost, which approximates
market value. Securities lending collateral is valued at amortized cost, which
approximates market value. Futures contracts and options on futures contracts
are valued at the daily quoted settlement prices. Exchange-traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between the last reported bid and asked prices. Swap agreements and other
securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Series' Board of Trustees. In determining whether market quotations are readily
available or fair valuation will be used, various factors will be taken into
consideration, such as market closures, or with respect to foreign securities,
aftermarket trading, or significant events after local market trading (e.g.,
government actions or pronouncements, trading volume or volatility on markets,
exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. Realized gains (losses) on
paydowns of mortgage- and asset-backed securities are classified as interest
income.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. There were no commission rebates during the
six months ended June 30, 2006. In general, best execution refers to many
factors, including the price paid or received for a security, the commission
charged, the promptness and reliability of execution, the confidentiality and
placement accorded the order, and other factors affecting the overall benefit
obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
Balanced Series-14
DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the
Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and
0.50% on average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.80% of average daily net assets of the Series through April 30, 2007.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO DMC AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$18,215 $1,461 $1 $1,422
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$790 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases other than U.S. government securities $20,995,020
Purchases of U.S. government securities 6,136,006
Sales other than U.S. government securities 24,241,545
Sales of U.S. government securities 6,028,637
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ----------- ------------ ------------ --------------
$37,280,167 $2,015,865 $(1,129,639) $886,226
Balanced Series-15
DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended June 30, 2006 and the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
---------- --------
Ordinary income....................... $1,122,167 $993,792
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest........... $ 54,093,732
Undistributed ordinary income........... 556,981
Capital loss carryforwards.............. (20,909,956)
Six month period realized gains ........ 671,571
Unrealized appreciation of investments.. 881,705
------------
Net assets.............................. $ 35,294,033
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
of futures contracts, tax treatment of market discount and premium on debt
instruments and contingent payment debt instruments.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on paydowns of mortgage- and asset-backed
securities and market discount and premium on certain debt instruments. Results
of operations and net assets were not affected by these reclassifications. For
the six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
----------------- ------------
$39,103 $(39,103)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $2,831,626 expires in
2008, $8,028,969 expires in 2009, $9,576,012 expires in 2010 and $473,349
expires in 2011. For the six months ended June 30, 2006, the Series had capital
gains of $671,571 which may reduce the capital loss carryforwards.
Balanced Series-16
DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- --------
Shares sold:
Standard Class........................... 29,354 51,036
Shares issued upon reinvestment of dividends
and distributions:
Standard Class........................... 82,019 77,210
Service Class............................ 10 8
-------- --------
111,383 128,254
-------- --------
Shares repurchased:
Standard Class........................... (347,821) (703,125)
-------- --------
Net decrease................................ (236,438) (574,871)
======== ========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. FUTURES CONTRACTS
The Series may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Series deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. Subsequent payments are received from the broker or paid to the
broker each day, based on the daily fluctuation in the market value of the
contract. These receipts or payments are known as "variation margin" and are
recorded daily by the Series as unrealized gains or losses until the contracts
are closed. When the contracts are closed, the Series records a realized gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. Risks of entering into
futures contracts include potential imperfect correlation between the futures
contracts and the underlying securities and the possibility of an illiquid
secondary market for these instruments.
8. SWAP AGREEMENTS
The Series may enter into total return swap agreements in accordance with its
investment objectives. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. Total return
swaps involve commitments to pay interest in exchange for a market linked return
based on a notional amount. To the extent the total return of the security,
instrument or basket of instruments underlying the transaction exceeds the
offsetting interest obligation, the Series will receive a payment from the
counterparty. To the extent the total return of the security, instrument or
basket of instruments underlying the transaction falls short of the offsetting
interest obligation, the Series will make a payment to the counterparty. The
change in value of swap agreements outstanding, if any, is recorded as
unrealized appreciation or depreciation daily. A realized gain or loss is
recorded on maturity or termination of the swap agreement.
Balanced Series-17
DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments(R) Family of
Funds, may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of the securities
issued in the United States. With respect to each loan, if the aggregate market
value of the collateral held on any business day is less than the aggregate
market value of the securities which are the subject of such loan, the borrower
will be notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Series, or at the
discretion of the lending agent, replace the loaned securities. The Series
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Series has the right under the Lending Agreement to recover the securities
from the borrower on demand. With respect to security loans collateralized by
U.S. Treasury obligations the Series receives a fee from the securities lending
agent. With respect to security loans collateralized by cash collateral, the
earnings from the collateral investments are shared among the Series, the
security lending agent and the borrower. The Series records securities lending
income net of allocations to the security lending agent and the borrower.
At June 30, 2006, the market value of the securities on loan was $2,597,175, for
which the Series received securities collateral, comprised of U.S. government
obligations valued at $1,125,193, and cash collateral of $1,508,824. Investments
purchased with cash collateral are presented on the Statement of Net Assets
under the caption "Securities Lending Collateral."
10. CREDIT AND MARKET RISK
The Series invests in fixed-income securities whose value is derived from an
underlying pool of mortgages or consumer loans. Investors receive principal and
interest payments as the underlying mortgages and consumer loans are paid back.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture. Prepayment of mortgages may shorten the
stated maturity of the obligations and can result in a loss of premium, if any
has been paid. Certain of these securities may be stripped (securities, which
provide only the principal or interest feature of the underlying security). The
yield to maturity on an interest-only CMO is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. A rapid rate
of principal payments may have a material adverse affect on the Series' yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Series may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
The Series may invest in advanced refunded bonds, escrow secured bonds or
defeased bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates.
Bonds are considered "pre-refunded" when the refunding issue's proceeds are
escrowed only until a permitted call date or dates on the refunded issue with
the refunded issue being redeemed at the time, including any required premium.
Bonds become "defeased" when the rights and interests of the bondholders and of
their lien on the pledged revenues or other security under the terms of the bond
contract are substituted with an alternative source of revenues (the escrow
securities) sufficient to meet payments of principal and interest to maturity or
to the first call dates. Escrowed secured bonds will often receive a rating of
AAA from Moody's Investor's Service, Inc., Standard & Poors Ratings Group,
and/or Fitch Ratings due to the strong credit quality of the escrow securities
and the irrevocable nature of the escrow deposit agreement.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, no securities have been determined to be illiquid under the
Series' Liquidity Procedures. Rule 144A securities have been identified on the
Statement of Net Assets.
Balanced Series-18
DELAWARE VIP BALANCED SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Balanced Series-19
DELAWARE VIP TRUST-DELAWARE VIP BALANCED SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP BALANCED SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Balanced
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Series, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all balanced
funds underlying variable insurance products as selected by Lipper. The Lipper
report comparison showed that the Series' total return for the one year period
was in the third quartile of such Performance Universe. The report further
showed that the Series' total return for the three, five and 10 year periods was
in the fourth quartile of such Performance Universe. The Board noted that the
Series performance was not in line with the Board's stated objective. The Board
also noted that strategic changes had been implemented by management in 2005.
Those changes included modifications to the Series' asset allocation
methodology, replacing the portfolio management team for the equity sleeve of
the Series and repositioning the Series to reflect the new team's investment
strategy. The Series' performance had improved since implementation these
changes in early 2005. The Board was satisfied that management was taking
effective action to improve Series performance and meet the Board's performance
objective.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in
Balanced Series-20
DELAWARE VIP BALANCED SERIES
OTHER SERIES INFORMATION (CONTINUED)
the Expense Group were similar in size to the Series) and actual management fees
(as reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Series' total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Standard Class shares
which do not charge 12b-1 and non-12b-1 service fees. The Board also considered
fees paid to Delaware Investments for non-management services. The Board noted
its objective to limit the Series' total expense ratio to an acceptable range as
compared to the median of the Expense Group. The following paragraph summarizes
the expense results for the Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second lowest expenses of its
Expense Group. The Board was satisfied with the management fee and total
expenses of the Series in comparison to its Expense Group as shown in the Lipper
report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Balanced Series-21
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,013.40 0.70% $3.49
Service Class 1,000.00 1,013.20 0.95% 4.74
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,021.32 0.70% $3.51
Service Class 1,000.00 1,020.08 0.95% 4.76
*"Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
Capital Reserves-1
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
AGENCY ASSET-BACKED SECURITIES 0.37%
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 1.95%
AGENCY MORTGAGE-BACKED SECURITIES 14.30%
AGENCY OBLIGATIONS 1.92%
COMMERCIAL MORTGAGE-BACKED SECURITIES 0.89%
CORPORATE BONDS 22.54%
Banking 1.52%
Basic Industry 1.55%
Brokerage 0.79%
Capital Goods 0.17%
Communications 4.08%
Consumer Cyclical 3.17%
Consumer Non-Cyclical 1.69%
Electric 2.52%
Energy 0.91%
Finance Companies 0.84%
Insurance 1.69%
Natural Gas 0.15%
Real Estate 1.67%
Technology 0.37%
Transportation 1.42%
NON-AGENCY ASSET-BACKED SECURITIES 27.41%
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 9.35%
SENIOR SECURED LOANS 0.29%
U.S. TREASURY OBLIGATIONS 19.04%
REPURCHASE AGREEMENTS 11.89%
TOTAL MARKET VALUE OF SECURITIES 109.95%
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (9.95%)
------
TOTAL NET ASSETS 100.00%
------
CREDIT RATING BREAKDOWN (AS A % OF FIXED INCOME INVESTMENTS)
- ------------------------------------------------------------
AAA 76.94%
AA 0.97%
A 7.34%
BBB 11.82%
BB 1.45%
B 1.48%
------
Total 100.00%
------
Capital Reserves 2
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ----------
AGENCY ASSET-BACKED SECURITIES-0.37%
Fannie Mae Grantor Trust
Series 2003-T4 2A5 4.907% 9/26/33 .................. $ 53,643 $ 52,965
oSeries 2004-T4 A3 4.42% 8/25/24 .................... 37,547 37,377
(S)(D)FHLMC Structured Pass-Through
Securities Series T-30 A5 8.61% 12/25/30 ........... 37,370 37,352
----------
TOTAL AGENCY ASSET-BACKED SECURITIES
(COST $128,024) .................................... 127,694
----------
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS-1.95%
Fannie Mae Grantor Trust Series 2001-T8
A2 9.50% 7/25/41 ................................... 30,315 32,407
Fannie Mae Series 2003-122 AJ 4.50% 2/25/28 ........... 33,469 32,171
Fannie Mae Whole Loan Series 2004-W9
2A1 6.50% 2/25/44 .................................. 69,527 70,157
Freddie Mac
Series 2326 ZQ 6.50% 6/15/31 ....................... 142,541 146,624
Series 2662 MA 4.50% 10/15/31 ...................... 63,838 61,991
Freddie Mac Stated Final Series 5 GC 2.95%
12/15/09 ........................................... 170,000 164,503
oFreddie Mac Strip Series 19 F 4.827% 6/1/28 .......... 31,194 30,994
(D)Freddie Mac Structured Pass-Through Securities
Series T-58 2A 6.50% 9/25/43 ....................... 73,357 73,917
GNMA Series 2002-61 BA 4.648% 3/16/26 ................. 60,674 59,296
----------
TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $687,908) .......................... 672,060
----------
AGENCY MORTGAGE-BACKED SECURITIES-14.30%
Fannie Mae
6.50% 8/1/17 ....................................... 35,083 35,510
6.52% 1/1/08 ....................................... 195,919 196,715
6.765% 1/1/07 ...................................... 44,036 43,939
7.00% 11/15/16 ..................................... 116,543 119,020
8.50% 9/20/10 ...................................... 10,062 10,392
9.00% 4/1/09 ....................................... 8,924 9,147
oFannie Mae ARM
3.024% 6/1/34 ...................................... 114,183 111,840
3.241% 10/1/33 ..................................... 238,794 237,245
3.788% 8/1/34 ...................................... 82,178 81,916
4.764% 12/1/33 ..................................... 98,133 100,189
5.068% 8/1/35 ...................................... 71,654 68,955
6.20% 6/1/36 ....................................... 250,000 250,938
6.376% 4/1/36 ...................................... 131,470 133,638
oFannie Mae ARM TBA
6.25% 7/25/36 ...................................... 225,000 226,617
6.35% 7/25/36 ...................................... 460,000 466,397
Fannie Mae FHAVA 9.00% 6/1/09 ......................... 59,261 60,891
Fannie Mae Relocation 30 yr A 5.00% 1/1/34 ............ 117,203 110,903
Fannie Mae Relocation 30 yr 5.00% 1/1/34 .............. 168,522 159,201
Fannie Mae S.F. 15 yr
7.50% 3/1/15 ....................................... 17,410 17,976
8.00% 10/1/14 ...................................... 20,021 20,390
8.00% 10/1/16 ...................................... 63,707 66,354
Fannie Mae S.F. 15 yr TBA 5.00% 7/1/21 ................ 15,000 14,447
Fannie Mae S.F. 30 yr
7.50% 12/1/10 ...................................... 9,335 9,422
7.50% 6/1/31 ....................................... 32,700 33,885
8.50% 5/1/11 ....................................... 4,858 4,981
8.50% 8/1/12 ....................................... 13,745 14,102
Fannie Mae S.F. 30 yr
9.00% 7/1/20 ....................................... $ 53,643 $ 57,498
10.00% 8/1/19 ...................................... 57,060 61,928
Fannie Mae S.F. 30 yr TBA 6.50% 7/1/36 ................ 555,000 557,949
oFreddie Mac ARM
3.914% 4/1/34 ...................................... 40,154 39,866
5.512% 4/1/33 ...................................... 77,068 79,044
Freddie Mac Balloon 5 yr
4.00% 6/1/08 ....................................... 20,672 20,098
4.00% 1/1/09 ....................................... 120,693 115,677
4.50% 1/1/10 ....................................... 222,486 217,597
Freddie Mac Balloon 7 yr
5.00% 6/1/11 ....................................... 215,575 211,426
5.00% 11/1/11 ...................................... 229,454 224,906
Freddie Mac Relocation 15 yr
3.50% 9/1/18 ....................................... 88,515 80,438
3.50% 10/1/18 ...................................... 13,939 12,667
Freddie Mac S.F. 15 yr
4.00% 11/1/13 ...................................... 142,159 135,007
4.00% 3/1/14 ....................................... 172,595 163,426
8.00% 5/1/15 ....................................... 56,070 59,119
8.50% 10/1/15 ...................................... 9,372 9,823
Freddie Mac S.F. 30 yr
7.00% 11/1/33 ...................................... 32,940 33,774
9.25% 9/1/08 ....................................... 4,150 4,254
GNMA S.F. 15 yr
6.00% 1/15/09 ...................................... 5,755 5,764
8.50% 8/15/10 ...................................... 3,517 3,578
GNMA S.F. 30 yr
8.00% 5/15/08 ...................................... 21,505 21,653
11.00% 11/15/10 .................................... 177,120 188,577
GNMA II S.F. 30 yr
12.00% 6/20/14 ..................................... 7,078 7,925
12.00% 3/20/15 ..................................... 719 790
12.00% 2/20/16 ..................................... 2,336 2,559
----------
TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(COST $5,027,689) .................................. 4,920,353
----------
AGENCY OBLIGATIONS-1.92%
Fannie Mae
5.25% 12/3/07 ...................................... 305,000 304,042
6.625% 9/15/09 ..................................... 145,000 150,015
Federal Home Loan Bank 4.25% 9/14/07 .................. 180,000 177,430
Freddie Mac 4.625% 12/19/08 ........................... 30,000 29,459
----------
TOTAL AGENCY OBLIGATIONS (COST $665,523) .............. 660,946
----------
COMMERCIAL MORTGAGE-BACKED SECURITIES-0.89%
#Bear Stearns Commercial Mortgage
Securities Series 2004-ESA E 144A 5.064%
5/14/16 ............................................ 65,000 64,046
(D)#Commercial Mortgage Pass-Through Certificates
Series 2001-J1A A2 144A 6.457% 2/14/34 ............. 48,443 49,513
First Union-Lehman Brothers-Bank of
America Series 1998-C2 A2 6.56% 11/18/35 ........... 88,696 89,644
#Hilton Hotel Pool Trust Series 2000-HLTA
A1 144A 7.055% 10/3/15 ............................. 22,266 22,918
Morgan Stanley Capital I Series 1998-XL1
A2 6.45% 6/3/30 .................................... 5,576 5,574
Capital Reserves-3
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ----------
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
#Tower 144A
Series 2006-1 B 5.588% 2/15/36 ..................... $ 30,000 $ 29,391
Series 2006-1 C 5.707% 2/15/36 ..................... 45,000 44,143
----------
TOTAL COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $318,885) ......................... 305,229
----------
CORPORATE BONDS- 22.54%
BANKING-1.52%
Credit Suisse First Boston USA 4.625% 1/15/08 ......... 40,000 39,452
Marshall & Ilsley 3.95% 8/14/09 ....................... 145,000 138,180
Popular North America 4.25% 4/1/08 .................... 205,000 199,466
oWachovia Capital Trust III 5.80% 3/15/42 ............. 150,000 145,707
----------
522,805
----------
BASIC INDUSTRY-1.55%
Abitibi-Consolidated 7.875% 8/1/09 .................... 80,000 77,000
Grupo Minero Mexico 8.25% 4/1/08 ...................... 100,000 104,375
Huntsman International 10.125% 7/1/09 ................. 100,000 102,000
Lubrizol 4.625% 10/1/09 ............................... 120,000 115,626
Norske Skog Canada 8.625% 6/15/11 ..................... 65,000 63,700
Weyerhaeuser 5.95% 11/1/08 ............................ 70,000 70,093
----------
532,794
----------
BROKERAGE-0.79%
Amvescap 4.50% 12/15/09 ............................... 120,000 114,812
LaBranche & Company 9.50% 5/15/09 ..................... 75,000 80,250
Nuveen Investments 5.00% 9/15/10 ...................... 80,000 76,989
----------
272,051
----------
CAPITAL GOODS-0.17%
York International 6.625% 8/15/06 ..................... 60,000 60,040
----------
60,040
----------
COMMUNICATIONS-4.08%
AT&T 7.30% 11/15/11 ................................... 180,000 191,287
BellSouth 4.20% 9/15/09 ............................... 90,000 85,865
Comcast Cable Communications 6.20% 11/15/08 ........... 235,000 237,455
Cox Communications 4.625% 1/15/10 ..................... 60,000 57,277
GTE California 7.65% 3/15/07 .......................... 105,000 106,294
Insight Midwest 10.50% 11/1/10 ........................ 50,000 52,375
oLiberty Media 6.829% 9/17/06 ......................... 99,000 99,332
News America Holdings 7.375% 10/17/08 ................. 70,000 72,410
Sprint Capital 4.78% 8/17/06 .......................... 60,000 59,937
Telecom Italia Capital 4.00% 1/15/10 .................. 130,000 121,749
Telefonos de Mexico 4.50% 11/19/08 .................... 155,000 149,899
#Viacom 144A
o5.691% 6/16/09 .................................... 120,000 120,038
5.75% 4/30/11 ..................................... 50,000 49,162
----------
1,403,080
----------
CONSUMER CYCLICAL-3.17%
CVS 3.875% 11/1/07 .................................... 155,000 150,940
oDaimlerChrysler Holdings 5.74% 3/13/09 ............... 135,000 135,193
Ford Motor Credit 5.80% 1/12/09 ....................... 95,000 86,838
Fortune Brands 5.125% 1/15/11 ......................... 70,000 67,109
oGeneral Motors Acceptance 6.018% 7/16/07 ............. 105,000 104,243
Johnson Controls 5.00% 11/15/06 ....................... 120,000 119,597
May Department Stores 3.95% 7/15/07 ................... 115,000 112,779
MGM MIRAGE 9.75% 6/1/07 ............................... $ 50,000 $ 51,625
Time Warner 8.18% 8/15/07 ............................. 190,000 194,977
Wal-Mart Stores 6.875% 8/10/09 ........................ 65,000 67,358
----------
1,090,659
----------
CONSUMER NON-CYCLICAL-1.69%
Biovail 7.875% 4/1/10 ................................. 75,000 76,313
Fred Meyer 7.45% 3/1/08 ............................... 70,000 71,746
Kraft Foods 4.125% 11/12/09 ........................... 220,000 209,266
MedPartners 7.375% 10/1/06 ............................ 110,000 110,413
US Oncology 9.00% 8/15/12 ............................. 110,000 114,950
----------
582,688
----------
ELECTRIC-2.52%
Ameren 4.263% 5/15/07 ................................. 80,000 78,951
America Electric Power 4.709% 8/16/07 ................. 95,000 93,862
CC Fund Trust I 6.90% 2/16/07 ......................... 45,000 45,259
Dominion Resources 5.687% 5/15/08 ..................... 75,000 74,800
Duke Capital 4.331% 11/16/06 .......................... 60,000 59,743
FPL Group Capital 4.086% 2/16/07 ...................... 105,000 103,982
Pacific Gas & Electric 3.60% 3/1/09 ................... 115,000 109,245
Potomac Electric Power 6.25% 10/15/07 ................. 75,000 75,439
#Power Contract Financing 144A 6.256% 2/1/10 .......... 60,000 60,032
#Power Receivables Finance 144A 6.29% 1/1/12 .......... 81,192 80,974
PSEG Funding Trust I 5.381% 11/16/07 .................. 60,000 59,588
Southern Capital Funding 5.30% 2/1/07 ................. 25,000 24,887
----------
866,762
----------
ENERGY-0.91%
Talisman Energy 7.125% 6/1/07 ......................... 210,000 212,213
Valero Energy 6.125% 4/15/07 .......................... 100,000 100,243
----------
312,456
----------
FINANCE COMPANIES-0.84%
American Express 3.75% 11/20/07 ....................... 65,000 63,409
International Lease Finance 4.625% 6/2/08 ............. 60,000 58,872
Residential Capital
6.125% 11/21/08 .................................... 80,000 79,115
6.375% 6/30/10 ..................................... 43,000 42,452
o6.489% 11/21/08 ................................... 45,000 45,209
----------
289,057
----------
INSURANCE-1.69%
Marsh & McLennan
5.15% 9/15/10 ...................................... 50,000 48,306
o5.19% 7/13/07 ..................................... 75,000 74,974
5.375% 3/15/07 ..................................... 95,000 94,522
#Nippon Life Insurance 144A 4.875% 8/9/10 ............. 90,000 86,574
SAFECO Capital I 8.072% 7/15/37 ....................... 100,000 105,150
St. Paul Travelers 5.01% 8/16/07 ...................... 70,000 69,220
WellPoint 4.25% 12/15/09 .............................. 35,000 33,410
Willis Group 5.125% 7/15/10 ........................... 70,000 67,582
----------
579,738
----------
NATURAL GAS-0.15%
oSempra Energy 5.659% 5/21/08 ......................... 50,000 50,047
----------
50,047
----------
Capital Reserves-4
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ----------
CORPORATE BONDS (CONTINUED)
REAL ESTATE-1.67%
oBrandywine Operating Partnership 5.415% 4/1/09 ....... $ 75,000 $ 75,093
Developers Diversified Realty 4.625% 8/1/10 ........... 100,000 95,313
EOP Operating 7.00% 7/15/11 ........................... 125,000 129,995
Simon Property Group 5.375% 8/28/08 ................... 130,000 128,854
Tanger Properties 9.125% 2/15/08 ...................... 140,000 146,118
----------
575,373
----------
TECHNOLOGY-0.37%
Motorola 4.608% 11/16/07 .............................. 130,000 128,171
----------
128,171
----------
TRANSPORTATION-1.42%
Continental Airlines 6.503% 6/15/11 ................... 245,000 244,523
oCSX 5.43% 8/3/06 ..................................... 24,000 23,999
#Erac USA Finance 144A 7.35% 6/15/08 .................. 215,000 220,771
----------
489,293
----------
TOTAL CORPORATE BONDS (COST $7,950,214) ............... 7,755,014
----------
NON-AGENCY ASSET-BACKED SECURITIES-27.41%
Advanta Mortgage Loan Trust Series 2000-1
A4 8.61% 3/25/28 ................................... 4,197 4,186
Ameriquest Mortgage Securities
Series 2003-5 A4 4.272% 4/25/33 .................... 27,107 26,756
Series 2003-11 AF6 5.14% 1/25/34 ................... 65,000 63,750
Series 2004-FR1 A4 3.243% 5/25/34 .................. 87,790 86,583
oSeries 2006-R1 A2C 5.513% 3/25/36 ................. 100,000 100,156
Argent Securities Series 2003-W5 AF4
4.66% 10/25/33 ..................................... 33,532 33,272
BMW Vehicle Owner Trust Series 2004-A A3
2.67% 3/25/08 ...................................... 110,082 109,231
Centex Home Equity Series 2005-B AF1
4.05% 3/25/35 ...................................... 33,359 33,223
Chase Funding Mortgage Loan Asset-Backed
Certificates
Series 2002-3 1A6 4.707% 9/25/13 ................... 202,016 198,323
Series 2003-2 1A4 3.986% 8/25/29 ................... 39,280 38,833
Series 2003-3 1A4 3.303% 11/25/29 .................. 218,187 214,017
Series 2003-4 1A3 2.734% 9/25/24 ................... 2,936 2,926
Chase Manhattan Auto Owner Trust
Series 2005-B A4 4.88% 6/15/12 ..................... 100,000 98,500
CIT Equipment Collateral Series 2005-VT1
A3 4.12% 8/20/08 ................................... 265,000 262,014
CitiFinancial Mortgage Securities Series 2003-2
AF4 4.098% 5/25/33 ................................. 220,000 211,994
Countrywide Asset-Backed Certificates
oSeries 2004-13 AF2 3.683% 8/25/24 ................. 56,816 56,615
oSeries 2004-13 AV2 5.583% 5/25/34 ................. 83,638 83,706
#Series 2004-BC1N 144A 5.50% 4/25/35 ............... 3,707 3,632
Series 2004-S1 A2 3.872% 3/25/20 ................... 335,000 328,836
oSeries 2005-7 AF2 4.367% 11/25/35 ................. 475,000 467,437
oSeries 2005-12 2A2 4.898% 2/25/36 ................. 350,000 345,400
oSeries 2006-1 AF2 5.281% 7/25/36 .................. 410,000 405,947
oSeries 2006-3 2A2 5.503% 6/25/36 .................. 135,000 135,237
Series 2006-9 1AF3 5.859% 10/25/46 ................. 160,000 159,984
oSeries 2006-11 1AF3 6.05% 9/25/46 ................. 215,000 214,570
Series 2006-S2 A2 5.627% 7/25/27 ................... 80,000 79,490
oSeries 2006-S3 A2 6.085% 6/25/21 .................. 250,000 249,975
Credit-Based Asset Service and Securitization
Series 2004-CB4 A3 4.632% 5/25/35 .................. $ 63,527 $ 63,225
Series 2005-CB8 AF1B 5.451% 12/25/35 ............... 157,729 156,680
#Dunkin Securitization Series 2006-1 A2
144A 5.779% 6/20/31 ................................ 100,000 99,374
oEquifirst Mortgage Loan Trust Series 2004-3
A2 5.653% 12/25/34 ................................. 105,236 105,402
Equity One ABS Series 2004-1 AF3 3.054%
4/25/34 ............................................ 30,826 30,694
General Motors Acceptance Corporation
Mortgage Loan Trust
Series 2003-HE2 A3 4.12% 10/25/26 .................. 195,000 193,069
oSeries 2004-HE5 A2 3.685% 9/25/34 ................. 58,063 57,764
Series 2004-HLT1 A2 3.87% 5/25/25 .................. 41,003 40,656
GSAMP Trust Series 2006-S3 A1 6.085%
5/25/36 ............................................ 236,840 236,262
Indymac Seconds Asset Backed Trust
Series 2006-1 A2 5.767% 5/25/36 .................... 235,000 235,000
Long Beach Mortgage Loan Trust
Series 2006-A A2 5.548% 5/25/36 .................... 205,000 204,112
#MASTR Specialized Loan Trust
Series 2005-2 A2 144A 5.15% 7/25/35 ................ 43,775 42,777
oMerrill Lynch Mortgage Investors
Series 2005-NCB A1A 5.451% 7/25/36 ................. 59,689 59,324
Series 2006-AR1 A2C 5.483% 3/25/37 ................. 80,000 79,998
Navistar Financial Corporation Owner Trust
Series 2002-B A4 3.52% 10/15/09 .................... 52,345 51,827
Nelnet Education Loan Funding
Series 2001-A A1 5.76% 7/1/12 ...................... 45,000 45,203
New Century Home Equity Loan Trust
Series 2003-5 AI4 4.76% 11/25/33 ................... 100,000 98,741
oOption One Mortgage Loan Trust
Series 2005-4 A3 5.583% 11/25/35 ................... 125,000 125,321
Ownit Mortgage Loan Asset Backed Certificates
Series 2006-2 A2B 5.633% 1/25/37 ................... 35,000 34,885
Renaissance Home Equity Loan Trust
Series 2004-2 AF3 4.464% 7/25/34 ................... 160,000 158,609
Series 2004-4 AF2 3.856% 2/25/35 ................... 193,000 191,706
Series 2005-1 AF2 4.263% 5/25/35 ................... 170,712 169,594
Series 2005-2 AF2 4.361% 8/25/35 ................... 65,000 63,986
Series 2005-4 A2 5.399% 2/25/36 .................... 40,000 39,614
Series 2005-4 A3 5.565% 2/25/36 .................... 25,000 24,736
Series 2006-1 AF3 5.608% 5/25/36 ................... 210,000 208,322
oSeries 2006-2 AF3 5.797% 8/25/36 .................. 125,000 125,000
Residential Asset Mortgage Products
Series 2004-RS12 AI2 3.767% 2/25/27 ................ 165,000 163,948
oSeries 2004-RZ2 AI3 4.30% 1/25/31 ................. 340,000 335,510
Residential Asset Securities
Series 1999-KS4 AI4 7.22% 6/25/28 .................. 29,981 29,920
Series 2002-KS2 AI5 6.779% 4/25/32 ................. 64,464 64,676
oSeries 2004-KS9 AI3 3.79% 8/25/29 ................. 195,000 190,944
oSeries 2006-KS3 AI3 5.493% 4/25/36 ................ 175,000 175,308
Residential Funding Mortgage Securities II
Series 2001-HS2 A5 6.92% 4/25/31 ................... 39,074 38,941
Series 2002-HI2 AI6 6.51% 11/25/19 ................. 6,635 6,615
Series 2005-HI1 A2 3.89% 8/25/34 ................... 502 500
Series 2005-HI3 A2 5.09% 9/25/35 ................... 160,000 157,793
Series 2006-HI2 A3 5.79% 2/25/36 ................... 150,000 149,016
Capital Reserves-5
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS (CONTUNUED)
PRINCIPAL MARKET
VALUE VALUE
---------- ----------
NON-AGENCY ASSET-BACKED SECURITIES (CONTINUED)
Residential Funding Mortgage Securities II
oSeries 2006-HSA1 A2 5.19% 2/25/36 ................ $ 345,000 $ 340,150
oSeries 2006-HSA2 AI2 5.50% 3/25/36 ............... 190,000 188,516
#Silverleaf Finance Series 2005-A A 144A
4.857% 11/15/16 ................................... 101,612 100,223
Structured Asset Securities
Series 2001-SB1 A2 3.375% 8/25/31 ................. 47,100 42,175
Series 2005-4XS 1A2B 4.67% 3/25/35 ................ 110,000 108,218
Series 2005-9XS 1A2A 4.84% 6/25/35 ................ 95,000 92,919
Series 2005-NC1 A2 3.92% 2/25/35 .................. 76,503 75,811
oSeries 2005-NC1 A7 5.553% 2/25/35 ................ 211,467 211,662
---------
TOTAL NON-AGENCY ASSET-BACKED SECURITIES
(COST $9,365,347) ................................. 9,429,319
---------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS-9.35%
Bank of America Alternative Loan Trust
Series 2003-10 2A1 6.00% 12/25/33 ................. 96,700 94,736
Series 2004-2 1A1 6.00% 3/25/34 ................... 77,770 76,191
Series 2004-11 1CB1 6.00% 12/25/34 ................ 42,728 42,048
Series 2005-9 5A1 5.50% 10/25/20 .................. 124,886 121,881
oBank of America Mortgage Securities
Series 2003-D 1A2 6.101% 5/25/33 .................. 3,352 3,359
oBear Stearns Adjustable Rate Mortgage Trust
Series 2005-7 1A2 4.75% 8/25/35 ................... 33,709 32,648
oBear Stearns Alternative A Trust
Series 2006-3 33A1 6.204% 5/25/36 ................. 121,559 122,015
Series 2006-3 34A1 6.226% 5/25/36 ................. 131,666 132,232
Bear Stearns Asset Backed Securities
Series 2005-AC8 A5 5.50% 11/25/35 ................. 104,022 102,473
Countrywide Alternative Loan Trust
Series 2004-28CB 6A1 6.00% 1/25/35 ................ 102,827 100,675
oSeries 2004-J7 1A2 4.673% 8/25/34 ................ 40,330 39,960
Series 2006-2CB A3 5.50% 3/25/36 .................. 84,374 83,841
(D)oCountrywide Home Loan Mortgage
Pass-Through Trust
Series 2003-21 A1 4.084% 5/25/33 .................. 44,615 43,726
Series 2006-HYB4 1A2 5.75% 6/20/36 ................ 109,809 109,122
Credit Suisse First Boston Mortgage Securities
Series 2003-29 5A1 7.00% 12/25/33 ................. 39,906 40,030
Series 2004-1 3A1 7.00% 2/25/34 ................... 10,580 10,668
First Horizon Alternative Mortgage Securities
Series 2004-FA1 1A1 6.25% 10/25/34 ................ 82,020 81,726
oFirst Horizon Asset Securities
Series 2004-AR5 4A1 5.67% 10/25/34 ................ 50,290 49,376
oGeneral Motors Acceptance Corporation
Mortgage Loan Trust Series 2005-AR2 4A
5.187% 5/25/35 .................................... 94,214 89,938
#GSMPS Mortgage Loan Trust 144A
Series 1998-3 A 7.75% 9/19/27 ..................... 36,918 38,137
Series 2005-RP1 1A3 8.00% 1/25/35 ................. 41,200 42,934
Series 2005-RP1 1A4 8.50% 1/25/35 ................. 19,692 20,726
GSR Mortgage Home Loan Trust
Series 2004-2F 9A1 6.00% 9/25/19 .................. 46,798 46,704
oIndymac Index Mortgage Loan Trust
Series 2006-AR2 1A1A 5.543% 4/25/46 ............... 43,780 43,815
Series 2006-AR7 5A1 6.167% 5/25/36 ................ 78,469 78,337
oJPMorgan Mortgage Trust
Series 2005-A6 1A2 5.151% 9/25/35 ................. 105,000 101,222
Lehman Mortgage Trust
Series 2005-2 2A3 5.50% 12/25/35 .................. $ 86,110 $ 85,237
oMASTR Adjustable Rate Mortgages Trust
Series 2003-6 1A2 2.871% 12/25/33 ................. 87,043 87,137
#MASTR Reperforming Loan Trust
Series 2005-1 1A5 144A 8.00% 8/25/34 .............. 79,503 82,724
Nomura Asset Acceptance
Series 2005-WF1 2A2 4.786% 3/25/35 ................ 100,000 97,468
oSeries 2006-AF1 1A2 6.159% 5/25/36 ............... 125,000 124,336
Residential Asset Mortgage Products
Series 2004-SL1 A3 7.00% 11/25/31 ................. 38,941 39,416
Series 2004-SL4 A3 6.50% 7/25/32 .................. 43,208 43,562
oStructured Adjustable Rate Mortgage Loan Trust
Series 2004-18 5A 5.50% 12/25/34 .................. 47,597 46,214
Series 2005-3XS A2 5.573% 1/25/35 ................. 106,951 107,035
Structured Asset Securities
Series 2004-5H A2 4.43% 12/25/33 .................. 71,322 70,296
Series 2004-12H 1A 6.00% 5/25/34 .................. 39,504 38,689
(D)oWashington Mutual Alternative Mortgage
Pass-Through Certificates
Series 2006-AR5 3A 5.083% 7/25/46 ................. 85,000 84,947
oWashington Mutual
Series 2003-AR4 A7 3.95% 5/25/33 .................. 45,529 43,690
Series 2004-AR4 A2 2.98% 6/25/34 .................. 115,000 113,791
Series 2006-AR7 1A 5.123% 7/25/46 ................. 75,000 74,859
oWells Fargo Mortgage Backed Securities Trust
Series 2004-I 1A1 3.383% 7/25/34 .................. 68,608 68,553
Series 2004-T A1 3.455% 9/25/34 ................... 50,499 50,598
Series 2006-AR4 2A1 5.793% 4/25/36 ................ 214,499 210,337
---------
TOTAL NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $3,279,473) ..................... 3,217,409
---------
<<SENIOR SECURED LOANS-0.29%
Visteon 8.18% 6/13/13 ................................ 100,000 100,250
---------
TOTAL SENIOR SECURED LOANS (COST $100,000) ........... 100,250
---------
U.S. TREASURY OBLIGATIONS-19.04%
U.S. Treasury Inflation Index Notes
2.375% 4/15/11 .................................... 116,714 116,290
(OO)3.00% 7/15/12 ................................. 246,481 253,895
3.625% 1/15/08 .................................... 199,504 202,996
3.875% 1/15/09 .................................... 522,032 540,874
U.S. Treasury Notes
4.875% 5/15/09 .................................... 560,000 556,369
4.875% 5/31/11 .................................... 25,000 24,754
5.125% 6/30/08 .................................... 4,855,000 4,853,485
---------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $6,570,529) ................................. 6,548,663
---------
REPURCHASE AGREEMENTS-11.89%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased
at $2,152,807, collateralized by
$2,098,000 U.S. Treasury
Notes 6.00% due 8/15/09,
market value $2,197,045) .......................... 2,152,000 2,152,000
Capital Reserves-6
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS (CONTUNUED)
PRINCIPAL MARKET
VALUE VALUE
---------- ----------
REPURCHASE AGREEMENTS (CONTINUED)
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $553,203, collateralized by
$277,000 U.S. Treasury Notes 3.875%
due 7/31/07, market value $277,195,
$277,000 U.S. Treasury Notes 3.875%
due 5/15/09, market value $268,729
and $19,000 U.S. Treasury Notes
6.50% due 10/15/06, market
value $19,034) .................................... $ 553,000 $ 553,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased
at $1,384,502, collateralized by
$744,000 U.S. Treasury Notes 3.875%
due 5/15/09, market value $721,807
and $692,000 U.S. Treasury Notes
4.875% due 5/15/09, market
value $691,660) ................................... 1,384,000 1,384,000
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $4,089,000) ................................. 4,089,000
-----------
TOTAL MARKET VALUE OF SECURITIES-109.95% (COST $38,182,592) ..... $37,825,937
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(9.95%)(H)....... (3,423,968)
-----------
NET ASSETS APPLICABLE TO 3,576,382 SHARES OUTSTANDING-100.00% ... $34,401,969
===========
NET ASSET VALUE-DELAWARE VIP CAPITAL RESERVES SERIES
STANDARD CLASS ($25,599,170 / 2,657,050 SHARES) .............. $ 9.63
===========
NET ASSET VALUE-DELAWARE VIP CAPITAL RESERVES SERIES
SERVICES CLASS ($8,802,799 / 919,332 SHARES) ................. $ 9.58
===========
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par)... $36,486,589
Undistributed net investment income ............................. 4,033
Accumulated net realized loss on investments .................... (1,731,473)
Unrealized depreciation of investments .......................... (357,180)
-----------
Total net assets ................................................ $34,401,969
===========
(D) Pass Through Agreement. Security represents the contractual right to
receive a proportionate amount of underlying payments due to the
counterparty pursuant to various agreements related to the rescheduling of
obligations and the exchange of certain notes.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
(H) Of this amount, $2,839,224 represents payable for securities purchased as
of June 30, 2006.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $1,258,089, which represented 3.66% of the Series' net
assets. See Note 9 in "Notes to Financial Statements."
(OO) Fully or partially pledged as collateral for financial futures contracts.
<< Senior Secured Loans in which the Series invests generally pay interest at
rates which are periodically redetermined by reference to a base lending
rate plus a premium. These base lending rates are generally (i) the prime
rate offered by one or more United States banks, (ii) the lending rate
offered by one or more European banks such as the London Inter-Bank Offered
Rate ("LIBOR") and (iii) the certificate of deposit rate. Senior Secured
Loans may be subject to restrictions on resale.
(S) Step coupon bond. Coupon increases periodically based on a predetermined
schedule. Stated interest rate in effect at June 30, 2006.
Summary of Abbreviations:
ARM - Adjustable Rate Mortgage
FHAVA - Federal Housing Administration & Veterans Administration
FHLMC - Federal Home Loan Mortgage Corporation
GNMA - Government National Mortgage Association
S.F. - Single Family
TBA - To be announced
yr - Year
Capital Reserves-7
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF NET ASSETS (CONTINUED)
The following futures contracts and swap agreement were outstanding at June 30,
2006:
FUTURES CONTRACTS(1)
NOTIONAL NOTIONAL UNREALIZED
CONTRACTS TO SELL PROCEEDS VALUE EXPIRATION DATE APPRECIATION
- ----------------------------- ---------- ---------- --------------- ------------
2 U.S. Treasury 2 year Notes $ 406,427 $ 405,563 9/30/06 $ 864
17 U.S. Treasury 5 year Notes 1,765,750 1,757,906 9/30/06 7,844
------
$8,708
======
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Series' total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Series' net assets.
SWAP AGREEMENTS(2)
UNREALIZED
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION DEPRECIATION
- --------------- --------------- ----------------------------- ------------
$870,000 8/1/06 Agreement with State Street $(9,254)
to receive the notional
amount multiplied by the
return on the Lehman Brothers
Commercial MBS Index AAA and
to pay the notional amount
multiplied by the 1 month BBA
LIBOR adjusted by a spread of
plus 0.10%.
Because there is no organized market for these swap agreements, the value of
open swaps may differ from that which would be realized in the event the Series'
terminated its position in the agreement. Risks of entering into these
agreements include the potential inability of the counterparty to meet the terms
of the agreements. This type of risk is generally limited to the amount of
favorable movements in the value of the underlying security, instrument, or
basket of instruments, if any, at the day of default. Risks also arise from
potential losses from adverse market movements and such losses could exceed the
related unrealized amounts shown above.
(1) See Note 7 in "Notes to Financial Statements."
(2) See Note 8 in "Notes to Financial Statements."
See accompanying notes
Capital Reserves-8
DELAWARE VIP TRUST-
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006
(Unaudited)
INVESTMENT INCOME:
Interest ........................................................... $686,067
--------
EXPENSES:
Management fees .................................................... 75,268
Distribution expenses - Service Class .............................. 9,069
Reports and statements to shareholders ............................. 8,627
Legal and professional fees ........................................ 7,444
Accounting and administration expenses ............................. 6,020
Pricing fees ....................................................... 3,604
Custodian fees ..................................................... 2,927
Dividend disbursing and transfer agent fees and expenses ........... 1,505
Trustees' fees ..................................................... 749
Insurance fees ..................................................... 652
Taxes (other than taxes on income) ................................. 183
Registration fees .................................................. 70
Other .............................................................. 287
--------
116,405
Less waiver of distribution expenses - Service Class ............... (1,511)
Less expense paid indirectly ....................................... (1,694)
--------
Total operating expenses ........................................... 113,200
--------
NET INVESTMENT INCOME .............................................. 572,867
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on:
Investments ..................................................... (107,997)
Futures contracts ............................................... 25,533
Swap agreements ................................................. (18,986)
--------
Net realized loss ............................................... (101,450)
Net change in unrealized appreciation/depreciation
of investments .................................................. (70,706)
--------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS .................................................. (172,156)
--------
NET INCREASE IN NET RESULTING
FROM OPERATIONS ................................................. $400,711
========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP CAPITAL RESERVES SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ -----------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS:
Net investment income ............................ $ 572,867 $ 917,619
Net realized loss on investments ................. (101,450) (21,346)
Net change in unrealized
appreciation/depreciation of investments ...... (70,706) (437,959)
------------ -----------
Net increase in net assets resulting
from operations ............................... 400,711 458,314
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income:
Standard Class ................................ (520,902) (998,134)
Service Class ................................. (127,917) (50,338)
------------ -----------
(648,819) (1,048,472)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ................................ 9,279,870 3,108,074
Service Class ................................. 11,407,470 7,736,817
Net asset value of shares issued
upon reinvestment of dividends and
distributions:
Standard Class ................................ 515,580 1,000,606
Service Class ................................. 122,397 46,785
------------ -----------
21,325,317 11,892,282
------------ -----------
Cost of shares repurchased:
Standard Class ................................ (7,894,691) (5,608,419)
Service Class ................................. (7,168,406) (3,268,155)
------------ -----------
(15,063,097) (8,876,574)
------------ -----------
Increase in net assets derived from
capital share transactions .................... 6,262,220 3,015,708
------------ -----------
NET INCREASE IN NET ASSETS ....................... 6,014,112 2,425,550
NET ASSETS:
Beginning of period .............................. 28,387,857 25,962,307
------------ -----------
End of period (including undistributed
net investment income of $4,033 and
$4,035, respectively) ......................... $ 34,401,969 $28,387,857
============ ===========
See accompanying notes
Capital Reserves-9
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP CAPITAL RESERVES SERIES STANDARD CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 9.710 $ 9.940 $10.020 $ 9.970 $ 9.750 $ 9.530
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) .................. 0.185 0.355 0.356 0.329 0.419 0.533
Net realized and unrealized gain (loss)
on investments ......................... (0.056) (0.180) 0.004 0.125 0.253 0.239
------- ------- ------- ------- ------- -------
Total from investment operations .......... 0.129 0.175 0.360 0.454 0.672 0.772
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ..................... (0.209) (0.405) (0.440) (0.404) (0.452) (0.552)
------- ------- ------- ------- ------- -------
Total dividends and distributions ......... (0.209) (0.405) (0.440) (0.404) (0.452) (0.552)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 9.630 $ 9.710 $ 9.940 $10.020 $ 9.970 $ 9.750
======= ======= ======= ======= ======= =======
Total return(3) ........................... 1.34% 1.79% 3.66% 4.63% 7.09% 8.27%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $25,599 $23,895 $25,955 $34,077 $42,698 $30,996
Ratio of expenses to average net assets ... 0.70%(4) 0.71% 0.62% 0.63% 0.62% 0.58%
Ratio of expenses to average net assets
prior to expense paid indirectly ....... 0.71% 0.71% 0.62% 0.63% 0.62% 0.58%
Ratio of net investment income to
average net assets ..................... 3.86% 3.61% 3.57% 3.36% 4.21% 5.46%
Ratio of net investment income to
average net assets prior to expense
paid indirectly ........................ 3.85% 3.61% 3.57% 3.36% 4.21% 5.46%
Portfolio turnover ........................ 395% 259% 252% 438% 427% 290%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value.
(4) Ratio for the period ended June 30, 2006 including fees paid indirectly in
accordance with Securities and Exchange Commission rules was 0.71%.
See accompanying notes
Capital Reserves-10
DELAWARE VIP CAPITAL RESERVES SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP CAPITAL RESERVES SERIES SERVICE CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 9.650 $ 9.900 $10.000 $ 9.970 $ 9.760 $ 9.530
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) .................. 0.173 0.331 0.333 0.308 0.406 0.519
Net realized and unrealized gain (loss) on
investments ............................ (0.046) (0.200) (0.017) 0.105 0.243 0.249
------- ------- ------- ------- ------- -------
Total from investment operations .......... 0.127 0.131 0.316 0.413 0.649 0.768
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ..................... (0.197) (0.381) (0.416) (0.383) (0.439) (0.538)
------- ------- ------- ------- ------- -------
Total dividends and distributions ......... (0.197) (0.381) (0.416) (0.383) (0.439) (0.538)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 9.580 $ 9.650 $ 9.900 $10.000 $ 9.970 $ 9.760
======= ======= ======= ======= ======= =======
Total return(3) ........................... 1.32% 1.35% 3.23% 4.21% 6.84% 8.23%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $ 8,803 $ 4,493 $ 7 $ 6 $ 6 $ 6
Ratio of expenses to average net assets ... 0.95%(4) 0.96% 0.87% 0.85% 0.77% 0.73%
Ratio of expenses to average net assets
prior to expense limitation and expenses
paid indirectly ........................ 1.01% 1.01% 0.92% 0.88% 0.77% 0.73%
Ratio of net investment income to average
net assets ............................. 3.61% 3.36% 3.32% 3.14% 4.06% 5.31%
Ratio of net investment income to average
net assets prior to expense limitation
and expenses paid indirectly ........... 3.55% 3.31% 3.27% 3.11% 4.06% 5.31%
Portfolio turnover ........................ 395% 259% 252% 438% 427% 290%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects a waiver
and payment of fees by the distributor, as applicable. Performance would
have been lower had the waiver not been in effect.
(4) Ratio for the period ended June 30, 2006 including fees paid indirectly in
accordance with Securities and Exchange Commission rules was 0.96%.
See accompanying notes
Capital Reserves-11
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Capital
Reserves Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek a high, stable level of
current income while attempting to minimize fluctuations in principal and
provide maximum liquidity.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--U.S. government and agency securities are valued at the mean
between the bid and asked prices. Other long-term debt securities are valued by
an independent pricing service and such prices are believed to reflect the fair
value of such securities. Short-term debt securities having less than 60 days to
maturity are valued at amortized cost, which approximates market value. Futures
contracts and options on futures contracts are valued at the daily quoted
settlement prices. Swap agreements and other securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Series' Board of Trustees.
In determining whether market quotations are readily available or fair valuation
will be used, various factors will be taken into consideration, such as market
closures, aftermarket trading, or significant events after local market trading
(e.g., government actions or pronouncements, trading volume or volatility on
markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income and common expenses are allocated to the
various classes of the Series on the basis of "settled shares" of each class in
relation to the net assets of the Series. Realized and unrealized gain (loss) on
investments is allocated to the classes of the Series on the basis of daily net
assets of each class. Distribution expenses relating to a specific class are
charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Interest income is recorded on the accrual basis. Discounts and premiums
are amortized to interest income over the lives of the respective securities.
Realized gains (losses) on paydowns of mortgage- and asset-backed securities are
classified as interest income.
The Series declares dividends daily from net investment income and pays such
dividends monthly and declares and pays distributions from net realized gain on
investments, if any, following the close of the fiscal year.
The Series may receive earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.50% on the first $500 million of average daily net assets of the
Series, 0.475% on the next $500 million, 0.45% on the next $1.5 billion, and
0.425% on average daily net assets in excess of $2.5 billion.
Capital Reserves-12
DELAWARE VIP CAPITAL RESERVES SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.70% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATIVE DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO DMC AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$32,626 $2,191 $2,533 $2,854
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$1,257 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases other than U.S. government securities...... $20,715,351
Purchases of U.S. government securities.............. 43,204,985
Sales other than U.S. government securities.......... 15,199,818
Sales of U.S. government securities.................. 40,391,592
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION DEPRECIATION
- ----------- ------------ ------------ --------------
$38,322,714 $25,561 $(522,338) $(496,777)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended June 30, 2006 and the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
---------- ----------
Ordinary income... $648,819 $1,048,472
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
Capital Reserves-13
DELAWARE VIP CAPITAL RESERVES SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest............... $36,486,589
Undistributed ordinary income............... 20,173
Capital loss carryforwards.................. (1,441,513)
Six month period realized losses............ (157,249)
Unrealized depreciation of investments...... (506,031)
-----------
Net assets.................................. $34,401,969
===========
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
of futures contracts, treatment of contingent payment debt instruments and tax
treatment of market discount and premium on debt instruments.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of paydown gains (losses) of mortgage- and asset-backed
securities and market discount and premium on certain debt instruments. Results
of operations and net assets were not affected by these reclassifications. For
the six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
- ----------------- ------------
$75,950 $(75,950)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $1,132,035 expires in
2008, $82,894 expires in 2010 and $226,584 expires in 2013. For the six months
ended June 30, 2006, the Series had capital losses of $157,249 which may
increase the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ---------
Shares sold:
Standard Class.................... 958,542 317,536
Service Class..................... 1,186,890 797,328
Shares issued upon reinvestment of
dividends and distributions:
Standard Class.................... 53,288 101,984
Service Class..................... 12,739 4,829
---------- ---------
2,211,459 1,221,677
---------- ---------
Shares repurchased:
Standard Class.................... (815,242) (570,499)
Service Class..................... (745,798) (337,333)
---------- ---------
(1,561,040) (907,832)
---------- ---------
Net increase......................... 650,419 313,845
========== =========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
Capital Reserves-14
DELAWARE VIP CAPITAL RESERVES SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FUTURES CONTRACTS
The Series may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Series deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. Subsequent payments are received from the broker or paid to the
broker each day, based on the daily fluctuation in the market value of the
contract.These receipts or payments are known as "variation margin" and are
recorded daily by the Series as unrealized gains or losses until the contracts
are closed. When the contracts are closed, the Series records a realized gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. Risks of entering into
futures contracts includes potential imperfect correlation between the futures
contracts and the underlying securities and the possibility of an illiquid
secondary market for these instruments.
8. SWAP AGREEMENTS
The Series may enter into total return swap agreements in accordance with its
investment objectives. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. Total return
swaps involve commitments to pay interest in exchange for a market linked return
based on a notional amount. To the extent the total return of the security,
instrument or basket of instruments underlying the transaction exceeds the
offsetting interest obligation, the Series will receive a payment from the
counterparty. To the extent the total return of the security, instrument or
basket of instruments underlying the transaction falls short of the offsetting
interest obligation, the Series will make a payment to the counterparty. The
change in value of swap agreements outstanding, if any, is recorded as
unrealized appreciation or depreciation daily. A realized gain or loss is
recorded on maturity or termination of the swap agreement.
9. CREDIT AND MARKET RISK
The Series invests in fixed income securities whose value is derived from an
underlying pool of mortgages or consumer loans. Investors receive principal and
interest payments as the underlying mortgages and consumer loans are paid back.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture. Prepayment of mortgages may shorten the
stated maturity of the obligations and can result in a loss of premium, if any
has been paid. Certain of these securities may be stripped (securities, which
provide only the principal or interest feature of the underlying security). The
yield to maturity on an interest-only CMO is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. A rapid rate
of principal payments may have a material adverse affect on the Series' yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Series may fail to recoup its initial investment
in these securities even if the securities are rated in the highest rating
categories.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, no securities have been determined to be illiquid under the
Series' Liquidity Procedures. Rule 144A securities have been identified on the
Statement of Net Assets.
10. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Capital Reserves-15
DELAWARE VIP TRUST-DELAWARE VIP CAPITAL RESERVES SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP CAPITAL RESERVES SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Capital
Reserves Series (the "Series"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Series performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all
intermediate investment grade debt funds underlying variable insurance products
as selected by Lipper. The Lipper report comparison showed that the Series'
total return for the one year period was in the third quartile of such
Performance Universe. The report further showed that the Series' total return
for the three, five and 10 year periods was in the first quartile. The Board
noted that the Series' performance results were mixed but on an overall basis
tended toward above median, which was acceptable.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
nonmanagement services. The Board noted its objective to limit the Series' total
expense ratio to an acceptable range as compared to the median of the Expense
Group. The following paragraph summarizes the expense results for the Series and
the Board's view of such expenses.
Capital Reserves-16
DELAWARE VIP CAPITAL RESERVES SERIES
OTHER SERIES INFORMATION (CONTINUED)
The expense comparisons for the Series showed that its actual management fee was
in the quartile with the second highest expenses of its Expense Group and its
total expenses were in the quartile with the highest expenses of its Expense
Group. The Board noted that the Series' total expenses were not in line with the
Board's stated objective. In evaluating total expenses, the Board considered fee
waivers in place through April 2007 and recent initiatives implemented by
management, such as the outsourcing of certain transfer agency services,
creating an opportunity for a reduction in expenses. The Board was satisfied
with management's efforts to improve the Series' total expense ratio and bring
it in line with the Board's objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Capital Reserves-17
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
Example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- ------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,020.50 0.68% $3.41
Service Class 1,000.00 1,019.20 0.93% 4.66
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 1,021.42 0.68% $3.41
Service Class 1,000.00 1,020.18 0.93% 4.66
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Cash Reserve-1
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
CERTIFICATES OF DEPOSIT 13.99%
------
DISCOUNTED COMMERCIAL PAPER 68.37%
------
Colleges & Universities 6.99%
Financial Services 46.59%
Industrial 3.18%
Mortgage Bankers & Brokers 8.14%
Sovereign Agency 3.47%
------
FLOATING RATE NOTES 7.00%
------
INTEREST BEARING COMMERCIAL PAPER 4.67%
------
MEDIUM TERM NOTES 2.33%
------
VARIABLE RATE DEMAND NOTES 3.73%
------
TOTAL MARKET VALUE OF SECURITIES 100.09%
------
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.09%)
------
TOTAL NET ASSETS 100.00%
------
Cash Reserve-2
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
---------- -----------
CERTIFICATES OF DEPOSIT-13.99%
American Express
Centurion Bank 5.29% 7/26/06 ..................... $ 750,000 $ 750,000
Citibank NA 5.225% 9/5/06 ........................... 750,000 750,000
First Tennessee Bank 5.02% 7/19/06 .................. 750,000 750,000
Wells Fargo Bank 5.30% 7/25/06 ...................... 750,000 750,000
-----------
TOTAL CERTIFICATES OF DEPOSIT
(COST $3,000,000) ................................ 3,000,000
-----------
NOT EQUAL TO DISCOUNTED COMMERCIAL PAPER-68.37%
COLLEGES & UNIVERSITIES-6.99%
Leland Stanford Junior University
5.141% 7/12/06 ................................... 750,000 748,827
University of California
4.972% 7/6/06 .................................... 500,000 499,659
5.282% 7/14/06 ................................... 250,000 249,524
-----------
1,498,010
-----------
FINANCIAL SERVICES-46.59%
(DS)Amstel Funding
5.097% 7/31/06 ................................... 500,000 497,904
5.191% 8/28/06 ................................... 270,000 267,773
(DS)Aquinas Funding 5.385% 9/18/06 .................. 497,000 491,209
(DS)Barton Capital 5.029% 7/6/06 .................... 750,000 749,481
(DS)Beta Finance 5.044% 7/21/06 ..................... 500,000 498,617
CBA Finance 5.033% 7/24/06 .......................... 500,000 498,412
(DS)Fountain Square 5.333% 7/28/06 .................. 360,000 358,566
HBOS 5.172% 8/24/06 ................................. 750,000 744,257
ING America Insurance Holdings
4.916% 7/6/06 .................................... 690,000 689,535
JPMorgan Chase 5.094% 7/5/06 ........................ 686,000 685,614
Prudential 5.023% 7/20/06 ........................... 750,000 748,037
(DS)Sigma Finance 5.009% 7/19/06 ................... 250,000 249,383
(DS)Starbird Funding
5.14% 7/7/06 ..................................... 490,000 489,582
5.16% 7/10/06 .................................... 355,000 354,544
(DS)Surrey Funding 5.094% 7/18/06 ................... 750,000 748,211
Swedish Export Credit 5.284% 8/3/06 ................. 750,000 746,391
(DS)Three Pillars 5.092% 7/3/06 ..................... 810,000 809,771
UBS Finance Delaware 5.272% 7/3/06 .................. 360,000 359,895
-----------
9,987,182
-----------
INDUSTRIAL-3.18%
BASF AG 5.314% 8/11/06 .............................. $ 385,000 $ 382,685
Sanofi-Aventis 5.284% 7/5/06 ........................ 300,000 299,824
-----------
682,509
-----------
MORTGAGE BANKERS & Brokers-8.14%
Bear Stearns 5.022% 7/17/06 ......................... 750,000 748,346
Morgan Stanley 5.279% 7/10/06 ....................... 500,000 499,341
Nordea North America 5.064% 7/28/06 ................. 500,000 498,125
-----------
1,745,812
-----------
SOVEREIGN AGENCY-3.47%
Swedish National Finance
5.314% 8/16/06 ................................... 750,000 744,950
-----------
744,950
-----------
TOTAL DISCOUNTED COMMERCIAL PAPER
(COST $14,658,463) ............................... 14,658,463
-----------
oFLOATING RATE NOTES-7.00%
#DNB NOR Bank 144A 5.313% 7/25/07 ................... 750,000 750,000
Washington Mutual Bank 5.207% 6/26/07 ............... 750,000 750,000
-----------
TOTAL FLOATING RATE NOTES
(COST $1,500,000) ................................ 1,500,000
-----------
INTEREST BEARING COMMERCIAL PAPER-4.67%
o#Goldman Sachs Group 144A 5.10% 8/7/06 ............. 1,000,000 1,000,000
-----------
TOTAL INVESTMENT COMPANIES
(COST $1,000,000) ................................ 1,000,000
-----------
MEDIUM TERM NOTES-2.33%
Sigma Finance 4.83% 1/30/07 ......................... 500,000 500,000
-----------
TOTAL MEDIUN TERM NOTES
(COST $500,000) .................................. 500,000
-----------
VARIABLE RATE DEMAND NOTES-3.73%
oNorth Texas Higher Education Authority
Student Loan Revenue 5.36% 12/1/44
(AMBAC) (SPA - Depfa Bank) ....................... 800,000 800,000
-----------
TOTAL VARIABLE RATE DEMAND NOTES
(COST $800,000) .................................. 800,000
-----------
Cash Reserve-3
DELAWARE VIP CASH RESERVE SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-100.09% (COST $21,458,463)(Y)... $21,458,463
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.09%).......... (19,743)
-----------
NET ASSETS APPLICABLE TO 21,438,628 SHARES OUTSTANDING-100.00%... $21,438,720
===========
NET ASSET VALUE-DELAWARE VIP CASH RESERVE SERIES STANDARD CLASS
($21,432,976 / 21,432,884 SHARES)............................. $ 1.00
===========
NET ASSET VALUE-DELAWARE VIP CASH RESERVE SERIES SERVICE CLASS
($5,744 / 5,744 SHARES)....................................... $ 1.00
===========
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par)... $21,492,027
Accumulated net realized loss on investments..................... (53,307)
-----------
Total net assets................................................. $21,438,720
===========
NOT EQUAL TO The interest rate shown is the effective yield as of the time of
purchase.
(DS) Asset-backed Commercial Paper.
(y) Also the cost for federal income tax purposes.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $1,750,000, which represented 8.16% of the Series' net
assets. See Note 4 in "Notes to Financial Statements."
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
SPA - Stand-by Purchase Agreement
See accompanying notes
Cash Reserve-4
DELAWARE VIP TRUST-
DELAWARE VIP CASH RESERVE SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Interest ........................................................... $527,745
--------
EXPENSES:
Management fees .................................................... 49,842
Reports and statements to shareholders ............................. 8,314
Legal and professional fees ........................................ 6,960
Accounting and administration expenses ............................. 4,430
Custodian fees ..................................................... 2,670
Dividend disbursing and transfer agent fees and expenses ........... 1,108
Trustees' fees ..................................................... 568
Pricing fees ....................................................... 481
Taxes (other than taxes on income) ................................. 110
Registration fees .................................................. 31
Insurance fees ..................................................... 10
Distribution expenses - Service Class .............................. 9
Other .............................................................. 448
--------
74,981
Less waiver of distribution expenses - Service Class ............... (2)
Less expense paid indirectly ....................................... (13)
--------
Total operating expenses ........................................... 74,966
--------
NET INVESTMENT INCOME .............................................. 452,779
NET REALIZED GAIN ON INVESTMENTS ................................... 9
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $452,788
========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP CASH RESERVE SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ............................ $ 452,779 $ 699,559
Net realized gain on investments ................. 9 82
----------- ------------
Net increase in net assets resulting from
operations .................................... 452,788 699,641
----------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income
Standard Class ................................ (452,671) (699,425)
Service Class ................................. (108) (134)
----------- ------------
(452,779) (699,559)
----------- ------------
CAPITAL SHARE TRANSACTIONS (AT $1.00 PER SHARE):
Proceeds from shares sold:
Standard Class ................................ 3,689,414 7,755,610
Net asset value of shares issued upon
reinvestment of dividends and
distributions:
Standard Class ................................ 452,260 690,782
Service Class ................................. 108 130
----------- ------------
4,141,782 8,446,522
----------- ------------
Cost of shares repurchased:
Standard Class ................................ (6,139,076) (14,846,540)
----------- ------------
Decrease in net assets derived from
capital share transactions .................... (1,997,294) (6,400,018)
----------- ------------
NET DECREASE IN NET ASSETS (1,997,285) (6,399,936)
NET ASSETS:
Beginning of period .............................. 23,436,005 29,835,941
----------- ------------
End of period (there was no undistributed
net investment income at either
period end) ................................... $21,438,720 $ 23,436,005
=========== ============
See accompanying notes
Cash Reserve-5
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP CASH RESERVE SERIES STANDARD CLASS
---------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04(2) 12/31/03 12/31/02(3) 12/31/01(3)
----------- -------- ----------- -------- ----------- -----------
Net asset value, beginning of period.................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................. 0.020 0.027 0.009 0.006 0.013 0.038
------- ------- ------- ------- ------- -------
Total from investment operations...................... 0.020 0.027 0.009 0.006 0.013 0.038
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................................. (0.020) (0.027) (0.009) (0.006) (0.013) (0.038)
------- ------- ------- ------- ------- -------
Total dividends and distributions..................... (0.020) (0.027) (0.009) (0.006) (0.013) (0.038)
------- ------- ------- ------- ------- -------
Net asset value, end of period........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= =======
Total return(4)....................................... 2.05% 2.69% 0.87% 0.61% 1.26% 3.90%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)............... $21,433 $23,430 $29,831 $42,748 $49,809 $43,421
Ratio of expenses to average net assets............... 0.68% 0.61% 0.55% 0.58% 0.59% 0.60%
Ratio of net investment income to average net assets.. 4.09% 2.62% 0.82% 0.60% 1.26% 3.78%
- ----------
(1) Ratios have been annualized and total return has not been annualized.
(2) On June 10, 2004, DMC voluntarily made a capital contribution of $0.001 per
share to the Series in order to eliminate the potential deviation in the
Series' net asset value of $1.00 per share caused by accumulated net
realized losses. This contribution had no impact on the Series' total
return.
(3) Effective December 20, 2002, the Series declared a 10 for 1 share split.
Per share data for periods prior to this date have been restated to reflect
this share split.
(4) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value.
See accompanying notes
Cash Reserve-6
DELAWARE VIP CASH RESERVE SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP CASH RESERVE SERIES SERVICE CLASS
---------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04(2) 12/31/03 12/31/02(3) 12/31/01(3)
----------- -------- ----------- -------- ----------- -----------
Net asset value, beginning of period.................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................. 0.019 0.024 0.006 0.004 0.011 0.037
------- ------- ------- ------- ------- -------
Total from investment operations...................... 0.019 0.024 0.006 0.004 0.011 0.037
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................................. (0.019) (0.024) (0.006) (0.004) (0.011) (0.037)
------- ------- ------- ------- ------- -------
Total dividends and distributions..................... (0.019) (0.024) (0.006) (0.004) (0.011) (0.037)
------- ------- ------- ------- ------- -------
Net asset value, end of period........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= =======
Total return(4)....................................... 1.92% 2.43% 0.60% 0.40% 1.13% 3.75%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)............... $ 6 $ 6 $ 5 $ 5 $ 5 $ 5
Ratio of expenses to average net assets............... 0.93% 0.86% 0.80% 0.80% 0.74% 0.75%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly.... 0.98% 0.91% 0.85% 0.83% 0.74% 0.75%
Ratio of net investment income to average net assets.. 3.84% 2.37% 0.57% 0.38% 1.11% 3.63%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly......................................... 3.79% 2.32% 0.52% 0.35% 1.11% 3.63%
- ----------
(1) Ratios have been annualized and total return has not been annualized.
(2) On June 10, 2004, DMC voluntarily made a capital contribution of $0.001 per
share to the Series in order to eliminate the potential deviation in the
Series' net asset value of $1.00 per share caused by accumulated net
realized losses. This contribution had no impact on the Series' total
return.
(3) Effective December 20, 2002, the Series declared a 10 for 1 share split.
Per share data for periods prior to this date have been restated to reflect
this share split.
(4) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects a waiver
and payment of fees by the distributor, as applicable. Performance would
have been lower had the waiver not been in effect.
See accompanying notes
Cash Reserve-7
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Cash
Reserve Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek to provide maximum current
income, while preserving principal and maintaining liquidity, by investing its
assets in a diversified portfolio of money market securities and managing the
portfolio to maintain a constant net asset value of $1 per share.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Securities are valued at amortized cost, which approximates
market value.
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income and common expenses are allocated to the
classes of the Series on the basis of "settled shares" of each class in relation
to the net assets of the Series. Realized and unrealized gain (loss) on
investments is allocated to the classes of the Series on the basis of daily net
assets of each class. Distribution expenses relating to a specific class are
charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Interest income is recorded on the accrual basis. Discounts and premiums
are amortized to interest income over the lives of the respective securities.
The Series declares dividends daily from net investment income and pays such
dividends monthly and declares and pays distributions from net realized gain on
investments, if any, following the close of the fiscal year.
The Series may receive earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.45% on the first $500 million of average daily net assets of the
Series, 0.40% on the next $500 million, 0.35% on the next $1.5 billion, and
0.30% on average daily net assets in excess of $2.5 billion.
Cash Reserve-8
DELAWARE VIP CASH RESERVE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.67% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006 the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
$7,983 $897 $1 $824
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$469 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. DIVIDEND AND DISTRIBUTION
Information Income and long-term capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from U.S.
generally accepted accounting principles. Additionally, net short-term gains on
sales of investment securities are treated as ordinary income for federal income
tax purposes. The tax character of dividends and distributions paid during the
six months ended June 30, 2006 and the year ended December 31, 2005 was as
follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
---------- --------
Ordinary income... $452,779 $699,559
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest..... $21,492,027
Capital loss carryforwards........ (53,313)
Six month period realized gains... 6
-----------
Net assets........................ $21,438,720
===========
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire in 2010. For the six months ended
June 30, 2006, the Series had capital gains of $6 which may reduce the capital
loss carryforwards.
Cash Reserve-9
DELAWARE VIP CASH RESERVE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT AND MARKET RISK
An investment in the Series is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Series seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Series.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, no securities have been determined to be illiquid under the
Series' Liquidity Procedures. Rule 144A securities have been identified on the
Statement of Net Assets.
5. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
- --------------------------------------------------------------------------------
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
Cash Reserve-10
DELAWARE VIP TRUST-DELAWARE VIP CASH RESERVE SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP CASH RESERVE SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Cash
Reserves Series (the "Series"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Series performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all money
market funds underlying variable insurance products as selected by Lipper. The
Lipper report comparison showed that the Series' total return for the one, three
and 10 year periods was in the third quartile of such Performance Universe. The
report further showed that the Series' total return for the five year period was
in the second quartile. The Board noted that the Series' performance results
were not in line with the Board's stated objective. The Board considered the
fact that management has contracted to waive fees and pay expenses through April
30, 2007 in order to prevent total operating expenses (excluding any 12b-1 fees,
taxes, interest, brokerage fees, extraordinary expenses and brokerage costs)
from exceeding 0.70% of average daily net assets. This cap is lower than in
previous years, a factor that may improve performance going forward. The Board
was satisfied that management was taking effective action to improve Series
performance and meet the Board's performance objective.
Cash Reserve-11
DELAWARE VIP CASH RESERVE SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second lowest expenses of its
Expense Group. The Board was satisfied with the management fee and total
expenses of the Series in comparison to its Expense Group as shown in the Lipper
report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Cash Reserve-12
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return,"
provides information about actual account values and actual expenses. You may
use the information in this section of the table, 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 section under
the heading entitled "Expenses Paid During Period" to estimate the expenses you
paid on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,010.00 0.77% $3.84
Service Class 1,000.00 1,008.70 1.02% 5.08
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.98 0.77% $3.86
Service Class 1,000.00 1,019.74 1.02% 5.11
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
Diversified Income-1
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
SECTOR ALLOCATION AND CREDIT RATING BREAKDOWN
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
AGENCY ASSET-BACKED SECURITIES 0.07%
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 0.97%
AGENCY MORTGAGE-BACKED SECURITIES 9.57%
AGENCY OBLIGATIONS 0.66%
COMMERCIAL MORTGAGE-BACKED SECURITIES 1.51%
CORPORATE BONDS 44.26%
Banking 3.78%
Basic Industry 3.88%
Brokerage 0.98%
Capital Goods 1.82%
Communications 8.17%
Consumer Cyclical 7.76%
Consumer Non-Cyclical 4.77%
Electric 1.61%
Emerging Markets 0.39%
Energy 1.02%
Finance Companies 3.04%
Industrial - Other 0.51%
Insurance 2.50%
Natural Gas 1.22%
Real Estate 0.68%
Technology 0.82%
Transportation 1.31%
FOREIGN AGENCIES 2.09%
Austria 0.29%
Germany 1.49%
Mexico 0.24%
Ukraine 0.07%
MUNICIPAL BONDS 0.14%
NON-AGENCY ASSET-BACKED SECURITIES 1.27%
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 5.25%
REGIONAL AGENCIES 0.75%
Australia 0.75%
REGIONAL AUTHORITIES 0.35%
Canada 0.35%
SENIOR SECURED LOANS 1.28%
SOVEREIGN AGENCIES 1.55%
France 0.75%
Japan 0.80%
SOVEREIGN DEBT 14.02%
Argentina 0.25%
Austria 0.96%
Brazil 1.82%
Colombia 0.65%
Czechoslovakia 0.18%
Dominican Republic 0.14%
El Salvador 0.21%
France 1.62%
Germany 1.48%
Indonesia 0.13%
Japan 0.54%
Korea 0.38%
Malaysia 0.35%
Mexico 0.97%
Netherlands 0.27%
Norway 0.36%
Panama 0.13%
Peru 0.19%
Philippines 0.43%
Poland 0.42%
Sweden 1.03%
Turkey 0.14%
United Kingdom 0.75%
Uruguay 0.08%
Venezuela 0.54%
SUPRANATIONAL BANKS 3.47%
U.S. TREASURY OBLIGATIONS 7.31%
COMMON STOCK 0.07%
PREFERRED STOCK 0.00%
WARRANT 0.15%
CURRENCY OPTIONS PURCHASED 0.00%
REPURCHASE AGREEMENTS 14.94%
TOTAL MARKET VALUE OF SECURITIES 109.68%
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (9.68)%
------
TOTAL NET ASSETS 100.00%
======
CREDIT RATING BREAKDOWN (AS A % OF FIXED INCOME INVESTMENTS)
AAA 46.20%
AA 1.88%
A 7.79%
BBB 9.53%
BB 12.50%
B 16.52%
CCC 4.35%
D 0.05%
NR 1.18%
------
TOTAL 100.00%
======
Diversified Income-2
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
MARKET
PRINCIPAL VALUE
AMOUNT DEG. (U.S. $)
----------- ------------
AGENCY ASSET-BACKED SECURITIES-0.07%
oFannie Mae Whole Loan Series 2002-W11
AV1 5.663% 11/25/32 ...................... USD 36,573 $ 36,575
(D)FHLMC Structured Pass-Through
Securities Series T-30 A5
8.61% 12/25/30 ........................... 220,924 220,813
-----------
TOTAL AGENCY ASSET-BACKED SECURITIES
(COST $256,950) .......................... 257,388
-----------
AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS-0.97%
Fannie Mae
Series 1996-46 ZA 7.50% 11/25/26 ......... 7,489 7,907
Series 2002-90 A1 6.50% 6/25/42 .......... 24,095 24,179
Series 2002-90 A2 6.50% 11/25/42 ......... 106,147 106,905
Series 2003-122 AJ 4.50% 2/25/28 ......... 114,352 109,918
Series 2005-110 MB 5.50% 9/25/35 ......... 730,000 720,086
Fannie Mae Grantor Trust
Series 1999-T2 A1 7.50% 1/19/39 .......... 2,148 2,215
Series 2001-T8 A2 9.50% 7/25/41 .......... 19,616 20,969
Series 2002-T4 A3 7.50% 12/25/41 ......... 44,781 45,993
Series 2004-T1 1A2 6.50% 1/25/44 ......... 45,108 45,512
Fannie Mae Whole Loan
Series 2002-W6 2A1 7.00% 6/25/42 ......... 77,184 78,601
Series 2004-W9 2A1 6.50% 2/25/44 ......... 12,875 12,992
Series 2004-W11 1A2 6.50% 5/25/44 ........ 142,020 143,321
Freddie Mac
Series 1730 Z 7.00% 5/15/24 .............. 184,375 191,627
Series 2326 ZQ 6.50% 6/15/31 ............. 285,082 293,247
Series 2480 EH 6.00% 11/15/31 ............ 440 439
Series 2552 KB 4.25% 6/15/27 ............. 160,403 158,010
Series 2662 MA 4.50% 10/15/31 ............ 293,653 285,160
Series 2872 GC 5.00% 11/15/29 ............ 220,000 210,753
Series 2890 PC 5.00% 7/15/30 ............. 105,000 100,755
Series 2915 KP 5.00% 11/15/29 ............ 265,000 254,971
Series 3022 MB 5.00% 12/15/28 ............ 165,000 159,899
Series 3063 PC 5.00% 2/15/29 ............. 540,000 522,113
(D)Freddie Mac Structured Pass-Through
Securities
Series T-54 2A 6.50% 2/25/43 ............. 42,111 42,408
Series T-58 2A 6.50% 9/25/43 ............. 17,261 17,392
-----------
TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $3,637,459) ............ 3,555,372
-----------
AGENCY MORTGAGE-BACKED SECURITIES-9.57%
FANNIE MAE
5.50% 1/1/13 ............................. 262,557 257,306
6.202% 5/1/09 ............................ 33,649 33,807
6.50% 8/1/17 ............................. 76,544 77,477
6.765% 1/1/07 ............................ 22,018 21,970
oFannie Mae ARM
3.241% 10/1/33 ........................... 497,673 494,446
5.068% 8/1/35 ............................ 597,120 574,624
Fannie Mae Relocation 15 yr
4.00% 9/1/20 ............................. 582,576 534,695
Fannie Mae Relocation 30 yr
5.00% 11/1/33 ............................ 11,359 10,748
5.00% 8/1/34 ............................. 74,445 70,328
5.00% 11/1/34 ............................ 103,401 97,681
5.00% 4/1/35 ............................. 292,774 275,848
Fannie Mae Relocation 30 yr
5.00% 10/1/35 ............................ USD 487,203 $ 459,037
5.00% 1/1/36 ............................. 617,682 581,972
Fannie Mae S.F. 15 yr TBA
5.00% 7/1/21 ............................. 350,000 337,094
5.50% 7/1/21 ............................. 4,915,000 4,824,379
Fannie Mae S.F. 20 yr 5.50% 8/1/25 .......... 936,056 908,560
Fannie Mae S.F. 30 yr
5.50% 3/1/29 ............................. 3,781 3,652
5.50% 4/1/29 ............................. 3,888 3,756
7.50% 3/1/32 ............................. 1,707 1,766
7.50% 4/1/32 ............................. 6,312 6,529
Fannie Mae S.F. 30 yr TBA
5.00% 7/1/36 ............................. 5,420,000 5,067,699
5.50% 7/1/36 ............................. 12,505,000 12,012,615
6.00% 7/1/36 ............................. 2,820,000 2,775,938
6.50% 7/1/36 ............................. 3,545,000 3,563,833
Freddie Mac 7.00% 1/1/08 .................... 89,311 89,758
oFreddie Mac ARM
2.995% 12/1/33 ........................... 679,428 670,160
3.914% 4/1/34 ............................ 14,172 14,070
Freddie Mac Relocation 30 yr
5.00% 9/1/33 ............................. 20,921 19,829
Freddie Mac S.F. 30 yr TBA
5.00% 7/1/36 ............................. 1,260,000 1,176,919
-----------
TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(COST $35,221,427) ....................... 34,966,496
-----------
AGENCY OBLIGATIONS-0.66%
Fannie Mae
3.00% 8/15/07 ............................ 40,000 38,931
6.375% 8/15/07 ........................... AUD 890,000 662,811
(y)Financing Corporation Interest Strip
CPN 13 5.161% 12/27/12 ................... USD 100,000 70,834
CPN 15 5.575% 3/7/16 ..................... 304,000 179,439
CPN D 5.08% 9/26/11 ...................... 150,000 114,393
Freddie Mac
4.625% 12/19/08 .......................... 1,060,000 1,040,881
4.75% 1/19/16 ............................ 305,000 288,121
-----------
TOTAL AGENCY OBLIGATIONS
(COST $2,437,000) ........................ 2,395,410
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES-1.51%
#Bear Stearns Commercial Mortgage Securities
Series 2004-ESA E 144A
5.064% 5/14/16 ........................... 300,000 295,599
(D)Commercial Mortgage Pass-Through
Certificates
#Series 2001-J1A A2 144A
6.457% 2/14/34 ........................... 188,927 193,099
Series 2006-C7 A2 5.69% 6/10/46 .......... 210,000 209,199
oCredit Suisse Mortgage Capital Certificates
Series 2006-C1 AAB 5.681% 2/15/39 ........ 115,000 113,012
#Crown Castle Towers Series 2005-1A C 144A
5.074% 6/15/35 ........................... 90,000 86,543
#First Union National Bank Commercial
Mortgage Series 2001-C2 L 144A
6.46% 1/12/43 ............................ 200,000 197,999
Diversified Income-3
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
MARKET
PRINCIPAL VALUE
AMOUNT DEG. (U.S. $)
----------- ------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
GE Capital Commercial Mortgage Trust
Series 2002-1A A3 6.269% 12/10/35 ........ USD 365,000 $ 373,696
Greenwich Capital Commercial Funding
Series 2006-GG7 6.11% 7/10/16 ............ 1,035,000 1,035,001
#Hilton Hotel Pool Trust Series 2000-
HLTA A1 144A 7.055% 10/3/15 .............. 80,715 83,079
JPMorgan Chase Commercial
Mortgage Securities
Series 2002-C1 A3 5.376% 7/12/37 ......... 290,000 284,056
Series 2002-C2 A2 5.05% 12/12/34 ......... 280,000 268,981
Series 2003-C1 A2 4.985% 1/12/37 ......... 20,000 19,121
oSeries 2006-LDP7
AJ 5.876% 4/15/45 ........................... 1,000,000 992,640
o#Series 2006-RR1 A1 144A
5.61% 10/18/52 ........................... 305,000 293,553
LB-UBS Commercial Mortgage Trust
Series 2002-C1 A4 6.462% 3/15/31 ......... 110,000 113,507
oMerrill Lynch Mortgage Trust
Series 2004-BPC1 A3 4.467% 10/12/41 ...... 25,000 23,512
Series 2006-C1 AJ 5.844% 5/12/39 ......... 215,000 211,588
oMerrill Lynch/Countrywide Commercial
Mortgage Trust Series 2006-2
AJ 5.917% 6/12/46 ........................ 160,000 160,026
#Morgan Stanley Capital I Series
1999-FNV1 G 144A 6.12% 3/15/31 ........... 110,000 109,849
o#Morgan Stanley Dean Witter Capital I Series
2001-TOP1 E 144A 7.551% 2/15/33 .......... 100,000 103,605
#Tower 144A
Series 2004-2A A 4.232% 12/15/14 ......... 65,000 62,146
Series 2006-1 B 5.588% 2/15/36 ........... 120,000 117,564
Series 2006-1 C 5.707% 2/15/36 ........... 185,000 181,475
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $5,617,707) ........................ 5,528,850
-----------
CORPORATE BONDS-44.26%
BANKING-3.78%
BAC Capital Trust XI 6.625% 5/23/36 ......... 105,000 104,059
#Banco BMG 144A 9.15% 1/15/16 ............... 351,000 344,858
o#Banco Santander 144A
5.633% 12/9/09 ........................... 60,000 60,056
oBarclays Bank 6.278% 12/29/49 .............. 170,000 148,415
o#BNP Paribas 144A 5.186% 6/29/49 ........... 280,000 254,302
Citigroup 5.875% 2/22/33 .................... 90,000 84,261
Credit Suisse First Boston USA
6.125% 11/15/11 .......................... 115,000 116,670
First Union II 7.85% 1/1/27 ................. 950,000 992,494
o#Glitnir Banki 144A 6.693% 6/15/16 ......... 570,000 567,326
#HBOS 144A 5.92% 9/29/49 .................... 300,000 276,859
#ICICI Bank 144A 5.75% 11/16/10 ............. 120,000 116,354
#Kaupthing Bank 144A
7.125% 5/19/16 ........................... 725,000 726,489
Kazkommerts International
8.00% 11/3/15 ............................ 288,000 281,059
Popular North America
4.25% 4/1/08 ............................. 335,000 325,957
o5.41% 4/6/09 ............................ 190,000 190,504
Popular North America Capital Trust
6.564% 9/15/34 ........................... 310,000 283,048
o#Rabobank Capital Funding II 144A
5.26% 12/29/49 ........................... USD 235,000 $ 220,826
Rabobank Nederland 9.125% 10/20/06 .......... ISK 105,000,000 1,367,762
oRBS Capital Trust I 4.709% 12/29/49 ........ USD 180,000 162,933
o#Resona Bank 144A 5.85% 9/29/49 ............ 605,000 563,896
o#Resona Preferred Global Securities
144A 7.191% 12/29/49 ........................ 1,110,000 1,115,239
Russian Agricultural Bank
6.875% 11/29/10 .......................... 1,172,000 1,164,060
#Russian Agricultural Bank
144A 7.175% 5/16/13 ...................... 635,000 631,031
#Russian Standard Bank 144A
8.625% 5/5/11 ............................ 165,000 158,202
o#Shinsei Finance 144A 6.418% 1/29/49 475,000 446,906
#TuranAlem Finance 144A
7.75% 4/25/13 ............................ 450,000 439,313
Vneshtorgbank 4.25% 2/15/16 ................. EUR 1,200,000 1,478,530
oWachovia Capital Trust III
5.80% 8/29/49 ............................ USD 950,000 922,813
Western Financial 9.625% 5/15/12 ............ 235,000 258,755
-----------
13,802,977
-----------
Basic Industry-3.88%
Abitibi-Consolidated
6.95% 12/15/06 ........................... 150,000 151,500
7.875% 8/1/09 ............................ 840,000 808,500
AK Steel 7.875% 2/15/09 ..................... 445,000 445,000
Aleris International 9.00% 11/15/14 ......... 361,000 369,123
Alrosa Finance 8.875% 11/17/14 .............. 222,000 241,292
@#Alrosa Finance 144A 8.875% 11/17/14 ....... 569,000 619,499
Barrick Gold Finance 7.50% 5/1/07 ........... 60,000 60,848
Bowater
9.00% 8/1/09 ............................. 280,000 285,600
9.50% 10/15/12 ........................... 1,275,000 1,278,187
Chemtura 6.875% 6/1/16 ...................... 300,000 291,375
Donohue Forest Products
7.625% 5/15/07 ........................... 275,000 277,063
Georgia-Pacific
8.875% 5/15/31 ........................... 635,000 635,000
9.50% 12/1/11 ............................ 600,000 630,000
Huntsman International
10.125% 7/1/09 ........................... 680,000 693,600
Ispat Inland 9.75% 4/1/14 ................... 65,000 71,761
Lubrizol 4.625% 10/1/09 ..................... 725,000 698,572
Lyondell Chemical 10.50% 6/1/13 ............. 50,000 55,250
#Nell AF SARL 144A 8.375% 8/15/15 ........... 525,000 507,281
NewPage 10.00% 5/1/12 ....................... 410,000 426,400
Norske Skog Canada 8.625% 6/15/11 ........... 750,000 735,000
#Norske Skogindustrier 144A
7.125% 10/15/33 .......................... 330,000 284,413
#Port Townsend Paper 144A
12.00% 4/15/11 ........................... 410,000 325,950
Potlatch 13.00% 12/1/09 ..................... 400,000 469,610
Rhodia 8.875% 6/1/11 ........................ 476,000 476,595
++Solutia 6.72% 10/15/37 .................... 615,000 571,181
#Southern Copper 144A 7.50% 7/27/35 ......... 800,000 765,784
#Stora Enso Oyj 144A 7.25% 4/15/36 .......... 345,000 337,781
Tembec Industries 8.625% 6/30/09 ............ 1,610,000 889,524
Diversified Income-4
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- -----------
(U.S. $)
CORPORATE BONDS (CONTINUED)
BASIC INDUSTRY (CONTINUED)
Vale Overseas 6.25% 1/11/16 .................. USD 165,000 $ 157,988
Weyerhaeuser 7.125% 7/15/23 .................. 525,000 517,366
Witco 6.875% 2/1/26 .......................... 125,000 111,875
-----------
14,188,918
-----------
BROKERAGE-0.98%
Amvescap 4.50% 12/15/09 ...................... 150,000 143,515
E Trade Financial 8.00% 6/15/11 .............. 760,000 779,000
FINOVA Group 7.50% 11/15/09 .................. 1,048,050 314,415
Goldman Sachs 6.345% 2/15/34 ................. 320,000 299,256
LaBranche & Company
9.50% 5/15/09 ............................. 525,000 561,750
11.00% 5/15/12 ............................ 524,000 576,400
Merrill Lynch
o4.16% 3/12/07 ............................. 95,000 93,851
6.05% 5/16/16 ............................. 510,000 507,571
Morgan Stanley 5.375% 10/15/15 ............... 325,000 308,215
-----------
3,583,973
-----------
CAPITAL GOODS-1.82%
Allied Waste North America
9.25% 9/1/12 .............................. 574,000 611,310
Armor Holdings 8.25% 8/15/13 ................. 650,000 676,000
Building Materials 8.00% 10/15/07 ............ 475,000 479,750
Casella Waste Systems 9.75% 2/1/13 ........... 850,000 896,750
#Compression Polymer 144A
10.50% 7/1/13 ............................. 345,000 353,625
General Electric 5.00% 2/1/13 ................ 365,000 350,092
Geo Subordinate 11.00% 5/15/12 ............... 925,000 934,250
Graham Packaging 9.875% 10/15/14 ............. 225,000 223,875
Interface 10.375% 2/1/10 ..................... 285,000 313,144
Intertape Polymer 8.50% 8/1/14 ............... 485,000 448,625
NTK Holdings 10.75% 3/1/14 ................... 450,000 327,938
Solo Cup 8.50% 2/15/14 ....................... 350,000 304,500
#TransDigm 144A 7.75% 7/15/14 ................ 125,000 125,000
#WCA Waste 144A 9.25% 6/15/14 ................ 600,000 609,000
-----------
6,653,859
-----------
COMMUNICATIONS-8.17%
(DS)Adelphia Communications
8.125% 12/15/06 ........................... 280,000 154,000
#Affinion Group 144A 11.50% 10/15/15 ......... 175,000 172,375
American Tower
7.125% 10/15/12 ........................... 620,000 621,550
7.25% 12/1/11 ............................. 175,000 179,813
AT&T
7.30% 11/15/11 ............................ 325,000 345,380
8.00% 11/15/31 ............................ 380,000 437,556
Bellsouth 4.20% 9/15/09 ...................... 150,000 143,108
British Telecommunications
8.875% 12/15/30 ........................... 295,000 363,573
++Century Communications 9.50% 9/1/06 ........ 2,350,000 2,361,749
#Charter Communications 144A
5.875% 11/16/09 ........................... 65,000 48,506
Charter Communications Holdings
11.125% 1/15/11 ........................... 315,000 196,875
13.50% 1/15/11 ............................ 1,275,000 835,125
#Charter Communications Operating 144A
8.375% 4/30/14 ............................ 30,000 30,188
Cincinnati Bell 8.375% 1/15/14 ............... 872,000 863,280
o#Cleveland Unlimited 144A
13.579% 12/15/10 .......................... USD 100,000 $ 105,750
Comcast 6.50% 11/15/35 ....................... 365,000 345,638
Cox Communications 4.625% 1/15/10 ............ 150,000 143,192
CSC Holdings
8.125% 7/15/09 ............................ 527,000 538,858
8.125% 8/15/09 ............................ 825,000 843,563
Dex Media East 12.125% 11/15/12 .............. 350,000 394,625
#Digicel Limited 144A 9.25% 9/1/12 ........... 500,000 525,000
GTE California 7.65% 3/15/07 ................. 470,000 475,790
(SS)Inmarsat Finance 10.375% 11/15/12 ........ 2,495,000 2,136,343
Insight Midwest 10.50% 11/1/10 ............... 1,769,000 1,853,027
#Intelsat Bermuda 144A 11.25% 6/15/16 ........ 850,000 875,500
Intelsat Subsidiary 8.625% 1/15/15 ........... 525,000 528,938
iPCS 11.50% 5/1/12 ........................... 80,000 89,600
oIWO Escrow Company 8.818% 1/15/12 ........... 40,000 41,600
oLiberty Media 6.829% 9/17/06 ................ 62,000 62,208
Mediacom Broadband 11.00% 7/15/13 ............ 900,000 952,874
Mediacom Capital 9.50% 1/15/13 ............... 840,000 840,000
#Nordic Telephone Holdings
144A 8.875% 5/1/16 ........................ 200,000 206,500
oQwest 8.579% 6/15/13 ........................ 125,000 132,813
#RH Donnelley 144A 8.875% 1/15/16 ............ 710,000 719,763
Rural Cellular 9.875% 2/1/10 ................. 820,000 847,675
o#Rural Cellular 144A 10.899% 11/1/12 ........ 230,000 237,188
Sheridan Acquisition 10.25% 8/15/11 .......... 215,000 219,569
Sirius Satellite 9.625% 8/1/13 ............... 100,000 94,250
Sprint Capital
7.625% 1/30/11 ............................ 370,000 394,216
8.75% 3/15/32 ............................. 445,000 538,157
Telecom Italia Capital 4.00% 1/15/10 ......... 470,000 440,169
Telefonica Emis
o5.714% 6/19/09 ............................ 240,000 240,302
5.984% 6/20/11 ............................ 265,000 264,307
6.421% 6/20/16 ............................ 110,000 109,972
7.045% 6/20/36 ............................ 325,000 325,833
Telefonos de Mexico 4.50% 11/19/08 ........... 395,000 382,000
Time Warner Entertainment
8.375% 3/15/23 ............................ 210,000 234,060
Triton Communications
8.50% 6/1/13 .............................. 435,000 401,288
9.375% 2/1/11 ............................. 1,075,000 774,000
oUS LEC 13.62% 10/1/09 ....................... 135,000 144,113
US Unwired 10.00% 6/15/12 .................... 265,000 295,475
Vertis 10.875% 6/15/09 ....................... 885,000 876,149
#Viacom 144A
o5.691% 6/16/09 ............................ 430,000 430,136
5.75% 4/30/11 ............................. 200,000 196,647
#Vimpelcom 144A 8.25% 5/23/16 ................ 982,000 943,947
#Wind Acquisition 144A
10.75% 12/1/15 ............................ 825,000 880,687
Windstream 7.26% 6/30/13 ..................... 585,000 585,000
#Windstream 144A
8.125% 8/1/13 ............................. 300,000 307,500
8.625% 8/1/16 ............................. 425,000 436,688
#XM Satellite Radio 144A 9.75% 5/1/14 ........ 750,000 690,000
-----------
29,853,988
-----------
Diversified Income-5
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
MARKET
PRINCIPAL VALUE
AMOUNT DEG. (U.S. $)
----------- -----------
CORPORATE BONDS (CONTINUED)
CONSUMER CYCLICAL-7.76%
Accuride 8.50% 2/1/15 ........................ USD 250,000 $ 241,250
#Baker & Taylor 144A 11.50% 7/1/13 ........... 375,000 376,875
Boyd Gaming 8.75% 4/15/12 .................... 475,000 499,938
Brickman Group 11.75% 12/15/09 ............... 305,000 329,400
Carrols 9.00% 1/15/13 ........................ 140,000 141,050
Centex
o5.399% 8/1/07 ............................. 265,000 265,186
6.50% 5/1/16 .............................. 650,000 632,730
Corrections Corporation of America
7.50% 5/1/11 .............................. 900,000 911,250
oDaimlerChrysler Holdings 5.74% 3/13/09 ...... 940,000 941,340
Ford Motor 7.45% 7/16/31 ..................... 1,365,000 993,038
Ford Motor Credit
5.70% 1/15/10 ............................. 195,000 170,939
7.375% 10/28/09 ........................... 485,000 448,720
#Ford Motor Credit 144A
9.75% 9/15/10 ............................. 380,000 370,577
#Galaxy Entertainment Finance
144A 9.875% 12/15/12 ...................... 1,986,000 2,075,369
Gaylord Entertainment
8.00% 11/15/13 ............................ 285,000 286,069
General Motors
8.375% 7/15/33 ............................ 1,370,000 1,109,699
General Motors Acceptance Corporation
6.875% 9/15/11 ............................ 2,060,000 1,967,666
=7.50% 12/1/06 ............................. NZD 1,315,000 793,618
8.00% 11/1/31 ............................. USD 3,485,000 3,358,445
Johnson Controls 5.00% 11/15/06 .............. 20,000 19,933
Landry's Restaurant 7.50% 12/15/14 ........... 470,000 433,575
Lodgenet Entertainment
9.50% 6/15/13 ............................. 780,000 834,600
Mandalay Resort Group 9.50% 8/1/08 ........... 580,000 616,250
Metaldyne 10.00% 11/1/13 ..................... 480,000 466,800
#Neiman Marcus 144A
9.00% 10/15/15 ............................ 445,000 467,250
10.375% 10/15/15 .......................... 720,000 768,600
#NPC International 144A 9.50% 5/1/14 ......... 575,000 559,188
O'Charleys 9.00% 11/1/13 ..................... 725,000 737,688
Penney (J.C.)
7.375% 8/15/08 ............................ 215,000 221,236
7.625% 3/1/97 ............................. 65,000 64,736
7.65% 8/15/16 ............................. 100,000 108,840
Playtex Products 9.375% 6/1/11 ............... 1,130,000 1,182,262
#Pokagon Gaming Authority
144A 10.375% 6/15/14 ...................... 400,000 415,500
Royal Caribbean Cruises
7.25% 6/15/16 ............................. 70,000 69,669
7.25% 3/15/18 ............................. 375,000 365,667
Schuler Homes 10.50% 7/15/11 ................. 80,000 84,282
Time Warner 8.18% 8/15/07 .................... 370,000 379,694
(SS)Town Sports International
11.00% 2/1/14 ............................. 550,000 441,375
True Temper Sports 8.375% 9/15/11 ............ 635,000 581,025
#Uno Restaurant 144A 10.00% 2/15/11 .......... 225,000 173,250
Visteon
7.00% 3/10/14 ............................. 85,000 69,806
8.25% 8/1/10 .............................. 1,805,000 1,696,699
Warnaco 8.875% 6/15/13 ....................... USD 185,000 $ 188,700
Warner Music Group 7.375% 4/15/14 ............ 935,000 911,625
Wheeling Island Gaming 10.125% 12/15/09 ...... 570,000 592,088
-----------
28,363,497
-----------
CONSUMER NON-CYCLICAL-4.77%
#AmerisourceBergen 144A
5.875% 9/15/15 ............................ 470,000 445,325
#Angiotech Pharmaceuticals 144A
7.75% 4/1/14 .............................. 600,000 576,000
Biovail 7.875% 4/1/10 ........................ 1,583,000 1,610,702
Constellation Brands 8.125% 1/15/12 .......... 516,000 532,770
Cott Beverages 8.00% 12/15/11 ................ 465,000 466,163
#CRC Health 144A 10.75% 2/1/16 ............... 560,000 572,600
DEL Laboratories 8.00% 2/1/12 ................ 185,000 154,706
Dole Food 8.875% 3/15/11 ..................... 755,000 711,588
Gold Kist 10.25% 3/15/14 ..................... 375,000 392,813
HCA 5.50% 12/1/09 ............................ 205,000 198,575
#Healthsouth 144A 10.75% 6/15/16 ............. 410,000 403,850
Humana 6.45% 6/1/16 .......................... 505,000 500,779
Ingles Markets 8.875% 12/1/11 ................ 450,000 473,063
#iPayment 144A 9.75% 5/15/14 ................. 275,000 275,000
Kraft Foods
4.125% 11/12/09 ........................... 280,000 266,340
6.50% 11/1/31 ............................. 105,000 105,182
#Le-Natures 144A 10.00% 6/15/13 .............. 325,000 344,094
Marsh Supermarket 8.875% 8/1/07 .............. 325,000 324,594
Medco Health Solutions 7.25% 8/15/13 ......... 695,000 736,888
MedPartners 7.375% 10/1/06 ................... 710,000 712,663
#Miller Brewing 144A 4.25% 8/15/08 ........... 175,000 169,992
National Beef Packing 10.50% 8/1/11 .......... 325,000 329,875
Pilgrim's Pride 9.625% 9/15/11 ............... 310,000 323,950
Pinnacle Foods 8.25% 12/1/13 ................. 375,000 370,313
#Reynolds American 144A
6.50% 6/1/07 .............................. 125,000 125,156
7.875% 5/15/09 ............................ 790,000 809,750
oSafeway 5.83% 3/27/09 ....................... 555,000 555,684
US Oncology
9.00% 8/15/12 ............................. 125,000 130,625
10.75% 8/15/14 ............................ 1,050,000 1,144,499
UST 6.625% 7/15/12 ........................... 290,000 298,664
(SS)Vanguard Health 11.25% 10/1/15 ........... 1,340,000 951,399
Warner Chilcott 8.75% 2/1/15 ................. 1,955,000 2,023,424
Wyeth 5.50% 2/1/14 ........................... 410,000 396,763
-----------
17,433,789
-----------
ELECTRIC-1.61%
Avista 9.75% 6/1/08 .......................... 415,000 441,313
++#Calpine 144A 9.90% 7/15/07 ................ 180,838 174,508
Consolidated Edison of New York
6.20% 6/15/36 ............................. 270,000 263,742
Dominion Resources
5.687% 5/15/08 ............................ 445,000 443,814
o5.79% 9/28/07 ............................. 400,000 400,382
Duke Capital 5.668% 8/15/14 .................. 160,000 154,911
Elwood Energy 8.159% 7/5/26 .................. 262,159 284,981
Hydro Quebec 10.50% 10/15/21 ................. CAD 219,000 305,725
Diversified Income-6
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- -----------
(U.S. $)
CORPORATE BONDS (CONTINUED)
ELECTRIC (CONTINUED)
Midwest Generation
8.30% 7/2/09 .............................. USD 495,000 $ 502,425
8.75% 5/1/34 .............................. 240,000 255,600
Mirant Americas Generation
8.30% 5/1/11 .............................. 1,100,000 1,091,751
Northern State Power 6.25% 6/1/36 ............ 295,000 294,027
Oncor Electric Delivery 7.00% 5/1/32 ......... 20,000 20,820
Orion Power 12.00% 5/1/10 .................... 190,000 215,650
Pepco Holdings
5.50% 8/15/07 ............................. 470,000 468,436
o5.856% 6/1/10 ............................. 265,000 265,973
#Power Contract Financing 144A
6.256% 2/1/10 ............................. 200,000 200,106
#Tenaska Alabama 144A 7.00% 6/30/21 .......... 98,526 96,518
Xcel Energy 6.50% 7/1/36 ..................... 10,000 9,839
-----------
5,890,521
-----------
EMERGING MARKETS-0.39%
Siberian Oil 10.75% 1/15/09 .................. 437,000 477,860
Southern Peru 7.50% 7/27/35 .................. 1,005,000 964,528
-----------
1,442,388
-----------
ENERGY-1.02%
#Basic Energy Service 144A
7.125% 4/15/16 ............................ 125,000 116,875
Bluewater Finance 10.25% 2/15/12 ............. 480,000 488,400
#Brigham Exploration 144A
9.625% 5/1/14 ............................. 115,000 113,275
#Canadian Oil Sands 144A
4.80% 8/10/09 ............................. 115,000 111,447
Compton Petroleum 7.625% 12/1/13 ............. 110,000 105,600
#Hilcorp Energy 144A
9.00% 6/1/16 .............................. 750,000 759,374
10.50% 9/1/10 ............................. 103,000 111,498
#Mariner Energy 144A 7.50% 4/15/13 ........... 125,000 120,938
#Markwest Energy 144A 8.50% 7/15/16 .......... 105,000 103,268
Nexen 5.875% 3/10/35 ......................... 95,000 84,139
#PetroHawk Energy 144A
9.125% 7/15/13 ............................ 605,000 604,999
oSecunda International 13.068% 9/1/12 ........ 240,000 252,000
Talisman Energy 5.125% 5/15/15 ............... 180,000 167,948
#VeraSun Energy 144A 9.875% 12/15/12 ......... 230,000 243,800
Weatherford International
4.95% 10/15/13 ............................ 72,000 67,424
Whiting Petroleum 7.25% 5/1/13 ............... 275,000 264,688
-----------
3,715,673
-----------
FINANCE COMPANIES-3.04%
American General Finance
4.875% 7/15/12 ............................ 630,000 596,787
oAmeriprise Financial 7.518% 6/1/66 .......... 335,000 337,612
ERAP 3.75% 4/25/10 ........................... EUR 596,000 760,093
FTI Consulting 7.625% 6/15/13 ................ USD 750,000 763,125
HSBC Finance 4.625% 9/15/10 .................. 615,000 589,961
oHSBC Finance Capital Trust IX
5.911% 11/30/35 ........................... 400,000 382,400
#Hughes Network Systems/Finance 144A
9.50% 4/15/14 ............................. 675,000 664,875
International Lease Finance 4.625% 6/2/08 130,000 127,556
JPM Capital Trust I 7.54% 1/15/27 ............ 135,000 140,315
oMUFG Capital Finance 1 6.346% 7/29/49 ....... 360,000 347,886
Residential Capital
5.125% 5/17/12 ............................ EUR 470,000 $ 593,420
6.00% 2/22/11 ............................. USD 740,000 717,753
6.125% 11/21/08 ........................... 480,000 474,696
6.375% 6/30/10 ............................ 285,000 281,365
6.375% 5/17/13 ............................ GBP 312,000 573,740
6.50% 4/17/13 ............................. USD 285,000 280,061
6.875% 6/30/15 ............................ 1,185,000 1,181,845
o#Residential Capital 144A
6.898% 4/17/09 ............................ 345,000 345,239
SLM 6.50% 6/15/10 ............................ NZD 2,140,000 1,286,817
Sovereign Capital Trust
7.908% 6/13/36 ............................ USD 510,000 525,096
o#Swiss Re Capital I 144A 6.854% 5/29/49 135,000 132,729
-----------
11,103,371
-----------
INDUSTRIAL - OTHER-0.51%
Adesa 7.625% 6/15/12 ......................... 290,000 286,375
Interline Brands 8.125% 6/15/14 .............. 200,000 200,500
#Knowledge Learn 144A 7.75% 2/1/15 ........... 210,000 193,200
Mueller Group 10.00% 5/1/12 .................. 324,000 349,920
(SS)Mueller Holdings 14.75% 4/15/14 .......... 187,000 158,015
Trimas 9.875% 6/15/12 ........................ 730,000 671,600
-----------
1,859,610
-----------
INSURANCE-2.50%
#Farmers Exchange Capital 144A
7.05% 7/15/28 ............................. 650,000 623,655
#Farmers Insurance Exchange 144A
6.00% 8/1/14 .............................. 70,000 67,438
8.625% 5/1/24 ............................. 5,000 5,561
Marsh & McLennan
5.15% 9/15/10 ............................. 370,000 357,467
o5.19% 7/13/07 ............................. 430,000 429,853
5.375% 3/15/07 ............................ 370,000 368,139
MetLife
5.00% 6/15/15 ............................. 255,000 236,305
5.70% 6/15/35 ............................. 45,000 40,276
#Metropolitan Life Global Funding 144A
4.25% 7/30/09 ............................. 450,000 434,253
#Nationwide Mutual Insurance 144A
7.875% 4/1/33 ............................. 375,000 417,060
#Nippon Life Insurance 144A
4.875% 8/9/10 ............................. 535,000 514,635
o(D)#North Front Pass-Through Trust 144A
5.81% 12/15/24 ............................ 500,000 476,148
o#Premium Asset Trust Series 2005-2
144A 5.191% 2/2/07 ........................ 85,000 84,947
Safeco Capital Trust I 8.072% 7/15/37 ........ 245,000 257,617
#Sagicor Financial 144A 7.50% 5/12/16 ........ 505,000 487,997
St. Paul Travelers 5.01% 8/16/07 ............. 430,000 425,206
o(D)# Twin Reefs Pass-Through Trust 144A
6.17% 12/31/49 ............................ 600,000 600,027
UnitedHealth Group 5.80% 3/15/36 ............. 375,000 336,774
#UnumProvident Finance 144A
6.85% 11/15/15 ............................ 185,000 182,176
WellPoint
4.25% 12/15/09 ............................ 130,000 124,095
5.85% 1/15/36 ............................. 210,000 188,269
Diversified Income-7
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- -----------
(U.S. $)
CORPORATE BONDS (CONTINUED)
INSURANCE (CONTINUED)
Willis Group
5.125% 7/15/10 ........................... USD 580,000 $ 559,965
5.625% 7/15/15 ........................... 580,000 539,567
o#ZFS Finance USA 144A
6.45% 12/15/65 ........................... 1,500,000 1,374,797
------------
9,132,227
------------
NATURAL GAS-1.22%
#Atlas Pipeline 144A 8.125% 12/15/15 ........ 165,000 165,206
oAtmos Energy 5.443% 10/15/07 ............... 300,000 300,473
#Copano Energy 144A 8.125% 3/1/16 ........... 100,000 100,000
El Paso Natural Gas 7.625% 8/1/10 ........... 1,000,000 1,022,501
El Paso Production 7.75% 6/1/13 ............. 790,000 799,875
Enterprise Products Operating
4.00% 10/15/07 ........................... 110,000 107,060
4.625% 10/15/09 .......................... 330,000 316,391
Inergy Finance
6.875% 12/15/14 .......................... 275,000 257,125
8.25% 3/1/16 ............................. 75,000 76,125
Kinder Morgan Finance
5.35% 1/5/11 ............................. 390,000 359,671
5.70% 1/5/16 ............................. 75,000 65,235
Oneok 5.51% 2/16/08 ......................... 385,000 382,652
oSempra Energy 5.659% 5/21/08 ............... 115,000 115,108
Tennessee Gas Pipeline
8.375% 6/15/32 ........................... 80,000 85,957
Valero Logistics Operations
6.05% 3/15/13 ............................ 315,000 312,763
------------
4,466,142
------------
REAL ESTATE-0.68%
American Real Estate Partners
8.125% 6/1/12 ............................ 1,000,000 1,002,501
BF Saul REIT 7.50% 3/1/14 ................... 585,000 596,700
Developers Diversified Realty
4.625% 8/1/10 ............................ 90,000 85,782
5.25% 4/15/11 ............................ 95,000 92,086
5.375% 10/15/12 .......................... 415,000 399,335
HRPT Properties Trust 5.75% 2/15/14 ......... 180,000 173,562
#Rouse 144A 6.75% 5/1/13 .................... 150,000 146,836
------------
2,496,802
------------
TECHNOLOGY-0.82%
Magnachip Semiconductor
8.00% 12/15/14 ........................... 1,150,000 960,250
Sanmina-SCI 8.125% 3/1/16 ................... 250,000 245,000
#Sunguard Data Systems 144A
9.125% 8/15/13 ........................... 30,000 31,275
10.25% 8/15/15 ........................... 826,000 858,008
#Telcordia Technologies 144A
10.00% 3/15/13 ........................... 840,000 714,000
#UGS Capital II PIK 144A 10.38% 6/1/11 ...... 175,000 174,125
------------
2,982,658
------------
TRANSPORTATION-1.31%
American Airlines
6.817% 5/23/11 ........................... 305,000 297,375
6.977% 5/23/21 ........................... 118,696 113,178
7.379% 5/23/16 ........................... 137,706 124,624
Continental Airlines 6.503% 6/15/11 ......... 205,000 204,601
oCSX 5.43% 8/3/06 ........................... 31,000 30,999
#Erac USA Finance 144A
5.30% 11/15/08 ........................... USD 100,000 $ 98,739
7.35% 6/15/08 ............................ 505,000 518,555
(SS)H-Lines Finance Holdings 11.00% 4/1/13 601,000 518,363
#Hertz 144A
8.875% 1/1/14 ............................ 275,000 283,250
10.50% 1/1/16 ............................ 80,000 85,200
Horizon Lines 9.00% 11/1/12 ................. 250,000 255,000
Kansas City Southern Railway
9.50% 10/1/08 ............................ 470,000 494,675
OMI 7.625% 12/1/13 .......................... 640,000 641,599
Seabulk International 9.50% 8/15/13 ......... 515,000 571,650
Stena 9.625% 12/1/12 ........................ 525,000 560,438
------------
4,798,246
------------
TOTAL CORPORATE BONDS
(COST $163,928,108) ...................... 161,768,639
------------
FOREIGN AGENCIES-2.09%
AUSTRIA-0.29%
Oesterreichische Kontrollbank
1.80% 3/22/10 ............................ JPY 120,000,000 1,071,191
------------
1,071,191
------------
GERMANY-1.49%
KFW
4.75% 12/7/10 ............................ GBP 716,000 1,307,831
4.95% 10/14/14 ........................... CAD 334,000 297,759
6.50% 11/15/11 ........................... NZD 1,017,000 616,500
KFW International Finance
1.75% 3/23/10 ............................ JPY 145,000,000 1,292,054
Rentenbank 1.375% 4/25/13 ................... JPY 227,000,000 1,937,928
------------
5,452,072
------------
MEXICO-0.24%
Pemex Project Funding Master Trust
6.625% 6/15/35 ........................... USD 568,000 514,750
#Pemex Project Funding Master Trust
144A 6.625% 6/15/35 ...................... USD 390,000 353,438
------------
868,188
------------
UKRAINE-0.07%
Exim of Ukraine 7.75% 9/23/09 ............... USD 255,000 252,476
------------
252,476
------------
TOTAL FOREIGN AGENCIES
(COST $7,825,112) ........................ 7,643,927
------------
MUNICIPAL BONDS-0.14%
Augusta, Georgia Water & Sewer
Revenue 5.25% 10/1/39 (FSA) .............. 85,000 88,250
California State 5.00% 2/1/33 ............... 25,000 25,195
California State University Systemwide
Revenue 5.00% 11/1/30 (AMBAC) ............ 95,000 97,070
Colorado Department of Transportation
Revenue 5.00% 12/15/12 (FGIC) ............ 5,000 5,281
Illinois State Taxable Pension
5.10% 6/1/33 ............................. 10,000 8,984
Massachusetts Health & Education
Facilities Authority Revenue Series A
5.00% 7/15/36 ............................ 220,000 226,034
New Jersey Economic Development
Authority Revenue Cigarette Tax
5.75% 6/15/29 ............................ 25,000 26,346
Diversified Income-8
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- ----------
(U.S. $)
MUNICIPAL BONDS (CONTINUED)
New York State Urban Development
Series A-1 5.25% 3/15/34 (FGIC) ............ USD 40,000 $ 41,642
Oregon State Taxable Pension
5.892% 6/1/27 .............................. 5,000 4,970
----------
TOTAL MUNICIPAL BONDS
(COST $526,069) ............................ 523,772
----------
NON-AGENCY ASSET-BACKED SECURITIES-1.27%
Chase Funding Mortgage Loan
Asset-Backed Certificates Series
2002-3 1A6 4.707% 9/25/13 .................. 770,481 756,395
Citibank Credit Card Issuance Trust
Series 2003-A7 A7 4.15% 7/7/17 ............. 10,000 8,960
Countrywide Asset-Backed Certificates
oSeries 2006-4 2A2 5.503% 7/25/36 ........... 1,050,000 1,051,862
oSeries 2006-11 1AF3 6.05% 9/25/46 .......... 735,000 733,530
Series 2006-S3 A2 6.085% 6/25/21 ........... 475,000 474,953
#Dunkin Securitization Series 2006-1 A2
144A 5.779% 6/20/31 ........................ 280,000 278,247
#MASTR Specialized Loan Trust Series
2005-2 A2 144A 5.15% 7/25/35 ............... 313,159 306,019
#MBNA Master Credit Card Trust Series
2000-D C 144A 8.40% 9/15/09 ................ 25,000 25,510
Mid-State Trust
Series 11 A1 4.864% 7/15/38 ................ 20,136 18,762
Series 2004-1 A 6.005% 8/15/37 ............. 10,889 10,831
Series 2005-1 A 5.745% 1/15/40 ............. 246,577 237,176
Ownit Mortgage Loan Asset Backed
Certificates Series 2006-2 A2B
5.633% 1/25/37 ............................. 125,000 124,590
Renaissance Home Equity Loan Trust
Series 2005-4 A2 5.399% 2/25/36 ............ 170,000 168,359
Series 2005-4 A3 5.565% 2/25/36 ............ 110,000 108,838
oResidential Asset Mortgage Products
Series 2004-RZ2 AI3 4.30% 1/25/31 .......... 50,000 49,340
oResidential Funding Mortgage Securities
II Series 2005-HI2 A1 5.463% 5/25/35 ....... 178,733 178,749
Structured Asset Securities
Series 2001-SB1 A2 3.375% 8/25/31 .......... 52,058 46,614
oSeries 2005-NC1 A7 5.553% 2/25/35 .......... 71,684 71,750
----------
TOTAL NON-AGENCY ASSET-BACKED SECURITIES
(COST $4,365,408) .......................... 4,650,485
----------
NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS-5.25%
Bank of America Alternative Loan Trust
Series 2003-10 2A1 6.00% 12/25/33 .......... 11,376 11,145
Series 2004-2 1A1 6.00% 3/25/34 ............ 3,240 3,175
Series 2004-10 1CB1 6.00% 11/25/34 ......... 88,088 86,687
Series 2005-3 2A1 5.50% 4/25/20 ............ 112,712 110,141
Series 2005-5 2CB1 6.00% 6/25/35 ........... 203,621 199,421
Series 2005-6 7A1 5.50% 7/25/20 ............ 279,334 272,787
Series 2005-9 5A1 5.50% 10/25/20 ........... 568,924 555,234
Bank of America Mortgage Securities
oSeries 2003-D 1A2 6.101% 5/25/33 ........... 372 373
oSeries 2004-G 2A3 4.232% 8/25/34 ........... 185,589 184,364
oSeries 2005-A 1A1 4.043% 2/25/35 ........... 136,001 132,984
Series 2005-9 2A1 4.75% 10/25/20 ........... 382,967 368,677
oBear Stearns Adjustable Rate Mortgage
Trust Series 2005-7 1A2 4.75% 8/25/35 ...... USD 126,408 $ 122,431
oBear Stearns Alternative A Trust Series
2006-3 33A1 6.204% 5/25/36 ................. 486,235 488,060
Bear Stearns Asset Backed Securities
Series 2005-AC8 A5 5.50% 11/25/35 .......... 429,091 422,700
Chase Mortgage Finance Series 2003-S8
A2 5.00% 9/25/18 ........................... 633,122 611,783
Countrywide Alternative Loan Trust
Series 2004-28CB 6A1 6.00% 1/25/35 ......... 467,699 457,907
oSeries 2004-J7 1A2 4.673% 8/25/34 .......... 50,412 49,950
oSeries 2005-63 3A1 5.902% 11/25/35 ......... 401,315 397,681
Series 2006-2CB A3 5.50% 3/25/36 ........... 328,120 326,050
(D)Countrywide Home Loan Mortgage
Pass-Through Trust
oSeries 2003-21 A1 4.084% 5/25/33 ........... 1,115 1,093
Series 2006-1 A2 6.00% 3/25/36 ............. 347,128 339,240
oSeries 2006-HYB3 3A1A 6.143% 5/25/33 ....... 445,450 445,213
Credit Suisse First Boston Mortgage Securities
Series 2003-29 5A1 7.00% 12/25/33 .......... 18,139 18,196
oSeries 2003-AR22 2A3 4.107% 9/25/33 ........ 6,470 6,447
First Horizon Alternative Mortgage Securities
Series 2004-FA1 1A1 6.25% 10/25/34 ......... 425,481 423,951
First Horizon Asset Securities
Series 2003-5 1A17 8.00% 7/25/33 ........... 2,307 2,398
oSeries 2004-AR5 4A1 5.67% 10/25/34 ......... 30,612 30,055
oGeneral Motors Acceptance Corporation
Mortgage Loan Trust Series 2005-AR2
4A 5.187% 5/25/35 .......................... 368,291 351,574
#GSMPS Mortgage Loan Trust 144A
Series 2005-RP1 1A3 8.00% 1/25/35 .......... 384,536 400,720
Series 2005-RP1 1A4 8.50% 1/25/35 .......... 324,925 341,983
Series 2006-RP1 1A2 7.50% 1/25/36 .......... 479,256 500,789
oIndymac Index Mortgage Loan Trust
Series 2005-AR25 1A21 5.897% 12/25/35 ...... 416,178 412,280
Series 2006-AR2 1A1A 5.543% 4/25/35 ........ 535,084 535,513
Series 2006-AR7 5A1 6.167% 5/25/36 ......... 313,877 313,349
oJP Morgan Mortgage Trust Series
2005-A6 1A2 5.151% 9/25/35 ................. 855,000 824,234
Lehman Mortgage Trust Series 2005-2
2A3 5.50% 12/25/35 ......................... 339,908 336,461
oMASTR Adjustable Rate Mortgages Trust
Series 2003-6 1A2 2.871% 12/25/33 .......... 10,880 10,892
MASTR Alternative Loans Trust
Series 2003-9 1A1 5.50% 12/25/18 ........... 66,572 65,012
Series 2005-3 7A1 6.00% 4/25/35 ............ 105,887 104,430
#MASTR Reperforming Loan Trust 144A
Series 2005-1 1A5 8.00% 8/25/34 ............ 570,346 593,452
Series 2005-2 1A4 8.00% 5/25/35 ............ 377,779 391,946
Morgan Stanley Mortgage Loan Trust
Series 2006-2 6A 6.50% 2/25/36 ............. 227,036 227,249
Nomura Asset Acceptance
Series 2005-WF1 2A2 4.786% 3/25/35 ......... 275,000 268,038
oSeries 2006-AF1 1A2 6.159% 5/25/36 ......... 400,000 397,875
Prime Mortgage Trust Series 2004-CL1
1A1 6.00% 2/25/34 .......................... 12,873 12,612
Diversified Income-9
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- ----------
(U.S. $)
NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Residential Asset Mortgage Products
Series 2004-SL1 A3 7.00% 11/25/31 .......... USD 1,498 $ 1,516
Series 2004-SL4 A3 6.50% 7/25/32 ........... 57,611 58,083
Series 2005-SL1 A2 6.00% 5/25/32 ........... 140,832 141,793
oStructured Adjustable Rate Mortgage
Loan Trust
Series 2004-18 5A 5.50% 12/25/34 ........... 39,664 38,512
Series 2005-3XS A2 5.573% 1/25/35........... 563,549 563,994
Structured Asset Securities
oSeries 2002-22H 1A 6.977% 11/25/32.......... 1,918 1,950
Series 2004-5H A2 4.43% 12/25/33............ 303,498 299,132
Series 2004-12H 1A 6.00% 5/25/34............ 44,771 43,847
Washington Mutual
oSeries 2003-AR4 A7 3.95% 5/25/33 ........... 5,294 5,080
Series 2004-CB3 1A 6.00% 10/25/34 .......... 58,112 56,895
Series 2004-CB3 4A 6.00% 10/25/19 .......... 18,393 18,399
oSeries 2006-AR7 1A 5.123% 7/25/46 .......... 325,000 324,391
(D)Washington Mutual Alternative Mortgage
Pass-Through Certificates
Series 2005-1 5A2 6.00% 3/25/35............. 61,778 60,676
Series 2005-1 6A2 6.50% 3/25/35............. 14,148 14,162
Series 2005-9 3CB 5.50% 10/25/20 ........... 295,251 291,599
Series 2006-2 2CB 6.50% 3/25/36 ............ 315,358 315,161
oSeries 2006-AR5 3A 5.083% 7/25/46 ............ 375,000 374,766
Wells Fargo Mortgage Backed
Securities Trust
oSeries 2004-I 1A1 3.383% 7/25/34............ 94,996 94,920
oSeries 2004-T A1 3.455% 9/25/34............. 199,191 199,579
Series 2005-12 1A7 5.50% 11/25/35........... 501,257 472,592
Series 2005-17 1A1 5.50% 1/25/36............ 433,701 412,016
Series 2005-17 1A2 5.50% 1/25/36............ 404,463 387,003
Series 2006-1 A3 5.00% 3/25/21.............. 831,023 792,328
Series 2006-2 3A1 5.75% 3/25/36............. 463,911 446,370
oSeries 2006-AR4 1A1 5.873% 4/25/36.......... 632,309 623,798
oSeries 2006-AR4 2A1 5.798% 4/25/36.......... 438,749 430,233
oSeries 2006-AR5 2A1 5.55% 4/25/36........... 567,771 561,911
----------
TOTAL NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $19,793,743).............. 19,187,258
----------
REGIONAL AGENCIES-0.75%'d'
AUSTRALIA-0.75%
New South Wales Treasury
6.00% 5/1/12................................ AUD 1,081,000 801,121
7.00% 12/1/10............................... AUD 850,000 655,663
Queensland Treasury
5.50% 5/14/10............................... AUD 877,000 642,568
6.00% 7/14/09............................... AUD 866,000 645,558
----------
TOTAL REGIONAL AGENCIES
(COST $2,797,881)........................... 2,744,910
----------
REGIONAL AUTHORITIES-0.35%'d'
CANADA-0.35%
Ontario Province
4.50% 3/8/15................................ CAD 366,000 $ 319,535
5.375% 12/2/12.............................. CAD 332,000 307,867
Quebec Province 5.00% 12/1/15.................. CAD 709,000 635,255
----------
TOTAL REGIONAL AUTHORITIES
(COST $1,264,188)........................... 1,262,657
----------
<<SENIOR SECURED LOANS-1.28%
oAvis Capital Rental 6.35% 4/19/12............. USD 130,000 129,025
oAWAS 2nd Lien 11.00% 3/21/13.................. 495,181 496,419
oGeorgia Pacific Term Loan
Tranche B 6.611% 12/20/12................... 997,500 997,500
Tranche C 7.591% 12/23/13................... 800,000 809,000
oHealthSouth 8.15% 3/10/13..................... 1,200,000 1,203,000
United Airlines Bank Loan Term B
o8.625% 2/1/12............................... 785,000 794,813
8.75% 2/1/12................................ 50,000 50,625
oVisteon 8.18% 6/13/13......................... 200,000 200,500
----------
TOTAL SENIOR SECURED LOANS
(COST $4,682,225)........................... 4,680,882
----------
SOVEREIGN AGENCIES-1.55%'d'
FRANCE-0.75%
Caisse d'Amortissement de la Dette Sociale
3.625% 4/25/16.............................. EUR 2,247,000 2,747,976
----------
2,747,976
----------
JAPAN-0.80%
Development Bank of Japan
1.70% 9/20/22............................... JPY 142,000,000 1,158,058
Japan Finance Corporation for
Municipal Enterprises 2.00% 5/9/16.......... JPY 200,000,000 1,760,129
----------
2,918,187
----------
TOTAL SOVEREIGN AGENCIES
(COST $5,728,082)........................... 5,666,163
----------
SOVEREIGN DEBT-14.02%'d'
ARGENTINA-0.25%
Republic of Argentina
(S)1.33% 12/31/38.............................. USD 1,631,000 590,911
o4.889% 8/3/12................................. USD 400,000 332,800
----------
923,711
----------
AUSTRIA-0.96%
Republic of Austria
5.25% 1/4/11................................ EUR 479,000 648,226
9.00% 9/15/06............................... ISK 159,200,000 2,078,398
#Republic of Austria 144A
4.00% 9/15/16............................... EUR 626,000 794,443
----------
3,521,067
----------
BRAZIL-1.82%
Federal Republic of Brazil
6.00% 8/15/10............................... BRL 5,178,533 2,094,485
8.00% 1/15/18............................... USD 799,000 844,943
8.25% 1/20/34............................... USD 594,000 625,185
8.75% 2/4/25................................ USD 819,000 900,900
11.00% 8/17/40.............................. USD 400,000 496,500
12.50% 1/5/16............................... BRL 898,000 407,353
Diversified Income-10
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
------------- -----------
(U.S. $)
SOVEREIGN DEBT (CONTINUED)
BRAZIL (CONTINUED)
#Federal Republic of Brazil 144A
6.00% 8/15/10 ........................... BRL 3,125,335 $ 1,264,059
-----------
6,633,425
-----------
COLOMBIA-0.65%
Republic of Colombia
8.25% 12/22/14 .......................... USD 615,000 648,825
8.375% 2/15/27 .......................... USD 381,000 384,810
9.75% 4/9/11 ............................ USD 159,135 172,661
10.50% 7/9/10 ........................... USD 351,000 396,630
12.00% 10/22/15 ......................... COP 1,785,000,000 779,023
-----------
2,381,949
-----------
CZECHOSLOVAKIA-0.18%
Slovak Republic 4.00% 3/26/21 .............. EUR 529,000 638,950
-----------
638,950
-----------
DOMINICAN REPUBLIC-0.14%
Dominican Republic 9.04% 1/23/18 ........... USD 106,882 112,226
#Dominican Republic 144A
8.625% 4/20/27 .......................... USD 404,000 404,000
-----------
516,226
-----------
EL SALVADOR-0.21%
Republic of El Salvador 7.65% 6/15/35 ...... USD 785,000 761,450
-----------
761,450
-----------
FRANCE-1.62%
French Treasury Note 2.75% 3/12/08 ......... EUR 2,733,000 3,450,144
Government of France
3.50% 4/25/15 ........................... EUR 1,207,000 1,482,810
4.00% 4/25/55 ........................... EUR 815,000 974,936
-----------
5,907,890
-----------
GERMANY-1.48%
Deutschland Republic
4.75% 7/4/08 ............................ EUR 2,681,000 3,504,748
6.25% 1/4/24 ............................ EUR 1,197,000 1,904,276
-----------
5,409,024
-----------
INDONESIA-0.13%
#Republic of Indonesia 144A
6.875% 3/9/17 ........................... USD 500,000 488,125
-----------
488,125
-----------
JAPAN-0.54%
Japan Government 20 yr Bond
2.30% 6/20/26 ........................... JPY 226,450,000 1,981,908
-----------
1,981,908
-----------
KOREA-0.38%
Government of South Korean
4.83% 5/10/08 ........................... KRW 1,309,000,000 1,378,363
-----------
1,378,363
-----------
MALAYSIAN-0.35%
Malaysian Government
3.756% 4/28/11 .......................... MYR 2,763,000 725,115
7.00% 3/15/09 ........................... MYR 1,954,000 563,146
-----------
1,288,261
-----------
MEXICO-0.97%
Mexican Government
5.625% 1/15/17 .......................... USD 370,000 345,025
6.375% 1/16/13 .......................... USD 935,000 939,675
6.625% 3/3/15 ........................... USD 251,000 254,765
9.00% 12/20/12 .......................... MXN 13,293,000 1,185,806
10.00% 12/5/24 .......................... MXN 8,910,000 823,024
-----------
3,548,295
-----------
NETHERLANDS-0.27%
Netherlands Government
5.75% 2/15/07 ........................... EUR 751,000 $ 974,863
-----------
974,863
-----------
NORWAY-0.36%
Norwegian Government
6.00% 5/16/11 ........................... NOK 3,800,000 659,395
6.50% 5/15/13 ........................... NOK 3,508,000 637,113
-----------
1,296,508
-----------
PANAMA-0.13%
Republic of Panama 7.125% 1/29/26 .......... USD 499,000 484,030
-----------
484,030
-----------
PERU-0.19%
Republic of Peru 8.75% 11/21/33 ............ USD 620,000 692,850
-----------
692,850
-----------
PHILIPPINES-0.43%
Republic of Philippines 8.25% 1/15/14 ...... USD 1,030,000 1,073,775
#Republic of Philippines 144A
8.75% 10/7/16 ........................... USD 480,000 508,200
-----------
1,581,975
-----------
POLAND-0.42%
Poland Government
6.00% 5/24/09 ........................... PLN 1,600,000 512,636
6.00% 11/24/10 .......................... PLN 3,207,000 1,028,357
-----------
1,540,993
-----------
SWEDEN-1.03%
Sweden Government
1.00% 4/1/12 ............................ SEK 9,535,000 1,278,529
5.00% 12/1/20 ........................... SEK 4,220,000 644,803
5.50% 10/8/12 ........................... SEK 8,370,000 1,264,324
Swedish Export Credit 10.50% 9/30/15 ....... TRY 1,250,000 572,670
-----------
3,760,326
-----------
TURKEY-0.14%
Republic of Turkey
7.25% 3/15/15 ........................... USD 354,000 334,088
8.00% 2/14/34 ........................... USD 195,000 184,275
-----------
518,363
-----------
UNITED KINGDOM-0.75%
U.K. Treasury
4.75% 9/7/15 ............................ GBP 263,000 487,287
5.00% 3/7/12 ............................ GBP 153,000 286,456
5.75% 12/7/09 ........................... GBP 340,000 647,467
8.00% 6/7/21 ............................ GBP 277,000 694,412
9.00% 7/12/11 ........................... GBP 282,000 618,907
-----------
2,734,529
-----------
URUGUAY-0 08%
Uruguay 7.625% 3/21/36 ..................... USD 326,000 295,030
-----------
295,030
-----------
VENEZUELA-0.54%
Venezuela Government
5.75% 2/26/16 ........................... USD 1,241,000 1,094,562
6.00% 12/9/20 ........................... USD 1,037,000 892,546
-----------
1,987,108
-----------
TOTAL SOVEREIGN DEBT
(COST $52,636,781) ...................... 51,245,219
-----------
Diversified Income-11
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT DEG. VALUE
----------- -----------
(U.S. $)
SUPRANATIONAL BANKS-3.47%
Asia Development Bank 0.50% 10/9/12 .......... AUD 759,000 $ 401,445
European Investment Bank
1.40% 6/20/17 ............................. JPY 236,400,000 1,949,347
3.625% 10/15/11 ........................... EUR 522,000 657,622
4.00% 10/15/37 ............................ EUR 2,115,000 2,473,670
4.25% 12/7/10 ............................. GBP 616,000 1,104,857
4.375% 7/8/15 ............................. GBP 1,162,000 2,049,336
Inter-American Development Bank 1.90% 7/8/09.. JPY 214,000,000 1,915,588
^International Bank for Reconstruction
& Development 7.066% 8/20/07 .............. NZD 3,793,000 2,138,255
-----------
TOTAL SUPRANATIONAL BANKS
(COST $12,960,871) ........................ 12,690,120
-----------
U.S. TREASURY OBLIGATIONS-7.31%
U.S. Treasury Bond
4.50% 2/15/36 ............................. USD 900,000 807,259
5.375% 2/15/31 ............................ 105,000 106,846
6.25% 8/15/23 ............................. 225,000 248,221
U.S. Treasury Inflation Index Notes
2.375% 4/15/11 ............................ 558,195 556,168
(OO)3.00% 7/15/12 ............................ 901,898 929,026
3.875% 1/15/09 ............................ 331,644 343,614
U.S. Treasury Notes
4.50% 2/15/16 ............................. 3,278,000 3,119,735
4.875% 5/31/11 ............................ 9,720,000 9,624,326
5.125% 6/30/08 ............................ 175,000 174,945
5.125% 5/15/16 ............................ 9,080,000 9,072,200
^U.S. Treasury Strip 6.90% 11/15/13 .......... 2,515,000 1,731,743
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $26,885,455) ........................ 26,714,083
-----------
NUMBER OF
SHARES
----------
COMMON STOCK-0.07%
B&G Foods .................................... 5,000 81,050
+Foster Wheeler .............................. 1,044 45,101
+Mirant ...................................... 5,025 134,670
-----------
TOTAL COMMON STOCK
(COST $192,409) ........................... 260,821
-----------
PREFERRED STOCK-0.00%
Nexen 7.35% .................................. 200 5,006
-----------
TOTAL PREFERRED STOCK
(COST $5,290) ............................. 5,006
-----------
WARRANT- 0.15%
+Argentina GDP Linked, expiration
date 12/15/35 ............................. 6,257,000 534,974
-----------
TOTAL WARRANT
(COST $488,972) ........................... 534,974
-----------
CURRENCY OPTIONS PURCHASED-0.00%
Put JPY 195,300,000, Call USD 1,860,000,
expiration date 8/11/06 ................... 186
-----------
TOTAL CURRENCY OPTIONS PURCHASED
(COST $15,671) ............................ 186
-----------
REPURCHASE AGREEMENTS-14.94%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased at
$28,737,773, collateralized by
$28,006,000 U.S. Treasury Notes
6.00% due 8/15/09, market value
$29,329,390) .............................. USD 28,727,000 $28,727,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $7,390,709, collateralized by
$3,694,000 U.S. Treasury Notes
3.875% due 7/31/07, market value
$3,700,403, $3,694,000 U.S. Treasury
Notes 3.875% due 5/15/09, market value
$3,587,387 and $250,000 U.S. Treasury
Notes 6.50% due 10/15/06, market
value $254,087) ........................... 7,388,000 7,388,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased
at $18,477,696, collateralized by
$9,926,000 U.S. Treasury Notes
3.875% due 5/15/09, market value
$9,635,743 and $9,235,000
U.S. Treasury Notes 4.875% due
5/15/09, market value $9,233,295) ......... 18,471,000 18,471,000
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $54,586,000) ........................ 54,586,000
-----------
Diversified Income-12
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-109.68% (COST $405,852,808) ........ $400,868,618
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(9.68%)(H) .......... (35,370,438)
------------
NET ASSETS APPLICABLE TO 39,765,469 SHARES OUTSTANDING-100.00% ...... $365,498,180
============
NET ASSET VALUE-DELAWARE VIP DIVERSIFIED INCOME SERIES STANDARD
CLASS ($203,642,963 / 22,127,628 SHARES) ............................ $ 9.20
============
NET ASSET VALUE-DELAWARE VIP DIVERSIFIED INCOME SERIES SERVICE
CLASS ($161,855,217 / 17,637,841 SHARES) ............................ $ 9.18
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par) ...... $366,866,782
Undistributed net investment income ................................. 7,179,927
Accumulated net realized loss on investments ........................ (3,529,809)
Net unrealized depreciation of investments and foreign currencies ... (5,018,720)
------------
Total net assets .................................................... $365,498,180
============
- ----------
DEG. Principal amount shown is stated in the currency in which each security is
denominated.
AUD - Australian Dollar
BRL - Brazilian Real
CAD - Canadian Dollar
COP - Colombian Peso
EUR - European Monetary Unit
GBP - British Pound Sterling
ISK - Iceland Krona
JPY - Japanese Yen
KRW - South Korean Won
MXN - Mexican Peso
MYR - Malaysia Ringgis
NOK - Norwegian Kroner
NZD - New Zealand Dollar
PLN - Polish Zloty
SEK - Swedish Krona
TRY - Turkish Lira
USD - United States Dollar
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $46,496,720, which represented 12.72% of the Series' net
assets. See Note 10 in "Notes to Financial Statements."
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
++ Non-income producing security. Security is currently in default.
@ Illiquid security. At June 30, 2006, the aggregate amount of illiquid
securities equaled $619,499, which represented 0.17% of the Series' net
assets.
See Note 10 in "Notes to Financial Statements."
= Security is being fair valued in accordance with the Series' fair valuation
policy. At June 30, 2006, the aggregate amount of fair valued securities
equaled $793,618, which represented 0.22% of the Series' net assets. See
Note 1 in "Notes to Financial Statements."
(SS) Step coupon bond. Indicates security that has a zero coupon that remains in
effect until a predetermined date at which time the stated interest rate
becomes effective.
(S) Step coupon bond. Coupon increases periodically based on a predetermined
schedule. Stated interest rate in effect at June 30, 2006.
(OO) Fully or partially pledged as collateral for financial futures contracts.
(DS) Security is currently in default. The issue has missed the maturity date.
Bankruptcy proceedings are in process to determine distribution of assets.
The date listed is the estimate of when proceedings will be finalized.
(D) Pass-Through Agreement. Security represents the contractual right to
receive a proportionate amount of underlying payments due to the
counterparty pursuant to various agreements related to the rescheduling of
obligations and the exchange of certain notes.
+ Non-income producing security for the period ended June 30, 2006.
<< Senior Secured Loans in which the Series invests generally pay interest at
rates which are periodically redetermined by reference to a base lending
rate plus a premium.
These base lending rates are generally (i) the prime rate offered by one or
more United States banks, (ii) the lending rate offered by one or more
European banks such as the London Inter-Bank Offered Rate ('LIBOR') and
(iii) the certificate of deposit rate. Senior Secured Loans may be subject
to restrictions on resale.
'd' Securities have been classified by country of origin.
(H) Of this amount, $54,870,912 represents payable for securities purchased as
of June 30, 2006.
Diversified Income-13
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
ARM - Adjustable Rate Mortgage
CPN - Coupon
FGIC - Insured by the Financial Guaranty Insurance Company
FHLMC - Federal Home Loan Mortgage Corporation
FSA - Insured by Financial Security Assurance
GDP - Gross Domestic Product
PIK - Pay-in-Kind
REIT - Real Estate Investment Trust
S.F. - Single Family
TBA - To be Announced
yr - Year
The following foreign currency exchange contracts, futures contracts, and swap
agreements were outstanding at June 30, 2006:
FOREIGN CURRENCY EXCHANGE CONTRACTS(1)
UNREALIZED
CONTRACTS TO APPRECIATION
RECEIVE (DELIVER) IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
- ------------------ ------------------ --------------- --------------
AUD (909,000) USD 665,070 8/1/06 $(10,136)
CAD 678,000 EUR (485,595) 8/1/06 (12,327)
EUR 3,617,275 GBP (2,479,000) 8/1/06 52,100
EUR 1,546,058 ISK (147,506,950) 9/15/06 80,844
EUR 1,039,442 NOK (8,175,000) 8/1/06 16,205
EUR 732,959 PLN (2,951,774) 8/1/06 9,636
EUR 495,237 SEK (4,594,000) 8/1/06 (5,217)
EUR (1,923,000) USD 2,415,399 8/1/06 (50,023)
ISK (122,706,240) USD 1,772,415 9/15/06 179,751
JPY 411,255,629 AUD (4,851,200) 8/1/06 8,315
JPY 704,532,166 EUR (4,873,181) 8/1/06 (60,313)
JPY 418,518,016 NZD (5,958,400) 8/1/06 52,085
JPY (183,250,000) USD 1,601,298 8/1/06 (8,068)
JPY 161,101,000 USD (1,394,572) 8/1/06 20,274
NZD (1,917,000) USD 1,188,981 8/1/06 23,194
TRY (1,097,200) USD 673,956 8/1/06 (9,294)
--------
$287,026
========
FUTURES CONTRACTS(2)
NOTIONAL NOTIONAL EXPIRATION UNREALIZED
CONTRACTS TO BUY COST VALUE DATE DEPRECIATION
- ------------------------------- ----------- ----------- ---------- ------------
339 U.S. Treasury 5 year Notes $35,270,771 $35,054,719 9/30/06 $(216,052)
120 U.S. Treasury 10 year Notes 12,650,348 12,583,125 9/30/06 (67,223)
---------
$(283,275)
=========
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Series' total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Series' net assets.
Diversified Income-14
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF NET ASSETS (CONTINUED)
SWAP AGREEMENTS(3)
UNREALIZED
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION DEPRECIATION
- --------------- --------------- ------------------------------ ------------
$1,810,000 8/1/06 Agreement with State Street to $(19,253)
receive the notional amount
multiplied by the return on
the Lehman Brothers Commercial
MBS Index AAA and to pay the
notional amount multiplied by
the 3 month BRA LIBOR adjusted
by a spread of plus 0.10%.
Because there is no organized market for these swap agreements, the value of
open swaps may differ from that which would be realized in the event the Series
terminated its position in the agreement. Risks of entering into these
agreements include the potential inability of the counterparty to meet the terms
of the agreements. This type of risk is generally limited to the amount of
favorable movements in the value of the underlying security, instrument, or
basket of instruments, if any, at the day of default. Risks also arise from
potential losses from adverse market movements and such losses could exceed the
related unrealized amounts shown above.
- ----------
(1) See Note 7 in "Notes to Financial Statements."
(2) See Note 8 in "Notes to Financial Statements."
(3) See Note 9 in "Notes to Financial Statements."
See accompanying notes
Diversified Income-15
DELAWARE VIP TRUST-
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Interest ........................................................ $ 8,060,435
Dividends ....................................................... 3,753
-----------
8,064,188
-----------
EXPENSES:
Management fees ................................................. 881,143
Distribution expenses - Service Class ........................... 219,159
Accounting and administration expenses .......................... 54,224
Custodian fees .................................................. 27,991
Professional fees ............................................... 21,934
Reports and statements to shareholders .......................... 17,305
Dividend disbursing and transfer agent fees and expenses ........ 13,556
Pricing fees .................................................... 10,428
Trustees' fees .................................................. 6,354
Insurance fees .................................................. 6,216
Taxes (other than taxes on income) .............................. 431
Other ........................................................... 5,099
-----------
1,263,840
Less waiver of distribution expenses - Service Class ............ (36,527)
-----------
Total operating expenses ........................................ 1,227,313
-----------
NET INVESTMENT INCOME ........................................... 6,836,875
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments .................................................. (1,597,942)
Futures contracts ............................................ (442,626)
Swap agreements .............................................. (76,366)
Foreign currencies ........................................... 520,782
-----------
Net realized loss ............................................... (1,596,152)
Net change in unrealized appreciation/depreciation
of investments and foreign currencies ........................ (3,363,219)
-----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS AND FOREIGN CURRENCIES ........................ (4,959,371)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .............................................. $ 1,877,504
-----------
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP DIVERSIFIED INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ -------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS:
Net investment income ........................... $ 6,836,875 $ 5,255,909
Net realized loss on investments and
foreign currencies ........................... (1,596,152) (2,817,864)
Net change in unrealized appreciation/
depreciation of investments and
foreign currencies ........................... (3,363,219) (3,080,673)
------------ ------------
Net increase (decrease) in net assets
resulting from operations .................... 1,877,504 (642,628)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income:
Standard Class ............................... (1,927,505) (257,955)
Service Class ................................ (2,054,268) (535,544)
Net realized gain on investments:
Standard Class ............................... -- (125,069)
Service Class ................................ -- (338,239)
------------ ------------
(3,981,773) (1,256,807)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................... 118,391,941 85,247,705
Service Class ................................ 43,320,012 99,383,381
Net asset value of shares issued upon
reinvestment of dividends and
distributions:
Standard Class ............................... 1,927,505 383,024
Service Class ................................ 2,054,268 873,783
------------ ------------
165,693,726 185,887,893
------------ ------------
Cost of shares repurchased:
Standard Class ............................... (6,286,363) (9,080,224)
Service Class ................................ (13,485,715) (15,414,593)
------------ ------------
(19,772,078) (24,494,817)
------------ ------------
Increase in net assets derived from
capital share transactions ................... 145,921,648 161,393,076
------------ ------------
NET INCREASE IN NET ASSETS ...................... 143,817,379 159,493,641
NET ASSETS:
Beginning of period ............................. 221,680,801 62,187,160
------------ ------------
End of period (including undistributed
net investment income of $7,179,927 and
$3,793,628, respectively) .................... $365,498,180 $ 221,680,801
============ =============
See accompanying notes
Diversified Income-16
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
FINANACIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP DIVERSIFIED INCOME SERIES STANDARD CLASS
-----------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED 5/16/03(2)
6/30/06(1) ------------------- TO
(UNAUDITED) 12/31/05 12/31/04 12/31/03
----------- -------- -------- ----------
Net asset value, beginning of period ......................... $ 9.260 $ 9.450 $ 8.940 $8.500
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(3) ..................................... 0.237 0.373 0.348 0.240
Net realized and unrealized gain (loss) on
investments and foreign currencies ........................ (0.144) (0.416) 0.395 0.200
-------- ------- ------- ------
Total from investment operations ............................. 0.093 (0.043) 0.743 0.440
-------- ------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ........................................ (0.153) (0.099) (0.233) --
Net realized gain on investments ............................. -- (0.048) -- --
-------- ------- ------- ------
Total dividends and distributions ............................ (0.153) (0.147) (0.233) --
-------- ------- ------- ------
Net asset value, end of period ............................... $ 9.200 $ 9.260 $ 9.450 $8.940
======== ======= ======= ======
Total return(4) .............................................. 1.00% (0.45%) 8.47% 5.18%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ...................... $203,643 $90,811 $14,770 $2,104
Ratio of expenses to average net assets ...................... 0.77% 0.79% 0.80% 0.80%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid indirectly ........ 0.77% 0.86% 0.98% 1.59%
Ratio of net investment income to average net assets ......... 5.18% 4.02% 3.82% 4.43%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly .. 5.18% 3.95% 3.64% 3.64%
Portfolio turnover ........................................... 343% 400% 493% 521%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) Commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(3) The average shares outstanding method has been applied for per share
information.
(4) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager. Performance would have been lower had
the expense limitation not been in effect.
See accompanying notes
Diversified Income-17
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
FINANACIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP DIVERSIFIED INCOME SERIES SERVICE CLASS
----------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED 5/16/03(2)
6/30/06(1) ------------------- TO
(UNAUDITED) 12/31/05 12/31/04 12/31/03
----------- -------- -------- ----------
Net asset value, beginning of period ......................... $ 9.230 $ 9.410 $ 8.930 $8.500
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(3) ..................................... 0.226 0.350 0.326 0.216
Net realized and unrealized gain (loss) on investments
and foreign currencies .................................... (0.146) (0.406) 0.373 0.214
-------- -------- ------- ------
Total from investment operations ............................. 0.080 (0.056) 0.699 0.430
-------- -------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ........................................ (0.130) (0.076) (0.219) --
Net realized gain on investments ............................. -- (0.048) -- --
-------- -------- ------- ------
Total dividends and distributions ............................ (0.130) (0.124) (0.219) --
-------- -------- ------- ------
Net asset value, end of period ............................... $ 9.180 $ 9.230 $ 9.410 $8.930
======== ======== ======= ======
Total return(4) .............................................. 0.87% (0.59%) 7.85% 5.06%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ...................... $161,855 $130,870 $47,417 $ --
Ratio of expenses to average net assets ...................... 1.02% 1.04% 1.05% 1.05%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ...................... 1.07% 1.16% 1.28% 1.89%
Ratio of net investment income to average net assets ......... 4.93% 3.77% 3.57% 4.18%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ........ 4.88% 3.65% 3.34% 3.34%
Portfolio turnover ........................................... 343% 400% 493% 521%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) Commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(3) The average shares outstanding method has been applied for per share
information.
(4) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor. Performance would have
been lower had the expense limitation and waiver not been in effect.
See accompanying notes
Diversified Income-18
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP
Diversified Income Series (the "Series"). The Trust is an open-end investment
company. The Series is considered diversified under the Investment Company Act
of 1940, as amended, and offers Standard Class and Service Class shares. The
Standard Class shares do not carry a 12b-1 fee and the Service Class shares
carry a 12b-1 fee. The shares of the Series are sold only to separate accounts
of life insurance companies.
The investment objective of the Series is to seek maximum long-term total return
consistent with reasonable risk.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. U.S.
government and agency securities are valued at the mean between the bid and
asked prices. Other long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Forward foreign
currency exchange contracts are valued at the mean between the bid and asked
prices of the contracts and are marked-to-market daily. Interpolated values are
derived when the settlement date of the contract is an interim date for which
quotations are not available. Futures contracts are valued at the daily quoted
settlement prices. Swap agreements and other securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Series' Board of Trustees.
In determining whether market quotations are readily available or fair valuation
will be used, various factors will be taken into consideration, such as market
closures, or with respect to foreign securities, aftermarket trading, or
significant events after local market trading (e.g., government actions or
pronouncements, trading volume or volatility on markets, exchanges among
dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Series
isolates that portion of realized gains and losses on investments in debt
securities, which are due to changes in the foreign exchange rates from that
which are due to changes in market prices of debt securities. The Series reports
certain foreign currency related transactions as components of realized gains
(losses) for financial reporting purposes, where such components are treated as
ordinary income (loss) for federal income tax purposes.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Withholding taxes have been provided for in
accordance with the Series' understanding of the applicable country's tax rules
and rates. Discounts and premiums on non-convertible bonds are amortized to
interest income over the lives of the respective securities. Realized gains
(losses) on paydowns of mortgage- and asset-backed securities are classified as
interest income.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Diversified Income-19
DELAWARE VIP DIVERSIFIED INCOME SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the
Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and
0.50% on the average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.81% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING,
INVESTMENT TRANSFER AGENT,
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION OTHER EXPENSES
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
181,744 $14,028 $32,706 $11,293
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$6,019 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases other than U.S. government securities ................. $478,248,479
Purchases of U.S. government securities ......................... 87,698,207
Sales other than U.S. government securities ..................... 348,251,264
Sales of U.S. government securities ............................. 87,911,162
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION DEPRECIATION
- ------------ ------------ ------------ --------------
$406,741,084 $1,437,124 $(7,309,590) $(5,872,466)
Diversified Income-20
DELAWARE VIP DIVERSIFIED INCOME SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Ordinary income ................................ $3,981,773 $1,201,382
Long-term capital gain ......................... -- 55,425
---------- ----------
$3,981,773 $1,256,807
========== ==========
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest .................. $366,866,782
Undistributed ordinary income .................. 7,574,709
Capital loss carryforwards ..................... (682,113)
Six month period realized losses ............... (2,242,695)
Unrealized depreciation of investments and
foreign currencies ........................... (6,018,503)
------------
Net assets ..................................... $365,498,180
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
of futures contracts, straddle deferrals, mark-to-market of foreign currency
contracts and tax treatment of contingent payment debt instruments.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of paydowns of mortgage- and asset-backed securities, gain
(loss) on foreign currency transactions and contingent payment debt instruments.
Results of operations and net assets were not affected by these
reclassifications. For the six months ended June 30, 2006, the Series recorded
an estimate of these differences since the final tax characteristics cannot be
determined until fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
----------------- ------------
$531,197 $(531,197)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire in 2013. For the six months ended
June 30, 2006, the Series had capital losses of $2,242,695 which may increase
the capital loss carryforwards.
Diversified Income-21
DELAWARE VIP DIVERSIFIED INCOME SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class .......................... 12,795,166 9,175,989
Service Class ........................... 4,693,323 10,713,809
Shares issued upon reinvestment of dividends
and distributions:
Standard Class .......................... 209,284 41,588
Service Class ........................... 223,533 95,080
---------- ----------
17,921,306 20,026,466
---------- ----------
Shares repurchased:
Standard Class .......................... (679,292) (978,146)
Service Class ........................... (1,462,825) (1,663,091)
---------- ----------
(2,142,117) (2,641,237)
---------- ----------
Net increase ............................... 15,779,189 17,385,229
========== ==========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. Foreign Currency Exchange Contracts
The Series may enter into forward foreign currency exchange contracts as a way
of managing foreign exchange rate risk. The Series may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to buy
or sell for the period between the date the trade was entered into and the date
the security is delivered and paid for. The Series may also use these contracts
to hedge the U.S. dollar value of securities it already owns that are
denominated in foreign currencies. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency exchange contracts limit the risk of loss due to a decline in the value
of the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Series could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.
8. FUTURES CONTRACTS
The Series may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Series deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. Subsequent payments are received from the broker or paid to the
broker each day, based on the daily fluctuation in the market value of the
contract. These receipts or payments are known as "variation margin" and are
recorded daily by the Series as unrealized gains or losses until the contracts
are closed. When the contracts are closed, the Series records a realized gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. Risks of entering into
futures contracts include potential imperfect correlation between the futures
contracts and the underlying securities and the possibility of an illiquid
secondary market for these instruments.
9. SWAP AGREEMENTS
The Series may enter into total return swap agreements in accordance with its
investment objectives. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. Total return
swaps involve commitments to pay interest in exchange for a market linked return
based on a notional amount. To the extent the total return of the security,
instrument or basket of instruments underlying the transaction exceeds the
offsetting interest obligation, the Series will receive a payment from the
counterparty. To the extent the total return of the security, instrument or
basket of instruments underlying the transaction falls short of the offsetting
interest obligation, the Series will make a payment to the counterparty. The
change in value of swap agreements outstanding, if any, is recorded as
unrealized appreciation or depreciation daily. A realized gain or loss is
recorded on maturity or termination of the swap agreement.
Diversified Income-22
DELAWARE VIP DIVERSIFIED INCOME SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CREDIT AND MARKET RISK
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited. In addition, a significant portion of the aggregate market
value of securities listed on the major securities exchanges in emerging markets
are held by a smaller number of investors. This may limit the number of shares
available for acquisition or disposition by the Series.
The Series invests in fixed income securities whose value is derived from
underlying mortgages or consumer loans. Investors receive principal and interest
payments as the underlying mortgages or consumer loans are paid back. Some of
these securities are collateralized mortgage obligations (CMOs). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders, which are collateralized by a pool of mortgages held
under an indenture. Prepayment of mortgages may shorten the stated maturity of
the obligations and can result in a loss of premium, if any has been paid.
Certain of these securities may be stripped (securities, which provide only the
principal or interest feature of the underlying security). The yield to maturity
on an interest-only CMO is extremely sensitive not only to changes in prevailing
interest rates, but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. A rapid rate of
principal payments may have a material adverse affect on the Series' yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Series may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
The Series invests a portion of its assets in high yield fixed income
securities, which carry ratings of BB or lower by Standard & Poor's Ratings
Group and/or Ba or lower by Moody's Investors Service, Inc. Investments in these
higher yielding securities are generally accompanied by a greater degree of
credit risk than higher rated securities. Additionally, lower rated securities
may be more susceptible to adverse economic and competitive industry conditions
than investment grade securities.
The Series may invest up to 15% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. Rule
144A and illiquid securities have been identified on the Statement of Net
Assets.
11. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Diversified Income-23
DELAWARE VIP TRUST-DELAWARE VIP DIVERSIFIED INCOME SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP DIVERSIFIED INCOME SERIES INVESTMENT
ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP
Diversified Income Series (the "Series"). In making its decision, the Board
considered information furnished throughout the year at regular Board meetings,
as well as information prepared specifically in connection with the Annual
Meeting. Information furnished and discussed throughout the year included
reports detailing Series performance, investment strategies, expenses,
compliance matters and other services provided by Delaware Management Company
("DMC"), the investment advisor. Information furnished specifically in
connection with the Annual Meeting included materials provided by DMC and its
affiliates ("Delaware Investments") concerning, among other things, the level of
services provided to the Fund, the costs of such services to the Series,
economies of scale and the financial condition and profitability of Delaware
Investments. In addition, in connection with the Annual Meeting, the Board
considered independent historical and comparative reports prepared by Lipper
Inc. ("Lipper"), an independent statistical compilation organization. The Board
also considered industry comparative information presented by representatives
from Lipper. The Lipper reports compared the Series' investment performance and
expenses with those of other comparable mutual funds. The Board also received
certain supplemental information regarding management's policy with respect to
advisory fee levels and its philosophy with respect to breakpoints; the
structure of portfolio manager compensation; and any constraints or limitations
on the availability of securities in certain investment styles which might
inhibit DMC's ability to fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25%-the second quartile; the next 25%-the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one year period ended January 31, 2006. The Board
noted its objective that the Series' performance for the periods considered be
at or above the median of its Performance Universe. The following paragraph
summarizes the performance results for the Series and the Board's view of such
performance.
The Performance Universe for the Series consisted of the Series and all general
bond funds underlying variable insurance products as selected by Lipper. The
Lipper report comparison showed that the Series' total return for the one year
period was in the fourth quartile of such Performance Universe. The Board noted
that the Series' performance results were not in line with the Board's stated
objective. The Board also noted that strategic changes had recently been
implemented by management. Those changes included increased exposure to the
emerging markets sector, which has provided strong returns. The Board was
satisfied that management was taking effective action to improve Series
performance and meet the Board's performance objective.
Diversified Income-24
DELAWARE VIP DIVERSIFIED INCOME SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee was
in the quartile with the lowest expenses of its Expense Group and its total
expenses were in the quartile with the second highest expenses of its Expense
Group. The Board gave favorable consideration to the Series' management fee, but
noted that the Series' total expenses were not in line with the Board's stated
objective. In evaluating total expenses, the Board considered fee waivers in
place through April 2007 and recent initiatives implemented by management, such
as the outsourcing of certain transfer agency services, creating an opportunity
for a reduction in expenses. The Board was satisfied with management's efforts
to improve the Series' total expense ratio and bring it in line with the Board's
objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Diversified Income-25
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect. The expenses shown in the
table assume reinvestment of all dividends and distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,026.70 1.50% $7.54
Service Class 1,000.00 1,025.70 1.75% 8.79
HYPOTHETICAL 5% RETURN
(5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,017.36 1.50% $7.50
Service Class 1,000.00 1,016.12 1.75% 8.75
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Emerging Markets-1
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
COUNTRY AND SECTOR ALLOCATIONS
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
PERCENTAGE
COUNTRY OF NET ASSETS
- ------- -------------
COMMON STOCK 88.48%
Brazil 9.64%
Chile 2.03%
China 6.27%
Czech Republic 1.73%
Egypt 0.65%
Hungary 1.95%
India 0.96%
Indonesia 0.60%
Israel 3.11%
Malaysia 8.70%
Mexico 6.44%
Morocco 0.61%
Panama 0.68%
Philippines 0.73%
Poland 2.62%
Republic of Korea 7.93%
Russia 3.68%
South Africa 9.42%
Taiwan 12.73%
Thailand 6.91%
Turkey 1.09%
PREFERRED STOCK 7.30%
Brazil 3.99%
Republic of Korea 3.31%
REPURCHASE AGREEMENTS 2.85%
TOTAL MARKET VALUE OF SECURITIES 98.63%
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 1.37%
------
TOTAL NET ASSETS 100.00%
======
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
Consumer Discretionary 8.18%
Consumer Staples 5.89%
Energy 6.59%
Financials 23.37%
Health Care 0.50%
Industrials 8.70%
Information Technology 9.46%
Materials 10.56%
Telecommunication Services 18.02%
Utilities 4.51%
-----
TOTAL 95.78%
=====
Emerging Markets-2
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER MARKET
OF SHARES VALUE
---------- -----------
(U.S. $)
COMMON STOCK-88.48%'d'
BRAZIL-9.64%
AES Tiete ........................................... 42,200,000 $ 993,675
Brazil Telecommunication ............................ 277,177 1,140
Companhia de Concessoes Rodoviarias ................. 398,800 3,222,217
Companhia Siderurgica Nacional ...................... 92,300 2,978,368
Companhia Vale do Rico Doce ADR ..................... 169,000 3,478,020
CPFL Energia ........................................ 77,700 950,667
+CPFL Energia ADR ................................... 25,800 942,990
Petroleo Brasiliero ADR ............................. 87,600 6,992,844
Votorantim Celulose e Papel ADR ..................... 352,300 5,488,834
-----------
25,048,755
-----------
CHILE-2.03%
AFP Provida ......................................... 34,862 55,275
Banco Santander ADR ................................. 91,400 3,687,077
+Inversiones Aguas Metropolitanas ................... 237,618 242,355
+#Inversiones Aguas Metropolitanas 144A ADR ......... 63,517 1,294,584
-----------
5,279,291
-----------
CHINA-6.27%[ ]
China Merchants Holdings International .............. 544,000 1,656,604
China Shipping Development .......................... 3,070,000 2,213,681
China Telecom ....................................... 11,958,000 3,849,348
Fountain Set Holdings ............................... 3,026,000 1,032,532
Guangshen Railway ................................... 3,020,000 1,147,143
Texwinca ............................................ 3,172,000 2,123,856
TPV Technology ...................................... 1,278,000 1,209,503
Zhejiang Expressway ................................. 5,014,000 3,050,526
-----------
16,283,193
-----------
CZECH REPUBLIC-1.73%
Komercni Banka ...................................... 28,870 4,226,457
Philip Morris ....................................... 476 262,439
-----------
4,488,896
-----------
EGYPT-0.65%
MobiNil-Egyptian Mobile Services .................... 75,034 1,681,909
-----------
1,681,909
-----------
HUNGARY-1.95%
Matav Tavkozlesi Telecommunications ................. 570,900 2,171,221
OTP Bank ............................................ 101,886 2,885,452
-----------
5,056,673
-----------
INDIA-0.96%
Hero Honda Motors ................................... 79,159 1,365,613
Tata Steel .......................................... 96,437 1,120,965
-----------
2,486,578
-----------
INDONESIA-0.60%
Telekomunikasi Indonesia ............................ 1,976,500 1,568,365
-----------
1,568,365
-----------
ISRAEL-3.11%
Bank Hapoalim ....................................... 1,089,973 4,651,866
Bezeq Israeli Telecommunication ..................... 1,679,777 1,960,483
Israel Chemicals .................................... 368,433 1,471,650
-----------
8,083,999
-----------
MALAYSIA-8.70%
Hong Leong Bank ..................................... 2,375,900 3,297,616
Maxis Communications ................................ 2,812,000 6,543,093
MISC - Foreign ...................................... 1,716,200 3,596,337
PLUS Expressways .................................... 4,316,600 3,136,569
Public Bank ......................................... 561,000 $ 969,479
Public Bank - Foreign ............................... 1,008,400 1,728,921
Tanjong ............................................. 902,600 3,316,125
-----------
22,588,140
-----------
MEXICO-6.44%
Cemex de C.V ........................................ 71,337 406,652
Cemex de C.V. ADR ................................... 53,495 3,047,639
+Grupo Aeroportuario del Pacifico de C.V. ADR ....... 39,700 1,264,445
Grupo Aeroportuario del Sureste de C.V. ADR ......... 43,000 1,444,370
Grupo Modelo Series C ............................... 946,700 3,618,600
Grupo Televisa ADR .................................. 168,800 3,259,528
Kimberly-Clark de Mexico de C.V ..................... 1,164,900 3,689,470
-----------
16,730,704
-----------
MOROCCO-0.61%
Maroc Telecom ....................................... 121,423 1,596,546
-----------
1,596,546
-----------
PANAMA-0.68%
Banco Latinoamericano Export ........................ 112,900 1,764,627
-----------
1,764,627
-----------
PHILIPPINES-0.73%
Philippine Long Distance Telephone ADR .............. 54,700 1,888,244
-----------
1,888,244
-----------
POLAND-2.62%
Bank Pekao .......................................... 69,235 4,139,807
Telekomunikacja Polska .............................. 423,692 2,666,742
-----------
6,806,549
-----------
REPUBLIC OF KOREA-7.93%
GS Engineering & Construction ....................... 28,910 1,871,052
Kookmin Bank ........................................ 47,470 3,902,863
Korea Electric Power ................................ 62,730 2,324,182
Korea Gas ........................................... 105,980 3,630,586
KT .................................................. 112,200 4,630,139
KT ADR .............................................. 12,627 270,849
KT&G ................................................ 33,867 1,977,680
Samsung Electronics ................................. 3,143 1,997,704
-----------
20,605,055
-----------
RUSSIA-3.68%
LUKOIL ADR .......................................... 30,464 2,546,790
Mobile Telesystems ADR .............................. 133,800 3,939,072
NovaTek OAO GDR ..................................... 69,885 3,060,963
-----------
9,546,825
-----------
SOUTH AFRICA-9.42%
African Bank Investments ............................ 932,868 3,639,160
Alexander Forbes .................................... 1,074,592 2,186,626
Aspen Pharmacare .................................... 200,774 1,021,359
Remgro .............................................. 233,170 4,387,496
Sasol ............................................... 89,859 3,444,073
Standard Bank Group ................................. 434,738 4,665,481
Steinhoff International ............................. 609,271 1,812,953
Telkom .............................................. 124,972 2,298,962
Tiger Brands ........................................ 49,997 999,940
-----------
24,456,050
-----------
Emerging Markets-3
DELAWARE VIP EMERGING MARKETS SERIES
STATEMENT OF NET ASSETS (CONTINUED)
NUMBER MARKET
OF SHARES VALUE
---------- ------------
(U.S. $)
COMMON STOCK (CONTINUED)
TAIWAN-12.73%
Asustek Computer ................................... 1,387,588 $ 3,407,148
Chunghwa Telecom ................................... 3,206,000 5,792,723
Chunghwa Telecom ADR ............................... 72,706 1,342,880
Lite-On Technology ................................. 2,482,000 3,675,816
Mega Financial Holding ............................. 7,522,000 5,564,193
Pihsiang Machinery Manufacturing ................... 150,954 285,338
President Chain Store .............................. 1,957,243 4,292,067
Synnex Technology International .................... 1,425,600 1,549,900
Taiwan Semiconductor Manufacturing ................. 3,961,343 7,145,269
------------
33,055,334
------------
THAILAND-6.91%
Advanced Info Service .............................. 1,942,400 4,585,939
Kasikornbank - Foreign ............................. 194,537 311,300
Kasikornbank NVDR .................................. 1,200,363 1,857,855
Land & Houses NVDR ................................. 17,854,600 3,302,071
Siam Cement NVDR ................................... 1,012,700 5,685,146
Siam City Bank - Foreign Registered ................ 1,649,800 809,320
Siam City Bank NVDR ................................ 1,896,800 925,511
Thai Union Frozen Products ......................... 505,332 334,723
Thai Union Frozen Products NVDR .................... 206,968 131,934
------------
17,943,799
------------
TURKEY-1.09%
Akbank ............................................. 168,727 810,316
Tofas .............................................. 528,822 1,383,459
+Vestel Elektronik Sanayi .......................... 288,015 629,720
------------
2,823,495
------------
TOTAL COMMON STOCK
(COST $218,404,346) ............................. 229,783,027
------------
PREFERRED STOCK-7.30%
BRAZIL-3.99%
AES Tiete ........................................ 55,500,000 1,332,471
Companhia Vale do Rio Doce ....................... 183,340 3,732,995
Investimentos Itau ............................... 1,054,628 4,231,367
Ultrapar Participacoes ........................... 67,270 1,059,101
------------
10,355,934
------------
REPUBLIC OF KOREA-3.31%
Hyundai Motor .................................... 60,420 3,025,128
Samsung Electronics .............................. 11,414 5,570,425
------------
8,595,553
------------
TOTAL PREFERRED STOCK
(COST $13,936,246) .............................. 18,951,487
------------
PRINCIPAL MARKET
AMOUNT VALUE
---------- ----------
(U.S. $)
REPURCHASE AGREEMENTS-2.85%
With BNP Paribas 4.50% 7/3/06 (dated 6/30/06, to be
repurchased at $3,895,460, collateralized by
$3,797,000 U.S. Treasury Notes 6.00% due 8/15/09,
market value $3,976,065) .......................... $3,894,000 $3,894,000
With Cantor Fitzgerald 4.40% 7/3/06 (dated 6/30/06,
to be repurchased at $1,002,367, collateralized
by $501,000 U.S. Treasury Notes 3.875% due
7/31/07, market value $501,648, $501,000 U.S.
Treasury Notes 3.875% due 5/15/09, market value
$486,327 and $34,000 U.S. Treasury Notes 6.50%
due 10/15/06, market value $34,446) ............... 1,002,000 1,002,000
With UBS Warburg 4.35% 7/3/06 (dated 6/30/06, to be
repurchased at $2,504,908, collateralized by
$1,346,000 U.S. Treasury Notes 3.875% due
5/15/09, market value $1,306,278 and $1,252,000
U.S. Treasury Notes 4.875% due 5/15/09, market
value $1,251,720) ................................. 2,504,000 2,504,000
----------
TOTAL REPURCHASE AGREEMENTS
(COST $7,400,000) ................................. 7,400,000
----------
Emerging Markets-4
DELAWARE VIP EMERGING MARKETS SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-98.63% (COST $239,740,592) ...... $256,134,514
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-1.37% ............ 3,550,078
------------
NET ASSETS APPLICABLE TO 14,465,661 SHARES OUTSTANDING-100.00% ... $259,684,592
============
NET ASSET VALUE-DELAWARE VIP EMERGING MARKETS SERIES STANDARD
CLASS ($139,449,143 / 7,762,979 SHARES) ....................... $ 17.96
============
NET ASSET VALUE-DELAWARE VIP EMERGING MARKETS SERIES SERVICE
CLASS ($120,235,449 / 6,702,682 SHARES) ....................... $ 17.94
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par) ... $229,616,761
Undistributed net investment income .............................. 2,533,397
Accumulated net realized gain on investments ..................... 11,138,460
Net unrealized appreciation of investments and foreign
currencies .................................................... 16,395,974
------------
Total net assets ................................................. $259,684,592
============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $1,294,584, which represented 0.50% of the Series' net
assets. See Note 8 in "Notes to Financial Statements."
'd' Securities have been classified by country of origin. Classification by
type of business has been presented on page 2 in "Country and Sector
Allocations."
[ ] Securities listed and traded on the Hong Kong Stock Exchange. These
securities have significant business operations in China.
SUMMARY OF ABBREVIATIONS:
ADR - American Depositary Receipts
GDR - Global Depositary Receipts
HKD - Hong Kong Dollar
NVDR - Non-Voting Depositary Receipts
USD - United States Dollar
ZAR - South African Rand Dollar
The following foreign currency exchange contracts were outstanding at June 30,
2006:
FOREIGN CURRENCY EXCHANGE CONTRACTS(1)
UNREALIZED
CONTRACTS TO RECEIVE (DELIVER) IN EXCHANGE FOR SETTLEMENT DATE APPRECIATION
- ------------------------------ --------------- --------------- ------------
HKD 2,022,700 USD(260,422) 7/03/06 $ 35
ZAR (1,275,690) USD 178,169 7/05/06 413
----
$448
====
(1) See Note 7 in "Notes to Financial Statements."
See accompanying notes
Emerging Markets-5
DELAWARE VIP TRUST-
DELAWARE VIP EMERGING MARKETS SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ...................................................... $ 5,454,544
Interest ....................................................... 207,614
Foreign tax withheld ........................................... (482,041)
------------
5,180,117
------------
EXPENSES:
Management fees ................................................ 1,590,652
Custodian fees ................................................. 249,891
Distribution expenses - Service Class .......................... 162,747
Accounting and administration expenses ......................... 50,901
Legal and professional fees .................................... 16,677
Dividend disbursing and transfer agent fees and expenses ....... 12,725
Reports and statements to shareholders ......................... 11,544
Trustees' fees ................................................. 6,443
Insurance fees ................................................. 5,449
Pricing fees ................................................... 3,531
Taxes (other than taxes on income) ............................. 1,688
Registration fees .............................................. 3
Other .......................................................... 7,686
------------
2,119,937
Less expenses absorbed or waived ............................... (48,553)
Less waiver of distribution expenses - Service Class ........... (27,125)
------------
Total operating expenses ....................................... 2,044,259
------------
NET INVESTMENT INCOME .......................................... 3,135,858
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments ................................................. 11,278,339
Foreign currencies .......................................... (13,892)
------------
Net realized gain .............................................. 11,264,447
Net change in unrealized appreciation/depreciation of
investments and foreign currencies .......................... (12,388,919)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCIES .................................................. (1,124,472)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 2,011,386
============
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP EMERGING MARKETS SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income ........................ $ 3,135,858 $ 2,705,766
Net realized gain on investments and foreign
currencies ................................ 11,264,447 6,690,267
Net change in unrealized appreciation/
depreciation of investments and foreign
currencies ................................ (12,388,919) 19,673,561
------------ ------------
Net increase in net assets resulting from
operations ................................ 2,011,386 29,069,594
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income:
Standard Class ............................ (1,865,697) (185,268)
Service Class ............................. (1,148,824) (26,959)
Net realized gain on investments:
Standard Class ............................ (3,946,372) (653,887)
Service Class ............................. (2,908,845) (255,396)
------------ ------------
(9,869,738) (1,121,510)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................ 49,197,090 79,478,798
Service Class ............................. 57,788,758 66,615,479
Net asset value of shares issued upon
reinvestment of dividends and
distributions:
Standard Class ............................ 5,812,069 839,155
Service Class ............................. 4,057,669 282,355
------------ ------------
116,855,586 147,215,787
------------ ------------
Cost of shares repurchased:
Standard Class ............................ (32,281,227) (14,800,249)
Service Class ............................. (15,899,698) (10,506,016)
------------ ------------
(48,180,925) (25,306,265)
------------ ------------
Increase in net assets derived from capital
share transactions ........................ 68,674,661 121,909,522
------------ ------------
NET INCREASE IN NET ASSETS ................... 60,816,309 149,857,606
NET ASSETS:
Beginning of period .......................... 198,868,283 49,010,677
------------ ------------
End of period (including undistributed net
investment income of $2,533,397 and
$2,425,952, respectively) ................. $259,684,592 $198,868,283
============ ============
See accompanying notes
Emerging Markets-6
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP EMERGING MARKETS SERIES STANDARD CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ......................... $ 18.200 $ 14.500 $11.180 $ 6.770 $ 6.610 $ 6.310
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) ..................................... 0.243 0.412 0.263 0.210 0.215 0.199
Net realized and unrealized gain
on investments and foreign currencies ..................... 0.274 3.519 3.388 4.410 0.137 0.133
-------- -------- ------- ------- ------- -------
Total from investment operations ............................. 0.517 3.931 3.651 4.620 0.352 0.332
-------- -------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ........................................ (0.243) (0.051) (0.331) (0.210) (0.192) (0.032)
Net realized gain on investments ............................. (0.514) (0.180) -- -- -- --
-------- -------- ------- ------- ------- -------
Total dividends and distributions ............................ (0.757) (0.231) (0.331) (0.210) (0.192) (0.032)
-------- -------- ------- ------- ------- -------
Net asset value, end of period ............................... $ 17.960 $ 18.200 $14.500 $11.180 $ 6.770 $ 6.610
======== ======== ======= ======= ======= =======
Total return(3) .............................................. 2.67% 27.49% 33.47% 70.54% 5.17% 5.28%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ...................... $139,449 $120,292 $36,966 $14,304 $12,651 $12,071
Ratio of expenses to average net assets ...................... 1.50% 1.47% 1.50% 1.49% 1.43% 1.45%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid indirectly ........ 1.54% 1.57% 1.63% 1.58% 1.46% 1.45%
Ratio of net investment income to average net assets ......... 2.57% 2.55% 2.15% 2.64% 3.15% 3.04%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ........ 2.53% 2.45% 2.02% 2.55% 3.12% 3.04%
Portfolio turnover ........................................... 29% 18% 34% 71% 39% 41%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Emerging Markets-7
DELAWARE VIP EMERGING MARKETS SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP EMERGING MARKETS SERIES SERVICE CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ......................... $ 18.160 $14.480 $11.170 $ 6.770 $ 6.610 $ 6.310
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) ..................................... 0.220 0.372 0.231 0.197 0.204 0.189
Net realized and unrealized gain
on investments and foreign currencies ..................... 0.277 3.507 3.397 4.402 0.138 0.135
-------- ------- ------- ------- ------- -------
Total from investment operations ............................. 0.497 3.879 3.628 4.599 0.342 0.324
-------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ........................................ (0.203) (0.019) (0.318) (0.199) (0.182) (0.024)
Net realized gain on investments ............................. (0.514) (0.180) -- -- -- --
-------- ------- ------- ------- ------- -------
Total dividends and distributions ............................ (0.717) (0.199) (0.318) (0.199) (0.182) (0.024)
-------- ------- ------- ------- ------- -------
Net asset value, end of period ............................... $ 17.940 $18.160 $14.480 $11.170 $ 6.770 $ 6.610
======== ======= ======= ======= ======= =======
Total return(3) .............................................. 2.57% 27.11% 33.26% 70.10% 5.03% 5.15%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ...................... $120,236 $78,576 $12,045 $ 144 $ 652 $ 570
Ratio of expenses to average net assets ...................... 1.75% 1.72% 1.75% 1.71% 1.58% 1.60%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ................... 1.84% 1.87% 1.93% 1.83% 1.61% 1.60%
Ratio of net investment income to average net assets ......... 2.32% 2.30% 1.90% 2.42% 3.00% 2.89%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ........ 2.23% 2.15% 1.72% 2.30% 2.97% 2.89%
Portfolio turnover ........................................... 29% 18% 34% 71% 39% 41%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
Emerging Markets-8
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP
Emerging Markets Series (the "Series"). The Trust is an open-end investment
company. The Series is considered non-diversified under the Investment Company
Act of 1940, as amended, and offers Standard Class and Service Class shares. The
Standard Class shares do not carry a 12b-1 fee and the Service Class shares
carry a 12b-1 fee. The shares of the Series are sold only to separate accounts
of life insurance companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. Short-term
debt securities having less than 60 days to maturity are valued at amortized
cost, which approximates market value. Forward foreign currency exchange
contracts are valued at the mean between the bid and asked prices of the
contracts and are marked-to-market daily. Interpolated values are derived when
the settlement date of the contract is an interim date for which quotations are
not available. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, aftermarket trading,
or significant events after local market trading (e.g., government actions or
pronouncements, trading volume or volatility on markets, exchanges among
dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Series does
not isolate that portion of realized gains and losses on investments which are
due to changes in foreign exchange rates from that which are due to changes in
market prices. The Series reports certain foreign currency related transactions
as components of realized gains (losses) for financial reporting purposes, where
such components are treated as ordinary income (loss) for federal income tax
purposes.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Foreign dividends are also recorded on the
ex-dividend date or as soon after the ex-dividend date that the Series is aware
of such dividends, net of all non-rebatable tax withholdings. Withholding taxes
on foreign dividends have been recorded in accordance with the Series'
understanding of the applicable country's tax rules and rates.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Emerging Markets-9
DELAWARE VIP EMERGING MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 1.25% on the first $500 million of average daily net assets of the
Series, 1.20% on the next $500 million, 1.15% on the next $1.5 billion, and
1.10% on average daily net assets in excess of $2.5 billion.
Mondrian Investment Partners Ltd. ("Mondrian") (the "Sub-Advisor") is
responsible for the day-to-day management of the Series' investment portfolio.
For these services, DMC, not the Series, pays the Sub-Advisor 0.20% of the
Series' average daily net assets.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.50% of average daily net assets of the Series through April 30, 2007.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$250,030 $10,446 $23,802 $10,782
- ----------
* DMC as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$5,443 for internal legal services provided by DMC.
Certain officers of DMC, DSC, and DDLP are officers and/or trustees of the
Trust. These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases ............. $97,022,650
Sales ................. 34,207,236
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ------------ ------------ ------------ --------------
$239,872,096 $27,602,997 $(11,340,579) $16,262,418
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
Emerging Markets-10
DELAWARE VIP EMERGING MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
---------- ----------
Ordinary income............... $5,745,436 $ 427,583
Long-term capital gain........ 4,124,302 693,927
---------- ----------
$9,869,738 $1,121,510
========== ==========
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest............ $229,616,761
Undistributed ordinary income............ 5,757,849
Undistributed long-term capital gains.... 8,634,978
Unrealized appreciation of investments
and foreign currencies................ 15,675,004
------------
Net assets............................... $259,684,592
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales and tax
recognition of unrealized gain on investments in passive foreign investment
companies.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on foreign currency transactions. Results of
operations and net assets were not affected by these reclassifications. For the
six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
- ----------------- ------------
$(13,892) $13,892
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class ................ 2,552,199 4,946,468
Service Class ................. 3,014,151 4,136,774
Shares issued upon reinvestment of
dividends and distributions:
Standard Class ................ 310,142 56,969
Service Class ................. 216,640 19,169
---------- ----------
6,093,132 9,159,380
---------- ----------
Shares repurchased:
Standard Class ................ (1,709,285) (942,342)
Service Class ................. (855,212) (660,948)
---------- ----------
(2,564,497) (1,603,290)
---------- ----------
Net increase ..................... 3,528,635 7,556,090
========== ==========
Emerging Markets-11
DELAWARE VIP EMERGING MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. FOREIGN CURRENCY EXCHANGE CONTRACTS
The Series may enter into forward foreign currency exchange contracts as a way
of managing foreign exchange rate risk. The Series may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to buy
or sell for the period between the date the trade was entered into and the date
the security is delivered and paid for. The Series may also use these contracts
to hedge the U.S. dollar value of securities it already owns that are
denominated in foreign currencies. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency exchange contracts limit the risk of loss due to a decline in the value
of the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Series could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.
8. CREDIT AND MARKET RISK
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited. In addition, a significant portion of the aggregate market
value of equity securities listed on the major securities exchanges in emerging
markets are held by a smaller number of investors. This may limit the number of
shares available for acquisition or disposition by the Series.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual Rule 144A securities
are liquid for purposes of the Series' limitation on investments in illiquid
assets. At June 30, 2006, no securities have been determined to be illiquid
under the Series' Liquidity Procedures. Rule 144A securities have been
identified on the Statement of Net Assets.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
10. SUBSEQUENT EVENT
Mondrian has resigned as sub-advisor to the Series effective September 25, 2006,
subject to an extension by agreement between the parties.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523- 1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Emerging Markets-12
DELAWARE VIP TRUST-DELAWARE VIP EMERGING MARKETS SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP EMERGING MARKETS SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Balanced
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE.Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all balanced
funds underlying variable insurance products as selected by Lipper. The Lipper
report comparison showed that the Series' total return for the one year period
was in the third quartile of such Performance Universe. The report further
showed that the Fund's total return for the three, five and 10 year periods was
in the fourth quartile of such Performance Universe. The Board noted that the
Series performance was not in line with the Board's stated objective. The Board
also noted that strategic changes had been implemented by management in 2005.
Those changes included modifications to the Series' asset allocation
methodology, replacing the portfolio management team for the equity sleeve of
the Series and repositioning the Series to reflect the new team's investment
strategy. The Fund's performance had improved since implementation these changes
in early 2005. The Board was satisfied that management was taking effective
action to enhance Series performance and meet the Board's performance objective.
Emerging Markets-13
DELAWARE VIP EMERGING MARKETS SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second lowest expenses of its
Expense Group. The Board was satisfied with the management fee and total
expenses of the Series in comparison to its Expense Group as shown in the Lipper
report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Emerging Markets-14
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,003.70 0.99% $4.92
Service Class 1,000.00 1,002.90 1.24% 6.16
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,019.89 0.99% $4.96
Service Class 1,000.00 1,018.65 1.24% 6.21
*" Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Global Bond-1
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND SERIES
SECTOR/COUNTRY ALLOCATION & CREDIT QUALITY BREAKDOWN
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR/COUNTRY OF NET ASSETS
- ---------------------------------------------------------------- -------------
CORPORATE BONDS 8.83%
Banking & Finance 8.43%
Utilities 0.40%
FOREIGN AGENCIES 6.92%
Austria 0.43%
Germany 6.49%
REGIONAL AGENCIES 0.93%
Australia 0.93%
REGIONAL AUTHORITY 1.61%
Canada 1.61%
SOVEREIGN AGENCIES 19.40%
France 4.47%
Japan 2.32%
United States 12.61%
SOVEREIGN DEBT 38.63%
Austria 3.99%
France 9.42%
Germany 7.95%
Japan 2.29%
Netherlands 1.16%
Norway 1.77%
Poland 1.56%
Republic of Slovakia 0.85%
Sweden 6.13%
United Kingdom 3.51%
SUPRANATIONAL BANKS 11.41%
U.S. TREASURY OBLIGATIONS 6.55%
TOTAL MARKET VALUE OF SECURITIES 94.28%
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 5.72%
------
TOTAL NET ASSETS 100.00%
======
CREDIT RATING BREAKDOWN (AS A % OF FIXED INCOME INVESTMENTS)
AAA 84.81%
AA 3.23%
A 7.70%
BBB 3.55%
BB 0.71%
------
Total 100.00%
======
Global Bond-2
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
MARKET
PRINCIPAL VALUE
AMOUNT DEG. (U.S. $)
----------- ----------
CORPORATE BONDS-8.83%
BANKING & FINANCE-8.43%
ERAP 3.75% 4/25/10 ............................ EUR 40,000 $ 51,013
=General Motors Acceptance Corporation
7.50% 12/1/06 .............................. NZD 69,000 41,642
Residential Capital
5.125% 5/17/12 ............................. EUR 93,000 117,421
6.375% 5/17/13 ............................. GBP 50,000 91,945
SLM 6.50% 6/15/10 ............................. NZD 170,000 102,224
Vneshtorgbank 4.25% 2/15/16 ................... EUR 100,000 123,212
----------
527,457
----------
UTILITIES-0.40%
Hydro Quebec 10.50% 10/15/21 .................. CAD 18,000 25,128
----------
25,128
----------
TOTAL CORPORATE BONDS
(COST $569,275) ............................ 552,585
----------
FOREIGN AGENCIES-6.92%
AUSTRIA-0.43%
Oesterreichesche Kontrollbank
1.80% 3/22/10 .............................. JPY 3,000,000 26,780
----------
26,780
----------
GERMANY-6.49%
KFW
4.75% 12/7/10 .............................. GBP 37,000 67,583
4.95% 10/14/14 ............................. CAD 32,000 28,528
6.50% 11/15/11 ............................. NZD 82,000 49,708
KFW International Finance
1.75% 3/23/10 .............................. JPY 11,000,000 98,018
Rentenbank 1.375% 4/25/13 ..................... JPY 19,000,000 162,205
----------
406,042
----------
TOTAL FOREIGN AGENCIES
(COST $457,834) ............................ 432,822
----------
REGIONAL AGENCIES-0.93%
AUSTRALIA-0.93%
New South Wales Treasury
6.00% 5/1/12 ............................... AUD 30,000 22,233
7.00% 12/1/10 .............................. AUD 27,000 20,827
Queensland Treasury 6.00% 7/14/09 ............. AUD 20,000 14,909
----------
TOTAL REGIONAL AGENCIES
(COST $59,229) ............................. 57,969
----------
REGIONAL AUTHORITY-1.61%
CANADA-1.61%
Ontario Province
4.50% 3/8/15 ............................... CAD 28,000 24,445
5.375% 12/2/12 ............................. CAD 25,000 23,183
Quebec Province 5.00% 12/1/15 ................. CAD 59,000 52,863
----------
TOTAL REGIONAL AUTHORITY
(COST $101,301) ............................ 100,491
----------
SOVEREIGN AGENCIES-19.40%
FRANCE-4.47%
Caisse d'Amortissement de la Dette
Sociale 3.625% 4/25/16 ..................... EUR 229,000 280,056
----------
280,056
----------
JAPAN-2.32%
Development Bank of Japan
1.70% 9/20/22 .............................. JPY 7,000,000 $ 57,087
Japan Finance Corporation for Municipal
Enterprises 2.00% 5/9/16 ................... JPY 10,000,000 88,007
----------
145,094
----------
UNITED STATES-12.61%
Fannie Mae
6.00% 5/15/11 .............................. USD 95,000 97,149
6.375% 8/15/07 ............................. AUD 22,000 16,384
Freddie Mac 5.75% 3/15/09 ..................... USD 670,000 675,576
----------
789,109
----------
TOTAL SOVEREIGN AGENCIES
(COST $1,255,201) .......................... 1,214,259
----------
SOVEREIGN DEBT-38.63%
AUSTRIA-3.99%
Republic of Austria
5.25% 1/4/11 ............................... EUR 29,000 39,245
9.00% 9/15/06 .............................. ISK 12,700,000 165,802
#Republic of Austria 144A 4.00% 9/15/16 ....... EUR 35,000 44,418
----------
249,465
----------
FRANCE-9.42%
France Government O.A.T.
4.00% 4/25/55 .............................. EUR 67,000 80,148
3.50% 4/25/15 .............................. EUR 88,000 108,109
French Treasury Note 2.75% 3/12/08 ............ EUR 318,000 401,444
----------
589,701
----------
GERMANY-7.95%
Deutschland Republic
4.75% 7/4/08 ............................... EUR 260,000 339,887
6.25% 1/4/24 ............................... EUR 99,000 157,496
----------
497,383
----------
JAPAN-2.29%
Japan Government 20 yr. Bond
2.30% 6/20/26 .............................. JPY 16,350,000 143,096
----------
143,096
----------
NETHERLANDS-1.16%
Netherlands Government 5.75% 2/15/07 .......... EUR 56,000 72,693
----------
72,693
----------
NORWAY-1.77%
Norwegian Government
6.00% 5/16/11 .............................. NOK 337,000 58,477
6.50% 5/15/13 .............................. NOK 286,000 51,943
----------
110,420
----------
POLAND-1.56%
Poland Government 6.00% 11/24/10 .............. PLN 304,000 97,481
----------
97,481
----------
REPUBLIC OF SLOVAKIA-0.85%
Slovak Republic 4.00% 3/26/21 ................. EUR 44,000 53,145
----------
53,145
----------
SWEDEN-6.13%
Sweden Government
1.00% 4/1/12 ............................... SEK 1,630,000 218,563
5.00% 12/1/20 .............................. SEK 335,000 51,187
5.50% 10/8/12 .............................. SEK 755,000 114,046
----------
383,796
----------
Global Bond-3
DELAWARE VIP GLOBAL BOND SERIES
STATEMENT OF NET ASSETS (CONTINUED)
MARKET
PRINCIPAL VALUE
AMOUNT DEG. (U.S. $)
----------- ----------
SOVEREIGN DEBT (CONTINUED)
UNITED KINGDOM-3.51%
U.K. Treasury
4.75% 9/7/15 ............................... GBP 50,250 $ 93,104
5.00% 3/7/12 ............................... GBP 15,000 28,084
8.00% 6/7/21 ............................... GBP 28,000 70,193
9.00% 7/12/11 .............................. GBP 13,000 28,531
----------
219,912
----------
TOTAL SOVEREIGN DEBT
(COST $2,424,832) 2,417,092
----------
SUPRANATIONAL BANKS-11.41%
Asia Development Bank 0.50% 10/9/12 ........... AUD 30,000 15,867
European Investment Bank
1.40% 6/20/17 .............................. JPY 9,500,000 78,337
3.625% 10/15/11 ............................ EUR 43,000 54,172
4.00% 10/15/37 ............................. EUR 166,000 194,151
4.25% 12/7/10 .............................. GBP 58,000 $ 104,029
4.375% 7/8/15 .............................. GBP 49,000 86,418
Inter-American Development Bank
1.90% 7/8/09 ............................... JPY 13,000,000 116,367
^International Bank for Reconstruction &
Development 7.122% 8/20/07 ................. NZD 115,000 64,830
----------
TOTAL SUPRANATIONAL BANKS
(COST $723,115) 714,171
----------
U.S. TREASURY OBLIGATIONS-6.55%
U.S. Treasury Notes 3.625% 5/15/13 ............ USD 230,000 210,459
^U.S. Treasury Strip 4.282% 11/15/13 .......... USD 290,000 199,684
----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $423,555) ............................ 410,143
----------
TOTAL MARKET VALUE OF SECURITIES-94.28% (COST $6,014,342) ....... 5,899,532
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-5.72% ........... 357,933
-----------
NET ASSETS APPLICABLE TO 634,449 SHARES OUTSTANDING-100.00% ..... $ 6,257,465
===========
NET ASSET VALUE-DELAWARE VIP GLOBAL BOND SERIES STANDARD CLASS
($6,249,328 / 633,624 SHARES) ................................ $ 9.86
===========
NET ASSET VALUE-DELAWARE VIP GLOBAL BOND SERIES SERVICE CLASS
($8,137 / 825 SHARES) ........................................ $ 9.86
===========
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par) .. $ 7,589,149
Undistributed net investment income ............................. 360,941
Accumulated net realized loss on investments .................... (1,608,799)
Net unrealized depreciation of investments and
foreign currencies ........................................... (83,826)
-----------
Total net assets ................................................ $ 6,257,465
===========
- ----------
DEG. Principal amount shown is stated in the currency in which each foreign bond
is denominated.
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - European Monetary Unit
GBP - British Pound Sterling
ISK - Iceland Krona
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
PLN - Polish Zloty
SEK - Swedish Kronor
USD - U.S. Dollar
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $44,418, which represented 0.71% of the Series' net
assets. See Note 8 in "Notes to Financial Statements."
= Security is being fair valued in accordance with the Series' fair valuation
policy. At June 30, 2006, the aggregate amount of fair valued securities
equaled $41,642, which represented 0.67% of the Series' net assets. See
Note 1 in "Notes to Financial Statements."
Global Bond-4
DELAWARE VIP GLOBAL BOND SERIES
STATEMENT OF NET ASSETS (CONTINUED)
SUMMARY OF ABBREVIATIONS:
O.A.T. - Obligation Assimilable au Tresor (Treasury Obligation)
yr. - year
FOREIGN CURRENCY EXCHANGE CONTRACTS(1)
The following foreign currency exchange contracts were outstanding at June 30,
2006:
UNREALIZED
APPRECIATION
CONTRACTS TO RECEIVE (DELIVER) IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
- ------------------------------ ----------------- --------------- --------------
CAD 102,000 EUR (72,885) 8/1/06 $(1,851)
EUR 38,874 PLN (156,554) 8/1/06 511
EUR 88,496 NOK (696,000) 8/1/06 1,380
EUR 108,299 SEK (998,000) 8/1/06 (230)
EUR 215,940 GBP (148,000) 8/1/06 3,110
EUR 103,069 ISK (12,292,090) 9/15/06 44,423
EUR (108,479) USD 133,309 9/15/06 (6,175)
JPY (12,000,000) USD 103,315 7/3/06 (1,570)
JPY 9,867,694 AUD (116,400) 8/1/06 200
JPY 31,193,584 NZD (444,100) 8/1/06 3,882
JPY 118,513,960 EUR (816,493) 8/1/06 (7,258)
-------
$36,422
=======
(1) See Note 7 in "Notes to Financial Statements."
See accompanying notes
Global Bond-5
DELAWARE VIP TRUST-
DELAWARE VIP GLOBAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2006 (Unaudited)
ASSETS:
Investments at market (cost $6,014,342)............................ $5,899,532
Foreign currencies (cost $111,423)................................. 111,779
Dividends and interest receivable.................................. 108,482
Subscriptions receivable........................................... 105
Receivable for securities sold .................................... 651,370
Net unrealized appreciation on foreign currency exchange
contracts....................................................... 36,422
----------
Total assets....................................................... 6,807,690
----------
LIABILITIES:
Cash overdraft..................................................... 29,284
Payable for securities purchased................................... 458,060
Liquidations payable............................................... 392
Due to manager and affiliates...................................... 17,673
Other accrued expenses............................................. 44,816
----------
Total liabilities.................................................. 550,225
----------
Total net assets................................................... $6,257,465
==========
See accompanying notes
Global Bond-6
DELAWARE VIP TRUST-
DELAWARE VIP GLOBAL BOND SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Interest ........................................................ $ 916,262
-----------
EXPENSES:
Management fees ................................................. 193,212
Custodian fees .................................................. 22,667
Reports and statements to shareholders .......................... 10,979
Accounting and administration expenses .......................... 10,305
Legal and professional fees ..................................... 9,850
Dividend disbursing and transfer agent fees and expenses ........ 2,576
Pricing fees .................................................... 1,990
Trustees' fees .................................................. 1,441
Registration fees ............................................... 48
Distribution expenses - Service Class ........................... 12
Other ........................................................... 1,127
-----------
254,207
Less waiver of distribution expenses - Service Class ............ (2)
-----------
Total operating expenses ........................................ 254,205
-----------
NET INVESTMENT INCOME ........................................... 662,057
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized loss on:
Investments .................................................. (805,704)
Foreign currencies ........................................... (361,737)
-----------
Net realized gain ............................................... (1,167,441)
Net change in unrealized appreciation/depreciation of investments
and foreign currencies ....................................... 1,433,561
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES ................................................... 266,120
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ 928,177
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP GLOBAL BOND SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income ........................... $ 662,057 $ 1,451,016
Net realized gain (loss) on investments and
foreign currencies ........................... (1,167,441) 938,859
Net change in unrealized appreciation/
depreciation on investments and foreign
currencies ................................... 1,433,561 (9,350,986)
------------ ------------
Net increase (decrease) in net assets resulting
from operations .............................. 928,177 (6,961,111)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class ............................... (1,095,558) (12,177,352)
Service Class ................................ (135) (1,263)
Net realized gain on investments:
Standard Class ............................... (1,681,682) (1,441,808)
Service Class ................................ (241) (152)
------------ ------------
(2,777,616) (13,620,575)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................... 1,059,080 3,701,855
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Standard Class ............................... 2,777,240 13,619,160
Service Class ................................ 376 1,415
------------ ------------
3,836,696 17,322,430
------------ ------------
Cost of shares repurchased:
Standard Class ............................... (57,740,913) (21,110,123)
------------ ------------
Decrease in net assets derived from capital share
transactions ................................. (53,904,217) (3,787,693)
------------ ------------
NET DECREASE IN NET ASSETS ...................... (55,753,656) (24,369,379)
NET ASSETS:
Beginning of period ............................. 62,011,121 86,380,500
------------ ------------
End of period (including undistributed net
investment income of $360,941 and $949,981,
respectively) ................................ $ 6,257,465 $ 62,011,121
============ ============
See accompanying notes
Global Bond-7
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP GLOBAL BOND SERIES STANDARD CLASS
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period................... $10.330 $13.560 $13.940 $ 11.770 $ 9.470 $ 9.730
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2)............................... 0.129 0.217 0.316 0.356 0.404 0.411
Net realized and unrealized gain (loss) and foreign
currencies.......................................... (0.092) (1.265) 1.262 2.005 1.957 (0.464)
------- ------- ------- -------- ------- -------
Total from investment operations....................... 0.037 (1.048) 1.578 2.361 2.361 (0.053)
------- ------- ------- -------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.................................. (0.200) (1.951) (1.692) (0.191) (0.061) (0.207)
Net realized gain on investments....................... (0.307) (0.231) (0.266) -- -- --
------- ------- ------- -------- ------- -------
Total dividends and distributions...................... (0.507) (2.182) (1.958) (0.191) (0.061) (0.207)
------- ------- ------- -------- ------- -------
Net asset value, end of period......................... $ 9.860 $10.330 $13.560 $ 13.940 $11.770 $ 9.470
======= ======= ======= ======== ======= =======
Total return(3)........................................ 0.37% (8.65%) 13.00% 20.36% 25.09% (0.48%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)................ $ 6,249 $62,003 $86,372 $105,463 $91,945 $17,012
Ratio of expenses to average net assets................ 0.99% 0.97% 0.93% 0.87% 0.81% 0.85%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly..... 0.99% 1.09% 0.93% 0.91% 0.81% 1.11%
Ratio of net investment income to average net assets... 2.57% 1.94% 2.52% 2.81% 3.76% 4.34%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly.......................................... 2.57% 1.82% 2.52% 2.77% 3.76% 4.08%
Portfolio turnover..................................... 213% 188% 117% 111% 49% 51%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Global Bond-8
DELAWARE VIP GLOBAL BOND SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP GLOBAL BOND SERIES SERVICE CLASS
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ....................... $10.310 $13.530 $13.920 $11.770 $ 9.460 $ 9.730
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) ................................... 0.116 0.189 0.285 0.328 0.389 0.397
Net realized and unrealized gain (loss) on investments
and foreign currencies .................................. (0.088) (1.259) 1.255 1.998 1.968 (0.470)
------- ------- ------- ------- ------- -------
Total from investment operations ........................... 0.028 (1.070) 1.540 2.326 2.357 (0.073)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ...................................... (0.171) (1.919) (1.664) (0.176) (0.047) (0.197)
Net realized gain on investments ........................... (0.307) (0.231) (0.266) -- -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions .......................... (0.478) (2.150) (1.930) (0.176) (0.047) (0.197)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............................. $ 9.860 $10.310 $13.530 $13.920 $11.770 $ 9.460
======= ======= ======= ======= ======= =======
Total return(3) ............................................ 0.29% (8.86%) 12.69% 20.04% 25.04% (0.70%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) .................... $ 8 $ 8 $ 9 $ 8 $ 7 $ 5
Ratio of expenses to average net assets .................... 1.24% 1.22% 1.18% 1.09% 0.96% 1.00%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ................. 1.29% 1.39% 1.23% 1.16% 0.96% 1.26%
Ratio of net investment income to average net assets ....... 2.32% 1.69% 2.27% 2.59% 3.61% 4.19%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ...... 2.27% 1.52% 2.22% 2.52% 3.61% 3.93%
Portfolio turnover ......................................... 213% 188% 117% 111% 49% 51%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
Global Bond-9
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Global
Bond Series (the "Series"). The Trust is an open-end investment company. The
Series is considered non-diversified under the Investment Company Act of 1940,
as amended, and offers Standard Class and Service Class shares. The Standard
Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1
fee. The shares of the Series are sold only to separate accounts of life
insurance companies.
The investment objective of the Series is to seek current income consistent with
the preservation of principal.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Securities listed on a foreign exchange are valued at the
last quoted sales price before the Series is valued. U.S. government and agency
securities are valued at the mean between the bid and asked prices. Other
long-term debt securities are valued by an independent pricing service and such
prices are believed to reflect the fair value of such securities. Short-term
debt securities having less than 60 days to maturity are valued at amortized
cost, which approximates market value. Forward foreign currency exchange
contracts are valued at the mean between the bid and asked prices of the
contracts and are marked-to-market daily. Interpolated values are derived when
the settlement date of the contract is an interim date for which quotations are
not available. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, aftermarket trading,
or significant events after local market trading (e.g., government actions or
pronouncements, trading volume or volatility on markets, exchanges among
dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Series
isolates that portion of realized gains and losses on investments in debt
securities, which are due to changes in foreign exchange rates from that which
are due to changes in market prices of debt securities. The Series reports
certain foreign currency related transactions as components of realized gains
(losses) for financial reporting purposes, where such components are treated as
ordinary income (loss) for federal income tax purposes.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Interest income is recorded on the accrual basis. Premiums and discounts
on all debt securities are amortized to interest income over the lives of the
respective securities.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), the investment manager, an annual fee
which is calculated daily at the rate of 0.75% on the first $500 million of
average daily net assets of the Series, 0.70% on the next $500 million, 0.65% on
the next $1.5 billion, and 0.60% on average daily net assets in excess of $2.5
billion.
Global Bond-10
DELAWARE VIP GLOBAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.00% of average daily net assets of the Series through April 30, 2007.
No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO DMC AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$14,853 $1,005 $2 $1,813
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$1,194 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases other than U.S. government securities ... $47,428,723
Purchases of U.S. government securities ........... 2,547,291
Sales other than U.S. government securities ....... 92,467,298
Sales of U.S. government securities ............... 12,023,185
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION DEPRECIATION
- ----------- ------------ ------------ --------------
$6,033,562 $45,288 $(179,318) $(134,030)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
---------- -----------
Ordinary income ........... $2,440,215 $12,733,806
Long-term capital gains ... 337,401 886,769
---------- -----------
Total distribution ........ $2,777,616 $13,620,575
========== ===========
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
Global Bond-11
DELAWARE VIP GLOBAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ........ $ 7,589,149
Undistributed ordinary income ........ 356,292
Accumulated capital losses ........... (1,589,579)
Unrealized depreciation of investments
and foreign currencies ............. (98,397)
-----------
Net assets ........................... $ 6,257,465
===========
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
of forward foreign currency contracts, currency straddles, and tax treatment of
market discount and premium on debt instruments.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on foreign currency transactions and market
discount and premium on certain debt instruments. Results of operations and net
assets were not affected by these reclassifications. For the six months ended
June 30, 2006, the Series recorded an estimate of these differences since the
final tax characteristics cannot be determined until fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
- ----------------- ------------
$(155,404) $155,404
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
----------- ---------
Shares sold:
Standard Class ................................. 105,214 317,642
Shares issued upon reinvestment of dividends and
distributions:
Standard Class .............................. 283,971 1,242,624
Service Class ............................... 38 129
---------- --------
389,223 1,560,395
---------- --------
Shares repurchased:
Standard Class ................................. (5,758,603) (1,928,903)
---------- --------
Net decrease ................................... (5,369,380) (368,508)
========== ========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
Global Bond-12
DELAWARE VIP GLOBAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FOREIGN CURRENCY EXCHANGE CONTRACTS
The Series may enter into forward foreign currency exchange contracts as a way
of managing foreign exchange rate risk. The Series may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to buy
or sell for the period between the date the trade was entered into and the date
the security is delivered and paid for. The Series may also use these contracts
to hedge the U.S. dollar value of securities it already owns that are
denominated in foreign currencies. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts and forward foreign cross
currency exchange contracts does not eliminate fluctuations in the underlying
prices of the securities, but does establish a rate of exchange that can be
achieved in the future. Although forward foreign currency exchange contracts
limit the risk of loss due to a decline in the value of the hedged currency,
they also limit any potential gain that might result should the value of the
currency increase. In addition, the Series could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
8. CREDIT AND MARKET RISK
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is a deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, no securities have been determined to be illiquid under the
Series' Liquidity Procedures. Rule 144A securities have been identified on the
Statement of Net Assets.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Global Bond-13
DELAWARE VIP TRUST-DELAWARE VIP GLOBAL BOND
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP GLOBAL BOND SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP
International Value Equity Series (the "Series"). In making its decision, the
Board considered information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
Annual Meeting. Information furnished and discussed throughout the year included
reports detailing Series performance, investment strategies, expenses,
compliance matters and other services provided by Delaware Management Company
("DMC"), the investment advisor. Information furnished specifically in
connection with the Annual Meeting included materials provided by DMC and its
affiliates ("Delaware Investments") concerning, among other things, the level of
services provided to the Fund, the costs of such services to the Series,
economies of scale and the financial condition and profitability of Delaware
Investments. In addition, in connection with the Annual Meeting, the Board
considered independent historical and comparative reports prepared by Lipper
Inc. ("Lipper"), an independent statistical compilation organization. The Board
also considered industry comparative information presented by representatives
from Lipper. The Lipper reports compared the Series' investment performance and
expenses with those of other comparable mutual funds. The Board also received
certain supplemental information regarding management's policy with respect to
advisory fee levels and its philosophy with respect to breakpoints; the
structure of portfolio manager compensation; and any constraints or limitations
on the availability of securities in certain investment styles which might
inhibit DMC's ability to fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company,
Inc. ("DSC"), noting DSC's commitment to maintain a high level of service in
keeping with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all
international core funds underlying variable insurance products as selected by
Lipper. The Lipper report comparison showed that the Series' total return for
the one year period was in the fourth quartile. The report further showed that
the Series' total return for the three, five and 10 year periods was in the
first quartile. The Board noted that the Series' performance results were mixed.
In evaluating the Series' performance, the Board considered the fact that the
new investment team began managing the Series in February 2006. At that time
management proposed, and the Board approved, modifications to the Series'
policies and strategies in order to reflect the new teams' investment approach.
The Board was pleased with management's efforts to enhance Series performance
and expressed confidence in the new team and its philosophy and processes.
Global Bond-14
DELAWARE VIP GLOBAL BOND
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second highest expenses of its
Expense Group. The Board noted that the Series' total expenses were not in line
with the Board's stated objective. In evaluating total expenses, the Board
considered fee waivers in place through April of 2007 and recent initiatives
implemented by management, such as the outsourcing of certain transfer agency
services, creating an opportunity for a reduction in expenses. The Board was
satisfied with management's efforts to improve the Series' total expense ratio
and bring it in line with the Board's objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Global Bond-15
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,030.40 0.89% $4.48
Service Class 1,000.00 1,029.00 1.14% 5.74
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.38 0.89% $4.46
Service Class 1,000.00 1,019.14 1.14% 5.71
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Growth Opportunities-1
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- -------------------------------------------------- -------------
COMMON STOCK 92.44%
Basic Industry/Capital Goods 9.71%
Business Services 13.70%
Consumer Non-Durables 10.17%
Consumer Services 4.86%
Energy 7.91%
Financials 9.56%
Health Care 17.50%
Technology 17.26%
Transportation 1.77%
REPURCHASE AGREEMENTS 8.84%
SECURITIES LENDING COLLATERAL 16.33%
Fixed Rate Notes 2.88%
Variable Rate Notes 13.45%
TOTAL MARKET VALUE OF SECURITIES 117.61%
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (16.33%)
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (1.28%)
------
TOTAL NET ASSETS 100.00%
======
Growth Opportunities-2
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- -----------
COMMON STOCK-92.44%
BASIC INDUSTRY/CAPITAL GOODS-9.71%
Allegheny Technologies ............................... 19,600 $ 1,357,104
*Graco ............................................... 23,700 1,089,726
JLG Industries ....................................... 35,800 805,500
Joy Global ........................................... 18,600 968,874
+Mettler-Toledo International ........................ 17,500 1,059,975
-----------
5,281,179
-----------
BUSINESS SERVICES-13.70%
+Dun & Bradstreet .................................... 14,300 996,424
Expeditors International Washington .................. 33,800 1,893,138
+Fiserv .............................................. 12,000 544,320
+Fisher Scientific International ..................... 9,400 686,670
Paychex .............................................. 23,300 908,234
*Pool ................................................ 13,300 580,279
Robert Half International ............................ 24,600 1,033,200
+WESCO International ................................. 11,800 814,200
-----------
7,456,465
-----------
CONSUMER NON-DURABLES-10.17%
American Eagle Outfitters ............................ 26,700 908,868
Nordstrom ............................................ 29,900 1,091,350
Staples .............................................. 58,900 1,432,448
+Starbucks ........................................... 21,600 815,616
Tiffany & Co ......................................... 11,400 376,428
+Urban Outfitters .................................... 20,800 363,792
Whole Foods Market ................................... 8,400 542,976
-----------
5,531,478
-----------
CONSUMER SERVICES-4.86%
Host Hotels & Resorts ................................ 8,938 195,474
Marriott International Class A ....................... 37,800 1,440,936
Starwood Hotels & Resorts Worldwide .................. 16,700 1,007,678
-----------
2,644,088
-----------
ENERGY-7.91%
*Chesapeake Energy ................................... 27,000 816,750
*+Helix Energy Solutions Group ....................... 8,200 330,952
+National Oilwell Varco .............................. 19,700 1,247,404
Rowan ................................................ 15,900 565,881
Smith International .................................. 30,200 1,342,994
-----------
4,303,981
-----------
FINANCIALS-9.56%
*+Affiliated Managers Group .......................... 8,900 773,321
Colonial BancGroup ................................... 29,900 767,832
Legg Mason ........................................... 5,600 557,312
Lehman Brothers Holdings ............................. 13,000 846,950
*Nuveen Investments .................................. 15,600 671,580
PartnerRe ............................................ 7,900 505,995
*+Penson Worldwide ................................... 11,600 199,636
UnumProvident ........................................ 20,900 378,917
Zions Bancorp ........................................ 6,400 498,816
-----------
5,200,359
-----------
HEALTH CARE-17.50%
Caremark Rx .......................................... 24,500 $ 1,221,815
Dade Behring Holdings ................................ 19,200 799,488
+Express Scripts Class A ............................. 7,900 566,746
*+Hologic ............................................ 20,600 1,016,816
*+Invitrogen ......................................... 15,300 1,010,871
+Kinetic Concepts .................................... 15,800 697,570
+Medco Health Solutions .............................. 16,700 956,576
*+MGI Pharma ......................................... 51,400 1,105,100
Omnicare ............................................. 12,000 569,040
*+PDL BioPharma ...................................... 45,400 835,814
Shire ADR ............................................ 16,700 738,641
-----------
9,518,477
-----------
TECHNOLOGY-17.26%
+Activision .......................................... 58,400 664,592
+Amdocs .............................................. 26,500 969,900
+BEA Systems ......................................... 30,700 401,863
+Broadcom Class A .................................... 19,750 593,488
*+Ciena .............................................. 121,900 586,339
+Citrix Systems ...................................... 10,600 425,484
Intersil ............................................. 22,800 530,100
L-3 Communications ................................... 13,100 988,002
+NAVTEQ .............................................. 10,300 460,204
+Network Appliance ................................... 26,700 942,510
+NII Holdings ........................................ 14,400 811,872
*+salesforce.com ..................................... 15,700 418,562
*Satyam Computer Services ADR ........................ 23,200 768,848
+Tellabs ............................................. 41,500 552,365
+VeriSign ............................................ 11,900 275,723
-----------
9,389,852
-----------
TRANSPORTATION-1.77%
Hunt (J.B.) Transport ................................ 14,700 366,177
+Swift Transportation ................................ 18,800 597,088
-----------
963,265
-----------
TOTAL COMMON STOCK
(COST $38,323,802) ................................ 50,289,144
-----------
Growth Opportunities-3
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- -----------
REPURCHASE AGREEMENTS-8.84%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased at $2,530,949,
collateralized by $2,467,000 U.S. Treasury Notes
6.00% due 8/15/09, market value $2,583,368) ...... $2,530,000 $ 2,530,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased at $651,239,
collateralized by $325,000 U.S. Treasury Notes
3.875% due 7/31/07, market value $325,936,
$325,000 U.S. Treasury Notes 3.875% due 5/15/09,
market value $315,981 and $22,000 U.S. Treasury
Notes 6.50% due 10/15/06, market value $22,380) .. 651,000 651,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased at $1,627,590,
collateralized by $874,000 U.S. Treasury Notes
3.875% due 5/15/09, market value $848,728 and
$813,000 U.S. Treasury Notes 4.875% due 5/15/09,
market value $813,280) ........................... 1,627,000 1,627,000
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $4,808,000) ................................ 4,808,000
-----------
TOTAL MARKET VALUE OF SECURITIES
BEFORE SECURITIES LENDING
COLLATERAL-101.28%
(COST $43,131,802) ............................... 55,097,144
-----------
SECURITIES LENDING COLLATERAL**-16.33%
SHORT-TERM INVESTMENTS-16.33%
FIXED RATE NOTES-2.88%
Citigroup Global Markets 5.35% 7/3/06 ............... 1,565,755 1,565,755
-----------
1,565,755
-----------
oVARIABLE RATE NOTES-13.45%
American Honda Finance
5.32% 2/21/07 .................................... $ 252,170 $ 252,170
ANZ National 5.11% 7/31/07 .......................... 56,038 56,038
Australia New Zealand 5.28% 7/31/07 ................. 280,189 280,189
Bank of America 5.32% 2/23/07 ....................... 364,245 364,245
Bank of New York 5.16% 7/31/07 ...................... 224,151 224,151
Barclays New York 5.31% 5/18/07 ..................... 364,246 364,245
Bayerische Landesbank 5.37% 8/25/06 ................. 280,189 280,189
Bear Stearns 5.19% 1/2/07 ........................... 336,227 336,227
BNP Paribas 5.14% 7/31/07 ........................... 280,189 280,189
Canadian Imperial Bank
5.28% 7/31/07 .................................... 140,094 140,094
5.32% 11/22/06 ................................... 280,189 280,189
CDC Financial Products 5.41% 7/31/06 ................ 364,246 364,245
Citigroup Global Markets 5.38% 7/7/06 ............... 364,246 364,246
Commonwealth Bank 5.29% 7/31/07 ..................... 280,189 280,189
Goldman Sachs 5.45% 7/2/07 .......................... 364,246 364,246
Manufacturers & Traders 5.31% 9/26/06 ............... 280,188 280,172
Marshall & Ilsley Bank 5.18% 7/31/07 ................ 308,208 308,208
Merrill Lynch Mortgage Capital
5.41% 8/3/06 ..................................... 252,170 252,170
National Australia Bank 5.10% 3/7/07 ................ 347,434 347,434
National City Bank 5.32% 3/2/07 ..................... 336,237 336,321
National Rural Utilities 5.10% 7/31/07 .............. 442,698 442,698
Nordea Bank New York 5.31% 5/16/07 .................. 140,094 140,087
Nordea Bank Norge 5.15% 7/31/07 ..................... 280,189 280,189
Royal Bank of Scotland 5.07% 7/31/07 ................ 280,189 280,189
Societe Generale 5.08% 7/31/07 ...................... 140,094 140,094
Wells Fargo 5.19% 7/31/07 ........................... 280,189 280,189
-----------
7,318,603
-----------
TOTAL SECURITIES LENDING COLLATERAL
(COST $8,884,358) ............................. 8,884,358
-----------
TOTAL MARKET VALUE OF SECURITIES-117.61% (COST $52,016,160) ... 63,981,502(Y)
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL**-
(16.33%) ................................................... (8,884,358)
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(1.28%) ....... (698,269)
-----------
NET ASSETS APPLICABLE TO 2,977,997 SHARES OUTSTANDING-
100.00% .................................................... $54,398,875
===========
NET ASSET VALUE-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
STANDARD CLASS ($41,682,363 / 2,275,047 SHARES) ............ $ 18.32
===========
NET ASSET VALUE-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
SERVICE CLASS ($12,716,512 / 702,950 SHARES) ............... $ 18.09
===========
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no
par) ....................................................... $49,781,617
Accumulated net realized loss on investments .................. (7,348,084)
Net unrealized appreciation of investments .................... 11,965,342
-----------
Total net assets .............................................. $54,398,875
===========
- ----------
+ Non-income producing security for the period ended June 30, 2006.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
* Fully or partially on loan.
** See Note 7 in "Notes to Financial Statements."
(y) Includes $8,773,732 of securities loaned.
ADR - American Depositary Receipts
See accompanying notes
Growth Opportunities-4
DELAWARE VIP TRUST-
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ....................................................... $ 160,536
Interest ........................................................ 45,175
Securities lending income ....................................... 3,270
-----------
208,981
===========
EXPENSES:
Management fees ................................................. 221,302
Distribution expenses - Service Class ........................... 20,718
Accounting and administration expenses .......................... 11,802
Legal and professional fees ..................................... 9,644
Reports and statements to shareholders .......................... 9,428
Dividend disbursing and transfer agent fees and expenses ........ 2,953
Custodian fees .................................................. 2,078
Trustees' fees .................................................. 1,519
Taxes (other than taxes on income) .............................. 1,048
Insurance fees .................................................. 1,042
Pricing fees .................................................... 195
Registration fees ............................................... 19
Other ........................................................... 1,735
-----------
283,483
Less waiver of distribution expenses - Service Class ............ (3,453)
Less expense paid indirectly .................................... (13)
-----------
Total operating expenses ........................................ 280,017
-----------
NET INVESTMENT LOSS ............................................. (71,036)
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ................................ 4,137,402
Net change in unrealized appreciation/depreciation of
investments .................................................. (2,062,376)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................. 2,075,026
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ 2,003,990
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss ............................. $ (71,036) $ (256,753)
Net realized gain on investments ................ 4,137,402 7,465,944
Net change in unrealized appreciation/
depreciation of investments .................. (2,062,376) (732,587)
------------ ------------
Net increase in net assets
resulting from operations .................... 2,003,990 6,476,604
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................... 1,905,838 1,424,558
Service Class ................................ 720,753 1,280,534
------------ ------------
2,626,591 2,705,092
------------ ------------
Cost of shares repurchased:
Standard Class ............................... (7,759,263) (17,343,946)
Service Class ................................ (2,520,897) (3,746,289)
------------ ------------
(10,280,160) (21,090,235)
------------ ------------
Decrease in net assets derived from capital
share transactions ........................... (7,653,569) (18,385,143)
------------ ------------
NET DECREASE IN NET ASSETS ...................... (5,649,579) (11,908,539)
NET ASSETS:
Beginning of period ............................. 60,048,454 71,956,993
------------ ------------
End of period (there was no undistributed net
investment income at either period end) ...... $ 54,398,875 $ 60,048,454
============ ============
See accompanying notes
Growth Opportunities-5
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP GROWTH OPPORTUNITIES SERIES STANDARD CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- ---------
Net asset value, beginning of period .................... $17.780 $15.960 $14.190 $10.060 $15.010 $ 23.990
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................................. (0.017) (0.056) (0.031) (0.032) (0.025) (0.010)
Net realized and unrealized gain (loss) on investments .. 0.557 1.876 1.801 4.162 (3.351) (4.209)
------- ------- ------- ------- ------- --------
Total from investment operations ........................ 0.540 1.820 1.770 4.130 (3.376) (4.219)
------- ------- ------- ------- ------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments ........................ -- -- -- -- -- (4.761)
Return of capital ....................................... -- -- -- -- (1.574) --
------- ------- ------- ------- ------- --------
Total dividends and distributions ....................... -- -- -- -- (1.574) (4.761)
------- ------- ------- ------- ------- --------
Net asset value, end of period .......................... $18.320 $17.780 $15.960 $14.190 $10.060 $ 15.010
======= ======= ======= ======= ======= ========
Total return(3) ......................................... 3.04% 11.40% 12.47% 41.05% (24.94%) (15.78%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................. $41,682 $46,000 $56,875 $65,368 $60,964 $117,527
Ratio of expenses to average net assets ................. 0.89% 0.90% 0.84% 0.85% 0.87% 0.85%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .............. 0.89% 0.90% 0.84% 0.85% 0.87% 0.87%
Ratio of net investment loss to average net assets ...... (0.18%) (0.35%) (0.21%) (0.27%) (0.21%) (0.06%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly ... (0.18%) (0.35%) (0.21%) (0.27%) (0.21%) (0.08%)
Portfolio turnover ...................................... 69% 75% 94% 94% 88% 117%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Growth Opportunities-6
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP GROWTH OPPORTUNITIES SERIES SERVICE CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- ---------- -------- --------
Net asset value, beginning of period ...................... $17.580 $15.810 $14.100 $10.010 $14.970 $23.980
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................................... (0.040) (0.096) (0.066) (0.058) (0.043) (0.033)
Net realized and unrealized gain (loss) on investments .... 0.550 1.866 1.776 4.148 (3.343) (4.216)
------- ------- ------- ------- ------- -------
Total from investment operations .......................... 0.510 1.770 1.710 4.090 (3.386) (4.249)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments .......................... -- -- -- -- -- (4.761)
Return of capital ......................................... -- -- -- -- (1.574) --
------- ------- ------- ------- ------- -------
Total dividends and distributions ......................... -- -- -- -- (1.574) (4.761)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............................ $18.090 $17.580 $15.810 $14.100 $10.010 $14.970
======= ======= ======= ======= ======= =======
Total return(3) ........................................... 2.90% 11.20% 12.13% 40.86% (25.09%) (15.94%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................... $12,717 $14,048 $15,082 $16,906 $15,275 $27,893
Ratio of expenses to average net assets ................... 1.14% 1.15% 1.09% 1.07% 1.02% 1.00%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ................ 1.19% 1.20% 1.14% 1.10% 1.02% 1.02%
Ratio of net investment loss to average net assets ........ (0.43%) (0.60%) (0.46%) (0.49%) (0.36%) (0.21%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly ..... (0.48%) (0.65%) (0.51%) (0.52%) (0.36%) (0.23%)
Portfolio turnover ........................................ 69% 75% 94% 94% 88% 117%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
Growth Opportunities-7
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Growth
Opportunities Series (the "Series"). The Trust is an open-end investment
company. The Series is considered diversified under the Investment Company Act
of 1940, as amended, and offers Standard Class and Service Class shares. The
Standard Class shares do not carry a 12b-1 fee and the Service Class shares
carry a 12b-1 fee. The shares of the Series are sold only to separate accounts
of life insurance companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation-Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Securities lending collateral is valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, aftermarket trading,
or significant events after local market trading (e.g., government actions or
pronouncements, trading volume or volatility on markets, exchanges among
dealers, or news events).
Federal Income Taxes-The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting-Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements-The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates-The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Other-Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $8,105 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series may receive earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the
Series, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and
0.60% on average daily net assets in excess of $2.5 billion.
Growth Opportunities-8
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its
management fee and reimburse the Series to the extent necessary to ensure that
annual operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.95% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 0.90% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING,
INVESTMENT TRANSFER AGENT, OTHER EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
$32,626 $2,191 $2,533 $2,854
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$1,257 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. Investments
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases ... $19,692,823
Sales ....... 30,898,840
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ----------- ------------ ------------ --------------
$52,158,742 $12,964,848 $(1,142,088) $11,822,760
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. There were no dividends and distributions paid during the six months
ended June 30, 2006 and the year ended December 31, 2005.
Growth Opportunities-9
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest............ $ 49,781,617
Capital loss carryforwards............... (11,017,398)
Six month period realized gains.......... 3,811,896
Unrealized appreciation of investments... 11,822,760
------------
Net assets............................... $ 54,398,875
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of net operating losses. Results of operations and net
assets were not affected by these reclassifications. For the six months ended
June 30, 2006, the Series recorded an estimate of these differences since the
final tax characteristics cannot be determined until fiscal year end.
ACCUMULATED
NET PAID-IN
INVESTMENT LOSS CAPITAL
- --------------- ---------
$71,036 $(71,036)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $11,017,398 expires in
2010. For the six months ended June 30, 2006, the Series had capital gains of
$3,811,896 which may reduce the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class.................................... 101,460 86,824
Service Class..................................... 39,100 78,177
-------- ----------
140,560 165,001
-------- ----------
Shares repurchased:
Standard Class.................................... (413,512) (1,064,136)
Service Class..................................... (135,309) (232,719)
-------- ----------
(548,821) (1,296,855)
-------- ----------
Net decrease......................................... (408,261) (1,131,854)
======== ==========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
Growth Opportunities-10
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments(R) Family of
Funds, may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of the securities
issued in the United States. With respect to each loan, if the aggregate market
value of the collateral held on any business day is less than the aggregate
market value of the securities which are the subject of such loan, the borrower
will be notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Series, or at the
discretion of the lending agent, replace the loaned securities. The Series
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Series has the right under the Lending Agreement to recover the securities
from the borrower on demand. The security lending agent and the borrower retain
a portion of the earnings from the collateral investments. The Series records
security lending income net of such allocation.
At June 30, 2006, the market value of securities on loan was $8,773,732, for
which cash collateral was received and invested in accordance with the Lending
Agreement. Such investments are presented on the Statement of Net Assets under
the caption "Securities Lending Collateral."
8. CREDIT AND MARKET RISK
The Series invests a significant portion of its assets in small- and mid-sized
companies and may be subject to certain risks associated with ownership of
securities of such companies. Investments in small- or mid-sized companies may
be more volatile than investments in larger companies for a number of reasons,
which include more limited financial resources or a dependence on narrow product
lines.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Growth Opportunities-11
DELAWARE VIP TRUST-DELAWARE VIP GROWTH OPPORTUNITIES SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP GROWTH OPPORTUNITIES SERIES INVESTMENT
ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Growth
Opportunities Series (the "Series"). In making its decision, the Board
considered information furnished throughout the year at regular Board meetings,
as well as information prepared specifically in connection with the Annual
Meeting. Information furnished and discussed throughout the year included
reports detailing Series performance, investment strategies, expenses,
compliance matters and other services provided by Delaware Management Company
("DMC"), the investment advisor. Information furnished specifically in
connection with the Annual Meeting included materials provided by DMC and its
affiliates ("Delaware Investments") concerning, among other things, the level of
services provided to the Fund, the costs of such services to the Series,
economies of scale and the financial condition and profitability of Delaware
Investments. In addition, in connection with the Annual Meeting, the Board
considered independent historical and comparative reports prepared by Lipper
Inc. ("Lipper"), an independent statistical compilation organization. The Board
also considered industry comparative information presented by representatives
from Lipper. The Lipper reports compared the Series' investment performance and
expenses with those of other comparable mutual funds. The Board also received
certain supplemental information regarding management's policy with respect to
advisory fee levels and its philosophy with respect to breakpoints; the
structure of portfolio manager compensation; and any constraints or limitations
on the availability of securities in certain investment styles which might
inhibit DMC's ability to fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all mid-cap
growth funds underlying variable insurance products as selected by Lipper. The
Lipper report comparison showed that the Series' total return for the one,
three, five and 10 year periods was in the second quartile of such Performance
Universe. The Board was satisfied with such performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
Growth Opportunities-12
DELAWARE VIP GROWTH OPPORTUNITIES SERIES
OTHER SERIES INFORMATION (CONTINUED)
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the lowest expenses of its Expense
Group. The Board was satisfied with the management fee and total expenses of the
Series in comparison to its Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Growth Opportunities-13
DELCHESTER ANNUAL Date In to St. Ives Date Out of St. Ives
- ---------------------- ------------------- --------------------
Initial Copy 8/21/2006 8/23/2006
1st Round of revisions 9/5/2006 9/6/2006
2nd Round of revisions 9/12/2006 9/13/2006
Sign off with changes 9/15/2006 9/15/2006
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-l) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $l,000 invested at the beginning of the
period and held for the entire period from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,041.10 0.76% $3.85
Service Class 1,000.00 1,038.60 1.01% 5.11
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,021.03 0.76% $3.81
Service Class 1,000.00 1,019.79 1.01% 5.06
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
High Yield-1
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
SECTOR ALLOCATION AND CREDIT RATING BREAKDOWN
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ---------------------------------------------------------------- -------------
COLLATERALIZED BOND OBLIGATIONS 0.05%
COMMERCIAL MORTGAGE-BACKED SECURITIES 0.52%
CORPORATE BONDS 91.95%
Banking 0.20%
Basic Industry 10.75%
Brokerage 2.87%
Capital Goods 5.90%
Consumer Cyclical 7.87%
Consumer Non-Cyclical 10.81%
Energy 5.61%
Finance & Investments 0.48%
Media 10.35%
Real Estate 1.73%
Services Cyclical 11.54%
Services Non-Cyclical 7.19%
Technology & Electronics 2.23%
Telecommunications 10.16%
Utilities 4.26%
CONVERTIBLE BONDS 0.19%
EMERGING MARKET BONDS 1.14%
COMMON STOCK 1.02%
WARRANTS 0.00%
REPURCHASE AGREEMENTS 5.73%
TOTAL MARKET VALUE OF SECURITIES 100.60%
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.60)%
------
TOTAL NET ASSETS 100.00%
======
CREDIT RATING BREAKDOWN (AS A % OF FIXED INCOME INVESTMENTS)
- ----------------------------------------------------------------
AAA 5.13%
AA 0.20%
A 0.11%
BBB 1.13%
BB 19.83%
B 55.40%
CCC 15.92%
C 0.01%
D 0.44%
NR 1.83%
------
TOTAL 100.00%
======
High Yield-2
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
---------- -----------
(U.S. $) (U.S. $)
@=COLLATERALIZED BOND OBLIGATIONS-0.05%
oMerrill Lynch CBO VII Series
1997-C3 5.824% 3/23/08 ........................... $ 285,742 $ 25,437
South Street CBO Series
1999-1A A1 7.16% 7/1/11 .......................... 110,804 111,357
-----------
TOTAL COLLATERALIZED BOND OBLIGATIONS
(COST $262,936) .................................. 136,794
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES-0.52%
#First Union National Bank Commercial
Mortgage Series 2001-C2 L 144A
6.46% 1/12/43 ................................. 1,375,000 1,361,240
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $1,395,571) ..................... 1,361,240
-----------
CORPORATE BONDS-91.95%
BANKING-0.20%
Western Financial 9.625% 5/15/12 .................... 485,000 534,027
-----------
534,027
-----------
BASIC INDUSTRY-10.75%
Abitibi-Consolidated
6.95% 12/15/06 ................................... 95,000 95,950
7.875% 8/1/09 .................................... 975,000 938,438
AK Steel 7.875% 2/15/09 ............................. 1,610,000 1,610,000
Bowater 9.50% 10/15/12 .............................. 3,700,000 3,709,249
Chemtura 6.875% 6/1/16 .............................. 1,225,000 1,189,781
Donohue Forest Products 7.625% 5/15/07 .............. 1,325,000 1,334,938
Georgia-Pacific
8.875% 5/15/31 ................................... 150,000 150,000
9.50% 12/1/11 .................................... 1,875,000 1,968,750
Gold Kist 10.25% 3/15/14 ............................ 1,135,000 1,188,913
Huntsman International 10.125% 7/1/09 ............... 430,000 438,600
Lyondell Chemical 10.50% 6/1/13 ..................... 190,000 209,950
#Nell AF Sarl 144A 8.375% 8/15/15 ................... 1,550,000 1,497,688
NewPage 10.00% 5/1/12 ............................... 1,560,000 1,622,400
Norske Skog 8.625% 6/15/11 .......................... 2,350,000 2,303,000
#Port Townsend Paper 144A 12.00% 4/15/11 ............ 1,730,000 1,375,350
Potlatch 13.00% 12/1/09 ............................. 1,210,000 1,420,570
Rhodia 8.875% 6/1/11 ................................ 1,665,000 1,667,081
++Solutia 6.72% 10/15/37 ............................ 2,270,000 2,108,263
Tembec Industries 8.625% 6/30/09 .................... 4,615,000 2,549,787
Witco 6.875% 2/1/26 ................................. 715,000 639,925
-----------
28,018,633
-----------
BROKERAGE-2.87%
E Trade Financial 8.00% 6/15/11 ..................... 2,615,000 2,680,375
#Hughes Network Systems 144A
9.50% 4/15/14 .................................... 1,675,000 1,649,875
LaBranche & Company
9.50% 5/15/09 .................................... 1,290,000 1,380,300
11.00% 5/15/12 ................................... 1,600,000 1,760,000
-----------
7,470,550
-----------
CAPITAL GOODS-5.90%
Armor Holdings 8.25% 8/15/13 ........................ 2,400,000 2,495,999
Building Materials 8.00% 10/15/07 ................... 800,000 808,000
#Compression Polymer 144A 10.50% 7/1/13 ............. 1,255,000 1,286,375
Graham Packaging 9.875% 10/15/14 .................... 800,000 796,000
Interface 10.375% 2/1/10 ............................ 1,555,000 1,708,556
Interline Brands 8.125% 6/15/14 ..................... $ 775,000 $ 776,938
Intertape Polymer 8.50% 8/1/14 ...................... 1,510,000 1,396,750
Mueller Group 10.00% 5/1/12 ......................... 405,000 437,400
(ss)Mueller Holdings 14.75% 4/15/14 ................. 1,574,000 1,330,030
(ss)NTK Holdings 10.75% 3/1/14 ...................... 1,650,000 1,202,438
Solo Cup Company 8.50% 2/15/14 ...................... 1,150,000 1,000,500
#TransDigm 144A 7.75% 7/15/14 ....................... 450,000 450,000
Trimas 9.875% 6/15/12 ............................... 1,855,000 1,706,600
-----------
15,395,586
-----------
CONSUMER CYCLICAL-7.87%
Accuride 8.50% 2/1/15 ............................... 1,225,000 1,182,125
#Baker & Taylor 144A 11.50% 7/1/13 .................. 1,150,000 1,155,750
Boyd Gaming 8.75% 4/15/12 ........................... 1,500,000 1,578,750
Carrols 9.00% 1/15/13 ............................... 365,000 367,738
Ford Motor Credit 7.375% 10/28/09 ................... 1,450,000 1,341,533
General Motors 8.375% 7/15/33 ....................... 920,000 745,200
General Motors Acceptance Corporation
6.875% 9/15/11 ................................... 1,855,000 1,771,855
8.00% 11/1/31 .................................... 1,180,000 1,137,149
Landry's Restaurant 7.50% 12/15/14 .................. 1,020,000 940,950
Metaldyne 10.00% 11/1/13 ............................ 1,795,000 1,745,638
#Neiman Marcus 144A 9.00% 10/15/15 .................. 1,165,000 1,223,250
#NPC International 144A 9.50% 5/1/14 ................ 2,000,000 1,944,999
O'Charleys 9.00% 11/1/13 ............................ 1,575,000 1,602,563
#Uno Restaurant 144A 10.00% 2/15/11 ................. 1,060,000 816,200
Visteon
7.00% 3/10/14 .................................... 300,000 246,375
8.25% 8/1/10 ..................................... 1,610,000 1,513,400
Warnaco 8.875% 6/15/13 .............................. 1,175,000 1,198,500
-----------
20,511,975
-----------
CONSUMER NON-CYCLICAL-10.81%
#Angiotech Pharmaceuticals
144A 7.75% 4/1/14 ................................ 1,775,000 1,704,000
Biovail 7.875% 4/1/10 ............................... 3,475,000 3,535,812
Constellation Brands 8.125% 1/15/12 ................. 1,175,000 1,213,188
Cott Beverages 8.00% 12/15/11 ....................... 2,125,000 2,130,313
Del Laboratories 8.00% 2/1/12 ....................... 705,000 589,556
Dole Food 8.875% 3/15/11 ............................ 1,550,000 1,460,875
#HealthSouth 144A 10.75% 6/15/16 .................... 1,275,000 1,255,875
Ingles Markets 8.875% 12/1/11 ....................... 1,450,000 1,524,313
#Le-Natures 144A 10.00% 6/15/13 ..................... 1,265,000 1,339,319
Marsh Supermarkets 8.875% 8/1/07 .................... 625,000 624,219
National Beef Packing 10.50% 8/1/11 ................. 1,485,000 1,507,275
Pilgrim's Pride 9.625% 9/15/11 ...................... 1,665,000 1,739,925
Pinnacle Foods 8.25% 12/1/13 ........................ 1,470,000 1,451,625
Playtex Products 9.375% 6/1/11 ...................... 2,255,000 2,359,294
#Reynolds American 144A 7.875% 5/15/09 .............. 1,080,000 1,107,000
True Temper Sports 8.375% 9/15/11 ................... 1,995,000 1,825,425
Warner Chilcott 8.75% 2/1/15 ........................ 2,710,000 2,804,849
-----------
28,172,863
-----------
ENERGY-5.61%
#Basic Energy Services 144A 7.125% 4/15/16 .......... 450,000 420,750
Bluewater Finance 10.25% 2/15/12 .................... 985,000 1,002,238
#Brigham Exploration 144A 9.625% 5/1/14 ............. 460,000 453,100
Compton Petroleum 7.625% 12/1/13 .................... 605,000 580,800
#Copano Energy 144A 8.125% 3/1/16 ................... 450,000 450,000
El Paso Natural Gas 7.625% 8/1/10 ................... 515,000 526,588
High Yield-3
DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
----------- -----------
(U.S. $) (U.S. $)
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
El Paso Production Holding 7.75% 6/1/13 ........... $1,545,000 $ 1,564,312
#Hilcorp Energy 144A
9.00% 6/1/16 ................................... 1,160,000 1,174,499
10.50% 9/1/10 .................................. 569,000 615,943
Inergy Finance
6.875% 12/15/14 ................................ 810,000 757,350
8.25% 3/1/16 ................................... 375,000 380,625
#Mariner Energy 144A 7.50% 4/15/13 ................ 700,000 677,250
#MarkWest Energy 144A 8.50% 7/15/16 ............... 325,000 319,638
#PetroHawk Energy 144A 9.125% 7/15/13 ............. 1,875,000 1,874,999
oSecunda International 13.068% 9/1/12 ............. 1,075,000 1,128,750
Tennessee Gas Pipeline 8.375% 6/15/32 ............. 600,000 644,677
#VeraSun Energy 144A 9.875% 12/15/12 .............. 1,100,000 1,166,000
Whiting Petroleum 7.25% 5/1/13 .................... 935,000 899,938
-----------
14,637,457
-----------
FINANCE & INVESTMENTS-0.48%
FINOVA Group 7.50% 11/15/09 ....................... 4,137,987 1,241,396
-----------
1,241,396
-----------
MEDIA-10.35%
#Affinion Group 144A 11.50% 10/15/15 .............. 920,000 906,200
Charter Communications Holdings
11.125% 1/15/11 ................................ 1,175,000 734,375
(SS)13.50% 1/15/11 ................................ 4,270,000 2,796,850
o#Cleveland Unlimited 144A 13.579% 12/15/10 ....... 600,000 634,500
CSC Holdings
8.125% 7/15/09 ................................. 750,000 766,875
8.125% 8/15/09 ................................. 1,750,000 1,789,375
Dex Media East 12.125% 11/15/12 ................... 1,780,000 2,006,950
Insight Midwest 10.50% 11/1/10 .................... 3,615,000 3,786,712
Lodgenet Entertainment 9.50% 6/15/13 .............. 2,510,000 2,685,700
Mediacom Broadband 11.00% 7/15/13 ................. 415,000 439,381
Mediacom Capital 9.50% 1/15/13 .................... 3,110,000 3,110,000
#RH Donnelley 144A 8.875% 1/15/16 ................. 1,905,000 1,931,194
Sheridan Acquisition 10.25% 8/15/11 ............... 710,000 725,088
Sirius Satellite 9.625% 8/1/13 .................... 400,000 377,000
Vertis 10.875% 6/15/09 ............................ 785,000 777,150
Warner Music Group 7.375% 4/15/14 ................. 1,805,000 1,759,875
#XM Satellite Radio 144A 9.75% 5/1/14 ............. 1,925,000 1,771,000
-----------
26,998,225
-----------
REAL ESTATE-1.73%
American Real Estate Partners
8.125% 6/1/12 .................................. 2,135,000 2,140,338
BF Saul REIT 7.50% 3/1/14 ......................... 1,750,000 1,785,000
#Rouse 144A 6.75% 5/1/13 .......................... 600,000 587,343
-----------
4,512,681
-----------
SERVICES CYCLICAL-11.54%
Adesa 7.625% 6/15/12 .............................. 1,360,000 1,343,000
American Airlines 7.379% 5/23/16 .................. 601,825 544,651
Corrections Corporation of America
7.50% 5/1/11 ................................... 2,730,000 2,764,124
FTI Consulting 7.625% 6/15/13 ..................... 1,765,000 1,795,888
#Galaxy Entertainment Finance
144A 9.875% 12/15/12 ........................... 3,025,000 3,161,124
Gaylord Entertainment 8.00% 11/15/13 .............. 1,230,000 1,234,613
(SS)H-Lines Finance 11.00% 4/1/13 ................. 2,288,000 1,973,400
#Hertz 144A
8.875% 1/1/14 .................................. $ 910,000 $ 937,300
10.50% 1/1/16 .................................. 370,000 394,050
Horizon Lines 9.00% 11/1/12 ....................... 935,000 953,700
Kansas City Southern Railway
9.50% 10/1/08 .................................. 1,450,000 1,526,125
#Knowledge Learning 144A 7.75% 2/1/15 ............. 1,065,000 979,800
Mandalay Resort Group 9.50% 8/1/08 ................ 2,200,000 2,337,500
OMI 7.625% 12/1/13 ................................ 2,355,000 2,360,888
#Pokagon Gaming Authority 144A
10.375% 6/15/14 ................................ 600,000 623,250
Royal Caribbean Cruises 7.25% 3/15/18 ............. 575,000 560,689
Seabulk International 9.50% 8/15/13 ............... 865,000 960,150
Stena 9.625% 12/1/12 .............................. 1,350,000 1,441,125
(SS)Town Sports International 11.00% 2/1/14 ....... 2,005,000 1,609,013
Wheeling Island Gaming
10.125% 12/15/09 ............................... 2,500,000 2,596,875
-----------
30,097,265
-----------
SERVICES NON-CYCLICAL-7.19%
Aleris International 9.00% 11/15/14 ............... 1,265,000 1,293,463
Allied Waste North America 9.25% 9/1/12 ........... 1,905,000 2,028,825
Brickman Group 11.75% 12/15/09 .................... 580,000 626,400
Casella Waste Systems 9.75% 2/1/13 ................ 2,525,000 2,663,875
#CRC Health 144A 10.75% 2/1/16 .................... 2,005,000 2,050,113
Geo Subordinate 11.00% 5/15/12 .................... 1,935,000 1,954,350
#iPayment 144A 9.75% 5/15/14 ...................... 1,275,000 1,275,000
US Oncology 10.75% 8/15/14 ........................ 2,350,000 2,561,500
(SS)Vanguard Health 11.25% 10/1/15 ................ 3,880,000 2,754,799
#WCA Waste 144A 9.25% 6/15/14 ..................... 1,525,000 1,547,875
-----------
18,756,200
-----------
TECHNOLOGY & ELECTRONICS-2.23%
Magnachip Semiconductor 8.00% 12/15/14 ............ 3,400,000 2,839,000
Sanmina-SCI 8.125% 3/1/16 ......................... 750,000 735,000
#Sunguard Data Systems 144A
10.25% 8/15/15 ................................. 1,500,000 1,558,125
o#UGS Capital II PIK 144A 10.38% 6/1/11 ........... 675,000 671,625
-----------
5,803,750
-----------
TELECOMMUNICATIONS-10.16%
++(SS)Allegiance Telecom 11.75% 2/15/08 ........... 565,000 257,075
American Tower 7.125% 10/15/12 .................... 1,610,000 1,614,025
American Towers 7.25% 12/1/11 ..................... 580,000 595,950
Cincinnati Bell 8.375% 1/15/14 .................... 2,210,000 2,187,900
#Digicel Limited 144A 9.25% 9/1/12 ................ 1,170,000 1,228,500
(SS)Inmarsat Finance 10.375% 11/15/12 ............. 2,895,000 2,478,844
#Intelsat Bermuda 144A 11.25% 6/15/16 ............. 775,000 798,250
Intelsat Subsidiary 8.625% 1/15/15 ................ 1,400,000 1,410,500
iPCS 11.50% 5/1/12 ................................ 885,000 991,200
oIWO Holdings 8.818% 1/15/12 ...................... 265,000 275,600
#Nordic Telephone Company Holdings 144A
8.875% 5/1/16 .................................. 750,000 774,375
oQwest 8.579% 6/15/13 ............................. 1,100,000 1,168,750
Rural Cellular 9.875% 2/1/10 ...................... 1,685,000 1,741,869
o#Rural Cellular 144A 10.899% 11/1/12 ............. 760,000 783,750
#Telcordia Technologies 144A
10.00% 3/15/13 ................................. 3,155,000 2,681,750
Triton Communications 9.375% 2/1/11 ............... 1,375,000 990,000
High Yield-4
DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
(U.S. $) (U.S. $)
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
oUS LEC 13.62% 10/1/09 .......................... $ 675,000 $ 720,563
#VimpelCom 144A 8.25% 5/23/16 ................... 1,100,000 1,057,375
#Wind Acquisition 144A 10.75% 12/1/15 ........... 2,700,000 2,882,249
#Windstream 144A
8.125% 8/1/13 ................................ 500,000 512,500
8.625% 8/1/16 ................................ 1,300,000 1,335,750
------------
26,486,775
------------
UTILITIES-4.26%
Avista 9.75% 6/1/08 ............................. 680,000 723,115
++#Calpine 144A 9.90% 7/15/07 ................... 1,177,692 1,136,473
Elwood Energy 8.159% 7/5/26 ..................... 1,223,408 1,329,910
Midwest Generation
8.30% 7/2/09 ................................. 1,350,000 1,370,250
8.75% 5/1/34 ................................. 1,010,000 1,075,650
Mirant Americas Generation 8.30% 5/1/11 ......... 2,450,000 2,431,625
NRG Energy 7.25% 2/1/14 ......................... 1,325,000 1,295,188
Orion Power Holdings 12.00% 5/1/10 .............. 1,105,000 1,254,175
#Tenaska Alabama Partners 144A 7.00% 6/30/21 .... 492,630 482,588
=++#USGen New England 144A 7.46% 1/2/15 ......... 10,697 7,220
------------
11,106,194
------------
TOTAL CORPORATE BONDS
(COST $243,217,635) .......................... 239,743,577
------------
CONVERTIBLE BONDS-0.19%
#Charter Communications 144A 5.875%
11/16/09 exercise price $2.42,
expiration date 11/16/09 ..................... 655,000 488,794
------------
TOTAL CONVERTIBLE BONDS
(COST $630,985) .............................. 488,794
------------
EMERGING MARKET BONDS-1 14%
#C&M Finance 144A 8.10% 2/1/16 .................. 750,000 717,645
Republic of El Salvador 7.65% 6/15/35 ........... 1,345,000 1,304,650
Venezuela Government 6.00% 12/9/20 .............. 1,110,000 955,377
------------
TOTAL EMERGING MARKET BONDS
(COST $3,108,068) ............................ 2,977,672
------------
NUMBER MARKET
OF SHARES VALUE
----------- ------------
(U.S. $)
COMMON STOCK-1.02%
@PIE=+Avado Brands Restricted ................... 1,813 $ 1,704
B&G Foods ....................................... 16,000 259,360
+Foster Wheeler ................................. 27,215 1,175,682
+Mirant ......................................... 35,864 961,155
+Petroleum Geo-Services ADR ..................... 2,484 155,896
+XM Satellite Radio Holdings Class A ............ 6,750 98,888
------------
TOTAL COMMON STOCK
(COST $1,465,516) ............................ 2,652,685
------------
WARRANTS-0.00%
+#Solutia 144A, exercise price $7.59,
expiration date 7/15/09 ...................... 850 --
------------
TOTAL WARRANTS
(COST $72,431) ............................... --
------------
PRINCIPAL
AMOUNT
----------
(U.S. $)
REPURCHASE AGREEMENTS-5.73%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased at
$7,857,946, collateralized by $7,658,000
U.S. Treasury Notes 6.00% due 8/15/09,
market value $8,019,831) ..................... $7,855,000 7,855,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased at
$2,020,741, collateralized by $1,010,000
U.S. Treasury Notes 3.875% due 7/31/07,
market value $1,011,838, $1,010,000 U.S.
Treasury Notes 3.875% due 5/15/09, market
value $980,935 and $68,000 U.S. Treasury
Notes 6.50% due 10/15/06, market value
$69,478) ..................................... 2,020,000 2,020,000
With UBS Warburg 4.35% 7/3/06 (dated
6/30/06, to be repurchased at $5,052,831,
collateralized by $2,714,000 U.S. Treasury
Notes 3.875% due 5/15/09, market value
$2,634,798 and $2,525,000 U.S. Treasury
Notes 4.875% due 5/15/09, market value
$2,524,753) .................................. 5,051,000 5,051,000
----------
TOTAL REPURCHASE AGREEMENTS
(COST $14,926,000) ........................... 14,926,000
----------
High Yield-5
DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-100.60% (COST $265,079,142) ... $262,286,762
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.60%) ........ (1,554,706)
------------
NET ASSETS APPLICABLE TO 45,491,724 SHARES OUTSTANDING-100.00% $260,732,056
============
NET ASSET VALUE-DELAWARE VIP HIGH YIELD SERIES STANDARD CLASS
($86,943,774 / 15,158,890 SHARES) ........................... $ 5.74
============
NET ASSET VALUE-DELAWARE VIP HIGH YIELD SERIES SERVICE CLASS
($173,788,282 / 30,332,834 SHARES) .......................... $ 5.73
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par).. $298,303,100
Undistributed net investment income ............................ 9,646,522
Accumulated net realized loss on investments ................... (44,425,186)
Net unrealized depreciation of investments ..................... (2,792,380)
------------
Total net assets ............................................... $260,732,056
============
- ----------
++ Non-income producing security. Security is currently in default.
+ Non-income producing security for the period ended June 30, 2006.
(SS) Step coupon bond. Indicates security that has a zero coupon that remains in
effect until a predetermined date at which time the stated interest rate
becomes effective.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At June 30, 2006, the aggregate amount of Rule 144A
securities equaled $59,234,818, which represented 22.72% of the Series' net
assets. See Note 7 in "Notes to Financial Statements."
@ Illiquid security. At June 30, 2006, the aggregate amount of illiquid
securities equaled $138,498, which represented 0.05% of the Series' net
assets. See Note 7 in "Notes to Financial Statements."
= Security is being fair valued in accordance with the Series' fair valuation
policy. At June 30, 2006, the aggregate amount of fair valued securities
equaled $145,718, which represented 0.06% of the Series' net assets. See
Note 1 in "Notes to Financial Statements."
PIE Restricted Security. Investment in a security not registered under the
Securities Act of 1933, as amended. This security has certain restrictions
on resale which may limit its liquidity. At June 30, 2006, the aggregate
amount of the restricted security equaled $1,704 or 0.00% of the Series'
net assets. See Note 7 in "Notes to Financial Statements."
SUMMARY OF ABBREVIATIONS:
ADR - American Depositary Receipts
CBO - Collateralized Bond Obligation
PIK - Pay-in-Kind
REIT - Real Estate Investment Trust
See accompanying notes
High Yield-6
DELAWARE VIP TRUST-
DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2006
(Unaudited)
ASSETS:
Investments at market (cost $265,079,142) ... $262,286,762
Cash ........................................ 380,416
Dividends and interest receivable ........... 4,693,459
Subscriptions receivable .................... 676,325
Receivable for securities sold .............. 11,666,256
------------
Total assets ................................ 279,703,218
------------
LIABILITIES:
Payable for securities purchased ............ 18,653,624
Liquidations payable ........................ 69,471
Due to manager and affiliates ............... 193,719
Other accrued expenses ...................... 54,348
------------
Total liabilities ........................... 18,971,162
------------
Total net assets ............................ $260,732,056
============
See accompanying notes
High Yield-7
DELAWARE VIP TRUST-
DELAWARE VIP HIGH YIELD SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006
(Unaudited)
INVESTMENT INCOME:
Interest ........................................................ $10,746,090
Dividends ....................................................... 16,601
-----------
10,762,691
-----------
EXPENSES:
Management fees ................................................. 796,568
Distribution expenses - Service Class ........................... 250,637
Accounting and administration expenses .......................... 49,019
Legal and professional fees ..................................... 23,183
Reports and statements to shareholders .......................... 21,490
Dividend disbursing and transfer agent fees and expenses ........ 12,255
Custodian fees .................................................. 7,527
Insurance fees .................................................. 6,652
Trustees' fees .................................................. 6,130
Registration fees ............................................... 2,795
Pricing fees .................................................... 2,494
Other ........................................................... 4,729
-----------
1,183,479
Less waiver of distribution expenses - Service Class ............ (41,773)
Less expense paid indirectly .................................... (2,185)
-----------
Total operating expenses ........................................ 1,139,521
-----------
NET INVESTMENT INCOME ........................................... 9,623,170
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ................................ 14,544
Net change in unrealized appreciation/ depreciation of
investments .................................................. (544,730)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ................. (530,186)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ 9,092,984
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP HIGH YIELD SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ............................ $ 9,623,170 $ 15,193,441
Net realized gain on investments ................. 14,544 1,807,494
Net change in unrealized appreciation/
depreciation of investments ................... (544,730) (9,505,870)
------------ ------------
Net increase in net assets resulting from
operations .................................... 9,092,984 7,495,065
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class ................................ (5,223,811) (4,250,072)
Service Class ................................. (10,890,450) (8,789,319)
------------ ------------
(16,114,261) (13,039,391)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ................................ 22,960,150 33,815,940
Service Class ................................. 34,506,553 60,267,388
Net asset value of shares issued upon reinvestment
of dividends and distributions:
Standard Class ................................ 5,223,811 4,250,072
Service Class ................................. 10,890,450 8,789,319
------------ ------------
73,580,964 107,122,719
------------ ------------
Cost of shares repurchased:
Standard Class ................................ (9,043,084) (31,558,451)
Service Class ................................. (29,307,991) (33,897,320)
------------ ------------
(38,351,075) (65,455,771)
------------ ------------
Increase in net assets derived from capital share
transactions .................................. 35,229,889 41,666,948
------------ ------------
NET INCREASE IN NET ASSETS ....................... 28,208,612 36,122,622
NET ASSETS:
Beginning of period .............................. 232,523,444 196,400,822
------------ ------------
End of period (including undistributed net
investment income of $9,646,522 and
$16,105,414, respectively) .................... $260,732,056 $232,523,444
============ ============
See accompanying notes
High Yield-8
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP HIGH YIELD SERIES STANDARD CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 5.910 $ 6.110 $ 5.690 $ 4.790 $ 5.220 $ 6.000
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (2) ................. 0.232 0.434 0.437 0.489 0.517 0.586
Net realized and unrealized gain (loss)
on investments and foreign currencies 0.007 (0.227) 0.332 0.804 (0.413) (0.821)
------- ------- ------- ------- ------- -------
Total from investment operations .......... 0.239 0.207 0.769 1.293 0.104 (0.235)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ..................... (0.409) (0.407) (0.349) (0.393) (0.534) (0.545)
------- ------- ------- ------- ------- -------
Total dividends and distributions ......... (0.409) (0.407) (0.349) (0.393) (0.534) (0.545)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 5.740 $ 5.910 $ 6.110 $ 5.690 $ 4.790 $ 5.220
======= ======= ======= ======= ======= =======
Total return(3) ........................... 4.11% 3.59% 14.25% 28.74% 1.84% (4.10%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $86,944 $70,139 $65,418 $71,061 $48,089 $51,459
Ratio of expenses to average net assets ... 0.76% 0.78% 0.75% 0.77% 0.78% 0.79%
Ratio of net investment income to
average net assets ..................... 8.02% 7.39% 7.66% 9.33% 10.96% 10.82%
Portfolio turnover ........................ 127% 162% 429% 716% 587% 557%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value.
See accompanying notes
High Yield-9
DELAWARE VIP HIGH YIELD SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP HIGH YIELD SERIES SERVICE CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 5.900 $ 6.100 $ 5.680 $ 4.780 $ 5.220 $ 6.000
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (2) ................. 0.225 0.419 0.423 0.477 0.510 0.578
Net realized and unrealized gain (loss)
on investments and foreign currencies (0.001) (0.226) 0.334 0.809 (0.424) (0.818)
-------- -------- -------- ------- ------- -------
Total from investment operations .......... 0.224 0.193 0.757 1.286 0.086 (0.240)
-------- -------- -------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ..................... (0.394) (0.393) (0.337) (0.386) (0.526) (0.540)
-------- -------- -------- ------- ------- -------
Total dividends and distributions ......... (0.394) (0.393) (0.337) (0.386) (0.526) (0.540)
-------- -------- -------- ------- ------- -------
Net asset value, end of period ............ $ 5.730 $ 5.900 $ 6.100 $ 5.680 $ 4.780 $ 5.220
======== ======== ======== ======= ======= =======
Total return(3) ........................... 3.86% 3.34% 14.02% 28.61% 1.65% (4.38%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $173,788 $162,384 $130,983 $68,295 $13,529 $ 5,715
Ratio of expenses to average net assets ... 1.01% 1.03% 1.00% 0.99% 0.93% 0.94%
Ratio of expenses to average net assets
prior to expense limitation and
expenses paid indirectly ............... 1.06% 1.08% 1.05% 1.02% 0.93% 0.94%
Ratio of net investment income to average
net assets ............................. 7.77% 7.14% 7.41% 9.11% 10.81% 10.67%
Ratio of net investment income to average
net assets prior to expense limitation
and expenses paid indirectly ........... 7.72% 7.09% 7.36% 9.08% 10.81% 10.67%
Portfolio turnover ........................ 127% 162% 429% 716% 587% 557%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the distributor, as applicable. Performance would
have been lower had the waiver not been in effect.
See accompanying notes
High Yield-10
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP High
Yield Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek total return and, as a
secondary objective, high current income.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Long-term debt securities are valued by an
independent pricing service and such prices are believed to reflect the fair
value of such securities. Short-term debt securities having less than 60 days to
maturity are valued at amortized cost, which approximates market value. Other
securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Series' Board of Trustees. In determining whether market quotations are readily
available or fair valuation will be used, various factors will be taken into
consideration, such as market closures, or with respect to foreign securities,
aftermarket trading or significant events after local market trading (e.g.,
government actions or pronouncements, trading volume or volatility on markets,
exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Discounts and premiums on non-convertible bonds
are amortized to interest income over the lives of the respective securities.
Realized gains (losses) on paydowns of mortgage-and asset-backed securities are
classified as interest income.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the
Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and
0.50% on average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.78% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
High Yield-11
DELAWARE VIP HIGH YIELD SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO DMC AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$137,882 $10,651 $35,409 $9,777
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$5,280 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases .......................................... $180,558,696
Sales .............................................. 146,812,376
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end.
At June 30, 2006, the cost of investments and unrealized appreciation
(depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION DEPRECIATION
- ------------ ------------ ------------ --------------
$266,027,419 $4,229,338 $(7,969,995) $(3,740,657)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
----------- -----------
Ordinary income .................................... $16,114,261 $13,039,391
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ...................... $298,303,100
Undistributed ordinary income....................... 9,646,522
Capital loss carryforwards ......................... (43,448,120)
Six month period realized losses ................... (28,789)
Unrealized depreciation of investments ............. (3,740,657)
------------
Net assets ......................................... $260,732,056
============
High Yield-12
DELAWARE VIP HIGH YIELD SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales and tax treatment
of market discount and premium on debt instruments.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of paydown gain (loss) on mortgage- and asset-backed
securities, and market discount and premium on certain debt instruments. Results
of operations and net assets were not affected by these reclassifications. For
the six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
- ----------------- ------------
$32,199 $(32,199)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $20,796,195 expires in
2008, $18,082,790 expires in 2009 and $4,569,135 expires in 2010. For the six
months ended June 30, 2006, the Series had capital losses of $28,789 which may
increase the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- -----------
Shares sold:
Standard Class .................................. 3,927,431 5,762,942
Service Class ................................... 5,928,658 10,268,782
Shares issued upon reinvestment of dividends and
distributions:
Standard Class .................................. 918,069 740,431
Service Class ................................... 1,917,333 1,531,240
---------- -----------
12,691,491 18,303,395
---------- -----------
Shares repurchased:
Standard Class .................................. (1,546,163) (5,350,215)
Service Class ................................... (5,030,234) (5,761,025)
---------- -----------
(6,576,397) (11,111,240)
---------- -----------
Net increase ....................................... 6,115,094 7,192,155
========== ===========
High Yield-13
DELAWARE VIP HIGH YIELD SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. CREDIT AND MARKET RISK
The Series invests a portion of its assets in high yield fixed income
securities, which carry ratings of BB or lower by Standard & Poor's Ratings
Group and/or Ba or lower by Moody's Investors Service, Inc. Investments in these
higher yielding securities are generally accompanied by a greater degree of
credit risk than higher rated securities. Additionally, lower rated securities
may be more susceptible to adverse economic and competitive industry conditions
than investment grade securities.
The Series may invest up to 15% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. Rule
144A and illiquid securities have been identified on the Statement of Net
Assets.
8. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
High Yield-14
DELAWARE VIP TRUST-DELAWARE VIP HIGH YIELD SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP TRUST HIGH YIELD SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP High Yield
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all high
current yield funds underlying variable insurance products as selected by
Lipper. The Lipper report comparison showed that the Series' total return for
the one and three year periods was in the first quartile of such Performance
Universe. The report further showed that the Series' total return for the five
and 10 year periods was in the second and fourth quartile, respectively. The
Board noted that the Series' performance results were mixed. However, given the
strong recent returns, which were achieved by the current portfolio manager, the
Board was satisfied with such performance.
High Yield-15
DELAWARE VIP HIGH YIELD SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee was
in the quartile with the second highest expenses of its Expense Group and its
total expenses were in the quartile with the highest expenses of its Expense
Group. The Board noted that the Series' total expenses were not in line with the
Board's stated objective. In evaluating total expenses, the Board considered fee
waivers in place through April 2007 and recent initiatives implemented by
management, such as the outsourcing of certain transfer agency services,
creating an opportunity for a reduction in expenses. The Board was satisfied
with management's efforts to improve the Series' total expense ratio and bring
it in line with the Board's objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
High Yield-16
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,070.60 0.98% $5.03
Service Class 1,000.00 1,069.30 1.23% 6.31
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,019.93 0.98% $4.91
Service Class 1,000.00 1,018.70 1.23% 6.16
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
International Value Equity-1
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
COUNTRY AND SECTOR ALLOCATIONS
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
COUNTRY OF NET ASSETS
- ------- -------------
COMMON STOCK 98.96%
Australia 4.90%
Belgium 1.88%
Canada 5.54%
Denmark 2.01%
Finland 4.32%
France 14.12%
Germany 6.07%
Hong Kong 1.61%
Japan 19.13%
Mexico 3.51%
Netherlands 2.87%
Norway 1.68%
Republic of Korea 2.34%
Sweden 2.43%
Switzerland 1.98%
United Kingdom 24.57%
RIGHTS 0.05%
REPURCHASE AGREEMENTS 0.73%
SECURITIES LENDING COLLATERAL 9.59%
Fixed Rate Notes 1.69%
Variable Rate Notes 7.90%
TOTAL MARKET VALUE OF SECURITIES 109.33%
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (9.59%)
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.26%
------
TOTAL NET ASSETS 100.00%
======
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
Consumer Discretionary 19.27%
Consumer Staples 7.44%
Energy 3.52%
Financials 24.07%
Health Care 10.68%
Industrials 8.77%
Information Technology 12.82%
Materials 7.29%
Telecommunication Services 5.15%
-----
TOTAL 99.01%
=====
International Value Equity-2
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER MARKET
OF SHARES VALUE
---------- ------------
(U.S. $)
COMMON STOCK-98.96%'d'
AUSTRALIA-4.90%
Coca-Cola Amatil................................... 630,789 $ 3,323,585
Telstra............................................ 624,459 1,707,765
Westpac Banking.................................... 159,243 2,754,989
------------
7,786,339
------------
BELGIUM-1.88%
Dexia.............................................. 124,250 2,987,733
------------
2,987,733
------------
CANADA-5.54%
Alcan.............................................. 42,219 1,977,456
*Canadian Pacific Railway.......................... 64,689 3,297,609
+CGI Group......................................... 566,005 3,528,659
------------
8,803,724
------------
DENMARK-2.01%
Novo Nordisk....................................... 50,030 3,187,034
------------
3,187,034
------------
FINLAND-4.32%
Nokia.............................................. 180,256 3,679,680
Tietoenator........................................ 110,342 3,186,782
------------
6,866,462
------------
FRANCE-14.12%
+Arkema............................................ 2,124 82,887
AXA................................................ 90,128 2,958,039
*Compagnie de Saint-Gobain......................... 48,927 3,498,226
LaFarge............................................ 27,405 3,440,390
*Lagardere......................................... 41,349 3,051,605
Sanofi-Aventis..................................... 39,046 3,810,558
Total.............................................. 84,976 5,592,026
------------
22,433,731
------------
GERMANY-6.07%
Bayerische Motoren Werke........................... 76,553 3,822,606
Metro.............................................. 73,991 4,199,096
Volkswagen......................................... 23,110 1,619,825
------------
9,641,527
------------
HONG KONG-1.61%
Esprit Holdings.................................... 313,921 2,562,703
------------
2,562,703
------------
JAPAN-19.13%
*Asahi Glass....................................... 194,000 2,459,968
*Canon............................................. 77,370 3,793,112
Fujitsu............................................ 451,000 3,495,911
Honda Motor........................................ 77,800 2,468,007
*Kao............................................... 129,000 3,376,345
Mitsubishi UFJ Financial Group..................... 251 3,509,570
*Nissan Motor...................................... 251,100 2,742,944
*Ono Pharmaceutical................................ 71,700 3,490,074
Sony............................................... 38,700 1,707,901
Terumo............................................. 100,000 3,338,287
------------
30,382,119
------------
MEXICO-3.51%
Cemex de C.V. ADR.................................. 49,599 2,825,655
Telefonos de Mexico de C.V. ADR.................... 131,716 2,743,644
------------
5,569,299
------------
NETHERLANDS-2.87%
ING Groep ......................................... 115,879 4,554,648
------------
4,554,648
------------
NORWAY-1.68%
Tandberg .......................................... 323,008 $ 2,672,318
------------
2,672,318
------------
REPUBLIC OF KOREA-2.34%
Kookmin Bank....................................... 45,170 3,713,763
------------
3,713,763
------------
SWEDEN-2.43%
Nordea Bank........................................ 322,974 3,859,487
------------
3,859,487
------------
SWITZERLAND-1.98%
Novartis........................................... 57,940 3,137,400
------------
3,137,400
------------
UNITED KINGDOM-24.57%
+British Airways................................... 485,815 3,081,489
DSG International.................................. 476,392 1,682,649
Greggs............................................. 12,319 915,337
HBOS............................................... 154,506 2,685,770
Kesa Electricals................................... 659,047 3,522,166
Rio Tinto.......................................... 61,540 3,254,761
Royal & Sun Alliance Insurance Group............... 1,497,016 3,723,440
Royal Bank of Scotland Group....................... 122,317 4,024,005
Standard Chartered................................. 138,761 3,384,604
Tomkins............................................ 299,890 1,593,007
Travis Perkins..................................... 111,791 3,127,817
Vodafone Group..................................... 1,752,219 3,734,435
WPP Group.......................................... 355,893 4,307,495
------------
39,036,975
------------
TOTAL COMMON STOCK
(COST $161,495,808)............................. 157,195,262
------------
RIGHTS-0.05%'d'
FRANCE-0.05%
AXA ............................................... 90,128 76,084
------------
TOTAL RIGHTS (COST $0)............................. 76,084
------------
International Value Equity-3
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
(U.S. $)
REPURCHASE AGREEMENTS - 0.73%
With BNP Paribas 4.50% 7/3/06 (dated 6/30/06, to
be repurchased at $610,229, collateralized by
$595,000 U.S. Treasury Notes 6.00% due 8/15/09,
market value $623,275).......................... $610,000 $ 610,000
With Cantor Fitzgerald 4.40% 7/3/06 (dated 6/30/06,
to be repurchased at $157,058, collateralized by
$79,000 U.S. Treasury Notes 3.875% due 7/31/07,
market value $78,637, $79,000 U.S. Treasury
Notes 3.875% due 5/15/09, market value $76,235
and $5,000 U.S. Treasury Notes 6.50% due
10/15/06, market value $5,400).................. 157,000 157,000
With UBS Warburg 4.35% 7/3/06 (dated 6/30/06, to be
repurchased at $393,142, collateralized by
$211,000 U.S. Treasury Notes 3.875% due 5/15/09,
market value $204,768 and $196,000 U.S. Treasury
Notes 4.875% due 5/15/09, market
value $196,216)................................. 393,000 393,000
------------
TOTAL REPURCHASE AGREEMENTS
(COST $1,160,000) .............................. 1,160,000
------------
TOTAL MARKET VALUE OF SECURITIES BEFORE
SECURITIES LENDING COLLATERAL - 99.74%
(COST $162,655,808)............................. 158,431,346
------------
SECURITIES LENDING COLLATERAL**-9.59%
SHORT-TERM INVESTMENTS-9.59%
FIXED RATE NOTES-1.69%
Citigroup Global Markets 5.35% 7/3/06 ............. $2,686,433 $ 2,686,433
------------
2,686,433
------------
oVARIABLE RATE NOTES-7.90%
American Honda Finance 5.32% 2/21/07 .............. 432,659 432,659
ANZ National 5.11% 7/31/07......................... 96,146 96,146
Australia New Zealand 5.28% 7/31/07................ 480,732 480,732
Bank of America 5.32% 2/23/07...................... 624,951 624,951
Bank of New York 5.16% 7/31/07..................... 384,586 384,586
Barclays New York 5.31% 5/18/07.................... 624,951 624,951
Bayerische Landesbank 5.37% 8/25/06................ 480,732 480,732
Bear Stearns 5.19% 1/2/07.......................... 576,878 576,878
BNP Paribas 5.14% 7/31/07.......................... 480,732 480,732
Canadian Imperial Bank 5.28% 7/31/07............... 240,366 240,366
5.32% 11/22/06..................................... 480,732 480,732
CDC Financial Products 5.41% 7/31/06............... 624,951 624,951
Citigroup Global Markets 5.38% 7/7/06.............. 624,951 624,951
Commonwealth Bank
5.29% 7/31/07................................... 480,732 480,732
Goldman Sachs 5.45% 7/2/07......................... 624,951 624,951
Manufacturers & Traders 5.31% 9/26/06.............. 480,730 480,702
Marshall & Ilsley Bank 5.18% 7/31/07............... 528,805 528,805
Merrill Lynch Mortgage Capital 5.41% 8/3/06........ 432,659 432,659
National Australia Bank 5.10% 3/7/07............... 596,108 596,108
National City Bank 5.32% 3/2/07.................... 576,897 577,039
National Rural Utilities 5.10% 7/31/07............. 759,556 759,556
Nordea Bank New York 5.31% 5/16/07................. 240,364 240,354
Nordea Bank Norge 5.15% 7/31/07.................... 480,732 480,732
Royal Bank of Scotland 5.27% 7/31/07............... 480,732 480,732
Societe Generale 5.08% 7/31/07..................... 240,366 240,366
Wells Fargo 5.19% 7/31/07.......................... 480,732 480,732
------------
12,556,835
------------
TOTAL SECURITIES LENDING COLLATERAL
(COST $15,243,268).............................................. 15,243,268
------------
TOTAL MARKET VALUE OF SECURITIES-109.33%
(COST $177,899,076)............................................. 173,674,614(y)
OBLIGATION TO RETURN SECURITIES LENDING
COLLATERAL**-(9.59%)......................................... (15,243,268)
RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES-0.26%............................................ 417,431
------------
NET ASSETS APPLICABLE TO 7,937,077 SHARES
OUTSTANDING-100.00%.......................................... $158,848,777
============
NET ASSET VALUE-DELAWARE VIP INTERNATIONAL VALUE
EQUITY SERIES STANDARD CLASS
($158,792,005 / 7,934,238 SHARES)............................ $ 20.01
============
NET ASSET VALUE-DELAWARE VIP INTERNATIONAL VALUE
EQUITY SERIES SERVICE CLASS
($56,772 / 2,839 SHARES)..................................... $ 20.00
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited
authorization-no par)........................................ $ 95,231,390
Undistributed net investment income............................. 3,342,229
Accumulated net realized gain on investments.................... 64,482,208
Net unrealized depreciation of investments and
foreign currencies........................................... (4,207,050)
------------
Total net assets................................................ $158,848,777
============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
* Fully or partially on loan.
** See Note 8 in "Notes to Financial Statements."
(y) Includes $13,937,490 of securities loaned.
'd' Securities have been classified by country of origin. Classification by
type of business has been presented on page 2 in "Country and Sector
Allocations."
ADR - American Depositary Receipts
See accompanying notes
International Value Equity-4
DELAWARE VIP TRUST-
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ...................................................... $ 4,651,701
Interest ....................................................... 23,026
Securities lending income ...................................... 74,945
Foreign tax withheld ........................................... (318,151)
------------
4,431,521
------------
EXPENSES:
Management fees ................................................ 698,520
Accounting and administration expenses ......................... 32,871
Custodian fees ................................................. 32,806
Legal and professional fees .................................... 18,278
Dividend disbursing and transfer agent fees and expenses ....... 8,218
Reports and statements to shareholders ......................... 4,790
Trustees' fees ................................................. 4,231
Insurance fees ................................................. 3,586
Pricing fees ................................................... 2,403
Registration fees .............................................. 102
Distribution expenses - Service Class .......................... 91
Other .......................................................... 3,279
------------
809,175
Less waiver of distribution expenses - Service Class ........... (15)
------------
Total operating expenses ....................................... 809,160
------------
NET INVESTMENT INCOME .......................................... 3,622,361
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized gain on:
Investments ................................................. 65,631,159
Foreign currencies .......................................... 73,551
------------
Net realized gain .............................................. 65,704,710
Net change in unrealized appreciation/depreciation of
investments and foreign currencies .......................... (57,969,528)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES .................................................. 7,735,182
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 11,357,543
============
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES STATEMENTS OF CHANGES IN NET
ASSETS
SIX MONTHS
ENDED
6/30/05 YEAR ENDED
(UNAUDITED) 12/31/05
------------- ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income .......................................... $ 3,622,361 $ 4,195,257
Net realized gain on investments and foreign currencies ........ 65,704,710 9,604,540
Net change in unrealized appreciation/depreciation of
investments and foreign currencies .......................... (57,969,528) 5,525,580
------------ ------------
Net increase in net assets resulting from operations ........... 11,357,543 19,325,377
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class .............................................. (4,683,222) (2,493,989)
Service Class ............................................... (1,608) (928)
Net realized gain on investments:
Standard Class .............................................. (9,267,611) (1,825,497)
Service Class ............................................... (3,444) (788)
------------ ------------
(13,955,885) (4,321,202)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class .............................................. 3,096,564 4,337,148
Service Class ............................................... 40 3,501
Net asset value of shares issued upon reinvestment of dividends
and distributions:
Standard Class .............................................. 13,950,833 4,319,486
Service Class ............................................... 5,052 1,716
------------ ------------
17,052,489 8,661,851
------------ ------------
Cost of shares repurchased:
Standard Class .............................................. (16,951,086) (26,906,001)
Service Class ............................................... (9,175) (44,213)
------------ ------------
(16,960,261) (26,950,214)
------------ ------------
Increase (decrease) in net assets derived from capital share
transactions ................................................ 92,228 (18,288,363)
------------ ------------
NET DECREASE IN NET ASSETS ..................................... (2,506,114) (3,284,188)
NET ASSETS:
Beginning of period ............................................ 161,354,891 164,639,079
------------ ------------
End of period (including undistributed net investment income of
$3,342,229 and $4,331,147, respectively) .................... $158,848,777 $161,354,891
============ ============
See accompanying notes
International Value Equity-5
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES STANDARD CLASS
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES STANDARD CLASS
------------------------------------------------------------------
SIX
MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ................... $ 20.380 $ 18.550 $ 15.660 $ 11.550 $ 13.900 $ 17.940
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) ............................... 0.455 0.496 0.396 0.373 0.254 0.277
Net realized and unrealized gain (loss) on investments
and foreign currencies .............................. 1.010 1.838 2.920 4.355 (1.556) (2.578)
-------- -------- -------- -------- -------- --------
Total from investment operations ....................... 1.465 2.334 3.316 4.728 (1.302) (2.301)
-------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income .................................. (0.616) (0.291) (0.426) (0.314) (0.284) (0.435)
Net realized gain on investments ....................... (1.219) (0.213) -- (0.304) (0.764) (1.304)
-------- -------- -------- -------- -------- --------
Total dividends and distributions ...................... (1.835) (0.504) (0.426) (0.618) (1.048) (1.739)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ......................... $ 20.010 $ 20.380 $ 18.550 $ 15.660 $ 11.550 $ 13.900
======== ======== ======== ======== ======== ========
Total return(3) ........................................ 7.06% 12.87% 21.79% 43.44% (10.40%) (12.83%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................ $158,792 $161,293 $164,544 $167,813 $142,065 $191,481
Ratio of expenses to average net assets ................ 0.98% 1.00% 0.99% 0.98% 0.98% 0.95%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly ..... 0.98% 1.02% 0.99% 0.99% 1.02% 1.01%
Ratio of net investment income to average net assets ... 4.41% 2.63% 2.46% 2.96% 1.99% 1.84%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly .......................................... 4.41% 2.61% 2.46% 2.95% 1.95% 1.78%
Portfolio turnover ..................................... 199% 8% 10% 11% 13% 11%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
International Value Equity-6
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES SERVICE CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ................ $20.350 $18.520 $15.650 $11.550 $13.900 $17.930
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) ............................ 0.429 0.449 0.356 0.345 0.236 0.255
Net realized and unrealized gain (loss)
on investments and foreign currencies ............. 1.009 1.845 2.911 4.355 (1.559) (2.561)
------- ------- ------- ------- ------- -------
Total from investment operations .................... 1.438 2.294 3.267 4.700 (1.323) (2.306)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ............................... (0.569) (0.251) (0.397) (0.296) (0.263) (0.420)
Net realized gain on investments .................... (1.219) (0.213) -- (0.304) (0.764) (1.304)
------- ------- ------- ------- ------- -------
Total dividends and distributions ................... (1.788) (0.464) (0.397) (0.600) (1.027) (1.724)
------- ------- ------- ------- ------- -------
Net asset value, end of period ...................... $20.000 $20.350 $18.520 $15.650 $11.550 $13.900
======= ======= ======= ======= ======= =======
Total return(3) ..................................... 6.93% 12.65% 21.44% 43.11% (10.54%) (12.88%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ............. $ 57 $ 62 $ 95 $ 109 $ 54 $ 11
Ratio of expenses to average net assets ............. 1.23% 1.25% 1.24% 1.20% 1.13% 1.10%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly .. 1.28% 1.32% 1.29% 1.24% 1.17% 1.16%
Ratio of net investment income to average net
assets ........................................... 4.16% 2.38% 2.21% 2.74% 1.84% 1.69%
Ratio of net investment income to average net
assets prior to expense limitation and expenses
paid indirectly .................................. 4.11% 2.31% 2.16% 2.70% 1.80% 1.63%
Portfolio turnover .................................. 199% 8% 10% 11% 13% 11%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value.
Total investment return reflects waivers and payment of fees by the manager
and distributor, as applicable. Performance would have been lower had the
expense limitation and waiver not been in effect.
See accompanying notes
International Value Equity-7
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP
International Value Equity Series (the "Series"). The Trust is an open-end
investment company. The Series is considered diversified under the Investment
Company Act of 1940, as amended, and offers Standard Class and Service Class
shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class
shares carry a 12b-1 fee. The shares of the Series are sold only to separate
accounts of life insurance companies.
The investment objective of the Series is to seek long-term growth without undue
risk to principal.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. Short-term
debt securities having less than 60 days to maturity are valued at amortized
cost, which approximates market value. Securities lending collateral is valued
at amortized cost, which approximates market value. Forward foreign currency
exchange contracts are valued at the mean between the bid and asked prices of
the contracts and are marked-to-market daily. Interpolated values are derived
when the settlement date of the contract is an interim date for which quotations
are not available. Other securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith under
the direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Series does
not isolate that portion of realized gains and losses on investments which are
due to changes in foreign exchange rates from that which are due to changes in
market prices. The Series reports certain foreign currency related transactions
as components of realized gains (losses) for financial reporting purposes, where
such components are treated as ordinary income (loss) for federal income tax
purposes.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Taxable non-cash dividends are recorded as
dividend income. Foreign dividends are also recorded on the ex-dividend date or
as soon after the ex-dividend date that the Series is aware of such dividends,
net of all non-rebatable tax withholdings. Withholding taxes on foreign
dividends have been recorded in accordance with the Series' understanding of the
applicable country's tax rules and rates.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.85% on the first $500 million of average daily net assets of the
Series, 0.80% on the next $500 million, 0.75% on the next $1.5 billion, and
0.70% on average daily net assets in excess of $2.5 billion.
International Value Equity-8
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
NOTES TO FINANCIAL STATMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
Prior to May 1, 2006, Mondrian Investment Partners Ltd. served as the Series'
sub-advisor. For these services, DMC, not the Series, paid the Sub-advisor 0.20%
of the Series' average daily net assets. Beginning May 1, 2006, DMC is
responsible for the day to day management of the Series.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.08% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 1.00% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEE PAYABLE TO
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$108,238 $6,399 $11 $6,555
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$3,501 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases.............................. $161,955,384
Sales.................................. 172,330,361
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION DEPRECIATION
------------ ------------ ------------ --------------
$178,069,168 $9,948,751 $(14,343,305) $(4,394,554)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
----------- ----------
Ordinary income........................ $ 4,773,624 $2,563,510
Long-term capital gains................ 9,182,261 1,757,692
----------- ----------
Total distribution..................... $13,955,885 $4,321,202
=========== ==========
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
International Value Equity-9
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest.......... $ 95,231,390
Undistributed ordinary income.......... 3,858,506
Undistributed long-term capital gain... 64,136,023
Unrealized depreciation of investments
and foreign currencies.............. (4,377,142)
------------
Net assets............................. $158,848,777
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on foreign currency transactions. Results of
operations and net assets were not affected by these reclassifications. For the
six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS)
----------------- ------------
$73,551 $(73,551)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class...................... 149,295 233,387
Service Class....................... 2 191
Shares issued upon reinvestment of
dividends and distributions:
Standard Class...................... 686,895 234,882
Service Class....................... 249 93
------- -------
836,441 468,553
------- -------
Shares repurchased:
Standard Class...................... (815,513) (1,425,475)
Service Class....................... (435) (2,381)
------- ---------
(815,948) (1,427,856)
------- ---------
Net increase (decrease)................ 20,493 (959,303)
======= =========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
International Value Equity-10
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FOREIGN CURRENCY EXCHANGE CONTRACTS
The Series may enter into forward foreign currency exchange contracts as a way
of managing foreign exchange rate risk. The Series may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to buy
or sell for the period between the date the trade was entered into and the date
the security is delivered and paid for. The Series may also use these contracts
to hedge the U.S. dollar value of securities it already owns that are
denominated in foreign currencies. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency exchange contracts limit the risk of loss due to a decline in the value
of the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Series could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts. No forward foreign currency exchange contracts were
outstanding at June 30, 2006.
8. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments(R) Family of
Funds, may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of securities
issued in the United States and 105% of the market value of the securities
issued outside the United States. With respect to each loan, if the aggregate
market value of the collateral held on any business day is less than the
aggregate market value of the securities which are the subject of such loan, the
borrower will be notified to provide additional collateral not less than the
applicable collateral requirements. Cash collateral received is invested in
fixed income securities, with a weighted average maturity not to exceed 90 days,
rated in one of the top two tiers by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or repurchase agreements collateralized by such
securities. However, in the event of default or bankruptcy by the lending agent,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event the borrower fails to return loaned securities and the
collateral received is insufficient to cover the value of the loaned securities
and provided such collateral shortfall is not the result of investment losses,
the lending agent has agreed to pay the amount of the shortfall to the Series,
or at the discretion of the lending agent, replace the loaned securities. The
Series continues to record dividends on the securities loaned and is subject to
change in value of the securities loaned that may occur during the term of the
loan. The Series has the right under the Lending Agreement to recover the
securities from the borrower on demand. The security lending agent and the
borrower retain a portion of the earnings from the collateral investments. The
Series records security lending income net of such allocation.
At June 30, 2006, the market value of securities on loan was $13,937,490, for
which cash collateral was received and invested in accordance with the Lending
Agreement. Such investments are presented on the Statement of Net Assets under
the caption "Securities Lending Collateral."
9. CREDIT AND MARKET RISK
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid, and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited. In addition, a significant portion of the aggregate market
value of equity securities listed on the major securities exchanges in emerging
markets are held by a smaller number of investors. This may limit the number of
shares available for acquisition or disposition by the Series.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
10. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
International Value Equity-11
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
DELAWARE VIP TRUST-DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES INVESTMENT
ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP
International Value Equity Series (the "Series"). In making its decision, the
Board considered information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
Annual Meeting. Information furnished and discussed throughout the year included
reports detailing Series performance, investment strategies, expenses,
compliance matters and other services provided by Delaware Management Company
("DMC"), the investment advisor. Information furnished specifically in
connection with the Annual Meeting included materials provided by DMC and its
affiliates ("Delaware Investments") concerning, among other things, the level of
services provided to the Fund, the costs of such services to the Series,
economies of scale and the financial condition and profitability of Delaware
Investments. In addition, in connection with the Annual Meeting, the Board
considered independent historical and comparative reports prepared by Lipper
Inc. ("Lipper"), an independent statistical compilation organization. The Board
also considered industry comparative information presented by representatives
from Lipper. The Lipper reports compared the Series' investment performance and
expenses with those of other comparable mutual funds. The Board also received
certain supplemental information regarding management's policy with respect to
advisory fee levels and its philosophy with respect to breakpoints; the
structure of portfolio manager compensation; and any constraints or limitations
on the availability of securities in certain investment styles which might
inhibit DMC's ability to fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
International Value Equity-12
DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES
OTHER SERIES INFORMATION (CONTINUED)
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all
international core funds underlying variable insurance products as selected by
Lipper. The Lipper report comparison showed that the Series' total return for
the one year period was in the fourth quartile. The report further showed that
the Series' total return for the three, five and 10 year periods was in the
first quartile. The Board noted that the Series' performance results were mixed.
In evaluating the Series' performance, the Board considered the fact that the
new investment team began managing the Series in February 2006. At that time
management proposed, and the Board approved, modifications to the Series'
policies and strategies in order to reflect the new teams' investment approach.
The Board was pleased with management's efforts to improve Series performance
and expressed confidence in the new team and its philosophy and processes.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second highest expenses of its
Expense Group. The Board noted that the Series' total expenses were not in line
with the Board's stated objective. In evaluating total expenses, the Board
considered fee waivers in place through April 2007 and recent initiatives
implemented by management, such as the outsourcing of certain transfer agency
services, creating an opportunity for a reduction in expenses. The Board was
satisfied with management's efforts to improve the Series' total expense ratio
and bring it in line with the Board's objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
International Value Equity-13
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,108.70 0.83% $4.34
Service Class 1,000.00 1,107.50 1.08% 5.64
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.68 0.83% $4.16
Service Class 1,000.00 1,019.44 1.08% 5.41
* " Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
REIT-1
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
COMMON STOCK 93.22%
Diversified REITs 5.78%
Healthcare REITs 3.19%
Hotel REITs 7.03%
Industrial REITs 9.23%
Mall REITs 12.30%
Manufactured Housing REITs 1.86%
Mortgage REITs 0.00%
Multifamily REITs 19.26%
Office REITs 20.21%
Real Estate Operating Companies 0.92%
Self-Storage REITs 2.10%
Shopping Center REITs 11.34%
REPURCHASE AGREEMENTS 5.88%
TOTAL MARKET VALUE OF SECURITIES 99.10%
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.90%
------
TOTAL NET ASSETS 100.00%
======
REIT-2
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCK-93.22%
DIVERSIFIED REITS-5.78%
Vornado Realty Trust ................................ 446,801 $ 43,585,438
------------
43,585,438
------------
HEALTHCARE REITS-3.19%
Medical Properties Trust ............................ 536,835 5,926,658
Ventas .............................................. 535,600 18,146,128
------------
24,072,786
------------
HOTEL REITS-7.03%
Hersha Hospitality Trust ............................ 875,390 8,132,373
Host Hotels & Resorts ............................... 1,008,096 22,047,059
LaSalle Hotel Properties ............................ 291,585 13,500,386
Strategic Hotels & Resorts .......................... 452,600 9,386,924
------------
53,066,742
------------
INDUSTRIAL REITS-9.23%
AMB Property ........................................ 371,055 18,756,830
First Potomac Realty Trust .......................... 213,547 6,361,565
ProLogis ............................................ 853,593 44,489,268
------------
69,607,663
------------
MALL REITS-12.30%
General Growth Properties ........................... 631,646 28,461,969
Macerich ............................................ 234,900 16,489,980
Simon Property Group ................................ 576,699 47,831,415
------------
92,783,364
------------
MANUFACTURED HOUSING REITS-1.86%
Equity Lifestyle Properties ......................... 320,200 14,034,366
------------
14,034,366
------------
MORTGAGE REITS-0.00%
KKR Financial ....................................... 1,300 27,053
------------
27,053
------------
MULTIFAMILY REITS-19.26%
Archstone-Smith Trust ............................... 454,900 23,140,763
AvalonBay Communities ............................... 263,474 29,145,494
Camden Property Trust ............................... 144,574 10,633,418
Equity Residential .................................. 962,500 43,052,625
Essex Property Trust ................................ 165,508 18,480,623
Home Properties ..................................... 84,700 4,701,697
United Dominion Realty Trust ........................ 574,936 16,103,957
------------
145,258,577
------------
OFFICE REITS-20.21%
Alexandria Real Estate Equities ..................... 237,596 $ 21,070,013
BioMed Realty Trust ................................. 205,600 6,155,664
Boston Properties ................................... 370,600 33,502,240
CarrAmerica Realty .................................. 182,200 8,117,010
Equity Office Properties Trust ...................... 632,500 23,092,575
Highwoods Properties ................................ 164,700 5,958,846
Maguire Properties .................................. 357,300 12,566,241
Reckson Associates Realty ........................... 495,397 20,499,528
SL Green Realty ..................................... 196,237 21,482,064
------------
152,444,181
------------
REAL ESTATE OPERATING COMPANIES-0.92%
Starwood Hotels & Resorts Worldwide ................. 115,650 6,978,321
------------
6,978,321
------------
SELF-STORAGE REITS-2.10%
U-Store-It Trust .................................... 840,700 15,855,602
------------
15,855,602
------------
SHOPPING CENTER REITS-11.34%
Developers Diversified Realty ....................... 359,078 18,736,690
Federal Realty Investment Trust ..................... 263,089 18,416,230
Kimco Realty ........................................ 393,100 14,344,219
Kite Realty Group Trust ............................. 858,596 13,385,512
Regency Centers ..................................... 331,939 20,630,009
------------
85,512,660
------------
TOTAL COMMON STOCK
(COST $575,658,723) .............................. 703,226,753
------------
REIT-3
DELAWARE VIP REIT SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
----------- -----------
REPURCHASE AGREEMENTS-5.88%
With BNP Paribas 4.50% 7/3/06 (dated 6/30/06, to be
repurchased at $23,349,753, collateralized by
$22,755,000 U.S. Treasury Notes 6.00% due
8/15/09, market value $23,830,600) .............. $23,341,000 $23,341,000
With Cantor Fitzgerald 4.40% 7/3/06 (dated 6/30/06,
to be repurchased at $6,005,201, collateralized
by $3,002,000 U.S. Treasury Notes 3.875% due
7/31/07, market value $3,006,637, $3,002,000 U.S.
Treasury Notes 3.875% due 5/15/09, market value
$2,914,810 and $203,000 U.S. Treasury Notes 6.50%
due 10/15/06, market value $206,450) ............ 6,003,000 6,003,000
REPURCHASE AGREEMENTS (CONTINUED)
With UBS Warburg 4.35% 7/3/06 (dated 6/30/06, to be
repurchased at $15,013,440, collateralized by
$8,065,000 U.S. Treasury Notes 3.875% due
5/15/09, market value $7,829,196 and $7,504,000
U.S. Treasury Notes 4.875% due 5/15/09, market
value $7,502,201) ............................... $15,008,000 $15,008,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $44,352,000) ..... 44,352,000
-----------
TOTAL MARKET VALUE OF SECURITIES-99.10% (COST $620,010,723) ..... 747,578,753
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-0.90% ........... 6,787,192
------------
NET ASSETS APPLICABLE TO 39,489,785 SHARES OUTSTANDING-100.00% .. $754,365,945
============
NET ASSET VALUE-DELAWARE VIP REIT SERIES STANDARD CLASS
($517,296,150 / 27,073,854 SHARES) ........................... $ 19.11
============
NET ASSET VALUE-DELAWARE VIP REIT SERIES SERVICE CLASS
($237,069,795 / 12,415,931 SHARES) ........................... $ 19.09
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization - no
par) ......................................................... $522,216,090
Undistributed net investment income ............................. 12,562,057
Accumulated net realized gain on investments .................... 92,019,768
Net unrealized appreciation of investments ...................... 127,568,030
------------
Total net assets ................................................ $754,365,945
============
REIT-Real Estate Investment Trust
See accompanying notes
REIT-4
DELAWARE VIP TRUST-
DELAWARE VIP REIT SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ...................................................... $ 1,374,967
Interest ....................................................... 979,454
------------
2,354,421
------------
EXPENSES:
Management fees ................................................ 3,033,519
Distribution expenses - Service Class .......................... 330,103
Accounting and administration expenses ......................... 165,260
Reports and statements to shareholders ......................... 69,565
Legal and professional fees .................................... 61,168
Dividend disbursing and transfer agent fees and expenses ....... 41,565
Trustees' fees ................................................. 20,636
Custodian fees ................................................. 14,301
Insurance fees ................................................. 13,800
Pricing fees ................................................... 144
Other .......................................................... 14,344
------------
3,764,405
Less waiver of distribution expenses - Service Class ........... (55,017)
Less expense paid indirectly ................................... (3,385)
------------
Total operating expenses ....................................... 3,706,003
------------
NET INVESTMENT LOSS ............................................ (1,351,582)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ............................... 102,124,887
Net change in unrealized appreciation/depreciation of
investments ................................................. (14,215,520)
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS .............................................. 87,909,367
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................. $ 86,557,785
============
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP REIT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------- --------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income (loss) .................. $ (1,351,582) $ 22,994,249
Net realized gain on investments .............. 102,124,887 52,767,407
Net change in unrealized appreciation/
depreciation of investments ................ (14,215,520) (21,990,619)
------------- -------------
Net increase in net assets resulting from
operations ................................. 86,557,785 53,771,037
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income:
Standard Class ............................. (13,253,838) (11,911,298)
Service Class .............................. (3,839,355) (2,802,570)
Net realized gain on investments:
Standard Class ............................. (44,190,646) (36,097,851)
Service Class .............................. (14,446,942) (9,584,965)
------------- -------------
(75,730,781) (60,396,684)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ............................. 48,522,664 111,459,280
Service Class .............................. 34,853,438 63,929,983
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Standard Class ............................. 57,444,484 48,009,149
Service Class .............................. 18,286,297 12,387,535
------------- -------------
159,106,883 235,785,947
------------- -------------
Cost of shares repurchased:
Standard Class ............................. (233,721,706) (139,035,302)
Service Class .............................. (21,618,030) (35,552,569)
------------- -------------
(255,339,736) (174,587,871)
------------- -------------
Increase (decrease) in net assets derived from
capital share transactions ................. (96,232,853) 61,198,076
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS ......... (85,405,849) 54,572,429
NET ASSETS:
Beginning of period ........................... 839,771,794 785,199,365
------------- -------------
End of period (including undistributed
net investment income of $12,562,057 and
$31,025,294, respectively) ................. $ 754,365,945 $ 839,771,794
============= =============
See accompanying notes
REIT-5
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP REIT SERIES STANDARD CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period.......................... $ 18.770 $ 19.080 $ 15.140 $ 11.730 $ 11.700 $11.020
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(2)............................... (0.025) 0.523 0.504 0.586 0.534 0.571
Net realized and unrealized gain on investments............... 2.077 0.618 4.112 3.271 0.010 0.361
-------- -------- -------- -------- -------- -------
Total from investment operations.............................. 2.052 1.141 4.616 3.857 0.544 0.932
-------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income......................................... (0.395) (0.360) (0.332) (0.342) (0.317) (0.209)
Net realized gain on investments.............................. (1.317) (1.091) (0.344) (0.105) (0.197) (0.043)
-------- -------- -------- -------- -------- -------
Total dividends and distributions............................. (1.712) (1.451) (0.676) (0.447) (0.514) (0.252)
-------- -------- -------- -------- -------- -------
Net asset value, end of period................................ $ 19.110 $ 18.770 $ 19.080 $ 15.140 $ 11.730 $11.700
======== ======== ======== ======== ======== =======
Total return(3)............................................... 10.87% 7.17% 31.38% 34.02% 4.52% 8.79%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)....................... $517,296 $637,889 $624,223 $359,958 $225,826 $99,787
Ratio of expenses to average net assets....................... 0.83% 0.85% 0.84% 0.86% 0.84% 0.85%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly.................... 0.83% 0.85% 0.84% 0.86% 0.84% 0.89%
Ratio of net investment income (loss) to average net assets .. (0.26%) 2.89% 3.11% 4.51% 4.52% 5.16%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly... (0.26%) 2.89% 3.11% 4.51% 4.52% 5.12%
Portfolio turnover......................................... 71% 42% 38% 37% 53% 56%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
REIT-6
DELAWARE VIP REIT SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP REIT SERIES SERVICE CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period.......................... $ 18.740 $ 19.050 $ 15.130 $11.720 $11.700 $11.020
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(2)............................... (0.049) 0.478 0.464 0.556 0.517 0.555
Net realized and unrealized gain on investments............... 2.066 0.622 4.102 3.283 -- 0.366
-------- -------- -------- ------- ------- -------
Total from investment operations.............................. 2.017 1.100 4.566 3.839 0.517 0.921
-------- -------- -------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income......................................... (0.350) (0.319) (0.302) (0.324) (0.300) (0.198)
Net realized gain on investments.............................. (1.317) (1.091) (0.344) (0.105) (0.197) (0.043)
-------- -------- -------- ------- ------- -------
Total dividends and distributions............................. (1.667) (1.410) (0.646) (0.429) (0.497) (0.241)
-------- -------- -------- ------- ------- -------
Net asset value, end of period................................ $ 19.090 $ 18.740 $ 19.050 $15.130 $11.720 $11.700
======== ======== ======== ======= ======= =======
Total return(3)............................................... 10.75% 6.86% 31.09% 33.73% 4.38% 8.67%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)....................... $237,070 $201,883 $160,976 $68,276 $28,152 $ 8,619
Ratio of expenses to average net assets....................... 1.08% 1.10% 1.09% 1.08% 0.99% 1.00%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly.................... 1.13% 1.15% 1.14% 1.11% 0.99% 1.04%
Ratio of net investment income (loss) to average net assets... (0.51%) 2.64% 2.86% 4.29% 4.37% 5.01%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly... (0.56%) 2.59% 2.81% 4.26% 4.37% 4.97%
Portfolio turnover............................................ 71% 42% 38% 37% 53% 56%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
REIT-7
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP REIT
Series (the "Series"). The Trust is an open-end investment company. The Series
is considered non-diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek maximum long-term total
return, with capital appreciation as a secondary objective.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Distributions received from investments in Real
Estate Investment Trusts are recorded as dividend income on ex-dividend date,
subject to reclassification upon notice of the character of such distributions
by the issuer.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $9,734 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the
Series, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and
0.60% on average daily net assets in excess of $2.5 billion.
REIT-8
DELAWARE VIP REIT SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.00% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006 the expense limitation was 0.95% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING,
TRANSFER AGENT, OTHER
INVESTMENT ACCOUNTING AND EXPENSES
MANAGEMENT ADMINISTRATIVE DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------- ------------ ---------------
$441,343 $30,806 $46,923 $38,383
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$17,864 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases ................. $284,652,880
Sales ..................... 482,910,852
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end.
At June 30, 2006, the cost of investments and unrealized appreciation
(depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ------------ ------------ ------------ --------------
$620,236,969 $129,549,009 $(2,207,225) $127,341,784
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended June 30, 2006 and the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
----------- -----------
Ordinary income ........... $17,111,655 $21,957,797
Long-term capital gains ... 58,619,126 38,438,887
----------- -----------
Total ..................... $75,730,781 $60,396,684
=========== ===========
- ----------
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
REIT-9
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ............ $522,216,090
Undistributed ordinary income ............ 19,434,395
Undistributed long-term capital gain ..... 85,373,676
Unrealized appreciation of investments ... 127,341,784
------------
Net assets ............................... $754,365,945
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
The undistributed earnings for the Series may be subject to reclassification
upon notice of the tax character of distributions received from investments in
Real Estate Investment Trusts.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of dividends and distributions. Results of operations and
net assets were not affected by these reclassifications. For the six months
ended June 30, 2006, the Series recorded an estimate of these differences since
the final tax characteristics cannot be determined until fiscal year end.
UNDISTRIBUTED
NET ACCUMULATED
INVESTMENT NET REALIZED
INCOME GAIN (LOSS)
- ------------- ------------
$(18,462) $18,462
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
----------- ----------
Shares sold:
Standard Class ................... 2,496,570 6,092,744
Service Class .................... 1,820,373 3,532,245
Shares issued upon reinvestment of
dividends and distributions:
Standard Class ................... 2,985,680 2,958,050
Service Class .................... 950,431 762,779
----------- ----------
8,253,054 13,345,818
----------- ----------
Shares repurchased:
Standard Class ................... (12,393,924) (7,785,003)
Service Class .................... (1,127,852) (1,972,201)
----------- ----------
(13,521,776) (9,757,204)
----------- ----------
Net increase (decrease) .......... (5,268,722) 3,588,614
=========== ==========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
REIT-10
DELAWARE VIP REIT SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT AND MARKET RISK
The Series concentrates its investments in the real estate industry and is
subject to some of the risks associated with that industry. If the Series holds
real estate directly as a result of defaults or receives rental income directly
from real estate holdings, its tax status as a regulated investment company may
be jeopardized. The Series is also affected by interest rate changes,
particularly if the real estate investment trusts it holds use floating rate
debt to finance their ongoing operations. Its investments may also tend to
fluctuate more in value than a portfolio that invests in a broader range of
industries.
The Series may invest up to 15% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
8. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
REIT-11
DELAWARE VIP TRUST-DELAWARE VIP REIT SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP REIT SERIES INVESTMENT ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP REIT
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five year periods ended January 31,
2006. The Board noted its objective that the Series' performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraph summarizes the performance results for the Series and the Board's view
of such performance.
The Performance Universe for the Series consisted of the Series and all real
estate funds underlying variable insurance products as selected by Lipper. The
Lipper report comparison showed that the Series' total return for the one, three
and five year periods was in the fourth quartile of such Performance Universe.
The Board noted that the Series' performance results were not in line with the
Board's stated objective. The Board also noted discussions with management
concerning the recent hire of a new lead portfolio manager for the Series. The
Board was satisfied that management was taking effective action to improve
Series performance and meet the Board's performance objective.
REIT-12
DELAWARE VIP REIT SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the lowest expenses of its Expense
Group. The Board was satisfied with the management fee and total expenses of the
Series in comparison to its Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. The Board also noted that the Series' assets exceeded the
first breakpoint level. The Board believed that, given the extent to which
economies of scale might be realized by the advisor and its affiliates, the
schedule of fees under the Investment Advisory Agreement provides a sharing of
benefits with the Series and its shareholders.
REIT-13
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect. The expenses shown in the
table assume reinvestment of all dividends and distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $ 961.50 0.90% $4.38
Service Class 1,000.00 959.10 1.15% 5.59
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.33 0.90% $4.51
Service Class 1,000.00 1,019.09 1.15% 5.76
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Select Growth-1
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
COMMON STOCK(SS) 97.65%
Basic Industry/Capital Goods 2.44%
Business Services 9.48%
Consumer Durables 2.03%
Consumer Non-Durables 12.92%
Consumer Services 26.89%
Energy 1.18%
Financials 3.91%
Health Care 16.58%
Technology 22.22%
REPURCHASE AGREEMENTS 2.51%
TOTAL MARKET VALUE OF SECURITIES 100.16%
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.16%)
------
TOTAL NET ASSETS 100.00%
======
(SS) Narrow industries are utilized for compliance purposes for diversification
whereas broad sectors are used for financial reporting.
Select Growth-2
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- -----------
COMMON STOCK-97.65%(SS)
BASIC INDUSTRY/CAPITAL GOODS-2.44%
Graco ................................................ 4,600 $ 211,508
Newmont Mining ....................................... 1,900 100,567
Praxair .............................................. 3,500 189,000
-----------
501,075
-----------
BUSINESS SERVICES-9.48%
Expeditors International Washington .................. 11,400 638,514
First Data ........................................... 8,000 360,320
+Global Cash Access .................................. 45,500 711,165
Paychex .............................................. 6,000 233,880
-----------
1,943,879
-----------
CONSUMER DURABLES-2.03%
+Select Comfort ...................................... 18,100 415,757
-----------
415,757
-----------
CONSUMER NON-DURABLES-12.92%
Best Buy ............................................. 1,950 106,938
+Blue Nile ........................................... 20,000 643,200
+NetFlix ............................................. 50,600 1,376,826
Staples .............................................. 9,500 231,040
Walgreen ............................................. 6,500 291,460
-----------
2,649,464
-----------
CONSUMER SERVICES-26.89%
+Apollo Group Class A ................................ 4,700 242,849
+eBay ................................................ 33,700 987,073
IHOP ................................................. 13,300 639,464
International Game Technology ........................ 8,600 326,284
Jackson Hewitt Tax Service ........................... 16,500 517,275
+Liberty Global Class C .............................. 10,068 207,099
+MGM MIRAGE .......................................... 9,000 367,200
Strayer Education .................................... 7,400 718,688
+Viacom Class B ...................................... 11,000 394,240
Weight Watchers International ........................ 14,800 605,172
+XM Satellite Radio Holdings Class A ................. 34,700 508,355
-----------
5,513,699
-----------
ENERGY-1.18%
EOG Resources ........................................ 3,500 242,690
-----------
242,690
-----------
FINANCIALS-3.91%
Chicago Mercantile Exchange Holdings ................. 660 324,159
+NETeller ............................................ 16,500 180,940
optionsXpress Holdings ............................... 12,700 296,037
-----------
801,136
-----------
HEALTH CARE-16.58%
Allergan ............................................. 10,300 1,104,778
+Genentech ........................................... 7,000 572,600
+Myogen .............................................. 3,500 101,500
UnitedHealth Group ................................... 21,100 944,858
+Zimmer Holdings ..................................... 11,900 674,968
-----------
3,398,704
-----------
TECHNOLOGY-22.22%
+Google Class A ...................................... 775 $ 324,981
+Intuit .............................................. 11,600 700,524
+NAVTEQ .............................................. 16,500 737,220
QUALCOMM ............................................. 24,200 969,694
+SanDisk ............................................. 18,000 917,640
+Seagate Technology .................................. 31,000 701,840
Sprint Nextel ........................................ 10,173 203,358
-----------
4,555,257
-----------
TOTAL COMMON STOCK
(COST $17,467,769) ................................ 20,021,661
-----------
PRINCIPAL
AMOUNT
---------
REPURCHASE AGREEMENTS-2.51%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased
at $271,102, collateralized by $264,200
U.S. Treasury Notes 6.00% due 8/15/09,
market value $276,713) ............................ $271,000 271,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $69,726, collateralized by $34,900
U.S. Treasury Notes 3.875% due 7/31/07,
market value $34,912, $34,900
U.S. Treasury Notes 3.875% due 5/15/09,
market value $33,846 and $2,300
U.S. Treasury Notes 6.50% due 10/15/06,
market value $2,397) .............................. 69,700 69,700
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased
at $174,363, collateralized by $93,600
U.S. Treasury Notes 3.875% due 5/15/09,
market value $90,910 and $87,100
U.S. Treasury Notes 4.875% due 5/15/09,
market value $87,113) ............................. 174,300 174,300
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $515,000) ................................... 515,000
-----------
Select Growth-3
DELAWARE VIP SELECT GROWTH SERIES
STATEMENT OF NET ASSETS (CONTINUED)
TOTAL MARKET VALUE OF SECURITIES-100.16% (COST $17,982,769) ........................................ $ 20,536,661
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.16%) ............................................ (32,865)
------------
NET ASSETS APPLICABLE TO 2,164,398 SHARES OUTSTANDING-100.00% ...................................... $ 20,503,796
============
NET ASSET VALUE-DELAWARE VIP SELECT GROWTH SERIES STANDARD CLASS ($15,919,482 / 1,675,842 SHARES) .. $ 9.50
============
NET ASSET VALUE-DELAWARE VIP SELECT GROWTH SERIES SERVICE CLASS ($4,584,314 / 488,556 SHARES) ...... $ 9.38
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited authorization-no par) ..................................... $ 66,902,689
Accumulated net realized loss on investments ....................................................... (48,952,785)
Net unrealized appreciation of investments ......................................................... 2,553,892
------------
Total net assets ................................................................................... $ 20,503,796
============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
'dd' Narrow industries are utilized for compliance purposes for diversification
whereas broad sectors are used for financial reporting.
See accompanying notes
Select Growth-4
DELAWARE VIP TRUST-
DELAWARE VIP SELECT GROWTH SERIES
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ....................................................... $ 63,819
Interest ........................................................ 6,061
-----------
69,880
-----------
EXPENSES:
Management fees ................................................. 83,973
Distribution expenses - Service Class ........................... 7,378
Legal and professional fees ..................................... 6,740
Accounting and administration expenses .......................... 4,478
Reports and statements to shareholders .......................... 3,790
Custodian fees .................................................. 1,264
Dividend disbursing and transfer agent fees and expenses ........ 1,120
Trustees' fees .................................................. 577
Insurance fees .................................................. 215
Pricing fees .................................................... 189
Registration fees ............................................... 33
Taxes (other than taxes on income) .............................. 9
Other ........................................................... 374
-----------
110,140
Less expenses absorbed or waived ................................ (1,848)
Less waiver of distribution expenses - Service Class ............ (1,230)
Less expense paid indirectly .................................... (11)
-----------
Total operating expenses ........................................ 107,051
-----------
NET INVESTMENT LOSS ............................................. (37,171)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ................................ 1,329,186
Net change in unrealized appreciation/depreciation of
investments .................................................. (2,107,151)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ................. (777,965)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ (815,136)
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP SELECT GROWTH SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment loss ................................ $ (37,171) $ (70,668)
Net realized gain on investments and foreign
currencies ...................................... 1,329,186 3,605,727
Net change in unrealized appreciation/depreciation
of investments and foreign currencies ........... (2,107,151) (97,657)
----------- -----------
Net increase (decrease) in net assets resulting from
operations ...................................... (815,136) 3,437,402
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class .................................. 203,761 271,657
Service Class ................................... 312,988 245,554
----------- -----------
516,749 517,211
----------- -----------
Cost of shares repurchased:
Standard Class .................................. (2,277,053) (4,882,598)
Service Class ................................... (609,118) (1,024,469)
----------- -----------
(2,886,171) (5,907,067)
----------- -----------
Decrease in net assets derived from capital share
transactions .................................... (2,369,422) (5,389,856)
----------- -----------
NET DECREASE IN NET ASSETS ......................... (3,184,558) (1,952,454)
NET ASSETS:
Beginning of period ................................ 23,688,354 25,640,808
----------- -----------
End of period (there was no undistributed net
investment income at either period end) ......... $20,503,796 $23,688,354
=========== ===========
See accompanying notes
Select Growth-5
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP SELECT GROWTH SERIES STANDARD CLASS
---------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 9.880 $ 8.460 $ 7.810 $ 5.600 $ 8.300 $10.890
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................... (0.014) (0.022) (0.011) (0.016) (0.024) (0.019)
Net realized and unrealized gain (loss) on
investments and foreign currencies ..... (0.366) 1.442 0.661 2.226 (2.676) (2.571)
------- ------- ------- ------- ------- -------
Total from investment operations .......... (0.380) 1.420 0.650 2.210 (2.700) (2.590)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 9.500 $ 9.880 $ 8.460 $ 7.810 $ 5.600 $ 8.300
======= ======= ======= ======= ======= =======
Total return(3) ........................... (3.85%) 16.78% 8.32% 39.46% (32.53%) (23.78%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $15,920 $18,612 $20,493 $23,089 $27,056 $55,104
Ratio of expenses to average net assets ... 0.90% 0.90% 0.83% 0.83% 0.86% 0.85%
Ratio of expenses to average net assets
prior to expense limitation and
expenses paid indirectly ............... 0.92% 0.97% 0.83% 0.83% 0.86% 0.88%
Ratio of net investment loss to average
net assets ............................. (0.27%) (0.26%) (0.14%) (0.24%) (0.35%) (0.22%)
Ratio of net investment loss to average
net assets prior to expense limitation
and expenses paid indirectly ........... (0.29%) (0.33%) (0.14%) (0.24%) (0.35%) (0.25%)
Portfolio turnover ........................ 48% 133% 86% 72% 106% 135%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Select Growth-6
DELAWARE VIP SELECT GROWTH SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP SELECT GROWTH SERIES SERVICE CLASS
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ...... $ 9.780 $ 8.390 $ 7.760 $ 5.580 $ 8.280 $10.880
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................... (0.026) (0.043) (0.030) (0.030) (0.034) (0.032)
Net realized and unrealized gain (loss) on
investments and foreign currencies ..... (0.374) 1.433 0.660 2.210 (2.666) (2.568)
------- ------- ------- ------- ------- -------
Total from investment operations .......... (0.400) 1.390 0.630 2.180 (2.700) (2.600)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 9.380 $ 9.780 $ 8.390 $ 7.760 $ 5.580 $ 8.280
======= ======= ======= ======= ======= =======
Total return(3) ........................... (4.09%) 16.57% 8.12% 39.07% (32.61%) (23.90%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ... $ 4,584 $ 5,076 $ 5,148 $ 5,670 $ 7,018 $14,498
Ratio of expenses to average net assets ... 1.15% 1.15% 1.08% 1.05% 1.01% 1.00%
Ratio of expenses to average net assets
prior to expense limitation and expenses
paid indirectly ........................ 1.22% 1.27% 1.13% 1.08% 1.01% 1.03%
Ratio of net investment loss to average net
assets ................................. (0.52%) (0.51%) (0.39%) (0.46%) (0.50%) (0.37%)
Ratio of net investment loss to average net
assets prior to expense limitation and
expenses paid indirectly ............... (0.59%) (0.63%) (0.44%) (0.49%) (0.50%) (0.40%)
Portfolio turnover ........................ 48% 133% 86% 72% 106% 135%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
Select Growth-7
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Select
Growth Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $1,987 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series may receive earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the
Series, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and
0.60% on average daily net assets in excess of $2.5 billion.
Select Growth-8
DELAWARE VIP SELECT GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.90% of average daily net assets of the Series through April 30, 2007.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ----------------
$12,289 $852 $947 $855
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$474 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases .... $5,274,149
Sales ........ 8,146,963
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ----------- ------------ ------------ --------------
$18,007,751 $3,618,905 $(1,089,995) $2,528,910
Select Growth-9
DELAWARE VIP SELECT GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. There were no
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ............ $66,902,689
Capital loss carryforwards ............... (50,257,509)
Six month period realized gains .......... 1,329,706
Unrealized appreciation of investments ... 2,528,910
-----------
Net assets ............................... $20,503,796
===========
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of net operating losses. Results of operations and net
assets were not affected by these reclassifications. For the six months ended
June 30, 2006, the Series recorded an estimate of these differences since the
final tax characteristics cannot be determined until fiscal year end.
ACCUMULATED NET PAID-IN
INVESTMENT LOSS CAPITAL
--------------- --------
$37,171 $(37,171)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $5,202,631 expires in
2008, $30,958,389 expires in 2009, $10,812,739 expires in 2010 and $3,283,750
expires in 2011. For the six months ended June 30, 2006, the Series had capital
gains of $1,329,706 which may reduce the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- --------
Shares sold:
Standard Class 20,657 30,108
Service Class 31,967 25,633
------- -------
52,624 55,741
------- -------
Shares repurchased:
Standard Class (227,777) (569,367)
Service Class (62,621) (120,148)
------- -------
(290,398) (689,515)
------- -------
Net decrease (237,774) (633,774)
======= =======
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
Select Growth-10
DELAWARE VIP SELECT GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT AND MARKET RISK
The Series invests a significant portion of its assets in small- and mid-sized
companies and may be subject to certain risks associated with ownership of
securities of such companies. Investments in small- or mid-sized companies may
be more volatile than investments in larger companies for a number of reasons,
which include more limited financial resources or a dependence on narrow product
lines.
The Series may invest up to 15% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
8. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Select Growth-11
DELAWARE VIP TRUST-DELAWARE VIP SELECT GROWTH SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP SELECT GROWTH SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Select
Growth Series (the "Series"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Series performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three and five year periods ended January 31,
2006. The Board noted its objective that the Series' performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraph summarizes the performance results for the Series and the Board's view
of such performance.
Lipper currently classifies the Series as a multi-cap core fund, although
management believes that the Series' objective is more closely aligned with
those funds in the multi-cap growth category. Accordingly, the Lipper report
prepared for this Series compares the Series' performance to two separate
Performance Universes consisting of the Series and all retail and institutional
multi-cap core funds and all retail and institutional multi-cap growth funds,
respectively, as selected by Lipper. When compared to other multi-cap core
funds, the Lipper report comparison showed that the Series' total return for the
one and three year periods was in the first quartile of such Performance
Universe. The report further showed that the Series' total return for the five
year period was in the fourth quartile. When compared to other multi-cap growth
funds, the Lipper report comparison showed that the Series' total return for the
one year period was in the second quartile. The report further showed that the
Series' total return for the three and five year periods was in the first
quartile and third quartile, respectively. The Board noted that the Series'
performance results were mixed. However, given the strong recent returns, which
were achieved by the current portfolio manager, the Board was satisfied with
such performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the
Select Growth-12
DELAWARE VIP SELECT GROWTH SERIES
OTHER SERIES INFORMATION (CONTINUED)
Series' contractual management fee and the actual management fee incurred by the
Series were compared with the contractual management fees (assuming all funds in
the Expense Group were similar in size to the Series) and actual management fees
(as reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Series' total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Standard Class shares
which do not charge 12b-1 and non-12b-1 service fees. The Board also considered
fees paid to Delaware Investments for non-management services. The Board noted
its objective to limit the Series' total expense ratio to an acceptable range as
compared to the median of the Expense Group. The following paragraph summarizes
the expense results for the Series and the Board's view of such expenses.
When compared to other multi-cap core and multi-cap growth funds, the expense
comparisons for the Series showed that its actual management fee was in the
quartile with the lowest expenses of its Expense Group and its total expenses
were in the quartile with the second lowest expenses of its Expense Group. The
Board was satisfied with total expenses of the Series in comparison to its
Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Select Growth-13
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,084.70 0.82% $4.24
Service Class 1,000.00 1,083.40 1.07% 5.53
HYPOTHETICAL 5% RETURN (5%
RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,020.73 0.82% $4.11
Service Class 1,000.00 1,019.49 1.07% 5.36
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Small Cap Value-1
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ------ -------------
COMMON STOCK 94.91%
Basic Industries/Capital Goods 12.92%
Business Services 2.15%
Capital Spending 6.80%
Consumer Cyclical 1.27%
Consumer Services 10.91%
Consumer Staples 2.81%
Energy 6.75%
Financial Services 18.32%
Health Care 6.90%
Real Estate 5.15%
Technology 13.85%
Transportation 4.01%
Utilities 3.07%
REPURCHASE AGREEMENTS 6.42%
SECURITIES LENDING COLLATERAL 15.93%
Fixed Rate Notes 2.81%
Variable Rate Notes 13.12%
TOTAL MARKET VALUE OF SECURITIES 117.26%
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (15.93%)
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (1.33%)
------
TOTAL NET ASSETS 100.00%
======
Small Cap Value-2
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCK-94.91%
BASIC INDUSTRIES/CAPITAL GOODS-12.92%
Albemarle ........................................... 180,000 $ 8,618,400
+Alpha Natural Resources ............................ 349,600 6,859,152
Arch Coal ........................................... 160,800 6,813,096
Bowater ............................................. 353,600 8,044,400
+Chaparral Steel .................................... 121,500 8,750,430
Crane ............................................... 233,900 9,730,240
+Crown Holdings ..................................... 544,400 8,476,308
FMC ................................................. 145,800 9,388,062
*Georgia Gulf ....................................... 340,100 8,509,302
+Griffon ............................................ 282,430 7,371,423
IPSCO ............................................... 88,100 8,430,289
*MacDermid .......................................... 329,200 9,480,960
+Pactiv ............................................. 232,300 5,749,425
*+PolyOne ........................................... 658,100 5,778,118
Spartech ............................................ 296,800 6,707,680
*Texas Industries ................................... 121,500 6,451,650
Valspar ............................................. 298,500 7,883,385
*Westlake Chemical .................................. 216,400 6,448,720
------------
139,491,040
------------
BUSINESS SERVICES-2.15%
Brink's ............................................. 270,400 15,253,264
+United Stationers .................................. 161,700 7,975,044
------------
23,228,308
------------
CAPITAL SPENDING-6.80%
*+Casella Waste Systems ............................. 482,400 6,314,616
*Gibraltar Industries ............................... 311,200 9,024,800
Harsco .............................................. 137,900 10,750,684
+Insituform Technologies Class A .................... 183,200 4,193,448
*Kaydon ............................................. 129,500 4,831,645
*Mueller Industries ................................. 262,200 8,660,466
+Mueller Water Products Class A ..................... 296,300 5,158,583
Wabtec .............................................. 429,900 16,078,260
Walter Industries ................................... 145,000 8,359,250
------------
73,371,752
------------
CONSUMER CYCLICAL-1.27%
Furniture Brands International ...................... 214,600 4,472,264
*KB HOME ............................................ 101,600 4,658,360
+WCI Communities .................................... 228,300 4,597,962
------------
13,728,586
------------
CONSUMER SERVICES-10.91%
Applebee's International ............................ 350,700 6,740,454
*Belo Class A ....................................... 284,500 4,438,200
Borders Group ....................................... 403,300 7,444,918
*Cato Class A ....................................... 444,600 11,492,910
*+CEC Entertainment ................................. 233,900 7,512,868
+Dollar Tree Stores ................................. 341,900 9,060,350
*K Swiss ............................................ 236,000 6,301,200
Kellwood ............................................ 188,300 5,511,541
*Kenneth Cole Productions Class A ................... 177,100 3,954,643
+Lenox Group ........................................ 153,000 1,084,770
Meredith ............................................ 146,900 7,277,426
PETsMART ............................................ 237,600 6,082,560
*Stage Stores ....................................... 218,650 7,215,450
*Thor Industries .................................... 212,800 10,310,160
Tuesday Morning ..................................... 326,400 $ 4,292,160
*Wolverine World Wide ............................... 385,350 8,990,216
+Zale ............................................... 416,300 10,028,667
------------
117,738,493
------------
CONSUMER STAPLES-2.81%
American Greetings Class A .......................... 316,600 6,651,766
Bunge Limited ....................................... 115,800 5,818,950
+Constellation Brands ............................... 332,800 8,320,000
Del Monte Foods ..................................... 847,300 9,515,179
------------
30,305,895
------------
ENERGY-6.75%
+Energy Partners .................................... 420,100 7,960,895
+Grey Wolf .......................................... 1,174,000 9,039,800
+Newfield Exploration ............................... 156,800 7,673,792
*Southwest Gas ...................................... 272,900 8,552,686
+TODCO .............................................. 165,800 6,772,930
+W-H Energy Services ................................ 392,300 19,940,609
*+Whiting Petroleum ................................. 308,100 12,900,147
------------
72,840,859
------------
FINANCIAL SERVICES-18.32%
AmerUs Group ........................................ 211,800 12,400,890
Bank of Hawaii ...................................... 255,100 12,652,960
*BankUnited Financial Class A ....................... 397,400 12,128,648
Berkley (W.R.) ...................................... 431,443 14,725,150
*Boston Private Financial Holdings .................. 360,300 10,052,370
Colonial BancGroup .................................. 652,800 16,763,903
Compass Bancshares .................................. 103,100 5,732,360
*First Midwest Bancorp .............................. 170,800 6,333,264
*First Republic Bank ................................. 321,500 14,724,700
*Greater Bay Bancorp ................................ 382,400 10,994,000
*Harleysville Group ................................. 214,600 6,807,112
*Independent Bank ................................... 121,800 3,954,846
*Infinity Property & Casualty ....................... 200,200 8,208,200
*MAF Bancorp ........................................ 209,300 8,966,412
NBT Bancorp ........................................ 200,400 4,655,292
Platinum Underwriters Holdings ...................... 330,900 9,258,582
Provident Bankshares ................................ 325,100 11,830,389
Republic Bancorp .................................... 552,396 6,844,186
*Sterling Financial ................................. 320,720 9,785,167
*+Triad Guaranty .................................... 224,500 10,973,560
------------
197,791,991
------------
HEALTH CARE-6.90%
*Arrow International ................................ 263,300 8,654,671
+Community Health Systems ........................... 220,900 8,118,075
*Owens & Minor ...................................... 312,000 8,923,200
+Par Pharmaceuticals ................................ 198,200 3,658,772
+Pediatrix Medical Group ............................ 235,000 10,645,500
*+PRA International ................................. 285,900 6,366,993
Service Corp International .......................... 1,052,000 8,563,280
STERIS .............................................. 372,700 8,519,922
Universal Health Services Class B ................... 218,700 10,991,862
------------
74,442,275
------------
REAL ESTATE-5.15%
*Ashford Hospitality Trust .......................... 523,300 6,604,046
*Brandywine Realty Trust ............................ 445,033 14,316,712
Camden Property Trust ............................... 151,500 11,142,825
*Education Realty Trust ............................. 258,000 4,295,700
Small Cap Value-3
DELAWARE VIP SMALL CAP VALUE SERIES
STATEMENT OF NET ASSETS (CONTINUED)
NUMBER OF MARKET
SHARES VALUE
--------- --------------
COMMON STOCK (CONTINUED)
REAL ESTATE (CONTINUED)
*Highland Hospitality ............................. 576,900 $ 8,122,752
*Reckson Associates Realty ........................ 267,900 11,085,702
--------------
55,567,737
--------------
TECHNOLOGY-13.85%
Acxiom ............................................ 448,500 11,212,500
+BEA Systems ...................................... 1,111,100 14,544,299
+Bell Microproducts ............................... 536,200 2,906,204
*+Brocade Communications Systems .................. 2,480,500 15,230,270
*+Checkpoint Systems .............................. 370,600 8,231,026
*+CommScope ....................................... 406,400 12,769,088
+Emulex ........................................... 590,600 9,609,062
*+Entegris ........................................ 634,600 6,047,738
+Ingram Micro Class A ............................. 555,100 10,063,963
*+Insight Enterprises ............................. 450,000 8,572,500
+NETGEAR .......................................... 221,600 4,797,640
+Parametric Technology ............................ 583,700 7,418,827
*+Premiere Global Services ........................ 826,800 6,242,340
*QAD .............................................. 338,800 2,625,700
Symbol Technologies ............................... 448,500 4,839,315
*+Synnex .......................................... 294,200 5,578,032
+Synopsys ......................................... 432,700 8,121,779
*Technitrol ....................................... 460,100 10,651,315
--------------
149,461,598
--------------
TRANSPORTATION-4.01%
*Alexander & Baldwin .............................. 268,200 11,873,214
*+Kirby ........................................... 390,200 15,412,900
*+SCS Transportation .............................. 122,800 3,380,684
SkyWest ........................................... 275,500 6,832,400
*+YRC Worldwide ................................... 136,500 5,748,015
--------------
43,247,213
--------------
UTILITIES-3.07%
Black Hills ....................................... 153,600 5,273,088
*+El Paso Electric ................................ 384,600 7,753,536
*FairPoint Communications ......................... 317,000 4,564,800
*Otter Tail ....................................... 253,600 6,930,888
*PNM Resources .................................... 344,650 8,602,464
--------------
33,124,776
--------------
TOTAL COMMON STOCK
(COST $810,052,971) ............................ 1,024,340,523
--------------
PRINCIPAL MARKET
AMOUNT VALUE
----------- --------------
REPURCHASE AGREEMENTS - 6.42%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased
at $36,471,672, collateralized by
$35,544,000 U.S. Treasury Notes
6.00% due 8/15/09, market
value $37,222,954) ........................... $36,458,000 $ 36,458,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $9,380,438, collateralized by
$4,688,000 U.S. Treasury Notes
3.875% due 7/31/07, market value
$4,696,311, $4,688,000
U.S. Treasury Notes 3.875%
due 5/15/09, market value $4,552,878
and $317,000 U.S. Treasury Notes
6.50% due 10/15/06, market value
$322,471) .................................... 9,377,000 9,377,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased
at $23,450,498, collateralized by
$12,597,000 U.S. Treasury Notes 3.875%
due 5/15/09, market value $12,229,059 and
$11,721,000 U.S. Treasury Notes 4.875%
due 5/15/09, market value
$11,718,298) ................................. 23,442,000 23,442,000
--------------
TOTAL REPURCHASE AGREEMENTS
(COST $69,277,000) ........................... 69,277,000
--------------
TOTAL MARKET VALUE OF SECURITIES
BEFORE SECURITIES LENDING
COLLATERAL-101.33%
(COST $879,329,971) .......................... 1,093,617,523
--------------
Small Cap Value-4
DELAWARE VIP SMALL CAP VALUE SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL
AMOUNT MARKET VALUE
----------- --------------
SECURITIES LENDING COLLATERAL**-15.93%
SHORT-TERM INVESTMENTS-15.93%
FIXED RATE NOTES-2.81%
Citigroup Global Markets 5.35% 7/3/06 .............. $30,302,467 $ 30,302,467
--------------
30,302,467
--------------
oVARIABLE RATE NOTES-13.12%
American Honda Finance 5.32% 2/21/07 ............... 4,880,311 4,880,311
ANZ National 5.11% 7/31/07 ......................... 1,084,513 1,084,513
Australia New Zealand 5.28% 7/31/07 ................ 5,422,567 5,422,567
Bank of America 5.32% 2/23/07 ...................... 7,049,338 7,049,338
Bank of New York 5.16% 7/31/07 ..................... 4,388,053 4,338,053
Barclays New York 5.31% 5/18/07 .................... 7,049,338 7,049,338
Bayerische Landesbank 5.37% 8/25/06 ................ 5,422,567 5,422,567
Bear Stearns 5.19% 1/2/07 .......................... 6,507,081 6,507,081
BNP Paribas 5.14% 7/31/07 .......................... 5,422,567 5,422,567
Canadian Imperial Bank 5.28% 7/31/07 ............... 2,711,284 2,711,284
5.32% 11/22/06 ..................................... 5,422,567 5,422,567
CDC Financial Products 5.41% 7/31/06................ 7,049,338 7,049,338
Citigroup Global Markets 5.38% 7/7/06............... 7,049,338 7,049,338
Commonwealth Bank 5.29% 7/31/07 .................... 5,422,567 5,422,567
Goldman Sachs 5.45% 7/2/07 ......................... 7,049,338 7,049,338
Manufacturers & Traders 5.31% 9/26/06 .............. 5,422,542 5,422,233
Marshall & Ilsley Bank 5.18% 7/31/07 ............... $ 5,964,824 $ 5,964,824
Merrill Lynch Mortgage Capital 5.41% 8/3/06 ........ 4,880,311 4,880,311
National Australia Bank 5.10% 3/7/07 ............... 6,723,983 6,723,983
National City Bank 5.32% 3/2/07 .................... 6,507,287 6,508,899
National Rural Utilities 5.10% 7/31/07 ............. 8,567,656 8,567,656
Nordea Bank New York 5.31% 5/16/07 ................. 2,711,266 2,711,148
Nordea Bank Norge 5.15% 7/31/07 .................... 5,422,567 5,422,567
Royal Bank of Scotland 5.27% 7/31/07 ............... 5,422,567 5,422,567
Societe Generale 5.08% 7/31/07 ..................... 2,711,284 2,711,284
Wells Fargo 5.19% 7/31/07 .......................... 5,422,567 5,422,567
--------------
141,638,806
--------------
TOTAL SECURITIES LENDING COLLATERAL
(COST $171,941,273) ............................. 171,941,273
--------------
TOTAL MARKET VALUE OF SECURITIES--117.26%
(COST $1,051,271,244)............................ 1,265,558,796(y)
OBLIGATION TO RETURN SECURITIES LENDING
COLLATERAL**--(15.93%)........................... (171,941,273)
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS--
(1.33%) ......................................... (14,354,861)
--------------
NET ASSETS APPLICABLE TO 34,616,262 SHARES
OUTSTANDING--100.00% ............................ $1,079,262,662
==============
NET ASSET VALUE--DELAWARE VIP SMALL CAP VALUE
SERIES STANDARD CLASS ($474,524,519 /
15,209,381 SHARES) .............................. $ 31.20
==============
NET ASSET VALUE--DELAWARE VIP SMALL CAP VALUE
SERIES SERVICE CLASS ($604,738,143 /
19,406,881 SHARES) .............................. $ 31.16
==============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited
authorization--no par) .......................... $ 815,732,934
Undistributed net investment income................. 1,693,185
Accumulated net realized gain on investments ....... 47,549,207
Net unrealized appreciation of investments and
foreign currencies............................... 214,287,336
--------------
Total net assets ................................... $1,079,262,662
==============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
* Fully or partially on loan.
** See Note 7 in "Notes to Financial Statements."
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
(y) Includes $169,715,013 of securities loaned.
See accompanying notes
Small Cap Value-5
DELAWARE VIP TRUST-
DELAWARE VIP SMALL CAP VALUE SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006
(Unaudited)
INVESTMENT INCOME:
Dividends ...................................................... $ 3,927,257
Interest ....................................................... 1,251,725
Securities lending income ...................................... 125,044
Foreign tax withheld ........................................... (4,269)
------------
5,299,757
------------
EXPENSES:
Management fees ................................................ 3,718,045
Distribution expenses - Service Class .......................... 854,490
Accounting and administration expenses ......................... 206,009
Reports and statements to shareholders ......................... 80,414
Legal and professional fees .................................... 59,160
Dividend disbursing and transfer agent fees and expenses........ 51,502
Trustees' fees ................................................. 26,122
Insurance fees ................................................. 18,665
Custodian fees ................................................. 14,008
Pricing fees ................................................... 457
Other .......................................................... 27,011
------------
5,055,883
Less waiver of distribution expenses - Service Class............ (142,415)
Less expense paid indirectly ................................... (3,355)
------------
Total operating expenses ....................................... 4,910,113
------------
NET INVESTMENT INCOME .......................................... 389,644
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments ................................................. 50,634,298
Foreign currencies .......................................... (247)
------------
Net realized gain .............................................. 50,634,051
------------
Net change in unrealized appreciation/depreciation
of investments and foreign currencies ....................... 26,288,445
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................ 76,922,496
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 77,312,140
============
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP SMALL CAP VALUE SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/05 YEAR ENDED
(UNAUDITED) 12/31/05
-------------- --------------
INCREASE IN NET
ASSETS FROM OPERATIONS:
Net investment income .......................... $ 389,644 $ 2,287,107
Net realized gain on investments and
foreign currencies .......................... 50,634,051 65,405,303
Net change in unrealized
appreciation/depreciation of investments
and foreign currencies ...................... 26,288,445 7,533,798
-------------- -------------
Net increase in net assets resulting
from operations ............................. 77,312,140 75,226,208
-------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income:
Standard Class .............................. (1,141,559) (1,473,097)
Service Class ............................... (137,447) (662,000)
Net realized gain on investments:
Standard Class .............................. (30,306,999) (27,988,835)
Service Class ............................... (37,402,855) (29,872,730)
-------------- -------------
(68,988,860) (59,996,662)
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class .............................. 67,769,648 137,932,285
Service Class ............................... 81,613,628 111,030,783
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Standard Class .............................. 31,448,558 29,461,932
Service Class ............................... 37,540,302 30,534,730
-------------- -------------
218,372,136 308,959,730
-------------- -------------
Cost of shares repurchased:
Standard Class .............................. (41,800,589) (98,348,749)
Service Class ............................... (30,988,187) (39,373,596)
-------------- -------------
(72,788,776) (137,722,345)
-------------- -------------
Increase in net assets derived from
capital share transactions .................. 145,583,360 171,237,385
-------------- -------------
NET INCREASE IN NET ASSETS ..................... 153,906,640 186,466,931
NET ASSETS:
Beginning of period ............................ 925,356,022 738,889,091
-------------- -------------
End of period (including undistributed
net investment income of $1,693,185
and $2,582,794, respectively) ............... $1,079,262,662 $ 925,356,022
============== =============
See accompanying notes
Small Cap Value-6
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
VIP SMALL CAP VALUE SERIES STANDARD CLASS
---------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- ---------- -------- --------
Net asset value, beginning of period ...................... $ 30.830 $ 30.450 $ 25.640 $ 18.140 $ 19.530 $ 17.650
INCOME (LOSS)FROM INVESTMENT OPERATIONS:
Net investment income(2) .................................. 0.034 0.121 0.122 0.068 0.101 0.162
Net realized and unrealized gain (loss) on investments
and foreign currencies .................................. 2.595 2.539 5.270 7.513 (1.149) 1.899
-------- -------- -------- -------- -------- --------
Total from investment operations .......................... 2.629 2.660 5.392 7.581 (1.048) 2.061
-------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ..................................... (0.082) (0.114) (0.053) (0.081) (0.104) (0.181)
Net realized gain on investments .......................... (2.177) (2.166) (0.529) -- (0.238) --
-------- -------- -------- -------- -------- --------
Total dividends and distributions ......................... (2.259) (2.280) (0.582) (0.081) (0.342) (0.181)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ............................ $ 31.200 $ 30.830 $ 30.450 $ 25.640 $ 18.140 $ 19.530
======== ======== ======== ======== ======== ========
Total return(3) ........................................... 8.47% 9.42% 21.48% 41.98% (5.60%) 11.84%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................... $474,525 $413,633 $339,542 $265,739 $170,630 $152,827
Ratio of expenses to average net assets ................... 0.82% 0.85% 0.83% 0.86% 0.85% 0.84%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ................ 0.82% 0.85% 0.83% 0.86% 0.85% 0.86%
Ratio of net investment income to average net assets ...... 0.21% 0.41% 0.46% 0.32% 0.52% 0.89%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly ............................................. 0.21% 0.41% 0.46% 0.32% 0.52% 0.87%
Portfolio turnover ........................................ 35% 32% 37% 41% 43% 73%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Small Cap Value-7
DELAWARE VIP SMALL CAP VALUE SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
VIP SMALL CAP VALUE SERIES SERVICE CLASS
--------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- ---------- -------- --------
Net asset value, beginning of period ..................... $ 30.760 $ 30.390 $ 25.610 $ 18.130 $ 19.520 $17.650
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(2) .......................... (0.006) 0.048 0.056 0.020 0.072 0.135
Net realized and unrealized gain (loss) on investments
and foreign currencies ................................ 2.591 2.536 5.258 7.512 (1.147) 1.900
-------- -------- -------- -------- -------- -------
Total from investment operations ......................... 2.585 2.584 5.314 7.532 (1.075) 2.035
-------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income .................................... (0.008) (0.048) (0.005) (0.052) (0.077) (0.165)
Net realized gain on investments ......................... (2.177) (2.166) (0.529) -- (0.238) --
-------- -------- -------- -------- -------- -------
Total dividends and distributions ........................ (2.185) (2.214) (0.534) (0.052) (0.315) (0.165)
-------- -------- -------- -------- -------- -------
Net asset value, end of period ........................... $ 31.160 $ 30.760 $ 30.390 $ 25.610 $ 18.130 $19.520
======== ======== ======== ======== ======== =======
Total return(3) .......................................... 8.34% 9.15% 21.16% 41.66% (5.72%) 11.68%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) .................. $604,738 $511,723 $399,347 $248,930 $124,241 $46,049
Ratio of expenses to average net assets .................. 1.07% 1.10% 1.08% 1.08% 1.00% 0.99%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ............... 1.12% 1.15% 1.13% 1.11% 1.00% 1.01%
Ratio of net investment income (loss) to average net
assets ................................................ (0.04%) 0.16% 0.21% 0.10% 0.37% 0.74%
Ratio of net investment income (loss) to average net
assets prior to expense limitation and expenses paid
indirectly ............................................ (0.09%) 0.11% 0.16% 0.07% 0.37% 0.72%
Portfolio turnover ....................................... 35% 32% 37% 41% 43% 73%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
Small Cap Value-8
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series. Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series. Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Small
Cap Value Series (the "Series"). The Trust is an open-end investment company.
The Series is considered diversified under the Investment Company Act of 1940,
as amended, and offers Standard Class and Service Class shares. The Standard
Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-l
fee. The shares of the Series are sold only to separate accounts of life
insurance companies.
The investment objective of the Series is to seek capital appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq) are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Securities lending collateral is valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income foxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of Financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Distributions received from investments in Real
Estate Investment Trusts are recorded as dividend income on ex-dividend date,
subject to reclassification upon notice of the character of such distribution by
the issuer.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $12,779 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the
Series, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and
0.60% on average daily net assets in excess of $2.5 billion.
Small Cap Value-9
DELAWARE VIP SMALL CAP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.03% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006 the expense limitation was 0.95% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
OTHER
DIVIDEND DISBURSING, EXPENSES
INVESTMENT TRANSFER AGENT, PAYABLE
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION TO DMC
FEE PAYABLE TO AND OTHER EXPENSES FEE PAYABLE AND
DMC PAYABLE TO DSC TO DDLP AFFILIATES*
- -------------- ----------------------------- ------------ -----------
$623,460 $44,123 $120,805 $43,200
- ----------
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$22,314 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases.............................. $235,957,487
Sales.................................. $173,257,025
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE NET
COST OF UNREALIZED UNREALIZED UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- -------------- ------------ ------------ ------------
$1,051,682,007 $245,608,105 $(31,731,316) $213,876,789
Small Cap Value-10
DELAWARE VIP SMALL CAP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS
ENDED YEAR ENDED
6/30/06* 12/31/05
----------- -----------
Ordinary income $20,780,190 $19,979,753
Long term capital gain................... 48,208,670 40,016,909
----------- -----------
Total.................................... $68,988,860 $59,996,662
=========== ===========
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest............ $ 815,732,934
Undistributed ordinary income............ 10,053,012
Undistributed long-term capital gain..... 39,600,143
Unrealized appreciation of investments
and foreign currencies................ 213,876,573
--------------
Net assets............................... $l,079,262,662
==============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on foreign currency transactions. Results of
operations and net assets were not affected by these reclassifications. For the
six months ended June 30, 2006, the Series recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
UNDISTRIBUTED ACCUMULATED
NET NET
INVESTMENT INCOME REALIZED GAIN (LOSS)
----------------- --------------------
$(247) $247
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class.................... 2,101,965 4,608,864
Service Class 2,559,584 3,758,275
Shares issued upon reinvestment of
dividends and distributions:
Standard Class.................... 999,954 1,042,531
Service Class..................... 1,194,030 1,080,493
---------- ----------
6,855,533 10,490,163
---------- ----------
Shares repurchased:
Standard Class.................... (1,308,565) (3,386,928)
Service Class..................... (980,410) (1,345,123)
---------- ----------
(2,288,975) (4,732,051)
---------- ----------
Net increase...................... 4,566,558 5,758,112
========== ==========
Small Cap Value-11
DELAWARE VIP SMALL CAP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006 or at any time during the
period.
7. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments Family of Funds,
may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of the securities
issued in the United States and 105% of the market value of securities issued
outside the United States. With respect to each loan, if the aggregate market
value of the collateral held on any business day is less than the aggregate
market value of the securities which are the subject of such loan, the borrower
will be notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Series, or at the
discretion of the lending agent, replace the loaned securities. The Series
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Series has the right under the Lending Agreement to recover the securities
from the borrower on demand. The security lending agent and the borrower retain
a portion of the earnings from the collateral investments. The Series records
security lending income net of such allocation.
At June 30, 2006, the market value of securities on loan was $169,715,013, for
which cash collateral was received and invested in accordance with the Lending
Agreement. Such investments are presented on the Statement of Net Assets under
the caption "Securities Lending Collateral."
8. CREDIT AND MARKET RISK
The Series invests a significant portion of its assets in small companies and
may be subject to certain risks associated with ownership of securities of small
companies. Investments in small-sized companies may be more volatile than
investments in larger companies for a number of reasons, which include limited
financial resources or a dependence on narrow product lines.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
Small Cap Value-12
DELAWARE VIP TRUST-DELAWARE VIP SMALL CAP VALUE SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP SMALL CAP VALUE SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Small Cap
Value Series (the "Series"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Series performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three and five year periods ended January 31,
2006. The Board noted its objective that the Series' performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraph summarizes the performance results for the Series and the Board's view
of such performance.
The Performance Universe for the Series consisted of the Series and all small
cap value funds underlying variable insurance products as selected by Lipper.
The Lipper report comparison showed that the Series' total return for the one
and five year periods was in the first quartile of such Performance Universe.
The report further showed that the Series' total return for the three year
period was in the second quartile. The Board was satisfied with such
performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
Small Cap Value-13
DELAWARE VIP SMALL CAP VALUE SERIES
OTHER SERIES INFORMATION (CONTINUED)
The expense comparisons for the Series showed that its actual management fee was
in the quartile with the lowest expenses of its Expense Group and its total
expenses were in the quartile with the second lowest expenses of its Expense
Group. The Board was satisfied with the management fee and total expenses of the
Series in comparison to its Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. The Board also noted that the Series' assets exceeded the
second breakpoint level. The Board believed that, given the extent to which
economies of scale might be realized by the advisor and its affiliates, the
schedule of fees under the Investment Advisory Agreement provides a sharing of
benefits with the Series and its shareholders.
Small Cap Value-14
DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,010.50 0.85% $4.24
Service Class 1,000.00 1,009.30 1.10 5.48
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,020.58 $1,000.00 0.85% $4.26
Service Class 1,000.00 1,019.34 1.10% 5.51
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Trend-1
DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ---------------------------------------------------------------- -------------
COMMON STOCK 95.09%
------
Basic Industry/Capital Goods 8.33%
Business Services 7.08%
Consumer Non-Durables 12.27%
Consumer Services 3.47%
Energy 6.48%
Financials 10.39%
Health Care 21.89%
Technology 23.37%
Transportation 1.81%
------
REPURCHASE AGREEMENTS 5.58%
------
SECURITIES LENDING COLLATERAL 18.00%
------
Fixed Rate Notes 3.17%
Variable Rate Notes 14.83%
------
TOTAL MARKET VALUE OF SECURITIES 118.67%
------
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (18.00%)
------
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.67%)
------
TOTAL NET ASSETS 100.00%
------
Trend-2
DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCK-95.09%
BASIC INDUSTRY/CAPITAL GOODS-8.33%
*AMCOL International ................................ 186,000 $ 4,901,100
*Bucyrus International Class A....................... 203,850 10,294,425
*+Energy Conversion Devices ......................... 102,000 3,715,860
JLG Industries ...................................... 250,100 5,627,250
+Mettler-Toledo International ....................... 177,300 10,739,061
MSC Industrial Direct Class A ....................... 237,600 11,302,632
------------
46,580,328
------------
BUSINESS SERVICES-7.08%
*+Advisory Board .................................... 149,100 7,170,219
*+Bright Horizons Family Solutions .................. 216,100 8,144,809
+DynCorp International Class A ...................... 240,900 2,500,542
+Fisher Scientific International .................... 97,000 7,085,850
+Monster Worldwide .................................. 203,200 8,668,512
*+Resources Connection .............................. 239,700 5,997,294
------------
39,567,226
------------
CONSUMER NON-DURABLES-12.27%
+Carter's............................................ 399,500 10,558,785
+Coach .............................................. 394,000 11,780,600
*+Crocs ............................................. 260,200 6,544,030
+Dick's Sporting Goods .............................. 175,500 6,949,800
*+DSW Class A ....................................... 248,500 9,050,370
+J Crew Group........................................ 9,200 252,540
*+Peet's Coffee & Tea ............................... 107,100 3,233,349
*+Tractor Supply .................................... 134,800 7,450,396
+Under Armour Class A ............................... 300,300 12,798,786
------------
68,618,656
------------
CONSUMER SERVICES-3.47%
+Sonic .............................................. 337,864 7,024,193
*+Texas Roadhouse ................................... 404,700 5,471,544
*+Wynn Resorts....................................... 94,000 6,890,200
------------
19,385,937
------------
ENERGY-6.48%
+Aventine Renewable Energy........................... 13,800 536,820
*Carbo Ceramics ..................................... 151,350 7,435,826
*+Helix Energy Solutions Group ...................... 266,400 10,751,904
*+Hydril ............................................ 124,800 9,799,296
*+Veritas DGC........................................ 150,000 7,737,000
------------
36,260,846
------------
FINANCIALS-10.39%
Aspen Insurance Holdings............................. 120,100 2,797,129
*Bankunited Financial Class A ....................... 109,800 3,351,096
City National ....................................... 112,300 7,309,607
*Delphi Financial Group Class A...................... 181,950 6,615,702
Hanover Insurance Group ............................. 152,300 7,228,158
+Nasdaq Stock Market ................................ 80,700 2,412,930
PartnerRe ........................................... 69,900 4,477,095
*+SVB Financial Group ............................... 70,200 3,191,292
Waddell & Reed Financial Class A .................... 335,700 6,901,992
Webster Financial ................................... 132,900 6,304,776
*Whitney Holding .................................... 211,400 7,477,218
------------
58,066,995
------------
HEALTH CARE-21.89%
*+Align Technology .................................. 613,400 $ 4,533,026
*+Cepheid ........................................... 626,800 6,086,228
*+Conceptus.......................................... 397,100 5,416,444
+CV Therapeutics .................................... 406,500 5,678,805
*+Digene ............................................ 229,700 8,898,578
+Encysive Pharmaceuticals ........................... 203,500 1,410,255
+Hologic ............................................ 209,900 10,360,664
*+MGI Pharma ........................................ 504,200 10,840,300
*+Nektar Therapeutics ............................... 505,800 9,276,372
*+NuVasive .......................................... 465,100 8,478,773
+PDL BioPharma ...................................... 491,900 9,055,879
+Per-Se Technologies ................................ 216,700 5,456,506
*+Progenics Pharmaceuticals ......................... 285,200 6,861,912
*+Sciele Pharma ..................................... 429,200 9,953,148
*+Telik ............................................. 481,900 7,951,350
*+United Therapeutics ............................... 209,500 12,102,815
------------
122,361,055
------------
TECHNOLOGY-23.37%
*+Akamai Technologies ............................... 279,800 10,125,962
+American Reprographics.............................. 296,000 10,729,999
+Arris Group ........................................ 220,400 2,891,648
+Cymer .............................................. 132,900 6,174,534
*+Hexcel ............................................ 381,800 5,998,078
*+Informatica ....................................... 584,600 7,693,336
*+Itron ............................................. 117,900 6,986,754
*+Ixia .............................................. 197,500 1,777,500
*+Microsemi.......................................... 298,300 7,272,554
+NAVTEQ ............................................. 105,900 4,731,612
+Opsware ............................................ 974,800 8,032,352
*+Polycom ........................................... 389,500 8,537,840
+Powerwave Technologies ............................. 450,000 4,104,000
+Rackable Systems ................................... 144,000 5,686,560
*+salesforce.com .................................... 152,000 4,052,320
+Silicon Laboratories ............................... 94,800 3,332,220
*+SiRF Technology Holdings .......................... 170,900 5,506,398
+TIBCO Software ..................................... 853,000 6,013,650
*+Trident Microsystems .............................. 210,200 3,989,596
+Varian Semiconductor Equipment ..................... 128,900 4,203,429
+Vishay Intertechnology ............................. 484,300 7,618,039
*+Wind River Systems ................................ 587,200 5,226,080
------------
130,684,461
------------
TRANSPORTATION-1.81%
Hunt (J.B.) Transport ............................... 149,100 3,714,081
UTi Worldwide ....................................... 253,500 6,395,805
------------
10,109,886
------------
TOTAL COMMON STOCK
(COST $408,106,965) .............................. 531,635,390
------------
Trend-3
DELAWARE VIP TREND SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
REPURCHASE AGREEMENTS-5.58%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased
at $16,433,160, collateralized by
$16,015,000 U.S. Treasury Notes
6.00% due 8/15/09, market value $16,772,010)... $ 16,427,000 $ 16,427,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $4,226,549, collateralized by
$2,113,000 U.S. Treasury Notes 3.875%
due 7/31/07, market value $2,116,075,
$2,113,000 U.S. Treasury Notes 3.875%
due 5/15/09, market value $2,051,447
and $143,000 U.S. Treasury Notes
6.50% due 10/15/06, market
value $145,300)................................ 4,225,000 4,225,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased at
$10,566,829, collateralized by
$5,676,000 U.S. Treasury Notes 3.875%
due 5/15/09, market value $5,510,199 and
$5,281,000 U.S. Treasury Notes 4.875%
due 5/15/09, market value $5,280,059).......... 10,563,000 10,563,000
------------
TOTAL REPURCHASE AGREEMENTS
(COST $31,215,000)............................. 31,215,000
------------
TOTAL MARKET VALUE OF SECURITIES
BEFORE SECURITIES LENDING COLLATERAL-100.67%
(COST $439,321,965)............................ 562,850,390
------------
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
SECURITIES LENDING COLLATERAL**-18.00%
SHORT-TERM INVESTMENTS-18.00%
FIXED RATE NOTES-3.17%
Citigroup Global Markets
5.35% 7/3/06 .................................. $ 17,731,765 $ 17,731,765
------------
17,731,765
------------
oVARIABLE RATE NOTES-14.83%
American Honda Finance
5.32% 2/21/07 ................................. 2,855,758 2,855,758
ANZ National 5.11% 7/31/07 ....................... 634,613 634,613
Australia New Zealand 5.28% 7/31/07 .............. 3,173,065 3,173,065
Bank of America 5.32% 2/23/07 .................... 4,124,984 4,124,984
Bank of New York 5.16% 7/31/07 ................... 2,538,452 2,538,452
Barclays New York 5.31% 5/18/07 .................. 4,124,984 4,124,984
Bayerische Landesbank 5.37% 8/25/06 .............. 3,173,065 3,173,065
Bear Stearns 5.19% 1/2/07 ........................ 3,807,678 3,807,678
BNP Paribas 5.14% 7/31/07 ........................ 3,173,065 3,173,065
Canadian Imperial Bank
5.28% 7/31/07 ................................. 1,586,532 1,586,532
5.32% 11/22/06 ................................ 3,173,065 3,173,065
CDC Financial Products 5.41% 7/31/06 ............. 4,124,984 4,124,984
Citigroup Global Markets 5.38% 7/7/06 ............ 4,124,984 4,124,984
Commonwealth Bank 5.29% 7/31/07 .................. 3,173,065 3,173,065
Goldman Sachs 5.45% 7/2/07 ....................... 4,124,984 4,124,984
Manufacturers & Traders 5.31% 9/26/06 ............ 3,173,050 3,172,869
Marshall & Ilsley Bank 5.18% 7/31/07 ............. 3,490,371 3,490,371
Merrill Lynch Mortgage Capital 5.41% 8/3/06 ...... 2,855,758 2,855,758
National Australia Bank 5.10% 3/7/07 ............. 3,934,600 3,934,600
National City Bank 5.32% 3/2/07 .................. 3,807,798 3,808,741
National Rural Utilities 5.10% 7/31/07 ........... 5,013,442 5,013,442
Nordea Bank New York 5.31% 5/16/07 ............... 1,586,522 1,586,453
Nordea Bank Norge 5.15% 7/31/07 .................. 3,173,065 3,173,065
Royal Bank of Scotland 5.27% 7/31/07 ............. 3,173,065 3,173,065
Societe Generale 5.08% 7/31/07 ................... 1,586,532 1,586,532
Wells Fargo 5.19% 7/31/07 ........................ 3,173,065 3,173,065
------------
82,881,239
------------
TOTAL SECURITIES LENDING COLLATERAL
(COST $100,613,004) ........................... 100,613,004
------------
TOTAL MARKET VALUE OF SECURITIES-118.67%
(COST $539,934,969) ...................................... 663,463,394(y)
OBLIGATION TO RETURN SECURITIES LENDING
COLLATERAL**-(18.00%) .................................... (100,613,004)
LIABILITIES NET OF RECEIVABLES AND OTHER
ASSETS-(0.67%) ........................................... (3,770,096)
-------------
NET ASSETS APPLICABLE TO 17,056,212 SHARES
OUTSTANDING-100.00% ...................................... $ 559,080,294
=============
NET ASSET VALUE-DELAWARE VIP TREND SERIES STANDARD
CLASS ($433,591,536 / 13,191,336 SHARES) ................. $ 32.87
=============
NET ASSET VALUE-DELAWARE VIP TREND SERIES SERVICE
CLASS ($125,488,758 / 3,864,876 SHARES) .................. $ 32.47
=============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited
authorization-no par) .................................... $ 470,104,685
Accumulated net realized loss on investments ................ (34,552,816)
Net unrealized appreciation of investments .................. 123,528,425
-------------
Total net assets ............................................ $ 559,080,294
=============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
* Fully or partially on loan.
** See Note 7 in "Notes to Financial Statements."
(y) Includes $98,980,695 of securities loaned.
See accompanying notes
Trend-4
DELAWARE VIP TRUST-
DELAWARE VIP TREND SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ...................................................... $ 732,913
Interest ....................................................... 432,166
Securities lending income ...................................... 361,527
------------
1,526,606
------------
EXPENSES:
Management fees ................................................ 2,190,901
Distribution expenses - Service Class .......................... 191,808
Accounting and administration expenses ......................... 119,320
Reports and statements to shareholders ......................... 62,750
Legal and professional fees .................................... 48,414
Dividend disbursing and transfer agent fees and expenses ....... 30,628
Trustees' fees ................................................. 15,174
Custodian fees ................................................. 9,349
Insurance fees ................................................. 7,437
Taxes (other than taxes on income) ............................. 3,061
Pricing fees ................................................... 282
Registration fees .............................................. 33
Other .......................................................... 12,349
------------
2,691,506
Less waiver of distribution expenses - Service Class ........... (31,968)
Less expense paid indirectly ................................... (32)
------------
Total operating expenses ....................................... 2,659,506
------------
NET INVESTMENT LOSS ............................................ (1,132,900)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ............................... 45,255,376
Net change in unrealized appreciation/
depreciation of investments and foreign currencies .......... (38,324,354)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES .................................................. 6,931,022
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................. $ 5,798,122
============
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP TREND SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment loss .................................... $ (1,132,900) $ (2,335,580)
Net realized gain on investments and foreign currencies 45,255,376 61,610,042
Net change in unrealized appreciation/ depreciation of
investments and foreign currencies .................. (38,324,354) (31,267,940)
------------ -------------
Net increase in net assets resulting from operations ... 5,798,122 28,006,522
------------ -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ...................................... 12,114,962 9,925,534
Service Class ....................................... 20,147,333 28,703,461
------------ -------------
32,262,295 38,628,995
------------ -------------
Cost of shares repurchased:
Standard Class ...................................... (34,015,089) (102,222,054)
Service Class ....................................... (14,851,405) (25,751,185)
------------ -------------
(48,866,494) (127,973,239)
------------ -------------
Decrease in net assets derived from capital share
transactions ........................................ (16,604,199) (89,344,244)
------------ -------------
NET DECREASE IN NET ASSETS ............................. (10,806,077) (61,337,722)
NET ASSETS:
Beginning of period .................................... 569,886,371 631,224,093
------------ -------------
End of period (there was no undistributed net investment
income at either period end) ........................ $559,080,294 $ 569,886,371
============ =============
See accompanying notes
Trend-5
DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP TREND SERIES STANDARD CLASS
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) --------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period .................... $ 32.530 $ 30.730 $ 27.290 $ 20.200 $ 25.230 $ 29.800
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................................. (0.056) (0.108) (0.108) (0.082) (0.085) (0.086)
Net realized and unrealized gain (loss)
on investments and foreign currencies ................ 0.396 1.908 3.548 7.172 (4.945) (4.484)
-------- -------- -------- -------- -------- --------
Total from investment operations ........................ 0.340 1.800 3.440 7.090 (5.030) (4.570)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .......................... $ 32.870 $ 32.530 $ 30.730 $ 27.290 $ 20.200 $ 25.230
======== ======== ======== ======== ======== ========
Total return(3) ......................................... 1.05% 5.86% 12.60% 35.10% (19.94%) (15.34%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................. $433,591 $450,525 $521,392 $515,829 $415,098 $590,742
Ratio of expenses to average net assets ................. 0.85% 0.87% 0.84% 0.84% 0.84% 0.85%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid indirectly ... 0.85% 0.87% 0.84% 0.84% 0.84% 0.90%
Ratio of net investment loss to average net assets ...... (0.33%) (0.36%) (0.38%) (0.36%) (0.38%) (0.35%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly ... (0.33%) (0.36%) (0.38%) (0.36%) (0.38%) (0.40%)
Portfolio turnover ...................................... 74% 63% 48% 50% 43% 51%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
Trend-6
DELAWARE VIP TREND SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP TREND SERIES SERVICE CLASS
---------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -------------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period .................... $ 32.170 $ 30.460 $ 27.120 $20.120 $25.170 $29.770
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(2) .................................. (0.098) (0.182) (0.178) (0.135) (0.117) (0.122)
Net realized and unrealized gain (loss)
on investments and foreign currencies ................ 0.398 1.892 3.518 7.135 (4.933) (4.478)
-------- -------- -------- ------- ------- -------
Total from investment operations ........................ 0.300 1.710 3.340 7.000 (5.050) (4.600)
-------- -------- -------- ------- ------- -------
Net asset value, end of period .......................... $ 32.470 $ 32.170 $ 30.460 $27.120 $20.120 $25.170
======== ======== ======== ======= ======= =======
Total return(3) ......................................... 0.93% 5.61% 12.32% 34.79% (20.06%) (15.45%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................. $125,489 $119,361 $109,832 $55,662 $22,136 $13,950
Ratio of expenses to average net assets ................. 1.10% 1.12% 1.09% 1.06% 0.99% 1.00%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .............. 1.15% 1.17% 1.14% 1.09% 0.99% 1.05%
Ratio of net investment loss to average net assets ...... (0.58%) (0.61%) (0.63%) (0.58%) (0.53%) (0.50%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly ... (0.63%) (0.66%) (0.68%) (0.61%) (0.53%) (0.55%)
Portfolio turnover ...................................... 74% 63% 48% 50% 43% 51%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
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DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Trend
Series (the "Series"). The Trust is an open-end investment company. The Series
is considered diversified under the Investment Company Act of 1940, as amended,
and offers Standard Class and Service Class shares. The Standard Class shares do
not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares
of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Securities lending collateral is valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $46,901 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the
Series, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and
0.60% on average daily net assets in excess of $2.5 billion.
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DELAWARE VIP TREND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.92% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006, the expense limitation was 0.95% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING,
INVESTMENT TRANSFER AGENT, OTHER EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
$332,136 $22,859 $24,767 $23,503
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$12,636 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases........................................................ $210,511,618
Sales............................................................ 241,241,752
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ------------ ------------ ------------ --------------
$543,456,166 $146,665,206 $(26,657,978) $120,007,228
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. There were no dividends and distributions paid for the six months
ended June 30, 2006 and the year ended December 31, 2005.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest................................... $470,104,685
Capital loss carryforwards...................................... (76,589,457)
Six month period realized gains................................. 45,557,838
Unrealized appreciation of investments.......................... 120,007,228
------------
Net assets...................................................... $559,080,294
============
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DELAWARE VIP TREND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of net operating losses. Results of operations and net
assets were not affected by these reclassifications. For the six months ended
June 30, 2006, the Series recorded an estimate of these differences since the
final tax characteristics cannot be determined until fiscal year end.
ACCUMULATED
NET PAID-IN
INVESTMENT LOSS CAPITAL
--------------- -----------
$1,132,900 $(1,132,900)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $41,125,717 expires in
2009, $35,292,270 expires in 2010 and $171,470 expires in 2011. For the six
months ended June 30, 2006, the Series had capital gains of $45,557,838 which
may reduce the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class .... 345,293 333,284
Service Class ..... 591,029 978,144
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936,322 1,311,428
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Shares repurchased:
Standard Class .... (1,003,186) (3,453,560)
Service Class ..... (435,979) (873,580)
---------- ----------
(1,439,165) (4,327,140)
---------- ----------
Net decrease ...... (502,843) (3,015,712)
========== ==========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments Family of Funds,
may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of the securities
issued in the United States and 105% of the market value of securities issued
outside the United States. With respect to each loan, if the aggregate market
value of the collateral held on any business day is less than the aggregate
market value of the securities which are the subject of such loan, the borrower
will be notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Series, or at the
discretion of the lending agent, replace the loaned securities. The Series
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Series has the right under the Lending Agreement to recover the securities
from the borrower on demand. The security lending agent and the borrower retain
a portion of the earnings from the collateral investments. The Series records
security lending income net of such allocation.
At June 30, 2006, the market value of securities on loan was $98,980,695, for
which cash collateral was received and invested in accordance with the Lending
Agreement. Such investments are presented on the Statement of Net Assets under
the caption "Securities Lending Collateral."
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DELAWARE VIP TREND SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT AND MARKET RISK
The Series invests a significant portion of its assets in small companies and
may be subject to certain risks associated with ownership of securities of small
companies. Investments in small-sized companies may be more volatile than
investments in larger companies for a number of reasons, which include limited
financial resources or a dependence on narrow product lines.
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
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DELAWARE VIP TRUST-DELAWARE VIP TREND SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP TREND SERIES INVESTMENT ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Trend
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all mid-cap
growth funds underlying variable insurance products as selected by Lipper. The
Lipper report comparison showed that the Series' total return for the one and
three year periods was in the third quartile of such Performance Universe. The
report further showed that the Series' total return for the five and 10 year
periods was in the second quartile and first quartile, respectively. The Board
noted that the Series' performance results were mixed. In evaluating the Series'
performance, the Board considered the transitions in the Series' portfolio
management team that took place in 2005. The Board was satisfied that management
was taking effective action to improve Series performance and meet the Board's
performance objective.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
Trend-12
DELAWARE VIP TREND SERIES
OTHER SERIES INFORMATION (CONTINUED)
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second lowest expenses of its
Expense Group. The Board was satisfied with the management fee and total
expenses of the Series in comparison to its Expense Group as shown in the Lipper
report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. The Board also noted that the Series assets exceeded the
first breakpoint level. The Board believed that, given the extent to which
economies of scale may be realized by the advisor and it affiliates, the
schedule of fees under the Investment Advisory Agreement provides a sharing of
benefits with the Series and its shareholders.
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DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect for Service Class shares. The
expenses shown in the table assume reinvestment of all dividends and
distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $ 973.00 0.76% $3.72
Service Class 1,000.00 972.90 1.01% 4.94
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,021.03 0.76% $3.81
Service Class 1,000.00 1,019.79 1.01% 5.06
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
U.S. Growth-1
DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ----------------------------------------------- -------------
COMMON STOCK'dd' 99.07%
Basic Industry/Capital Goods 3.62%
Business Services 18.32%
Consumer Non-Durables 14.82%
Consumer Services 17.80%
Financials 3.87%
Health Care 15.09%
Technology 25.55%
REPURCHASE AGREEMENTS 0.75%
TOTAL MARKET VALUE OF SECURITIES 99.82%
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.18%
------
TOTAL NET ASSETS 100.00%
======
'dd' Narrow industries are utilized for compliance purposes for diversification
whereas broad sectors are used for financial reporting.
U.S. Growth-2
DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCK-99.07%'dd'
BASIC INDUSTRY/CAPITAL GOODS - 3.62%
Praxair............................................. 85,000 $ 4,590,000
------------
4,590,000
------------
BUSINESS SERVICES-18.32%
Expeditors International Washington................. 91,400 5,119,314
First Data.......................................... 105,000 4,729,200
Moody's............................................. 70,000 3,812,200
Paychex............................................. 115,000 4,482,700
United Parcel Service Class B....................... 62,000 5,104,460
------------
23,247,874
------------
CONSUMER NON-DURABLES-14.82%
Procter & Gamble.................................... 80,000 4,448,000
Staples............................................. 200,000 4,864,000
Wal-Mart Stores..................................... 90,000 4,335,300
Walgreen............................................ 115,000 5,156,600
------------
18,803,900
------------
CONSUMER SERVICES-17.80%
+Apollo Group Class A............................... 55,700 2,878,019
+eBay............................................... 180,000 5,272,200
International Game Technology....................... 120,000 4,552,800
+MGM MIRAGE......................................... 100,000 4,080,000
Weight Watchers International....................... 65,000 2,657,850
+XM Satellite Radio Holdings Class A................ 215,000 3,149,750
------------
22,590,619
------------
FINANCIALS-3.87%
Chicago Mercantile Exchange Holdings................ 10,000 4,911,500
------------
4,911,500
------------
HEALTH CARE-15.09%
Allergan............................................ 46,000 4,933,960
+Genentech.......................................... 72,000 5,889,600
UnitedHealth Group.................................. 100,000 4,478,000
+Zimmer Holdings.................................... 68,000 3,856,960
------------
19,158,520
------------
TECHNOLOGY-25.55%
+Google Class A..................................... 11,000 $ 4,612,630
+Intuit............................................. 80,000 4,831,200
+NAVTEQ............................................. 80,000 3,574,400
QUALCOMM............................................ 170,000 6,811,900
+SanDisk............................................ 80,000 4,078,400
+Seagate Technology................................. 200,000 4,528,000
Sprint Nextel....................................... 200,000 3,998,000
------------
32,434,530
------------
TOTAL COMMON STOCK
(COST $118,141,931).............................. 125,736,943
------------
PRINCIPAL
AMOUNT
---------
REPURCHASE AGREEMENTS-0.75%
With BNP Paribas 4.50% 7/3/06 (dated 6/30/06, to be
repurchased at $502,188, collateralized by
$489,000 U.S. Treasury Notes 6.00% due 8/15/09,
market value $512,053)........................... $502,000 502,000
With Cantor Fitzgerald 4.40% 7/3/06 (dated 6/30/06,
to be repurchased at $129,047, collateralized by
$64,000 U.S. Treasury Notes 3.875% due 7/31/07,
market value $64,604, $64,000 U.S. Treasury Notes
3.875% due 5/15/09, market value $62,631 and
$4,000 U.S. Treasury Notes 6.50% due 10/15/06,
market value $4,436)............................. 129,000 129,000
With UBS Warburg 4.35% 7/3/06 (dated 6/30/06, to be
repurchased at $322,117, collateralized by
$173,000 U.S. Treasury Notes 3.875% due 5/15/09,
market value $168,227 and $161,000 U.S. Treasury
Notes 4.875% due 5/15/09, market value
$161,201)........................................ 322,000 322,000
------------
TOTAL REPURCHASE AGREEMENTS
(COST $953,000).................................. 953,000
------------
TOTAL MARKET VALUE OF SECURITIES-99.82%
(COST $119,094,931).............................. 126,689,943
RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES-0.18%................................ 228,347
------------
NET ASSETS APPLICABLE TO 16,773,303 SHARES
OUTSTANDING-100.00%.............................. $126,918,290
============
NET ASSET VALUE-DELAWARE VIP U.S. GROWTH SERIES
STANDARD CLASS ($88,969,311 / 11,746,500
SHARES).......................................... $ 7.57
============
NET ASSET VALUE-DELAWARE VIP U.S. GROWTH SERIES
SERVICE CLASS ($37,948,979 / 5,026,803 SHARES)... $ 7.55
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited
authorization-no par)............................ $129,633,055
Accumulated net realized loss on investments........ (10,309,777)
Net unrealized appreciation of investments.......... 7,595,012
------------
Total net assets.................................... $126,918,290
============
- ----------
+ Non-income producing security for the period ended June 30, 2006.
'dd' Narrow industries are utilized for compliance purposes for diversification
whereas broad sectors are used for financial reporting.
See accompanying notes
U.S. Growth-3
DELAWARE VIP TRUST-
DELAWARE VIP U.S. GROWTH SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006
(Unaudited)
INVESTMENT INCOME:
Dividends........................................... $ 370,137
Interest............................................ 45,433
-----------
415,570
-----------
EXPENSES:
Management fees..................................... 345,513
Distribution expenses - Service Class............... 60,777
Accounting and administration expenses.............. 21,262
Reports and statements to shareholders.............. 10,499
Legal and professional fees......................... 9,507
Dividend disbursing and transfer agent fees and
expenses......................................... 4,777
Trustees' fees...................................... 2,605
Insurance fees...................................... 2,196
Custodian fees...................................... 1,931
Registration fees................................... 1,080
Taxes (other than taxes on income).................. 351
Pricing fees........................................ 104
Other............................................... 1,935
-----------
462,537
Less waiver of distribution expenses - Service
Class............................................ (10,130)
Less expense paid indirectly........................ (151)
-----------
Total operating expenses............................ 452,256
-----------
NET INVESTMENT LOSS................................. (36,686)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments.................... (171,225)
Net change in unrealized appreciation/
depreciation of investments...................... (3,206,784)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS..... (3,378,009)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS.................................. $(3,414,695)
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP U.S. GROWTH SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
6/30/06 YEAR ENDED
(UNAUDITED) 12/31/05
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss ................................ $ (36,686) $ (142,189)
Net realized gain (loss) on investments ............ (171,225) 1,289,624
Net change in unrealized appreciation/depreciation
of investments .................................. (3,206,784) 7,020,019
------------ ------------
Net increase (decrease) in net assets resulting from
operations ...................................... (3,414,695) 8,167,454
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class .................................. -- (58,346)
Service Class ................................... -- (147,794)
------------ ------------
-- (206,140)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class .................................. 47,759,474 36,446,938
Service Class ................................... 1,847,146 6,320,210
Net asset value of shares issued upon reinvestment
of dividends and distributions:
Standard Class .................................. -- 58,346
Service Class ................................... -- 147,794
------------ ------------
49,606,620 42,973,288
------------ ------------
Cost of shares repurchased:
Standard Class .................................. (2,041,008) (3,859,090)
Service Class ................................... (4,948,028) (7,451,404)
------------ ------------
(6,989,036) (11,310,494)
------------ ------------
Increase in net assets derived from capital share
transactions .................................... 42,617,584 31,662,794
------------ ------------
NET INCREASE IN NET ASSETS ......................... 39,202,889 39,624,108
NET ASSETS:
Beginning of period ................................ 87,715,401 48,091,293
------------ ------------
End of period (there was no undistributed net
investment income at either period end) ......... $126,918,290 $ 87,715,401
============ ============
See accompanying notes
U.S. Growth-4
DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP U.S. GROWTH SERIES STANDARD CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ........................ $ 7.780 $ 6.830 $ 6.620 $ 5.370 $ 7.600 $10.140
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(2) ............................. 0.001 (0.005) 0.049 0.010 0.010 0.022
Net realized and unrealized gain (loss) on investments ...... (0.211) 0.997 0.169 1.251 (2.215) (2.503)
------- ------- ------- ------- ------- -------
Total from investment operations ............................ (0.210) 0.992 0.218 1.261 (2.205) (2.481)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ....................................... -- (0.042) (0.008) (0.011) (0.025) (0.059)
------- ------- ------- ------- ------- -------
Total dividends and distributions ........................... -- (0.042) (0.008) (0.011) (0.025) (0.059)
------- ------- ------- ------- ------- -------
Net asset value, end of period .............................. $ 7.570 $ 7.780 $ 6.830 $ 6.620 $ 5.370 $ 7.600
======= ======= ======= ======= ======= =======
Total return(3) ............................................. (2.70%) 14.65% 3.30% 23.75% (29.24%) (24.47%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ..................... $88,969 $45,653 $10,438 $11,862 $ 9,595 $16,856
Ratio of expenses to average net assets ..................... 0.76% 0.81% 0.76% 0.75% 0.75% 0.75%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .................. 0.76% 0.81% 0.76% 0.75% 0.75% 0.86%
Ratio of net investment income (loss) to average net assets 0.03% (0.07%) 0.77% 0.17% 0.15% 0.27%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid
indirectly ............................................... 0.03% (0.07%) 0.77% 0.17% 0.15% 0.16%
Portfolio turnover .......................................... 18% 91% 167% 102% 101% 78%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager, as applicable. Performance would have
been lower had the expense limitation not been in effect.
See accompanying notes
U.S. Growth-5
DELAWARE VIP U.S. GROWTH SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP U.S. GROWTH SERIES SERVICE CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ........................ $ 7.760 $ 6.810 $ 6.610 $ 5.360 $ 7.590 $10.130
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(2) ............................. (0.009) (0.023) 0.033 (0.005) 0.001 0.011
Net realized and unrealized gain (loss) on investments ...... (0.201) 0.999 0.167 1.257 (2.218) (2.503)
------- ------- ------- ------- ------- -------
Total from investment operations ............................ (0.210) 0.976 0.200 1.252 (2.217) (2.492)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ....................................... -- (0.026) -- (0.002) (0.013) (0.048)
------- ------- ------- ------- ------- -------
Total dividends and distributions ........................... -- (0.026) -- (0.002) (0.013) (0.048)
------- ------- ------- ------- ------- -------
Net asset value, end of period .............................. $ 7.550 $ 7.760 $ 6.810 $ 6.610 $ 5.360 $ 7.590
======= ======= ======= ======= ======= =======
Total return(3) ............................................. (2.71%) 14.41% 3.03% 23.37% (29.26%) (24.61%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ..................... $37,949 $42,062 $37,653 $ 9,718 $ 666 $ 40
Ratio of expenses to average net assets ..................... 1.01% 1.06% 1.01% 0.97% 0.90% 0.90%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly .......... 1.06% 1.11% 1.06% 1.00% 0.90% 1.01%
Ratio of net investment income (loss) to average net assets.. (0.22%) (0.32%) 0.52% (0.05%) 0.00% 0.12%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid
indirectly ............................................... (0.27%) (0.37%) 0.47% (0.08%) 0.00% 0.01%
Portfolio turnover .......................................... 18% 91% 167% 102% 101% 78%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the expense limitation and waiver not
been in effect.
See accompanying notes
U.S. Growth-6
DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP U.S.
Growth Series (the "Series"). The Trust is an open-end investment company. The
Series is considered diversified under the Investment Company Act of 1940, as
amended, and offers Standard Class and Service Class shares. The Standard Class
shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee.
The shares of the Series are sold only to separate accounts of life insurance
companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $7,363 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
U.S. Growth-7
DELAWARE VIP U.S. GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the
Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50%
on average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Series to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.87% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006 the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING,
INVESTMENT TRANSFER AGENT,
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION OTHER EXPENSES
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
$64,589 $4,992 $7,705 $4,415
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$2,322 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases....................... $52,027,785
Sales........................... 9,237,298
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ------------ ------------ ------------ --------------
$119,225,472 $13,959,339 $(6,494,868) $7,464,471
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. There were no distributions paid during the six months ended June 30,
2006. The tax character of dividends and distributions paid during the year
ended December 31, 2005 was as follows:
YEAR
ENDED
12/31/05
--------
Ordinary income................. $206,140
U.S. Growth-8
DELAWARE VIP U.S. GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ............ $129,633,055
Capital loss carryforwards ............... (10,138,170)
Six month period realized losses ......... (41,066)
Unrealized appreciation of investments ... 7,464,471
------------
Net assets................................ $126,918,290
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of net operating losses. Results of operations and net
assets were not affected by these reclassifications. For the six months ended
June 30, 2006, the Series recorded an estimate of these differences since the
final tax characteristics cannot be determined until fiscal year end.
ACCUMULATED
NET PAID-IN
INVESTMENT LOSS CAPITAL
- --------------- ---------
$36,686 $(36,686)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $75,384 expires in 2008,
$4,507,939 expires in 2009, $3,675,553 expires in 2010, $1,428,622 expires in
2011 and $450,672 expires in 2012. For the six months ended June 30, 2006, the
Series had capital losses of $41,066 which may increase the capital loss
carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class ............................. 6,136,122 4,883,834
Service Class .............................. 237,103 922,111
Shares issued upon reinvestment of dividends
and distributions:
Standard Class ............................. -- 9,018
Service Class .............................. -- 22,878
--------- ----------
6,373,225 5,837,841
--------- ----------
Shares repurchased:
Standard Class ............................. (261,100) (550,181)
Service Class .............................. (630,949) (1,050,132)
--------- ----------
(892,049) (1,600,313)
--------- ----------
Net increase .................................. 5,481,176 4,237,528
========= ==========
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
U.S. Growth-9
DELAWARE VIP U.S. GROWTH SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT AND MARKET RISK
The Series may invest up to 15% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
8. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
- --------------------------------------------------------------------------------
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
U.S. Growth-10
DELAWARE VIP TRUST-DELAWARE VIP U.S. GROWTH SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP U.S. GROWTH SERIES INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP U.S.
Growth Series (the "Series"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Series performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25%-the second quartile; the next 25%-the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three and five year periods ended January 31,
2006. The Board noted its objective that the Series' performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraph summarizes the performance results for the Series and the Board's view
of such performance.
The Performance Universe for the Series consisted of the Series and all large
cap growth funds underlying variable insurance products as selected by Lipper.
The Lipper report comparison showed that the Series' total return for the one
year period was in the first quartile of such Performance Universe. The report
further showed the Series' total return for the three and five year periods was
in the third quartile. The Board noted that the Series' performance results were
mixed. However, given the strong recent returns, which were achieved by the
current portfolio manager, the Board was satisfied with such performance.
U.S. Growth-11
DELAWARE VIP U.S. GROWTH SERIES
OTHER SERIES INFORMATION (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
The expense comparisons for the Series showed that its actual management fee and
total expenses were in the quartile with the second lowest expenses of its
Expense Group. The Board was satisfied with the management fee and total
expenses of the Series in comparison to its Expense Group as shown in the Lipper
report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
U.S. Growth-12
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
DISCLOSURE OF SERIES EXPENSES
For the Period January 1, 2006 to June 30, 2006
As a shareholder of the Series, you incur ongoing costs, including management
fees; distribution and/or service (12b-1) fees; and other Series expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Series 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 from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The first section of the table shown, "Actual Series Return," provides
information about actual account values and actual expenses. You may use the
information in this section of the table, 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 section under the
heading entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Series' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Series' 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 Series and other
funds. To do so, compare the 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. As a shareholder of the Series, you do not incur any
transaction costs, such as sales charges (loads), redemption fees or exchange
fees, but shareholders of other funds may incur such costs. Also, the fees
related to the variable annuity investment or the deferred sales charge that
could apply have not been included. Therefore, the second section of the table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. The Series' actual expenses
shown in the table reflect fee waivers in effect. The expenses shown in the
table assume reinvestment of all dividends and distributions.
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT ANNUALIZED PERIOD
VALUE VALUE EXPENSE 1/1/06 TO
1/1/06 6/30/06 RATIOS 6/30/06*
--------- --------- ---------- -----------
ACTUAL SERIES RETURN
Standard Class $1,000.00 $1,065.50 0.71% $3.64
Service Class 1,000.00 1,064.20 0.96% 4.91
HYPOTHETICAL 5% RETURN (5% RETURN BEFORE EXPENSES)
Standard Class $1,000.00 $1,021.27 0.71% $3.56
Service Class 1,000.00 1,020.03 0.96% 4.81
* "Expenses Paid During Period" are equal to the Series' annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
Value Series-1
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
SECTOR ALLOCATION
As of June 30, 2006
Sector designations may be different than the sector designations presented in
other Series materials.
PERCENTAGE
SECTOR OF NET ASSETS
- ---------------------------------------------------------------- -------------
COMMON STOCK 98.54%
Consumer Discretionary 8.87%
Consumer Staples 11.89%
Energy 6.05%
Financials 23.68%
Health Care 17.94%
Industrials 5.87%
Information Technology 11.80%
Materials 2.86%
Telecommunication Services 6.41%
Utilities 3.17%
REPURCHASE AGREEMENTS 1.29%
SECURITIES LENDING COLLATERAL 3.49%
Fixed Rate Notes 0.61%
Variable Rate Notes 2.88%
TOTAL MARKET VALUE OF SECURITIES 103.32%
OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (3.49%)
------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.17%
------
TOTAL NET ASSETS 100.00%
======
Value Series-2
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
STATEMENT OF NET ASSETS
June 30, 2006 (Unaudited)
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCK- 98.54%
CONSUMER DISCRETIONARY-8.87%
Gap.................................................. 804,400 $ 13,996,560
Limited Brands....................................... 507,200 12,979,248
Mattel............................................... 912,500 15,065,375
------------
42,041,183
------------
CONSUMER STAPLES-11.89%
ConAgra Foods........................................ 594,200 13,137,762
Heinz (H.J.)......................................... 327,100 13,483,062
Kimberly-Clark....................................... 228,800 14,116,960
Safeway.............................................. 600,200 15,605,200
------------
56,342,984
------------
ENERGY-6.05%
Chevron.............................................. 231,300 14,354,478
ConocoPhillips....................................... 218,500 14,318,305
------------
28,672,783
------------
FINANCIALS-23.68%
Allstate............................................. 261,000 14,284,530
Aon.................................................. 409,400 14,255,308
Chubb................................................ 271,300 13,537,870
Hartford Financial Services Group.................... 148,800 12,588,480
*Huntington Bancshares............................... 583,500 13,758,930
Morgan Stanley....................................... 241,900 15,290,499
*Wachovia............................................ 269,700 14,585,376
*Washington Mutual................................... 304,700 13,888,226
------------
112,189,219
------------
HEALTH CARE-17.94%
Abbott Laboratories.................................. 340,200 14,836,122
Baxter International................................. 366,800 13,483,568
*Bristol-Myers Squibb................................ 577,100 14,923,806
Merck & Co........................................... 405,800 14,783,294
Pfizer............................................... 600,900 14,103,123
Wyeth................................................ 290,300 12,892,223
------------
85,022,136
------------
INDUSTRIALS-5.87%
Donnelley (R.R.) & Sons.............................. 463,300 14,802,435
Waste Management..................................... 362,000 12,988,560
------------
27,790,995
------------
INFORMATION TECHNOLOGY-11.80%
Hewlett-Packard...................................... 432,000 13,685,760
Intel................................................ 758,500 14,373,575
International Business Machines...................... 179,100 13,758,462
*+Xerox.............................................. 1,014,300 14,108,913
------------
55,926,710
------------
MATERIALS-2.86%
duPont (E.I.) deNemours.............................. 325,200 13,528,320
------------
13,528,320
------------
TELECOMMUNICATION SERVICES-6.41%
*AT&T................................................ 550,224 15,345,747
Verizon Communications............................... 448,300 15,013,567
------------
30,359,314
------------
UTILITIES-3.17%
*Progress Energy..................................... 350,200 $ 15,013,074
------------
15,013,074
------------
TOTAL COMMON STOCK
(COST $422,125,689)............................... 466,886,718
------------
PRINCIPAL
AMOUNT
----------
REPURCHASE AGREEMENTS-1.29%
With BNP Paribas 4.50% 7/3/06
(dated 6/30/06, to be repurchased
at $3,227,210, collateralized by
$3,146,000 U.S. Treasury Notes
6.00% due 8/15/09, market
value $3,294,224)................................. $3,226,000 3,226,000
With Cantor Fitzgerald 4.40% 7/3/06
(dated 6/30/06, to be repurchased
at $830,304, collateralized by
$415,000 U.S. Treasury Notes
3.875% due 7/31/07, market
value $415,623,
$415,000 U.S. Treasury Notes
3.875% due 5/15/09, market
value $402,929 and $28,000
U.S. Treasury Notes 6.50% due
10/15/06, market
value $28,539).................................... 830,000 830,000
With UBS Warburg 4.35% 7/3/06
(dated 6/30/06, to be repurchased
at $2,075,752, collateralized by
$1,115,000 U.S. Treasury Notes
3.875% due 5/15/09, market
value $1,082,269 and
$1,037,000 U.S. Treasury
Notes 4.875% due
5/15/09, market
value $1,037,067)................................. 2,075,000 2,075,000
-----------
TOTAL REPURCHASE AGREEMENTS
(COST $6,131,000)................................. 6,131,000
-----------
TOTAL MARKET VALUE OF SECURITIES BEFORE
SECURITIES LENDING COLLATERAL-99.83%
(COST $428,256,689)............................... 473,017,718
-----------
Value Series-3
DELAWARE VIP VALUE SERIES
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
SECURITIES LENDING COLLATERAL**-3.49%
SHORT-TERM INVESTMENTS-3.49%
FIXED RATE NOTES-0.61%
Citigroup Global Markets 5.35% 7/3/06 ........... $2,916,292 $ 2,916,292
------------
2,916,292
------------
oVARIABLE RATE NOTES-2.88%
American Honda Finance 5.32% 2/21/07 ............ 469,678 469,678
ANZ National 5.11% 7/31/07 ...................... 104,373 104,373
Australia New Zealand 5.28% 7/31/07 ............. 521,865 521,865
Bank of America 5.32% 2/23/07 ................... 678,424 678,424
Bank of New York 5.16% 7/31/07 .................. 417,492 417,492
Barclays New York 5.31% 5/18/07 ................. 678,424 678,424
Bayerische Landesbank 5.37% 8/25/06 ............. 521,865 521,865
Bear Stearns 5.19% 1/2/07 ....................... 626,238 626,238
BNP Paribas 5.14% 7/31/07 ....................... 521,865 521,865
Canadian Imperial Bank
5.28% 7/31/07 ................................ 260,932 260,932
5.32% 11/22/06 ............................... 521,865 521,865
CDC Financial Products 5.41% 7/31/06 ............ 678,424 678,424
Citigroup Global Markets 5.38% 7/7/06 ........... 678,424 678,424
Commonwealth Bank 5.29% 7/31/07 ................. 521,865 521,865
Goldman Sachs 5.45% 7/2/07 ...................... $ 678,424 $ 678,424
Manufacturers & Traders 5.31% 9/26/06 ........... 521,863 521,833
Marshall & Ilsley Bank 5.18% 7/31/07 ............ 574,051 574,051
Merrill Lynch Mortgage Capital 5.41% 8/3/06 ..... 469,678 469,678
National Australia Bank 5.10% 3/7/07 ............ 647,112 647,112
National City Bank 5.32% 3/2/07 ................. 626,257 626,412
National Rural Utilities 5.10% 7/31/07 .......... 824,546 824,546
Nordea Bank New York 5.31% 5/16/07 .............. 521,887 521,865
Nordea Bank Norge 5.15% 7/31/07 ................. 260,919 260,919
Royal Bank of Scotland 5.07% 7/31/07 ............ 521,865 521,865
Societe Generale 5.08% 7/31/07 .................. 260,932 260,932
Wells Fargo 5.19% 7/31/07 ....................... 521,865 521,865
------------
13,631,236
------------
TOTAL SECURITIES LENDING COLLATERAL
(COST $16,547,528) .............................. 16,547,528
------------
TOTAL MARKET VALUE OF SECURITIES-103.32%
(COST $444,804,217) ............................. 489,565,246(y)
OBLIGATION TO RETURN SECURITIES LENDING
COLLATERAL**-(3.49%) ............................ (16,547,528)
RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES-0.17% ............................... 797,647
------------
NET ASSETS APPLICABLE TO 24,012,022 SHARES
OUTSTANDING-100.00% ............................. $473,815,365
============
NET ASSET VALUE-DELAWARE VIP VALUE SERIES STANDARD
CLASS ($377,575,586 / 19,132,357 SHARES) ........ $ 19.73
============
NET ASSET VALUE-DELAWARE VIP VALUE SERIES SERVICE
CLASS ($96,239,779 / 4,879,665 SHARES) .......... $ 19.72
============
COMPONENTS OF NET ASSETS AT JUNE 30, 2006:
Shares of beneficial interest (unlimited
authorization-no par) ........................... $413,387,426
Undistributed net investment income
Accumulated net realized gain on investments ....... 4,616,877
11,050,033
Net unrealized appreciation of investments ......... 44,761,029
------------
Total net assets ................................... $473,815,365
============
- ----------
* Fully or partially on loan.
** See Note 7 in "Notes to Financial Statements."
(y) Includes $16,387,861 of securities loaned.
+ Non-income producing security for the period ended June 30, 2006.
o Variable rate security. The interest rate shown is the rate as of June 30,
2006.
See accompanying notes
Value Series-4
DELAWARE VIP TRUST-
DELAWARE VIP VALUE SERIES
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006 (Unaudited)
INVESTMENT INCOME:
Dividends ....................................................... $ 6,007,708
Interest ........................................................ 326,733
Securities lending income ....................................... 12,675
-----------
6,347,116
-----------
EXPENSES:
Management fees ................................................. 1,475,130
Distribution expenses - Service Class ........................... 128,154
Accounting and administration expenses .......................... 90,777
Reports and statements to shareholders .......................... 56,794
Legal and professional fees ..................................... 38,407
Dividend disbursing and transfer agent fees and expenses ........ 22,694
Insurance fees .................................................. 13,165
Trustees' fees .................................................. 11,466
Custodian fees .................................................. 7,648
Registration fees ............................................... 2,450
Pricing fees .................................................... 114
Other ........................................................... 18,248
-----------
1,865,047
Less management fees absorbed or waived ......................... (113,352)
Less waiver of distribution expenses - Service Class ............ (21,359)
Less expense paid indirectly .................................... (1,809)
-----------
Total operating expenses ........................................ 1,728,527
-----------
NET INVESTMENT INCOME ........................................... 4,618,589
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ................................ 16,995,058
Net change in unrealized appreciation/depreciation of
investments .................................................. 6,936,239
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................. 23,931,297
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $28,549,886
===========
See accompanying notes
DELAWARE VIP TRUST-
DELAWARE VIP VALUE SERIES
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS YEAR
ENDED 6/30/06 ENDED
(UNAUDITED) 12/31/05
------------- ------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .................................. $ 4,618,589 $ 7,271,468
Net realized gain on investments ....................... 16,995,058 15,751,969
Net change in unrealized appreciation/depreciation
of investments ...................................... 6,936,239 (751,957)
------------ ------------
Net increase in net assets resulting from operations ... 28,549,886 22,271,480
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Standard Class ...................................... (6,076,791) (5,331,963)
Service Class ....................................... (1,195,238) (567,103)
Net realized gain on investments:
Standard Class ...................................... (8,040,632) --
Service Class ....................................... (1,846,025) --
------------ ------------
(17,158,686) (5,899,066)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Standard Class ...................................... 55,062,728 67,835,208
Service Class ....................................... 25,372,685 46,375,696
Net asset value of shares issued upon reinvestment
of dividends and distributions:
Standard Class ...................................... 14,117,423 5,331,963
Service Class ....................................... 3,041,263 567,103
------------ ------------
97,594,099 120,109,970
------------ ------------
Cost of shares repurchased:
Standard Class ...................................... (50,418,829) (48,165,366)
Service Class ....................................... (9,972,488) (7,441,636)
------------ ------------
(60,391,317) (55,607,002)
------------ ------------
Increase in net assets derived from capital share
transactions ........................................ 37,202,782 64,502,968
------------ ------------
NET INCREASE IN NET ASSETS ............................. 48,593,982 80,875,382
NET ASSETS:
Beginning of period .................................... 425,221,383 344,346,001
------------ ------------
End of period (including undistributed net investment
income of $4,616,877 and $7,270,317, respectively) .. $473,815,365 $425,221,383
============ ============
See accompanying notes
Value Series-5
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP VALUE SERIES STANDARD CLASS
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) -----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period...................... $ 19.230 $ 18.460 $ 16.330 $ 13.000 $ 16.210 $ 16.910
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2).................................. 0.204 0.369 0.313 0.265 0.235 0.217
Net realized and unrealized gain (loss)
on investments and foreign currencies.................. 1.058 0.722 2.082 3.337 (3.215) (0.886)
-------- -------- -------- -------- -------- --------
Total from investment operations.......................... 1.262 1.091 2.395 3.602 (2.980) (0.669)
-------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income..................................... (0.328) (0.321) (0.265) (0.272) (0.230) (0.031)
Net realized gain on investments.......................... (0.434) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions......................... (0.762) (0.321) (0.265) (0.272) (0.230) (0.031)
-------- -------- -------- -------- -------- --------
Net asset value, end of period............................ $ 19.730 $ 19.230 $ 18.460 $ 16.330 $ 13.000 $ 16.210
======== ======== ======== ======== ======== ========
Total return(3)........................................... 6.55% 6.03% 14.93% 28.29% (18.68%) (3.89%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)................... $377,575 $349,443 $310,704 $302,266 $240,752 $355,015
Ratio of expenses to average net assets................... 0.71% 0.73% 0.70% 0.70% 0.70% 0.68%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly................ 0.76% 0.78% 0.75% 0.75% 0.75% 0.73%
Ratio of net investment income to average net assets...... 2.08% 1.98% 1.87% 1.88% 1.61% 1.34%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly..... 2.03% 1.93% 1.82% 1.83% 1.56% 1.29%
Portfolio turnover........................................ 28% 23% 124% 79% 100% 102%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager. Performance would have been lower had
the waiver not been in effect.
See accompanying notes
Value Series-6
DELAWARE VIP VALUE SERIES
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Series outstanding throughout each period
were as follows:
DELAWARE VIP VALUE SERIES STANDARD CLASS
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
6/30/06(1) ----------------------------------------------------
(UNAUDITED) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..................... $19.200 $18.430 $16.320 $12.990 $16.200 $16.910
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) ................................. 0.180 0.323 0.271 0.233 0.214 0.193
Net realized and unrealized gain (loss)
on investments and foreign currencies.................. 1.055 0.726 2.072 3.348 (3.218) (0.886)
------- ------- ------- ------- ------- -------
Total from investment operations ......................... 1.235 1.049 2.343 3.581 (3.004) (0.693)
------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income..................................... (0.281) (0.279) (0.233) (0.251) (0.206) (0.017)
Net realized gain on investments ......................... (0.434) -- -- -- -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions......................... (0.715) (0.279) (0.233) (0.251) (0.206) (0.017)
------- ------- ------- ------- ------- -------
Net asset value, end of period............................ $19.720 $19.200 $18.430 $16.320 $12.990 $16.200
======= ======= ======= ======= ======= =======
Total return(3) .......................................... 6.42% 5.79% 14.59% 28.10% (18.81%) (4.03%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)................... $96,240 $75,778 $33,642 $14,737 $5,463 $2,902
Ratio of expenses to average net assets .................. 0.96% 0.98% 0.95% 0.92% 0.85% 0.83%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly ............... 1.06% 1.08% 1.05% 1.00% 0.90% 0.88%
Ratio of net investment income to average net assets ..... 1.83% 1.73% 1.62% 1.66% 1.46% 1.19%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly..... 1.73% 1.63% 1.52% 1.58% 1.41% 1.14%
Portfolio turnover........................................ 28% 23% 124% 79% 100% 102%
- ----------
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
and payment of fees by the manager and distributor, as applicable.
Performance would have been lower had the waiver not been in effect.
See accompanying notes
Value Series-7
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
Delaware VIP Trust (the "Trust") is organized as a Delaware statutory trust and
offers 15 series: Delaware VIP Balanced Series, Delaware VIP Capital Reserves
Series, Delaware VIP Cash Reserve Series, Delaware VIP Diversified Income
Series, Delaware VIP Emerging Markets Series, Delaware VIP Global Bond Series,
Delaware VIP Growth Opportunities Series, Delaware VIP High Yield Series,
Delaware VIP International Value Equity Series, Delaware VIP REIT Series,
Delaware VIP Select Growth Series, Delaware VIP Small Cap Value Series, Delaware
VIP Trend Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series.
These financial statements and the related notes pertain to Delaware VIP Value
Series (the "Series"). The Trust is an open-end investment company. The Series
is considered diversified under the Investment Company Act of 1940, as amended,
and offers Standard Class and Service Class shares. The Standard Class shares do
not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares
of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek long-term capital
appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Securities lending collateral is valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Series' Board of Trustees. In determining whether market
quotations are readily available or fair valuation will be used, various factors
will be taken into consideration, such as market closures, or with respect to
foreign securities, aftermarket trading, or significant events after local
market trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes--The Series intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting--Investment income, common expenses and realized and unrealized
gain (loss) on investments are allocated to the classes of the Series on the
basis of daily net assets of each class. Distribution expenses relating to a
specific class are charged directly to that class.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
The Series declares and pays dividends from net investment income and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.
Subject to seeking best execution, the Series may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Series in cash. Such commission rebates are included in
realized gain on investments in the accompanying financial statements and
totaled $9,233 for the six months ended June 30, 2006. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Series on the transaction.
The Series receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Series
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the
Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and
0.50% on average daily net assets in excess of $2.5 billion. DMC has voluntarily
agreed to waive management fees in the amount of 0.05% of average daily net
assets until such time as the waiver is discontinued.
Value Series-8
DELAWARE VIP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has also contractually agreed to waive that portion, if any, of its
management fee and reimburse the Series to the extent necessary to ensure that
annual operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.86% of average daily net assets of the Series through April 30, 2007.
Prior to May 1, 2006 the expense limitation was 0.80% of average daily net
assets. No reimbursement was due for the six months ended June 30, 2006 under
the 0.86% or 0.80% limit, although DMC did waive the management fee to 0.60%.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Series pays
DSC a monthly fee computed at the annual rate of 0.04% of the Series' average
daily net assets for accounting and administrative services. The Series pays DSC
a monthly fee based on average net assets for dividend disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, the Series pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Service Class shares. DDLP has contracted to waive distribution
and service fees through April 30, 2007 in order to prevent distribution and
service fees of the Service Class shares from exceeding 0.25% of average daily
net assets. Standard Class shares pay no distribution and service expenses.
At June 30, 2006, the Series had liabilities payable to affiliates as follows:
DIVIDEND DISBURSING, OTHER
INVESTMENT TRANSFER AGENT, EXPENSES
MANAGEMENT ACCOUNTING AND ADMINISTRATION DISTRIBUTION PAYABLE
FEE PAYABLE TO FEES AND OTHER EXPENSES FEES PAYABLE TO DMC
DMC PAYABLE TO DSC TO DDLP AND AFFILIATES*
- -------------- ----------------------------- ------------ ---------------
$227,825 $19,263 $19,092 $18,365
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Series and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, custodian fees and trustees' fees.
As provided in the investment management agreement, the Series bears the cost of
certain legal services, including internal legal services provided to the Series
by DMC employees. For the six months ended June 30, 2006, the Series was charged
$9,752 for internal legal services provided by DMC.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Series.
3. INVESTMENTS
For the six months ended June 30, 2006, the Series made purchases and sales of
investment securities other than short-term investments as follows:
Purchases........................ $83,714,383
Sales............................ 60,950,164
At June 30, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At June 30, 2006, the cost of investments and unrealized
appreciation (depreciation) for the Series were as follows:
AGGREGATE AGGREGATE
COST OF UNREALIZED UNREALIZED NET UNREALIZED
INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
- ------------ ------------ ------------ --------------
$446,445,916 $51,286,021 $(8,166,691) $43,119,330
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the six months ended June 30, 2006 and
the year ended December 31, 2005 was as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06* 12/31/05
----------- ----------
Ordinary income.................. $ 7,279,765 $5,899,066
Long-term capital gain........... 9,878,921 --
----------- ----------
$17,158,686 $5,899,066
=========== ==========
* Tax information for the six months ended June 30, 2006 is an estimate and
the tax character of dividends and distributions may be redesignated at
fiscal year end.
Value Series-9
DELAWARE VIP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of June 30, 2006, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest ............ $413,387,426
Undistributed ordinary income ............ 4,616,877
*Capital loss carryforwards .............. (4,296,070)
Six month period realized gains........... 16,987,802
Unrealized appreciation of investments ... 43,119,330
------------
Net assets................................ $473,815,365
============
* The amount of this loss which can be utilized in subsequent years is
subject to an annual limitation in accordance with the Internal Revenue
Code due to the fund merger with Delaware VIP Devon Series in 2003.
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at December 31, 2005 will expire as follows: $2,816,084 expires in
2009 and $1,479,986 expires in 2010. For the six months ended June 30, 2006, the
Series had capital gains of $16,987,802 which may reduce the capital loss
carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
6/30/06 12/31/05
---------- ----------
Shares sold:
Standard Class ............................. 2,788,709 3,617,312
Service Class .............................. 1,286,578 2,487,125
Shares issued upon reinvestment of dividends
and distributions:
Standard Class ............................. 713,001 296,056
Service Class .............................. 153,599 31,488
---------- ----------
4,941,887 6,431,981
---------- ----------
Shares repurchased:
Standard Class ............................. (2,536,520) (2,581,332)
Service Class .............................. (506,781) (397,840)
---------- ----------
(3,043,301) (2,979,172)
---------- ----------
Net increase .................................. 1,898,586 3,452,809
========== ==========
Value Series-10
DELAWARE VIP VALUE SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Series, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Series had no amounts outstanding as of June 30, 2006, or at any time during the
period.
7. SECURITIES LENDING
The Series, along with other funds in the Delaware Investments Family of Funds,
may lend its securities pursuant to a security lending agreement (Lending
Agreement) with JPMorgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. government obligations
and/or cash collateral not less than 102% of the market value of the securities
issued in the United States and 105% of the market value of securities issued
outside the United States. With respect to each loan, if the aggregate market
value of the collateral held on any business day is less than the aggregate
market value of the securities which are the subject of such loan, the borrower
will be notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Series, or at the
discretion of the lending agent, replace the loaned securities. The Series
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Series has the right under the Lending Agreement to recover the securities
from the borrower on demand. The security lending agent and the borrower retain
a portion of the earnings from the collateral investments. The Series records
security lending income net of such allocation.
At June 30, 2006, the market value of securities on loan was $16,387,861, for
which cash collateral was received and invested in accordance with the Lending
Agreement. Such investments are presented on the Statement of Net Assets under
the caption "Securities Lending Collateral."
8. CREDIT AND MARKET RISK
The Series may invest up to 10% of its total assets in illiquid securities,
which may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Series from disposing of them in
a timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Series' Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Series' limitation on investments in illiquid assets. At
June 30, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Series' Liquidity Procedures.
9. CONTRACTUAL OBLIGATIONS
The Series enters into contracts in the normal course of business that contain a
variety of indemnifications. The Series' maximum exposure under these
arrangements is unknown. However, the Series has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Series' existing
contracts and expects the risk of loss to be remote.
- --------------------------------------------------------------------------------
The Series files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Series' Forms N-Q, as well as a description of the policies and
procedures that the Series uses to determine how to vote proxies (if any)
relating to portfolio securities is available without charge (i) upon request,
by calling 800-523-1918; (ii) on the Series' website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. The Series' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Information (if any) regarding how the Series voted proxies relating to
portfolio securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Series' website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
Value Series-11
DELAWARE VIP TRUST-DELAWARE VIP VALUE SERIES
OTHER SERIES INFORMATION
BOARD CONSIDERATION OF DELAWARE VIP VALUE SERIES INVESTMENT ADVISORY AGREEMENT
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the VIP Value
Series (the "Series"). In making its decision, the Board considered information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the Annual Meeting. Information
furnished and discussed throughout the year included reports detailing Series
performance, investment strategies, expenses, compliance matters and other
services provided by Delaware Management Company ("DMC"), the investment
advisor. Information furnished specifically in connection with the Annual
Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Series, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Series' investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Series policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments(R) Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Series, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Series and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Series and its shareholders. In
reviewing the nature, extent and quality of services, the Board emphasized
reports furnished to it throughout the year at regular Board meetings covering
matters such as the relative performance of the Series, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Series, the compliance of management personnel with the Code of Ethics adopted
throughout the Delaware Investments Family of Funds complex, the adherence to
fair value pricing procedures as established by the Board and the accuracy of
net asset value calculations. The Board noted that it was pleased with the
current staffing of the Series' investment advisor during the past year, the
emphasis on research and the compensation system for advisory personnel.
Favorable consideration was given to DMC's efforts to maintain, and in some
instances increase, financial and human resources committed to fund matters.
Other factors taken into account by the Board were Delaware Investments'
preparedness for, and response to, legal and regulatory matters. The Board also
considered the transfer agent and shareholder services provided to Series
shareholders by Delaware Investments' affiliate, Delaware Service Company, Inc.
("DSC"), noting DSC's commitment to maintain a high level of service in keeping
with its past receipt of the DALBAR Pyramid Award, and the continuing
expenditures by Delaware Investments to improve the delivery of shareholder
services. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Series. The Board was pleased by DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Series in view
of its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Series showed the investment
performance of its Standard Class shares in comparison to a group of similar
funds as selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest is ranked last. The
highest/best performing 25% of funds in the Performance Universe make up the
first quartile; the next 25% - the second quartile; the next 25% - the third
quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Series was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Series' performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Series and the
Board's view of such performance.
The Performance Universe for the Series consisted of the Series and all
large-cap value funds underlying variable insurance products as selected by
Lipper. The Lipper report comparison showed that the Series' total return for
the one, three and 10 year periods was in the second quartile of such
Performance Universe. The report further showed that the Series' total return
for the five year period was in the first quartile. The Board was satisfied with
such performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds. Management provided the Board with
information on pricing levels and fee structures for the Series. The Board
focused particularly on the comparative analysis of the management fees and
total expense ratios of the Series and the management fees and expense ratios of
a group of similar funds as selected by Lipper (the "Expense Group"). In
reviewing comparative costs, the Series' contractual management fee and the
actual management fee incurred by the Series were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Series) and actual management fees (as reported by each fund) of other funds
within the Expense Group, taking into effect any applicable breakpoints and fee
waivers. The Series' total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Standard Class shares which do not charge 12b-1 and non-12b-1 service
fees. The Board also considered fees paid to Delaware Investments for
non-management services. The Board noted its objective to limit the Series'
total expense ratio to an acceptable range as compared to the median of the
Expense Group. The following paragraph summarizes the expense results for the
Series and the Board's view of such expenses.
Value Series-12
DELAWARE VIP VALUE SERIES
OTHER SERIES INFORMATION (CONTINUED)
The expense comparisons for the Series showed that its actual management fee was
in the quartile with the lowest expenses of its Expense Group and its total
expenses were in the quartile with the second lowest expenses of its Expense
Group. The Board was satisfied with the management fee and total expenses of the
Series in comparison to its Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Series.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC initiatives. The Board also considered the extent to
which Delaware Investments might derive ancillary benefits from fund operations,
including the potential for procuring additional business as a result of the
prestige and visibility associated with its role as service provider to the
Delaware Investments Family of Funds, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationship with the Series and the Delaware Investments Family of Funds
required no negotiation of reduction of fees.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Series' assets increase and the extent
to which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Series' management contract fell within the
standard structure. Although the Series has not reached a size at which the
advantages of breakpoints would be realized, the Board recognized that the fee
was structured so that when the Series grows, economies of scale may be shared.
Value Series-13
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this Form
N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or
statements filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
There were no significant changes in the registrant's internal control over
financial reporting that occurred during the second fiscal quarter of the period
covered by the report to stockholders included herein (i.e., the registrant's
second fiscal quarter) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
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.
NAME OF REGISTRANT: Delaware VIP Trust
/s/ Patrick P. Coyne
- -------------------------------------
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: August 25, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Patrick P. Coyne
- -------------------------------------
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: August 25, 2006
/s/ Michael P. Bishof
- -------------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: August 25, 2006