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: 811-2071
Exact name of registrant as specified in charter: Delaware Group Income Funds
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: July 31
Date of reporting period: July 31, 2006
Item 1. Reports to Stockholders
Annual Report Delaware
Corporate Bond Fund
Delaware Extended Duration
Bond Fund
July 31, 2006
Fixed income mutual funds
[DELAWARE INVESTMENTS LOGO] [LOGO] POWERED BY RESEARCH(R)
<page>
Table of contents
> Portfolio management review .................................................1
> Performance summary .........................................................4
> Disclosure of Fund expenses .................................................8
> Sector/Country allocation and credit rating breakdown .......................9
> Statements of net assets ...................................................11
> Statements of operations ...................................................25
> Statements of changes in net assets ........................................26
> Financial highlights .......................................................27
> Notes to financial statements ..............................................37
> Report of independent registered public accounting firm ....................42
> Other Fund information .....................................................43
> Board of trustees/directors and officers addendum ..........................46
> About the organization .....................................................48
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a
series of Delaware Management Business Trust, which is a registered
investment advisor.
(C)2006 Delaware Distributors, L.P.
<page>
Portfolio management review
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
July 31, 2006
Ryan K. Brist
Lead Portfolio Manager of the Funds
What was the investment climate for investment-grade corporate bonds during the
fiscal year ended July 31, 2006?
In general, the fiscal year 2006 proved to be a difficult one for
investment-grade bond holders as interest rates rose. Fundamentals remained
intact for investment-grade corporate bonds, although rising interest rates, a
flattening treasury yield curve, and continued shareholder-friendly actions did
not foster an environment supportive of the asset class.
During the 12-month period, the U.S. Federal Reserve (Fed) continued to increase
interest rates, pushing its overnight lending rate target from 3.25% to 5.25%.
One significant effect of the Fed's actions was a flatter yield curve. For
example, as the fiscal period began, the 2-year Treasury note yielded 0.27% less
than its 10-year counterpart. By July 31, 2006, that gap had compressed to 0.02%
(source: Bloomberg).
In addition, the general continuation of shareholder friendly actions, such as
dividend increases, share repurchases, corporate mergers, and leveraged buyouts,
demonstrated a preference among some corporate management teams for attempting
to create shareholder value over paying down debt.
How did the funds perform for the fiscal year ended July 31, 2006?
Delaware Corporate Bond Fund Class A shares returned 0.70% at net asset value
and -3.79% at maximum offer price (both returns include distributions
reinvested) for the fiscal year ended July 31, 2006. By comparison, the funds
comprising the Lipper Corporate Debt BBB-rated Funds Average category returned
0.81% for the same period. The Fund's benchmark, the Lehman Brothers U.S. Credit
Index, returned 0.37%.
For complete, annualized performance for Delaware Corporate Bond Fund, please
see the table on page 4.
With its longer-term profiles, Delaware Extended Duration Bond Fund did not
perform as well as Delaware Corporate Bond Fund in the rising interest rate
environment. Class A shares returned -2.89% at net asset value and -7.26% at
maximum offer price (both returns include distributions reinvested) for the
fiscal year ended July 31, 2006. By comparison, the funds comprising the Lipper
Corporate Debt BBB-Rated Funds Average category returned 0.81% for the same
period. The Fund's benchmark, the Lehman Brothers Long U.S. Credit Index,
returned -3.03%.
For complete, annualized performance for Delaware Extended Duration Bond Fund,
please see the table on page 6.
What strategies did you implement for the funds during the fiscal year?
One of our primary strategies was simply to invest in, or remain invested in,
companies that we believed were fundamentally sound and that we believed would
perform well regardless of general economic or industry-related trends.
We continued to invest in a diverse mix of investment grade securities, with a
heavier weighting than our benchmark indices in BBB-rated bonds. We also
invested a portion of both funds' assets in high yield securities, emerging
market securities, and non-U.S. dollar denominated debt.
How did your approach to credit-quality selection influence performance?
Within the investment grade universe (bonds rated BBB and above), higher-quality
bonds generally performed best. Therefore, our decision to invest more heavily
than the benchmark in bonds with BBB-quality ratings modestly detracted from
performance.
On the other hand, our strategy of investing about 20% of each Fund's portfolio
in high yield securities during the year helped both funds outperform their
respective benchmarks at net asset value. Generally, high yield bonds continued
to perform well, even as the
1
<page>
Portfolio management review
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
investment-grade universe underperformed. One reason for the success of the high
yield sector is that this asset class tends to be less sensitive to interest
rate movement. In addition, low default rates and solid demand supported this
asset class.
What specific factors contributed positively to performance?
High yielding automobile bonds (General Motors, for example) and other specific
bond issues (GMAC, Residential Capital, and Visteon) made positive contributions
to the fiscal year returns of both funds. After suffering deep declines in the
fourth calendar quarter of 2005, auto industry bonds rebounded nicely in 2006
because of new cost-cutting efforts in the industry, as well as product
improvement initiatives.
Among investment grade bonds, the funds' continued to invest more heavily in the
airline sector than what is represented in the benchmark indices. Airlines were
the top-performing sector within the benchmarks for the period. Specifically,
our positions in American Airlines and Continental Airlines performed well.
The funds also realized solid performance from the insurance sector, where
investments in property and casualty insurers contributed to performance as the
sector recovered from weakness after the 2005 hurricanes.
What factors detracted from performance?
Poor performance during the year was primarily attributable to the selection of
individual securities, rather than each Fund's sector positioning or any
industry-wide issues. For example, several companies announced that they would
engage in leveraged buyouts, and this shareholder friendly news led to poor
performance for some of those companies' bonds. Frequently, bondholders will
view dividend declarations negatively, as it signals that the company has opted
- - at least in the short term - to use its available cash to reward its equity
shareholders, rather than to pay off the company's debt.
Specifically, our positions in supermarket retailer Albertson's (later sold by
the funds) and energy provider Kinder Morgan each posted disappointing results.
Similarly, paper manufacturer Georgia Pacific positions were sold at a loss and
detracted from Fund performance.
How were the Funds positioned at the end of the fiscal year?
Our focus at the end of the fiscal year was on two areas that we believed to be
attractive from a valuation standpoint: hybrid securities, which typically
combine equity and debt characteristics, and Tier 1 securities, which reflect
core capital among financial institutions. In particular, we were focused at
fiscal year end on securities issued by highly rated insurance companies and
U.S., European, and Japanese banks.
Also by year end, our strategy evolved to accommodate changes in the investment
environment. The rationale for the funds' allocations to high yield securities
at fiscal year end was two-fold. First, we continued to favor a heavier
weighting in high quality, shorter-term securities that have the advantage of
higher yield over comparative investment-grade debt. We continued to favor bank
loans because they offer attractive yields with better recovery rates, more
covenant protection, and lower default risk than comparable investment-grade
debt. Second, we anticipate exploring the market for securities we believe to be
undervalued, specifically in the automotive industry and in certain leveraged
buyout situations.
As the fiscal year drew to a close, we had also slightly extended the duration
in the funds. As of July 31, 2006, our duration strategy was neutral compared to
the benchmarks. We implemented this posture due to the market's expectation for
a near-term conclusion to the Federal Reserve's rate-tightening campaign.
2
<page>
Performance summary
Delaware Corporate Bond Fund
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. A rise or fall in interest rates can have a significant impact on
bond prices and the net asset value (NAV) of the Fund. Funds that invest in
bonds can lose their value, as interest rates can rise, and an investor can
lose principal. Please obtain the performance data for the most recent
month end by calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Corporate Bond Fund prospectus contains this and other
important information about the investment company. Please request a prospectus
by calling 800 523-1918 or obtain one online at www.delawareinvestments.com.
Read it carefully before you invest or send money. Performance includes
reinvestment of all distributions.
Fund Performance
Average Annual Total Returns
Through July 31, 2006 1 Year 5 Years Lifetime
________________________________________________________________________________
Class A (Est. 9/15/98)
Excluding Sales Charge +0.70% +7.04% +6.47%
Including Sales Charge -3.79% +6.07% +5.84%
________________________________________________________________________________
Class B (Est. 9/15/98)
Excluding Sales Charge +0.13% +6.25% +5.70%
Including Sales Charge -3.68% +6.02% +5.70%
________________________________________________________________________________
Class C (Est. 9/15/98)
Excluding Sales Charge -0.05% +6.25% +5.70%
Including Sales Charge -1.00% +6.25% +5.70%
________________________________________________________________________________
Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Performance for Class B and C shares, excluding sales
charges, assumes either contingent deferred sales charges did not apply or the
investment was not redeemed.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%. The distributor has contracted to
limit the amount to 0.25% through November 30, 2006.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The average annual total returns for the one-year and lifetime periods ended
July 31, 2006 for Delaware Corporate Bond Fund's Class R shares were +0.45% and
+3.53%, respectively. Class R shares were first made available on June 2, 2003
and are available only for certain retirement plan products. They are sold
without a sales charge and have an annual distribution and service fee of 0.60%.
The distributor has contracted to limit the amount to 0.50% through November
30, 2006.
The average annual total returns for the 1-year, 5-year, and lifetime periods
ended July 31, 2006 for Delaware Corporate Bond Fund's Institutional Class were
+0.95%, +7.28%, and +6.71%, respectively. Institutional Class shares were first
made available on September 15, 1998 and are available without sales or
asset-based distribution charges only to certain eligible institutional
accounts.
An expense limitation was in effect for all classes of Delaware Corporate Bond
Fund during some periods shown. Performance would have been lower had the
expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
<page>
Fund basics
As of July 31, 2006
________________________________________________________________________________
Fund objective
________________________________________________________________________________
The Fund seeks to provide investors with total return.
________________________________________________________________________________
Total Fund net assets
________________________________________________________________________________
$569 million
________________________________________________________________________________
Number of holdings
________________________________________________________________________________
357
________________________________________________________________________________
Fund start date
________________________________________________________________________________
September 15, 1998
________________________________________________________________________________
Your fund manager
________________________________________________________________________________
Prior to joining Delaware Investments in 2000, Ryan K. Brist, CFA, was a member
of the portfolio management team that managed Conseco Capital Management's
investment grade Core and Core Plus products for five years. He previously
worked in investment banking as an analyst for Dean Witter Reynolds in New York.
Brist holds a bachelor's degree in finance from Indiana University.
________________________________________________________________________________
Nasdaq symbols CUSIPs
________________________________________________________________________________
Class A DGCAX 245908785
Class B DGCBX 245908777
Class C DGCCX 245908769
Class R DGCRX 245908744
Institutional Class DGCIX 245908751
[PERFORMANCE OF A $10,000 INVESTMENT LINE CHART]
Chart assumes $10,000 invested on September 15, 1998 and includes the effect of
a 4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to differing charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers U.S.
Credit Index at that month's end, September 30, 1998. After September 30,1998,
returns plotted on the chart were as of the last day of each month shown. The
Lehman Brothers U.S. Credit Index is an unmanaged composite of investment grade
corporate and non-corporate bonds. An index is unmanaged and does not reflect
the costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities. You cannot invest directly in an index.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares. An expense
limitation was in effect for all classes of Delaware Corporate Bond Fund during
the periods shown. Performance would have been lower had the expense limitation
not been in effect. Past performance is not a guarantee of future results.
5
<page>
Performance summary
Delaware Extended Duration Bond Fund
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. A rise or fall in interest rates can have a significant impact on
bond prices and the net asset value (NAV) of the Fund. Funds that invest in
bonds can lose their value, as interest rates can rise, and an investor
can lose principal. Please obtain the performance data for the most
recent month end by calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Extended Duration Bond Fund prospectus contains this and
other important information about the investment company. Please request a
prospectus by calling 800 523-1918 or obtain one online at
www.delawareinvestments.com. Read it carefully before you invest or send money.
Performance includes reinvestment of all distributions.
Fund Performance
Average Annual Total Returns
Through July 31, 2006 1 Year 5 Years Lifetime
________________________________________________________________________________
Class A (Est. 9/15/98)
Excluding Sales Charge -2.89% +8.14% +6.97%
Including Sales Charge -7.26% +7.14% +6.35%
________________________________________________________________________________
Class B (Est. 9/15/98)
Excluding Sales Charge -3.45% +7.35% +6.19%
Including Sales Charge -7.10% +7.12% +6.19%
________________________________________________________________________________
Class C (Est. 9/15/98)
Excluding Sales Charge -3.45% +7.34% +6.20%
Including Sales Charge -4.36% +7.34% +6.20%
________________________________________________________________________________
Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Performance for Class B and C shares, excluding sales
charges, assumes either contingent deferred sales charges did not apply or the
investment was not redeemed.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%. The distributor has contracted to
limit the amount to 0.25% through November 30, 2006.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The cumulative total return for the lifetime period ended July 31, 2006 for
Delaware Extended Duration Bond Fund Class R shares was -2.67%. Class R shares
were first made available on October 1, 2005 and are available only for certain
retirement plan products. They are sold without a sales charge and have an
annual distribution and service fee of 0.60%. The distributor has contracted to
limit the amount to 0.50% through November 30, 2006.
The average annual total returns for the 1-year, 5-year, and lifetime periods
ended July 31, 2006 for Delaware Extended Duration Bond Fund's Institutional
Class were -2.48%, +8.43%, and +7.25%, respectively. Institutional Class shares
were first made available on September 15, 1998 and are available without sales
or asset-based distribution charges only to certain eligible institutional
accounts.
An expense limitation was in effect for all classes of Delaware Extended
Duration Bond Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
6
<page>
Fund basics
As of July 31, 2006
________________________________________________________________________________
Fund objective
________________________________________________________________________________
The Fund seeks to provide investors with total return.
________________________________________________________________________________
Total Fund net assets
________________________________________________________________________________
$179 million
________________________________________________________________________________
Number of holdings
________________________________________________________________________________
266
________________________________________________________________________________
Fund start date
________________________________________________________________________________
September 15, 1998
________________________________________________________________________________
Your fund manager
________________________________________________________________________________
Prior to joining Delaware Investments in 2000, Ryan K. Brist, CFA, was a member
of the portfolio management team that managed Conseco Capital Management's
investment grade Core and Core Plus products for five years. He previously
worked in investment banking as an analyst for Dean Witter Reynolds in New York.
Brist holds a bachelor's degree in finance from Indiana University.
________________________________________________________________________________
Nasdaq symbols CUSIPs
________________________________________________________________________________
Class A DEEAX 245908835
Class B DEEBX 245908827
Class C DEECX 245908819
Class R DEERX 245908728
Institutional Class DEEIX 245908793
[PERFORMANCE OF A $10,000 INVESTMENT LINE CHART]
Chart assumes $10,000 invested on September 15, 1998 and includes the effect of
a 4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to differing charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers Long
U.S. Credit Index at that month's end, September 30, 1998. After September 30,
1998, returns plotted on the chart were as of the last day of each month shown.
The Lehman Brothers Long U.S. Credit Index is an unmanaged composite of
corporate and non-corporate fixed income securities that are rated investment
grade and have at least 10 years to final maturity. An index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling, and holding securities. You cannot invest directly in an index.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares. An expense
limitation was in effect for all classes of Delaware Extended Duration Bond Fund
during the periods shown. Performance would have been lower had the expense
limitation not been in effect. Past performance is not a guarantee of future
results.
7
<page>
Disclosure of Fund expenses
For the period February 1, 2006 to July 31, 2006
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution and/or service (12b-1) fees; and other
Fund expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 invested at the beginning of
the period and held for the entire period February 1, 2006 to July 31, 2006.
Actual Expenses
The first section of the tables shown, "Actual Fund 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 this period.
Hypothetical Example for Comparison Purposes
The second section of the tables shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the tables are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of each table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Funds' actual expenses shown in the tables reflect fee waivers in
effect. The expenses shown in each table assume reinvestment of all dividends
and distributions.
"Expenses Paid During Period" are equal to the Funds' annualized expense ratios,
multiplied by the average account value over the period, multiplied by 181/365
(to reflect the one-half year period).
Delaware Corporate Bond Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/06 to
2/1/06 7/31/06 Ratio 7/31/06
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $1,005.70 0.82% $4.08
Class B 1,000.00 1,002.00 1.57% 7.79
Class C 1,000.00 1,002.00 1.57% 7.79
Class R 1,000.00 1,004.40 1.07% 5.32
Institutional Class 1,000.00 1,005.10 0.57% 2.83
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,020.73 0.82% $4.11
Class B 1,000.00 1,017.01 1.57% 7.85
Class C 1,000.00 1,017.01 1.57% 7.85
Class R 1,000.00 1,019.49 1.07% 5.36
Institutional Class 1,000.00 1,021.97 0.57% 2.86
________________________________________________________________________________
Delaware Extended Duration Bond Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/06 to
2/1/06 7/31/06 Ratio 7/31/06
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $978.50 0.80% $3.92
Class B 1,000.00 976.70 1.55% 7.60
Class C 1,000.00 974.90 1.55% 7.59
Class R 1,000.00 976.80 1.05% 5.15
Institutional Class 1,000.00 981.50 0.55% 2.70
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,020.83 0.80% $4.01
Class B 1,000.00 1,017.11 1.55% 7.75
Class C 1,000.00 1,017.11 1.55% 7.75
Class R 1,000.00 1,019.59 1.05% 5.26
Institutional Class 1,000.00 1,022.07 0.55% 2.76
________________________________________________________________________________
8
<page>
Sector/country allocation and credit rating breakdown
Delaware Corporate Bond Fund
As of July 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector/Country of Net Assets
________________________________________________________________________________
Agency Collateralized Mortgage Obligations 0.42%
________________________________________________________________________________
Agency Mortgage-Backed Securities 0.74%
________________________________________________________________________________
Collateralized Bond Obligations 0.18%
________________________________________________________________________________
Commercial Mortgage-Backed Securities 2.39%
________________________________________________________________________________
Corporate Bonds 78.40%
Banking 8.98%
Basic Industry 5.66%
Brokerage 4.35%
Capital Goods 0.36%
Communications 11.26%
Consumer Cyclical 9.93%
Consumer Non-Cyclical 6.46%
Electric 6.32%
Energy 4.21%
Financials 5.65%
Insurance 8.43%
Natural Gas 3.40%
Real Estate 1.23%
Technology 0.26%
Transportation 1.90%
________________________________________________________________________________
Foreign Agencies 1.09%
________________________________________________________________________________
Municipal Bonds 1.54%
________________________________________________________________________________
Non-Agency Asset-Backed Securities 0.74%
________________________________________________________________________________
Non-Agency Collateralized Mortgage Obligations 2.22%
________________________________________________________________________________
Regional Agency 0.47%
________________________________________________________________________________
Regional Authority 0.47%
________________________________________________________________________________
Senior Secured Loans 4.27%
________________________________________________________________________________
Sovereign Debt 3.21%
Brazil 0.70%
Colombia 0.37%
Germany 0.19%
Mexico 0.25%
Netherlands 0.14%
Poland 0.09%
Russia 0.18%
Sweden 0.57%
United Kingdom 0.51%
Venezuela 0.21%
________________________________________________________________________________
Supranational Banks 0.14%
________________________________________________________________________________
U.S. Treasury Obligations 2.60%
________________________________________________________________________________
Common Stock 0.01%
________________________________________________________________________________
Preferred Stock 0.14%
________________________________________________________________________________
Warrant 0.00%
________________________________________________________________________________
Repurchase Agreements 1.11%
________________________________________________________________________________
Total Market Value of Securities 100.14%
________________________________________________________________________________
Liabilities Net of Receivables and Other Assets (0.14%)
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
Credit Rating Breakdown
(as a % of fixed income investments)
________________________________________________________________________________
AAA+/AAA 12.42%
AA 3.53%
A 22.57%
BBB 42.24%
BB 9.69%
B 8.47%
CCC 0.43%
NR 0.65%
________________________________________________________________________________
Total 100.00%
________________________________________________________________________________
9
<page>
Sector/country allocation and credit rating breakdown
Delaware Extended Duration Bond Fund
As of July 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector/Country of Net Assets
________________________________________________________________________________
Agency Collateralized Mortgage Obligations 0.25%
________________________________________________________________________________
Agency Mortgage-Backed Securities 0.28%
________________________________________________________________________________
Collateralized Bond Obligations 0.03%
________________________________________________________________________________
Commercial Mortgage-Backed Securities 1.90%
________________________________________________________________________________
Corporate Bonds 84.05%
Banking 8.30%
Basic Industry 6.00%
Brokerage 3.85%
Capital Goods 0.84%
Communications 14.75%
Consumer Cyclical 10.56%
Consumer Non-Cyclical 7.88%
Electric 8.82%
Energy 5.70%
Financials 3.09%
Industrial 0.17%
Insurance 8.55%
Natural Gas 2.99%
Real Estate 0.14%
Technology 1.45%
Transportation 0.96%
________________________________________________________________________________
Foreign Agencies 1.42%
________________________________________________________________________________
Municipal Bonds 1.23%
________________________________________________________________________________
Non-Agency Asset-Backed Securities 0.22%
________________________________________________________________________________
Non-Agency Collateralized Mortgage Obligations 0.34%
________________________________________________________________________________
Regional Agency 0.47%
________________________________________________________________________________
Regional Authority 0.47%
________________________________________________________________________________
Senior Secured Loans 4.68%
________________________________________________________________________________
Sovereign Debt 3.70%
Brazil 0.72%
Colombia 0.35%
Germany 0.19%
Mexico 0.97%
Netherlands 0.14%
Poland 0.08%
Russia 0.08%
Sweden 0.50%
United Kingdom 0.51%
Venezuela 0.16%
________________________________________________________________________________
Supranational Banks 0.12%
________________________________________________________________________________
U.S. Treasury Obligations 1.41%
________________________________________________________________________________
Preferred Stock 0.12%
________________________________________________________________________________
Warrant 0.00%
________________________________________________________________________________
Total Market Value of Securities 100.69%
________________________________________________________________________________
Liabilities Net of Receivables and Other Assets (0.69%)
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
Credit Rating Breakdown
(as a % of fixed income investments)
________________________________________________________________________________
AAA+/AAA 6.31%
AA 4.31%
A 28.25%
BBB 41.76%
BB 9.86%
B 8.53%
CCC 0.43%
NR 0.55%
________________________________________________________________________________
Total 100.00%
________________________________________________________________________________
10
<page>
Statements of net assets
Delaware Corporate Bond Fund
July 31, 2006
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Agency Collateralized Mortgage Obligations - 0.42%
________________________________________________________________________________
Fannie Mae Interest Strip
Series 265 2 9.00% 3/1/24 USD 31,915 $ 34,266
Fannie Mae Series 2003-122
AJ 4.50% 2/25/28 513,109 494,272
Freddie Mac Series 2890
PC 5.00% 7/15/30 1,405,000 1,355,571
GNMA Series 2003-5
B 4.486% 10/16/25 540,000 522,617
__________
Total Agency Collateralized Mortgage
Obligations (cost $2,500,014) 2,406,726
__________
________________________________________________________________________________
Agency Mortgage-Backed Securities - 0.74%
________________________________________________________________________________
Fannie Mae S.F. 30 yr
6.00% 8/1/36 TBA 4,050,000 4,024,687
7.00% 2/1/36 203,886 209,174
__________
Total Agency Mortgage-Backed
Securities (cost $4,195,642) 4,233,861
__________
________________________________________________________________________________
=@# Collateralized Bond Obligations - 0.18%
________________________________________________________________________________
Alliance Capital Funding CBO
Series 1 A3 144A 5.84% 2/15/10 92,526 92,526
Juniper CBO Series 1999-1A A1 144A
6.83% 4/15/11 411,425 413,794
Putnam CBO II Limited 144A
6.875% 11/8/09 33,330 33,330
Travelers Funding Limited CBO
Series 1A A2 144A 6.35% 2/18/14 500,000 498,855
__________
Total Collateralized Bond Obligations
(cost $1,063,468) 1,038,505
__________
________________________________________________________________________________
Commercial Mortgage-Backed Securities - 2.39%
________________________________________________________________________________
~ Bank of America Commercial Mortgage
Securities Series 2006-3
A4 5.889% 7/10/44 4,225,000 4,271,211
# Bear Stearns Commercial Mortgage
Securities Series 2004-ESA E 144A
5.064% 5/14/16 1,105,000 1,096,117
# Credit Suisse First Boston Mortgage
Securities Series 2001-SPGA A2 144A
6.515% 8/13/18 2,395,000 2,500,993
JPMorgan Chase Commercial Mortgage
Securities
Series 2002-C2 A2 5.05% 12/12/34 800,000 778,497
~ Series 2006-LDP7 AJ 6.066% 4/15/45 1,920,000 1,939,949
# Merrill Lynch Mortgage Trust Series
2002-MW1 J 144A 5.695% 7/12/34 325,000 308,258
# Morgan Stanley Capital I Series
1999-FNV1 G 144A 6.12% 3/15/31 510,000 511,316
# Tower 144A
Series 2004-2A A 4.232% 12/15/14 935,000 902,110
Series 2006-1 B 5.588% 2/15/36 510,000 504,251
Series 2006-1 C 5.707% 2/15/36 785,000 777,098
__________
Total Commercial Mortgage-Backed
Securities (cost $13,629,524) 13,589,800
__________
________________________________________________________________________________
Corporate Bonds 78.40%
________________________________________________________________________________
Banking - 8.98%
BAC Capital Trust XI
6.625% 5/23/36 USD 1,380,000 $ 1,410,701
~# Banco Santander 144A
5.633% 12/9/09 730,000 730,665
BB&T Capital Trust I 5.85% 8/18/35 1,525,000 1,400,876
BB&T Capital Trust II 6.75% 6/7/36 295,000 304,036
Citigroup 6.625% 6/15/32 330,000 349,471
# CoreStates Capital I Trust 144A
8.00% 12/15/26 630,000 658,050
~# Glitnir Banki 144A 6.693% 6/15/16 2,530,000 2,539,184
~# HBOS 144A 5.92% 9/29/49 1,400,000 1,315,874
# ICICI Bank 144A 5.75% 11/16/10 1,850,000 1,810,266
# Kaupthing Bank 144A
7.125% 5/19/16 4,075,000 4,126,189
MBNA 5.00% 6/15/15 700,000 664,113
Popular North America
4.25% 4/1/08 1,235,000 1,206,205
~ 5.886% 4/6/09 2,220,000 2,226,229
Popular North America Capital Trust I
6.564% 9/15/34 1,730,000 1,602,798
~# Rabobank Capital Funding II
144A 5.26% 12/29/49 1,870,000 1,786,768
~ RBS Capital Trust I 4.709% 12/29/49 895,000 821,142
~# Resona Preferred Global Securities
Cayman 144A 7.191% 12/29/49 8,030,000 8,194,551
Russian Agriculture Bank
6.875% 11/29/10 1,760,000 1,772,723
# 144A 7.175% 5/16/13 980,000 995,680
~# Shinsei Finance Cayman 144A
6.418% 1/29/49 1,760,000 1,707,886
~# Skandinaviska Enskilda Banken 144A
8.125% 9/29/49 835,000 836,986
# Sovereign Bancorp 144A
4.80% 9/1/10 2,435,000 2,353,401
Sovereign Capital Trust VI
7.908% 6/13/36 2,755,000 2,920,402
~# Sumitomo Mitsui Banking 144A
5.625% 7/29/49 2,030,000 1,929,430
~# United Overseas Bank 144A
5.375% 9/3/19 1,315,000 1,259,725
~ Wachovia Capital Trust III
5.80% 8/29/49 6,315,000 6,218,886
__________
51,142,237
__________
Basic Industry - 5.66%
Abitibi-Consolidated 7.875% 8/1/09 1,100,000 1,067,000
Alcan 5.75% 6/1/35 800,000 727,506
Barrick Gold 5.80% 11/15/34 1,550,000 1,396,438
Bowater 9.00% 8/1/09 1,490,000 1,530,975
Donohue Forest Products
7.625% 5/15/07 795,000 800,963
Georgia-Pacific
8.875% 5/15/31 2,749,000 2,752,436
9.50% 12/1/11 675,000 712,125
Grupo Minero Mexico 8.25% 4/1/08 2,105,000 2,178,675
Huntsman International
10.125% 7/1/09 1,295,000 1,320,900
IMC Global 7.375% 8/1/18 300,000 275,250
(continues) 11
<page>
Statements of net assets
Delaware Corporate Bond Fund
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Basic Industry (continued)
Ispat Inland 9.75% 4/1/14 USD 1,755,000 $ 1,950,721
Lubrizol 4.625% 10/1/09 2,890,000 2,801,719
Newmont Gold 8.91% 1/5/09 264,253 275,409
Newmont Mining 5.875% 4/1/35 2,125,000 1,911,359
Norske Skog 8.625% 6/15/11 1,713,000 1,678,740
# Norske Skogindustrier 144A
7.125% 10/15/33 2,200,000 1,942,541
Placer Dome 6.45% 10/15/35 1,760,000 1,726,901
Sherwin-Williams 6.85% 2/1/07 681,000 684,416
# Southern Copper 144A
7.50% 7/27/35 1,200,000 1,193,387
Southern Peru Copper
7.50% 7/27/35 3,495,000 3,475,740
Vale Overseas 6.25% 1/11/16 690,000 683,790
Witco 6.875% 2/1/26 1,265,000 1,144,825
_________
32,231,816
__________
Brokerage - 4.35%
~ Ameriprise Financial 7.518% 6/1/66 4,785,000 4,929,544
Amvescap 4.50% 12/15/09 2,870,000 2,767,131
E Trade Financial 8.00% 6/15/11 1,795,000 1,853,338
Goldman Sachs
5.25% 10/15/13 1,855,000 1,796,004
6.125% 2/15/33 745,000 715,275
6.345% 2/15/34 3,465,000 3,323,589
LaBranche & Company 9.50% 5/15/09 1,980,000 2,049,300
Lehman Brothers Holdings
4.50% 7/26/10 390,000 376,070
~ Lehman Brothers Holdings E-Capital
Trust I 5.954% 8/19/65 400,000 400,634
Merrill Lynch 6.05% 5/16/16 2,870,000 2,881,681
Morgan Stanley
~ 5.358% 11/24/06 350,000 350,194
5.375% 10/15/15 1,410,000 1,352,705
Nuveen Investments 5.00% 9/15/10 1,995,000 1,935,302
_________
24,730,767
__________
Capital Goods - 0.36%
Allied Waste North America
9.25% 9/1/12 1,114,000 1,189,195
# Sealed Air 144A 5.375% 4/15/08 830,000 825,911
__________
2,015,106
__________
Communications - 11.26%
AT&T 7.30% 11/15/11 3,495,000 3,744,631
AT&T Wireless Services
7.875% 3/1/11 525,000 570,143
8.75% 3/1/31 3,660,000 4,544,868
BellSouth
4.20% 9/15/09 3,050,000 2,929,095
6.00% 11/15/34 1,480,000 1,339,668
` British Telecommunications
8.875% 12/15/30 2,200,000 2,781,101
Comcast 6.50% 11/15/35 2,400,000 2,304,336
Comcast Cable Communications
6.75% 1/30/11 2,205,000 2,291,892
Cox Communications 4.625% 1/15/10 2,580,000 2,480,827
CSC Holdings
8.125% 7/15/09 120,000 123,450
8.125% 8/15/09 950,000 977,313
GTE Hawaiian Telephone
7.375% 9/1/06 380,000 380,950
# Hanarotelecom 144A 7.00% 2/1/12 1,250,000 1,195,346
Insight Midwest 10.50% 11/1/10 1,325,000 1,384,625
Intelsat Bermuda 8.625% 1/15/15 520,000 517,400
Liberty Media 8.50% 7/15/29 795,000 794,944
News America 6.20% 12/15/34 2,575,000 2,365,058
Nextel Communications
6.875% 10/31/13 1,280,000 1,295,546
Sprint Capital 8.75% 3/15/32 2,670,000 3,261,448
Telecom Italia Capital
4.00% 1/15/10 415,000 390,920
~ 6.108% 7/18/11 1,620,000 1,622,864
7.20% 7/18/36 3,315,000 3,391,185
Telefonica Emisones
~ 5.714% 6/19/09 2,410,000 2,413,789
5.984% 6/20/11 1,450,000 1,457,911
6.421% 6/20/16 795,000 806,359
7.045% 6/20/36 2,290,000 2,359,584
Telefonos de Mexico
4.50% 11/19/08 1,825,000 1,781,906
Time Warner Entertainment
8.375% 3/15/23 1,409,000 1,569,961
Triton Communications 8.50% 6/1/13 2,005,000 1,879,688
US Unwired 10.00% 6/15/12 580,000 640,900
# Viacom 144A
~ 5.691% 6/16/09 2,735,000 2,736,947
5.75% 4/30/11 905,000 889,043
6.875% 4/30/36 1,700,000 1,635,381
# Vimpelcom 144A 8.25% 5/23/16 530,000 528,675
Vodafone Group 5.375% 1/30/15 1,795,000 1,702,437
# Windstream 144A
8.125% 8/1/13 960,000 1,003,200
8.625% 8/1/16 1,925,000 2,011,625
__________
64,105,016
__________
Consumer Cyclical - 9.93%
Centex 6.50% 5/1/16 3,165,000 3,118,734
Corrections Corporation of America
7.50% 5/1/11 885,000 898,275
~ DaimlerChrysler Holdings
5.74% 3/13/09 4,960,000 4,968,744
Disney (Walt) 7.55% 7/15/93 1,565,000 1,732,356
Ford Motor 7.45% 7/16/31 3,895,000 2,882,300
Ford Motor Credit 5.70% 1/15/10 2,255,000 2,021,953
Fortune Brands
5.125% 1/15/11 100,000 96,945
5.875% 1/15/36 1,090,000 976,926
# Galaxy Entertainment Finance
144A 9.875% 12/15/12 1,435,000 1,506,750
General Motors 8.375% 7/15/33 4,915,000 4,054,875
General Motors Acceptance Corporation
6.875% 9/15/11 4,670,000 4,526,710
8.00% 11/1/31 8,785,000 8,638,467
# Johnson (SC) & Son 144A
5.75% 2/15/33 515,000 477,761
Kohl's 7.25% 6/1/29 425,000 451,822
Lodgenet Entertainment 9.50% 6/15/13 335,000 358,450
12
<page>
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Consumer Cyclical (continued)
May Department Stores
3.95% 7/15/07 USD 1,875,000 $ 1,843,251
6.65% 7/15/24 860,000 858,619
Neiman Marcus 10.375% 10/15/15 1,435,000 1,530,069
# Nissan Motor Acceptance
144A 5.625% 3/14/11 700,000 695,020
Office Depot 6.25% 8/15/13 1,395,000 1,410,122
Penney (J.C.)
7.625% 3/1/97 275,000 277,519
7.65% 8/15/16 3,000,000 3,298,908
Royal Caribbean Cruises
7.25% 6/15/16 620,000 617,057
Target 5.875% 7/15/16 1,175,000 1,189,069
Time Warner 8.18% 8/15/07 3,155,000 3,236,096
Visteon
7.00% 3/10/14 1,200,000 984,000
8.25% 8/1/10 4,205,000 3,889,625
__________
56,540,423
__________
Consumer Non-Cyclical - 6.46%
Altria Group
7.65% 7/1/08 1,585,000 1,644,363
7.75% 1/15/27 1,040,000 1,211,428
AmerisourceBergen
5.625% 9/15/12 1,785,000 1,714,851
5.875% 9/15/15 125,000 118,752
Anheuser Busch 5.75% 4/1/36 1,615,000 1,549,457
Biovail 7.875% 4/1/10 2,105,000 2,147,100
Boston Scientific 7.00% 11/15/35 1,410,000 1,358,113
Constellation Brands 8.125% 1/15/12 632,000 654,120
Genentech 4.75% 7/15/15 645,000 598,850
# HealthSouth 144A 10.75% 6/15/16 1,745,000 1,675,200
Kraft Foods
4.125% 11/12/09 1,825,000 1,749,356
5.25% 6/1/07 1,050,000 1,045,515
Kroger 5.50% 2/1/13 3,510,000 3,404,796
Marsh Supermarket 8.875% 8/1/07 570,000 568,575
Medco Health Solutions 7.25% 8/15/13 3,530,000 3,778,407
Merck
4.75% 3/1/15 265,000 245,644
5.95% 12/1/28 1,585,000 1,523,380
# Miller Brewing 144A 4.25% 8/15/08 860,000 837,748
Pilgrim's Pride 9.625% 9/15/11 1,055,000 1,110,388
# Reynolds American 144A
7.875% 5/15/09 1,115,000 1,162,480
Schering-Plough
5.55% 12/1/13 695,000 682,088
6.75% 12/1/33 565,000 595,213
US Oncology 9.00% 8/15/12 1,275,000 1,332,375
UST 6.625% 7/15/12 920,000 955,571
Wyeth 5.50% 2/1/14 5,195,000 5,098,088
__________
36,761,858
__________
Electric - 6.32%
Alabama Power 5.875% 12/1/22 1,520,000 1,499,469
Avista
7.75% 1/1/07 1,380,000 1,390,629
9.75% 6/1/08 100,000 106,443
BVPS II Funding 8.33% 12/1/07 451,000 451,532
CenterPoint Energy Houston Electric
5.60% 7/1/23 2,080,000 1,959,599
Cleveland Electric Illuminating
7.88% 11/1/17 200,000 227,865
Detroit Edison 4.80% 2/15/15 1,450,000 1,334,713
Dominion Resources 6.30% 3/15/33 2,095,000 2,015,224
Duke Capital
4.331% 11/16/06 845,000 841,349
5.668% 8/15/14 2,390,000 2,310,862
Entergy Gulf States
5.12% 8/1/10 1,575,000 1,524,513
6.00% 12/1/12 1,855,000 1,837,663
# MidAmerican Energy Holdings 144A
6.125% 4/1/36 1,770,000 1,708,910
Monongahela Power 5.00% 10/1/06 685,000 684,138
NRG Energy 7.375% 2/1/16 1,795,000 1,759,100
Pacific Gas & Electric 6.05% 3/1/34 2,720,000 2,633,132
PacifiCorp 7.00% 7/15/09 500,000 519,473
Peco Energy 5.95% 11/1/11 2,150,000 2,180,455
# Power Contract Financing 144A
6.256% 2/1/10 2,209,000 2,218,737
# Power Receivables Finance 144A
6.29% 1/1/12 183,772 184,183
~ Progress Energy 5.957% 1/15/10 1,305,000 1,310,575
PSEG Funding Trust I 5.381% 11/16/07 1,680,000 1,673,453
PSEG Power 5.50% 12/1/15 2,640,000 2,516,792
# Tenaska Alabama Partners 144A
7.00% 6/30/21 908,829 899,170
TXU Energy 6.125% 3/15/08 935,000 939,953
Westar Energy 6.00% 7/1/14 1,250,000 1,252,725
__________
35,980,657
__________
Energy - 4.21%
Amerada Hess 7.125% 3/15/33 2,235,000 2,379,520
# Canadian Oil Sands 144A
4.80% 8/10/09 489,000 475,639
ConocoPhillips 5.90% 10/15/32 1,250,000 1,232,650
EnCana 6.50% 8/15/34 2,340,000 2,362,600
Nexen 5.875% 3/10/35 1,270,000 1,151,416
# Ras Laffan Liquefied Natural Gas II
144A 5.298% 9/30/20 1,000,000 946,348
# Ras Laffan Liquefied Natural Gas III
144A 5.838% 9/30/27 1,775,000 1,682,343
SEACOR Holdings 7.20% 9/15/09 2,115,000 2,164,447
~ Secunda International
13.507% 9/1/12 1,275,000 1,340,344
Siberian Oil 10.75% 1/15/09 1,210,000 1,333,178
Smith International 7.00% 9/15/07 2,360,000 2,390,885
Talisman Energy 5.85% 2/1/37 1,645,000 1,492,819
# TNK-BP Finance 144A
7.50% 7/18/16 2,800,000 2,836,240
Tyumen Oil 11.00% 11/6/07 1,340,000 1,417,854
USX 9.125% 1/15/13 600,000 706,880
Weatherford International
4.95% 10/15/13 50,000 47,383
__________
23,960,546
__________
(continues) 13
<page>
Statements of net assets
Delaware Corporate Bond Fund
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Financials - 5.65%
American General Finance
4.875% 7/15/12 USD 2,185,000 $ 2,092,432
Capital One Bank 5.75% 9/15/10 1,250,000 1,255,633
HSBC Finance
4.625% 9/15/10 1,250,000 1,207,829
5.00% 6/30/15 750,000 704,717
~ HSBC Finance Capital Trust IX
5.911% 11/30/35 2,600,000 2,537,434
# Mantis Reef 144A 4.799% 11/3/09 2,140,000 2,070,313
~ MUFG Capital Finance 1
6.346% 7/29/49 1,775,000 1,739,305
Residential Capital
5.125% 5/17/12 790,000 1,010,565
6.125% 11/21/08 2,875,000 2,857,847
6.375% 6/30/10 815,000 812,948
~ 6.489% 11/21/08 1,920,000 1,937,739
6.50% 4/17/13 1,430,000 1,424,515
6.875% 6/30/15 10,750,000 10,920,548
~# 144A 7.337% 4/17/09 1,610,000 1,609,383
__________
32,181,208
__________
Insurance - 8.43%
# Farmers Exchange Capital 144A
7.05% 7/15/28 2,262,000 2,199,200
# Farmers Insurance Exchange 144A
6.00% 8/1/14 885,000 861,217
8.625% 5/1/24 4,105,000 4,616,269
Humana 6.45% 6/1/16 1,115,000 1,122,528
# Liberty Mutual 144A
5.75% 3/15/14 1,450,000 1,378,801
7.00% 3/15/34 805,000 771,341
# Liberty Mutual Insurance 144A
7.697% 10/15/97 2,745,000 2,655,551
Marsh & McLennan
5.15% 9/15/10 895,000 874,385
5.375% 3/15/07 2,145,000 2,141,650
~ 5.64% 7/13/07 1,745,000 1,744,756
Montpelier Re Holdings
6.125% 8/15/13 2,645,000 2,487,522
# Nationwide Mutual Insurance
144A 7.875% 4/1/33 1,465,000 1,652,514
# Nippon Life Insurance 144A
4.875% 8/9/10 2,880,000 2,792,523
~/# North Front Pass-Through Trust
144A 5.81% 12/15/24 4,850,000 4,662,154
Phoenix 6.675% 2/16/08 1,405,000 1,412,237
Safeco Capital Trust I 8.072% 7/15/37 1,055,000 1,110,634
St. Paul Travelers 5.01% 8/16/07 2,605,000 2,578,510
~/# Twin Reefs Pass-Through Trust
144A 6.345% 12/31/49 2,000,000 2,000,120
UnitedHealth Group 5.80% 3/15/36 2,365,000 2,202,491
WellPoint
4.25% 12/15/09 1,505,000 1,445,909
5.85% 1/15/36 1,930,000 1,791,204
Willis Group
5.125% 7/15/10 2,080,000 2,023,570
5.625% 7/15/15 2,170,000 2,033,494
~# ZFS Finance USA Trust I 144A
6.45% 12/15/65 1,510,000 1,421,278
__________
47,979,858
__________
Natural Gas - 3.40%
Atmos Energy 4.00% 10/15/09 1,020,000 967,031
Energy Transfer 5.95% 2/1/15 2,475,000 2,424,233
Enterprise Products Operating
4.00% 10/15/07 590,000 577,646
4.625% 10/15/09 1,565,000 1,510,723
# GulfSouth Pipeline 144A
5.05% 2/1/15 1,825,000 1,714,963
Kaneb Pipe Line 5.875% 6/1/13 455,000 448,020
KeySpan Gas East 6.90% 1/15/08 725,000 737,736
Kinder Morgan 5.70% 1/5/16 1,075,000 941,624
Northern Border Pipeline
6.25% 5/1/07 700,000 702,211
ONEOK 5.51% 2/16/08 2,665,000 2,657,882
Sempra Energy
4.621% 5/17/07 230,000 228,373
4.75% 5/15/09 735,000 719,432
~ 5.659% 5/21/08 245,000 245,338
Sunoco Logistics Partners
6.125% 5/15/16 2,740,000 2,739,633
Texas East Transmission
5.25% 7/15/07 615,000 611,198
Valero Logistics Operations
6.05% 3/15/13 2,155,000 2,151,640
__________
19,377,683
__________
Real Estate - 1.23%
Brandywine Operating Partnership
5.625% 12/15/10 1,455,000 1,438,302
~ 5.958% 4/1/09 1,560,000 1,562,220
Developers Diversified Realty
4.625% 8/1/10 2,765,000 2,652,005
5.375% 10/15/12 530,000 515,828
HRPT Properties Trust 5.75% 2/15/14 845,000 825,495
__________
6,993,850
__________
Technology - 0.26%
Sungard Data Systems
10.25% 8/15/15 1,452,000 1,479,225
__________
1,479,225
__________
Transportation - 1.90%
American Airlines
6.817% 5/23/11 2,070,000 2,028,600
6.977% 5/23/21 121,993 117,414
Continental Airlines
6.503% 6/15/11 2,080,000 2,092,056
6.703% 6/15/21 371,953 373,582
~ CSX 5.43% 8/3/06 294,000 294,000
# Erac USA Finance 144A
5.30% 11/15/08 2,555,000 2,533,821
7.35% 6/15/08 1,320,000 1,359,513
14
<page>
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Transportation (continued)
# Hertz 144A 10.50% 1/1/16 USD 1,735,000 $ 1,895,488
++ United Air Lines 8.70% 10/7/08 494,749 141,004
___________
10,835,478
___________
Total Corporate Bonds
(cost $454,794,982) 446,315,728
___________
________________________________________________________________________________
Foreign Agencies - 1.09%
________________________________________________________________________________
Pemex Project Funding Master Trust
6.125% 8/15/08 2,095,000 2,104,428
6.625% 6/15/35 810,000 781,354
Series A 6.625% 6/15/35 3,475,000 3,339,071
___________
Total Foreign Agencies
(cost $6,103,054) 6,224,853
___________
________________________________________________________________________________
Municipal Bonds - 1.54%
________________________________________________________________________________
American Eagle Northwest Series A
4.97% 12/15/18 585,000 554,381
California State 5.00% 2/1/33 890,000 904,979
California State University Systemwide
Revenue 5.00% 11/1/30 (AMBAC) 1,460,000 1,509,552
Illinois State Taxable Pension
5.10% 6/1/33 2,140,000 1,952,130
New York State Urban Development
Series A-1 5.25% 3/15/34 (FGIC) 1,430,000 1,504,317
Oregon State Taxable Pension
5.892% 6/1/27 1,600,000 1,612,496
West Virginia Economic Development
Authority 5.37% 7/1/20 (MBIA) 290,000 281,689
Wisconsin State General Taxable Revenue
Series A 5.70% 5/1/26 (FSA) 475,000 471,670
___________
Total Municipal Bonds (cost $8,946,522) 8,791,214
___________
________________________________________________________________________________
Non-Agency Asset-Backed Securities - 0.74%
________________________________________________________________________________
Citibank Credit Card Issuance Trust Series
2003-A7 A7 4.15% 7/7/17 285,000 259,086
# GSAA Trust Series 2004-4N Note 144A
6.25% 5/25/34 18,099 18,065
Mid-State Trust
Series 11 A1 4.864% 7/15/38 232,217 218,450
Series 2004-1 A 6.005% 8/15/37 290,253 291,207
Series 2005-1 A 5.745% 1/15/40 348,078 338,832
Renaissance Home Equity Loan Trust Series
2005-2 AF2 4.361% 8/25/35 1,570,000 1,548,694
~ Residential Asset Mortgage Products
Series 2004-RZ2 AI3 4.30% 1/25/31 734,040 725,147
# Sharp Net Interest Margin Trust Series
2004-2N Note 144A 7.00% 1/25/34 77,107 77,107
# Sierra Receivables Funding Company
Series 2003-1A A 144A
3.09% 1/15/14 88,759 87,002
Structured Asset Securities Series
2001-SB1 A2 3.375% 8/25/31 708,361 636,435
___________
Total Non-Agency Asset-Backed Securities
(cost $4,277,336) 4,200,025
___________
________________________________________________________________________________
Non-Agency Collateralized Mortgage Obligations - 2.22%
________________________________________________________________________________
~ Bear Stearns Adjustable Rate Mortgage
Trust Series 2005-7 1A2
4.75% 8/25/35 489,425 476,020
~ Bear Stearns Alternative A Trust Series
2006-3 34A1 6.219% 5/25/36 1,712,016 1,727,369
Countrywide Alternative Loan Trust
Series 2006-2CB A3 5.50% 3/25/36 1,239,479 1,238,094
~ GMAC Mortgage Loan Trust Series
2005-AR2 4A 5.187% 5/25/35 1,548,409 1,496,723
~ Indymac Index Mortgage Loan Trust
Series 2006-AR7 5A1
6.164% 5/25/36 1,423,124 1,428,867
Series 2006-AR7 5A2
6.164% 5/25/36 2,105,058 2,107,114
Lehman Mortgage Trust Series 2005-2
2A3 5.50% 12/25/35 1,555,163 1,545,636
~ MASTR Adjustable Rate Mortgage
Trust Series 2004-10 2A2
4.947% 10/25/34 594,206 600,720
`# MASTR Specialized Loan Trust Series
2005-2 A2 144A 5.006% 7/25/35 805,751 784,963
~ Nomura Asset Acceptance Series
2006-AF1 1A2 6.159% 5/25/36 1,200,000 1,203,894
__________
Total Non-Agency Collateralized
Mortgage Obligations
(cost $12,664,231) 12,609,400
__________
________________________________________________________________________________
Regional Agency - 0.47%
________________________________________________________________________________
Queensland Treasury
6.00% 10/14/15 AUD 3,512,000 2,691,760
__________
Total Regional Agency
(cost $2,668,195) 2,691,760
__________
________________________________________________________________________________
Regional Authority - 0.47%
________________________________________________________________________________
Ontario Province
4.50% 3/8/15 CAD 1,098,000 963,880
Quebec Province
5.00% 12/1/15 CAD 1,884,000 1,698,455
__________
Total Regional Authority
(cost $2,607,793) 2,662,335
__________
________________________________________________________________________________
<< Senior Secured Loans - 4.27%
________________________________________________________________________________
Alltel/Windstream Term Loan B
7.196% 7/17/13 USD 3,225,000 3,233,063
AWAS Capital 7.25% 3/21/13 2,450,134 2,450,134
Georgia Pacific Term Loan
Tranche B 7.35% 12/20/12 3,084,500 3,084,500
Tranche C 8.30% 12/23/13 2,200,000 2,224,750
HealthSouth 8.52% 3/10/13 5,100,000 5,093,625
@ Neiman Marcus Term Bank
Loan 7.77% 4/6/13 2,408,228 2,432,310
NRG Energy Bank 7.499% 2/1/13 1,000,000 1,003,750
(continues) 15
<page>
Statements of net assets
Delaware Corporate Bond Fund
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
<< Senior Secured Loans (continued)
________________________________________________________________________________
@ Qwest Communications
Bank Loan
Tranch A 11.00% 6/30/07 USD 1,000,000 $ 1,018,750
Tranch B 6.95% 6/30/10 1,250,000 1,246,094
United Airlines Bank Loan Tranche B
8.625% 2/1/12 1,437,500 1,453,672
9.125% 2/1/12 162,500 164,328
Visteon 8.61% 6/13/13 900,000 900,000
__________
Total Senior Secured Loans
(cost $24,270,684) 24,304,976
__________
________________________________________________________________________________
Sovereign Debt - 3.21%
________________________________________________________________________________
Brazil - 0.70%
Republic of Brazil
# 144A 6.00% 8/15/10 BRL 6,188,405 2,580,177
12.50% 1/5/16 BRL 3,082,000 1,424,424
__________
4,004,601
__________
Colombia - 0.37%
Republic of Colombia
7.375% 1/27/17 USD 885,000 904,913
12.00% 10/22/15 COP 2,445,000,000 1,181,934
__________
2,086,847
__________
Germany - 0.19%
Deutschland Republic
5.00% 7/4/11 EUR 813,000 1,098,028
__________
1,098,028
__________
Mexico - 0.25%
Mexican Bonos
10.00% 12/5/24 MXN 14,025,000 1,421,789
__________
1,421,789
__________
Netherlands - 0.14%
Netherlands Government
5.75% 2/15/07 EUR 617,000 798,072
__________
798,072
__________
Poland - 0.09%
Poland Government
6.25% 10/24/15 PLN 1,529,000 518,811
__________
518,811
__________
Russia - 0.18%
~/@ Russian Paris Club Participation
Note 2.654% 8/20/20 JPY 118,501,334 1,033,637
__________
1,033,637
__________
Sweden - 0.57%
Swedish Government
4.00% 12/1/09 SEK 12,995,000 1,831,080
4.50% 8/12/15 SEK 5,805,000 847,754
5.00% 12/1/20 SEK 3,535,000 550,319
__________
3,229,153
__________
United Kingdom - 0.51%
U.K. Treasury 8.00% 9/27/13 GBP 1,296,000 2,908,570
__________
2,908,570
__________
Venezuela - 0.21%
Venezuela Government
6.00% 12/9/20 USD 1,315,000 $ 1,188,760
__________
1,188,760
__________
Total Sovereign Debt
(cost $17,692,909) 18,288,268
__________
________________________________________________________________________________
Supranational Banks - 0.14%
________________________________________________________________________________
Inter-American Development
Bank 1.90% 7/8/09 JPY 4,000,000 35,757
^ International Bank for
Reconstruction & Development
6.861% 8/20/07 NZD 1,269,000 728,813
__________
Total Supranational Banks
(cost $802,905) 764,570
__________
________________________________________________________________________________
U.S. Treasury Obligations - 2.60%
________________________________________________________________________________
U.S. Treasury Bonds
5.375% 2/15/31 USD 4,360,000 4,509,535
U.S. Treasury Inflation Index Notes
oo 1.875% 7/15/15 348,705 333,926
3.875% 1/15/09 475,306 492,164
U.S. Treasury Notes
4.875% 5/15/09 780,000 779,208
oo 4.875% 5/31/11 4,840,000 4,832,062
5.125% 6/30/11 1,295,000 1,307,040
5.125% 5/15/16 2,505,000 2,531,814
__________
Total U.S. Treasury Obligations
(cost $14,714,379) 14,785,749
__________
Number
of Shares
________________________________________________________________________________
Common Stock - 0.01%
________________________________________________________________________________
Masco 281 7,511
+ UAL 2,320 60,649
__________
Total Common Stock
(cost $77,459) 68,160
__________
________________________________________________________________________________
Preferred Stock - 0.14%
________________________________________________________________________________
Nexen 7.35% 32,495 815,949
__________
Total Preferred Stock
(cost $846,759) 815,949
__________
________________________________________________________________________________
Warrant - 0.00%
________________________________________________________________________________
+# Solutia144A, exercise price $7.59,
expiration date 7/15/09 1,590 0
__________
Total Warrant (cost $135,295) 0
__________
16
<page>
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Repurchase Agreements - 1.11%
________________________________________________________________________________
With BNP Paribas 5.22% 8/1/06
(dated 7/31/06, to be repurchased
at $3,348,485, collateralized by
$2,038,000 U.S. Treasury Bills due
1/25/07, market value $1,987,757,
$1,012,000 U.S. Treasury Notes
3.375% due 9/15/09, market
value $979,828 and $424,000
U.S. Treasury Notes 6.00% due
8/15/09, market value
$ 448,443) USD 3,348,000 $ 3,348,000
With Cantor Fitzgerald 5.22%
8/1/06 (dated 7/31/06, to be
repurchased at $1,698,246,
collateralized by $255,000
U.S. Treasury Notes 3.00% due
2/15/09, market value $246,478,
$192,000 U.S. Treasury Notes
3.625% due 7/15/09, market
value $185,620, $424,000
U.S. Treasury Notes 3.875% due
5/15/09, market value $416,037,
$424,000 U.S. Treasury Notes
5.50% due 5/15/09, market
value $435,738 and $424,000
U.S. Treasury Notes 6.00% due
8/15/09, market value
$ 448,443) 1,698,000 1,698,000
With UBS Warburg 5.20% 8/1/06
(dated 7/31/06, to be repurchased
at $1,273,184, collateralized by
$1,325,000 U.S. Treasury Notes
3.875% due 5/15/09, market
value $1,299,265) 1,273,000 1,273,000
____________
Total Repurchase Agreements
(cost $6,319,000) 6,319,000
____________
Total Market Value of Securities - 100.14%
(cost $578,310,151) 570,110,879
Liabilities Net of Receivables and
Other Assets - (0.14%) (788,473)
____________
Net Assets Applicable to 103,819,335
Shares Outstanding - 100.00% $569,322,406
____________
Net Asset Value - Delaware Corporate Bond Fund
Class A ($256,775,958 / 46,811,897 Shares) $5.49
_____
Net Asset Value - Delaware Corporate Bond Fund
Class B ($23,791,828 / 4,339,888 Shares) $5.48
_____
Net Asset Value - Delaware Corporate Bond Fund
Class C ($48,424,952 / 8,827,561 Shares) $5.49
_____
Net Asset Value - Delaware Corporate Bond Fund
Class R ($6,048,691 / 1,102,495 Shares) $5.49
_____
Net Asset Value - Delaware Corporate Bond Fund
Institutional Class ($234,280,977 / 42,737,494) $5.48
_____
Components of Net Assets at July 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $590,759,627
Distribution in excess of net investment income (753,270)
Accumulated net realized loss on investments (12,729,670)
Net unrealized depreciation of investments
and foreign currencies (7,954,281)
____________
Total net assets $569,322,406
____________
o 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
JPY - Japanese Yen
MXN - Mexican Peso
NZD - New Zealand Dollar
PLN - Polish Zloty
SEK - Swedish Krona
USD - U.S. Dollar
+ Non-income producing security for the year ended July 31, 2006.
++ Non-income producing security. Security is currently in default.
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
~ Variable rate security. The interest rate shown is the rate as of July 31,
2006.
` Step coupon bond. Coupon increases periodically based on a predetermined
schedule. Stated interest rate in effect at July 31, 2006.
@ Illiquid security. At July 31, 2006, the aggregate amount of illiquid
securities equals $6,769,296, which represented 1.19% of the Fund's net
assets. See Note 10 in "Notes to Financial Statements."
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At July 31, 2006, the aggregate amount of Rule 144A
securities equals $108,893,651, which represented 19.13% of the Fund's net
assets. See Note 10 in "Notes to Financial Statements."
<< Senior Secured Loans in which the Fund 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.
/ 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.
oo Fully or partially pledged as collateral for financial futures contracts.
= Security is being fair valued in accordance with the Fund's fair valuation
policy. At July 31, 2006, the aggregate amount of fair valued securities
equals $1,038,505, which represented 0.18% of the Fund's net assets. See Note
1 in "Notes to Financial Statements."
(continues) 17
<page>
Statements of net assets
Delaware Corporate Bond Fund
________________________________________________________________________________
________________________________________________________________________________
Summary of Abbreviations:
AMBAC - Insured by the AMBAC Assurance Corporation
CBO - Collateralized Bond Obligation
CDO - Collateralized Debt Obligation
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
S.F. - Single Family
TBA - To be announced
yr - Year
Net Asset Value and Offering Price Per Share -
Delaware Corporate Bond Fund
Net asset value Class A (A) $5.49
Sales charge (4.50% of offering price) (B) 0.26
_____
Offering price $5.75
_____
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
The following foreign currency exchange contracts, forward foreign
cross-currency exchange contracts and futures contracts were outstanding at July
31, 2006:
Foreign Currency Exchange Contracts and Forward Foreign
Cross-Currency Exchange Contracts (1)
Contracts to Unrealized
Receive Settlement Appreciation
(Deliver) In Exchange For Date (Depreciation)
_______________ _______________ __________ ______________
AUD (3,687,410) USD 2,807,225 8/4/06 $(17,769)
CAD (2,403,800) USD 2,174,401 8/4/06 50,098
EUR 360,800 USD (461,312) 8/4/06 (353)
GBP (1,610,000) USD 2,969,666 8/4/06 (37,888)
JPY 97,728,500 EUR (682,600) 8/4/06 (19,357)
JPY 211,847,000 USD(1,868,056) 8/4/06 (19,575)
JPY 443,543,000 USD(3,916,702) 11/2/06 4,285
NZD (1,150,800) USD 734,636 8/4/06 24,110
PLN (2,069,310) USD 690,852 8/4/06 20,572
SEK (15,311,200) USD 2,137,958 11/2/06 (3,116)
________
$ 1,007
________
Futures Contracts (2)
Notional Unrealized
Contracts Cost Notional Expiration Appreciation
to Buy (Sell) (Proceeds) Value Date (Depreciation)
____________________ ___________ ___________ __________ ______________
434 U.S. Treasury
5 year Notes $45,091,989 $45,230,938 9/30/06 $ 138,949
548 U.S. Treasury
10 year Notes 57,691,241 58,105,125 9/30/06 413,884
(168) U.S. Treasury
long Bond (17,895,253) (18,191,250) 9/30/06 (295,997)
_________
$ 256,836
_________
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 Fund's total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Fund's net assets.
(1) See Note 8 in "Notes to Financial Statements."
(2) See Note 9 in "Notes to Financial Statements."
See accompanying notes
18
<page>
Statements of net assets
Delaware Extended Duration Bond Fund
July 31, 2006
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Agency Collateralized Mortgage Obligations - 0.25%
________________________________________________________________________________
oo Freddie Mac Series 2890 PC
5.00% 7/15/30 USD 300,000 $ 289,446
GNMA Series 2003-5 B
4.486% 10/16/25 160,000 154,849
___________
Total Agency Collateralized Mortgage
Obligations (cost $462,016) 444,295
___________
________________________________________________________________________________
Agency Mortgage-Backed Securities - 0.28%
________________________________________________________________________________
Fannie Mae S.F. 30 yr
5.00% 9/1/35 126,664 119,975
oo 5.50% 3/1/29 255,487 249,418
Fannie Mae S.F. 30 yr TBA
5.50% 8/1/36 130,000 126,263
___________
Total Agency Mortgage-Backed Securities
(cost $500,323) 495,656
___________
________________________________________________________________________________
@=# Collateralized Bond Obligations - 0.03%
________________________________________________________________________________
Juniper CBO Series 1999-1A A1 144A
6.83% 4/15/11 48,163 48,440
Putnam CBO II Limited 144A
6.875% 11/8/09 11,403 11,403
___________
Total Collateralized Bond Obligations
(cost $61,679) 59,843
___________
________________________________________________________________________________
Commercial Mortgage-Backed Securities - 1.90%
________________________________________________________________________________
~ Bank of America Commercial Mortgage
Series 2006-3 A4 5.889% 7/10/44 1,395,000 1,410,257
# Bear Stearns Commercial Mortgage
Securities Series 2004-ESA E 144A
5.064% 5/14/16 260,000 257,910
# Credit Suisse First Boston Mortgage
Securities Series 2001-SPGA A2 144A
6.515% 8/13/18 610,000 636,996
~ JPMorgan Chase Commercial Mortgage
Securities Series 2006-LDP7 AJ
6.066% 4/15/45 600,000 606,234
Merrill Lynch Mortgage Trust
# Series 2002-MW1 J 144A
5.695% 7/12/34 110,000 104,334
Series 2005-CIP1 A2 4.96% 7/12/38 50,000 49,007
# Morgan Stanley Capital I
Series 1999-FNV1 G 144A
6.12% 3/15/31 155,000 155,400
# Tower Series 2004-2A A 144A
4.232% 12/15/14 195,000 188,141
___________
Total Commercial Mortgage-Backed Securities
(cost $3,389,730) 3,408,279
___________
________________________________________________________________________________
Corporate Bonds - 84.05%
________________________________________________________________________________
Banking - 8.30%
BAC Capital Trust XI 6.625% 5/23/36 655,000 669,572
~ Barclays Bank 6.278% 12/29/49 1,035,000 935,317
BB&T Capital Trust I 5.85% 8/18/35 875,000 803,781
Citigroup
6.625% 6/15/32 100,000 105,900
6.875% 2/15/98 750,000 803,588
~# HBOS 144A
5.92% 9/29/49 300,000 281,973
6.413% 9/29/49 1,000,000 924,478
HSBC 7.625% 5/17/32 500,000 580,795
# Kaupthing Bank 144A
7.125% 5/19/16 1,290,000 1,306,205
Popular North America Capital Trust I
6.564% 9/15/34 580,000 537,354
~# Rabobank Capital Funding II 144A
5.26% 12/29/49 505,000 482,523
~ RBS Capital Trust I 4.709% 12/29/49 285,000 261,481
~# Resona Preferred Global Securities
Cayman 144A 7.191% 12/29/49 2,270,000 2,316,517
# Russian Agriculture Bank 144A
7.175% 5/16/13 300,000 304,800
~# Shinsei Finance Cayman 144A
6.418% 1/29/49 550,000 533,715
Sovereign Capital Trust VI
7.908% 6/13/36 900,000 954,033
~# Sumitomo Mitsui Banking 144A
5.625% 7/29/49 540,000 513,247
Travelers Capital III 7.625% 12/1/36 581,000 659,817
~# United Overseas Bank 144A
5.375% 9/3/19 305,000 292,180
~ Wachovia Capital Trust III
5.80% 8/29/49 1,600,000 1,575,648
___________
14,842,924
___________
Basic Industry - 6.00%
Abitibi-Consolidated 7.875% 8/1/09 395,000 383,150
Alcan 5.75% 6/1/35 930,000 845,726
Barrick Gold 5.80% 11/15/34 500,000 450,464
Bowater 9.00% 8/1/09 320,000 328,800
Georgia-Pacific
8.875% 5/15/31 870,000 871,088
9.50% 12/1/11 250,000 263,750
Huntsman International 10.125% 7/1/09 495,000 504,900
IMC Global 7.375% 8/1/18 200,000 183,500
Ispat Inland 9.75% 4/1/14 380,000 422,378
Lubrizol 6.50% 10/1/34 835,000 818,532
Newmont Mining 5.875% 4/1/35 500,000 449,732
Norske Skog 8.625% 6/15/11 460,000 450,800
# Norske Skogindustrier 144A
7.125% 10/15/33 1,120,000 988,929
Phelps Dodge 9.50% 6/1/31 500,000 631,697
Placer Dome 6.45% 10/15/35 675,000 662,306
# Southern Copper 144A 7.50% 7/27/35 625,000 621,556
Southern Peru Copper 7.50% 7/27/35 940,000 934,820
Vale Overseas 6.25% 1/11/16 215,000 213,065
Weyerhaeuser 7.125% 7/15/23 340,000 338,900
Witco 6.875% 2/1/26 400,000 362,000
___________
10,726,093
___________
Brokerage - 3.85%
~ Ameriprise Financial 7.518% 6/1/66 1,370,000 1,411,385
E Trade Financial 8.00% 6/15/11 495,000 511,088
# FMR 144A 7.57% 6/15/29 350,000 414,234
(continues) 19
<page>
Statements of net assets
Delaware Extended Duration Bond Fund
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Brokerage (continued)
Goldman Sachs
6.125% 2/15/33 USD 555,000 $ 532,856
6.345% 2/15/34 2,370,000 2,273,277
LaBranche & Company 9.50% 5/15/09 595,000 615,825
Merrill Lynch 6.05% 5/16/16 725,000 727,951
Morgan Stanley 5.375% 10/15/15 420,000 402,933
___________
6,889,549
___________
Capital Goods - 0.84%
Allied Waste North America
9.25% 9/1/12 405,000 432,338
Honeywell International 5.70% 3/15/36 300,000 287,381
United Technologies 6.05% 6/1/36 785,000 789,961
___________
1,509,680
___________
Communications - 14.75%
America Movil 6.375% 3/1/35 600,000 556,884
AT&T 8.00% 11/15/31 1,100,000 1,287,217
AT&T Wireless Services 8.75% 3/1/31 1,720,000 2,135,839
BellSouth 6.00% 11/15/34 1,170,000 1,059,062
` British Telecommunications
8.875% 12/15/30 985,000 1,245,175
Citizens Communications 9.00% 8/15/31 500,000 515,000
Comcast 6.50% 11/15/35 1,260,000 1,209,776
Cox Communications
6.80% 8/1/28 984,000 978,996
6.95% 1/15/28 645,000 643,185
CSC Holdings 8.125% 8/15/09 215,000 221,181
# Hanarotelecom 144A 7.00% 2/1/12 285,000 272,539
Insight Midwest 10.50% 11/1/10 260,000 271,700
Intelsat Bermuda 8.625% 1/15/15 165,000 164,175
Liberty Media 8.50% 7/15/29 530,000 529,962
News America
6.20% 12/15/34 755,000 693,444
7.30% 4/30/28 700,000 721,986
Nextel Communications
6.875% 10/31/13 310,000 313,765
Pacific Bell 7.125% 3/15/26 100,000 104,536
SBC Communications 5.10% 9/15/14 1,125,000 1,057,581
Sprint Capital 8.75% 3/15/32 2,255,000 2,754,518
Telecom Italia Capital 7.20% 7/18/36 2,075,000 2,122,688
Telefonica Emisones
6.421% 6/20/16 305,000 309,358
7.045% 6/20/36 1,455,000 1,499,212
Telefonos de Mexico 5.50% 1/27/15 600,000 574,201
Time Warner Entertainment
8.375% 3/15/23 1,670,000 1,860,777
Triton Communications 8.50% 6/1/13 630,000 590,625
US Unwired 10.00% 6/15/12 180,000 198,900
# Viacom 144A 6.875% 4/30/36 1,130,000 1,087,048
Vodafone Group 7.875% 2/15/30 400,000 448,331
# Windstream 144A
8.125% 8/1/13 305,000 318,725
8.625% 8/1/16 605,000 632,225
___________
26,378,611
___________
Consumer Cyclical - 10.56%
Centex 6.50% 5/1/16 1,225,000 1,207,093
Corrections Corporation of America
7.50% 5/1/11 280,000 284,200
DaimlerChrysler Holdings
8.50% 1/18/31 600,000 694,862
Disney (Walt) 7.55% 7/15/93 1,920,000 2,125,319
Ford Motor 7.45% 7/16/31 1,880,000 1,391,200
Fortune Brands 5.875% 1/15/36 680,000 609,458
# Galaxy Entertainment Finance 144A
9.875% 12/15/12 415,000 435,750
General Motors 8.375% 7/15/33 1,620,000 1,336,500
General Motors Acceptance Corporation
6.875% 9/15/11 1,120,000 1,085,635
8.00% 11/1/31 3,695,000 3,633,367
# Johnson (SC) & Son 144A
5.75% 2/15/33 225,000 208,730
Kohl's 7.25% 6/1/29 600,000 637,867
Lodgenet Entertainment 9.50% 6/15/13 195,000 208,650
May Department Stores
6.65% 7/15/24 500,000 499,197
6.70% 7/15/34 960,000 955,747
Neiman Marcus 10.375% 10/15/15 490,000 522,463
Office Depot 6.25% 8/15/13 300,000 303,252
Penney (J.C.)
7.625% 3/1/97 85,000 85,779
7.65% 8/15/16 550,000 604,800
Royal Caribbean Cruises 7.25% 6/15/16 235,000 233,885
Target 5.875% 7/15/16 375,000 379,490
Visteon
7.00% 3/10/14 385,000 315,700
8.25% 8/1/10 1,230,000 1,137,750
___________
18,896,694
___________
Consumer Non-Cyclical - 7.88%
Altria Group 7.75% 1/15/27 785,000 914,395
AmerisourceBergen
5.625% 9/15/12 525,000 504,368
5.875% 9/15/15 450,000 427,508
Biovail 7.875% 4/1/10 615,000 627,300
Boston Scientific 7.00% 11/15/35 1,640,000 1,579,650
# Cargill 144A 6.125% 4/19/34 1,000,000 986,760
Delhaize America 9.00% 4/15/31 455,000 512,804
Genentech 5.25% 7/15/35 800,000 706,595
# HealthSouth 144A 10.75% 6/15/16 550,000 528,000
Kraft Foods 6.50% 11/1/31 1,195,000 1,221,047
Marsh Supermarket 8.875% 8/1/07 180,000 179,550
Medco Health Solutions 7.25% 8/15/13 1,335,000 1,428,944
Merck 5.95% 12/1/28 655,000 629,536
Pilgrim's Pride 9.625% 9/15/11 285,000 299,963
# Reynolds American 144A
7.875% 5/15/09 355,000 370,117
Schering-Plough 6.75% 12/1/33 950,000 1,000,801
US Oncology 9.00% 8/15/12 400,000 418,000
UST 6.625% 7/15/12 255,000 264,859
Wyeth 6.00% 2/15/36 1,545,000 1,488,166
___________
14,088,363
___________
Electric - 8.82%
Alabama Power 5.875% 12/1/22 925,000 912,506
CalEnergy 8.48% 9/15/28 1,345,000 1,654,072
20
<page>
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Electric (continued)
Carolina Power & Light
8.625% 9/15/21 USD 1,410,000 $ 1,744,743
CenterPoint Energy Houston Electric
5.60% 7/1/23 830,000 781,955
Cleveland Electric Illuminating
7.88% 11/1/17 530,000 603,841
Dominion Resources
5.95% 6/15/35 450,000 414,334
6.30% 3/15/33 800,000 769,537
Duke Capital 5.668% 8/15/14 780,000 754,173
# MidAmerican Energy Holdings 144A
6.125% 4/1/36 1,115,000 1,076,517
Northern States Power-Minnesota
5.25% 7/15/35 805,000 712,993
NRG Energy 7.375% 2/1/16 610,000 597,800
Ohio Edison 6.875% 7/15/36 1,120,000 1,169,724
Oncor Electric 7.25% 1/15/33 625,000 680,868
Otter Tail 6.80% 10/1/32 450,000 439,008
Pacific Gas & Electric 6.05% 3/1/34 1,295,000 1,253,642
PSEG Power 5.50% 12/1/15 860,000 819,864
Tampa Electric 6.55% 5/15/36 100,000 102,174
# Tenaska Alabama Partners 144A
7.00% 6/30/21 268,740 265,884
Xcel Energy 6.50% 7/1/36 1,025,000 1,029,644
___________
15,783,279
___________
Energy - 5.70%
Amerada Hess 7.125% 3/15/33 800,000 851,730
ConocoPhillips 5.90% 10/15/32 850,000 838,202
EnCana 6.50% 8/15/34 650,000 656,278
Global Marine 7.00% 6/1/28 525,000 561,388
Nexen 5.875% 3/10/35 1,050,000 951,958
Petro-Canada 5.95% 5/15/35 1,450,000 1,333,408
# Ras Laffan Liquefied Natural Gas II 144A
5.298% 9/30/20 500,000 473,174
# Ras Laffan Liquefied Natural Gas III 144A
5.838% 9/30/27 1,220,000 1,156,315
SEACOR Holdings 7.20% 9/15/09 240,000 245,611
~ Secunda International 13.507% 9/1/12 225,000 236,531
Siberian Oil 10.75% 1/15/09 475,000 523,355
Talisman Energy 5.85% 2/1/37 990,000 898,414
# TNK-BP Finance 144A 7.50% 7/18/16 1,105,000 1,119,302
Tyumen Oil 11.00% 11/6/07 330,000 349,173
___________
10,194,839
___________
Financials - 3.09%
~ HSBC Finance Capital Trust IX
5.911% 11/30/35 900,000 878,342
# Mantis Reef 144A 4.799% 11/3/09 340,000 328,928
~ MUFG Capital Finance 1 6.346% 7/29/49 555,000 543,839
Residential Capital
5.125% 5/17/12 EUR 250,000 319,799
6.875% 6/30/15 USD 3,410,000 3,464,100
___________
5,535,008
___________
Industrial - 0.17%
President and Fellows of
Harvard College
6.30% 10/1/37 305,000 307,602
___________
307,602
___________
Insurance - 8.55%
American RE 7.45% 12/15/26 155,000 167,708
# Farmers Exchange Capital 144A
7.05% 7/15/28 365,000 354,867
# Farmers Insurance Exchange 144A
6.00% 8/1/14 300,000 291,938
8.625% 5/1/24 1,680,000 1,889,241
Humana 6.45% 6/1/16 345,000 347,329
# Liberty Mutual 144A 7.00% 3/15/34 270,000 258,710
# Liberty Mutual Insurance 144A
7.697% 10/15/97 1,110,000 1,073,830
MetLife
5.70% 6/15/35 715,000 657,337
6.375% 6/15/34 500,000 500,845
Montpelier Re Holdings
6.125% 8/15/13 735,000 691,240
# Mutual of Omaha 144A
6.80% 6/15/36 900,000 893,643
# Nationwide Mutual Insurance 144A
7.875% 4/1/33 410,000 462,478
# New York Life Insurance 144A
5.875% 5/15/33 295,000 287,973
~/# North Front Pass-Through Trust 144A
5.81% 12/15/24 1,660,000 1,595,707
UnitedHealth Group 5.80% 3/15/36 1,860,000 1,732,192
WellPoint 5.85% 1/15/36 2,195,000 2,037,146
Willis Group 5.625% 7/15/15 1,205,000 1,129,198
~# ZFS Finance USA Trust I 144A
6.45% 12/15/65 990,000 931,832
___________
15,303,214
___________
Natural Gas - 2.99%
Energy Transfer 5.95% 2/1/15 490,000 479,949
Enterprise Products 5.75% 3/1/35 650,000 565,535
# GulfSouth Pipeline 144A 5.05% 2/1/15 175,000 164,449
Kaneb Pipe Line 5.875% 6/1/13 145,000 142,776
Kinder Morgan 6.40% 1/5/36 1,750,000 1,440,550
San Diego Gas & Electric
6.00% 6/1/26 1,020,000 1,019,312
Sunoco Logistics Partners
6.125% 5/15/16 845,000 844,887
Valero Logistics Operations
6.05% 3/15/13 685,000 683,932
___________
5,341,390
___________
Real Estate - 0.14%
HRPT Properties Trust 5.75% 2/15/14 265,000 258,883
___________
258,883
___________
Technology - 1.45%
Dell 7.10% 4/15/28 420,000 461,775
International Business Machines
7.125% 12/1/96 100,000 110,164
(continues) 21
<page>
Statements of net assets
Delaware Extended Duration Bond Fund
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Technology (continued)
Motorola
6.50% 9/1/25 USD 415,000 $ 420,651
6.50% 11/15/28 1,050,000 1,065,371
Sungard Data Systems
10.25% 8/15/15 530,000 539,938
___________
2,597,899
___________
Transportation - 0.96%
American Airlines
6.817% 5/23/11 380,000 372,400
6.977% 5/23/21 72,537 69,814
Continental Airlines 6.503% 6/15/11 725,000 729,202
# Hertz 144A 10.50% 1/1/16 495,000 540,788
___________
1,712,204
___________
Total Corporate Bonds (cost $154,523,411) 150,366,232
___________
________________________________________________________________________________
Foreign Agencies - 1.42%
________________________________________________________________________________
Pemex Project Funding Master Trust
6.625% 6/15/35 1,075,000 1,036,982
Series A 6.625% 6/15/35 1,560,000 1,498,979
___________
Total Foreign Agencies (cost $2,357,840) 2,535,961
___________
________________________________________________________________________________
Municipal Bonds - 1.23%
________________________________________________________________________________
American Eagle Northwest Series
A 4.97% 12/15/18 125,000 118,458
California State 5.00% 2/1/33 180,000 183,029
California State University Systemwide
Revenue 5.00% 11/1/30 (AMBAC) 600,000 620,364
Illinois State Taxable Pension
5.10% 6/1/33 355,000 323,835
New York State Urban Development
Series A-1 5.25% 3/15/34 (FGIC) 295,000 310,331
Oregon State Taxable Pension
5.892% 6/1/27 410,000 413,202
West Virginia Economic Development
Authority 5.37% 7/1/20 (MBIA) 60,000 58,280
Wisconsin State General Taxable Revenue
Series A 5.70% 5/1/26 (FSA) 170,000 168,808
___________
Total Municipal Bonds (cost $2,228,167) 2,196,307
___________
________________________________________________________________________________
Non-Agency Asset-Backed Securities - 0.22%
________________________________________________________________________________
Citibank Credit Card Issuance Trust Series
2003-A7 A7 4.15% 7/7/17 150,000 136,361
# GSAA Trust Series 2004-4N Note 144A
6.25% 5/25/34 3,810 3,803
Mid-State Trust
Series 11 A1 4.864% 7/15/38 63,030 59,294
Series 2005-1 A 5.745% 1/15/40 171,836 167,271
# Sharp Net Interest Margin Trust Series
2004-2N 144A 7.00% 1/25/34 23,366 23,366
___________
Total Non-Agency Asset-Backed Securities
(cost $394,138) 390,095
___________
________________________________________________________________________________
Non-Agency Collateralized Mortgage Obligations - 0.34%
________________________________________________________________________________
# GSMPS Mortgage Loan Trust 144A
Series 2005-RP1 1A3
8.00% 1/25/35 156,943 164,478
~ Indymac Index Mortgage Loan Trust
Series 2006-AR7 5A1 6.164% 5/25/36 446,851 448,654
___________
Total Non-Agency Collateralized Mortgage
Obligations (cost $619,262) 613,132
___________
________________________________________________________________________________
Regional Agency - 0.47%
________________________________________________________________________________
Queensland Treasury
6.00% 10/14/15 AUD 1,105,000 846,923
___________
Total Regional Agency (cost $845,088) 846,923
___________
________________________________________________________________________________
Regional Authority - 0.47%
________________________________________________________________________________
Ontario Province 4.50% 3/8/15 CAD 345,000 302,859
Quebec Province 5.00% 12/1/15 CAD 589,000 530,992
___________
Total Regional Authority (cost $817,026) 833,851
___________
________________________________________________________________________________
<<Senior Secured Loans - 4.68%
________________________________________________________________________________
Alltel/Windstream Term Loan B
7.196% 7/17/13 USD 1,020,000 1,022,550
AWAS Capital 7.25% 3/21/13 833,046 833,046
Georgia Pacific Loan
Tranche B 7.35% 12/20/12 995,000 995,000
Tranche C 8.30% 12/23/13 700,000 707,875
HealthSouth 8.52% 3/10/13 1,600,000 1,598,000
@ Neiman Marcus Term Bank Loan
7.77% 4/6/13 1,000,000 1,010,000
@ Qwest Communications Bank Loan
Tranch B 6.95% 6/30/10 1,400,000 1,395,625
United Airlines Bank Loan Tranche B
8.625% 2/1/12 437,500 442,422
9.125% 2/1/12 62,500 63,203
Visteon 8.61% 6/13/13 300,000 300,000
___________
Total Senior Secured Loans (cost $8,351,364) 8,367,721
___________
________________________________________________________________________________
Sovereign Debt - 3.70%
________________________________________________________________________________
Brazil - 0.72%
Republic of Brazil
# 144A 6.00% 8/15/10 BRL 2,715,046 1,132,004
12.50% 1/5/16 BRL 310,000 143,274
___________
1,275,278
___________
Colombia - 0.35%
Republic of Colombia
7.375% 1/27/17 USD 250,000 255,625
12.00% 10/22/15 COP 775,000,000 374,642
___________
630,267
___________
Germany - 0.19%
Deutschland Republic
5.00% 7/4/11 EUR 251,000 338,997
___________
338,997
___________
Mexico - 0.97%
Mexican Bonos 10.00% 12/5/24 MXN 4,425,000 448,586
Mexico Government
6.75% 9/27/34 USD 1,250,000 1,276,250
___________
1,724,836
___________
22
Principal Market
Amount o Value (U.S. $)
________________________________________________________________________________
Sovereign Debt (continued)
________________________________________________________________________________
Netherlands - 0.14%
Netherlands Government
5.75% 2/15/07 EUR 197,000 $ 254,814
_______________
254,814
_______________
Poland - 0.08%
Poland Government
6.25% 10/24/15 PLN 420,000 142,512
_______________
142,512
_______________
Russia - 0.08%
/ ~ @ Russian Paris Club Participation Note
2.654% 8/20/20 JPY 16,595,898 144,759
_______________
144,759
_______________
Sweden - 0.50%
Swedish Government
4.00% 12/1/09 SEK 4,045,000 569,967
4.50% 8/12/15 SEK 1,355,000 197,882
5.00% 12/1/20 SEK 850,000 132,326
_______________
900,175
_______________
United Kingdom - 0.51%
U.K. Treasury 8.00% 9/27/13 GBP 405,000 908,928
_______________
908,928
_______________
Venezuela - 0.16%
Venezuela Government
6.00% 12/9/20 USD 325,000 293,800
_______________
293,800
_______________
Total Sovereign Debt (cost $6,423,271) 6,614,366
_______________
________________________________________________________________________________
Supranational Banks - 0.12%
________________________________________________________________________________
Inter-American Development Bank
1.90% 7/8/09 JPY 1,000,000 8,939
^ International Bank for Reconstruction
& Development
6.861% 8/20/07 NZD 357,000 205,033
_______________
Total Supranational Banks (cost $224,681) 213,972
_______________
________________________________________________________________________________
U.S. Treasury Obligations - 1.41%
________________________________________________________________________________
U.S. Treasury Bonds
5.375% 2/15/31 USD 2,290,000 2,368,540
oo U.S. Treasury Notes
3.75% 3/31/07 75,000 74,335
5.125% 5/15/16 85,000 85,910
_______________
Total U.S. Treasury Obligations
(cost $2,516,296) 2,528,785
_______________
Number
of Shares
________________________________________________________________________________
Preferred Stock - 0.12%
________________________________________________________________________________
Nexen 7.35% 8,710 218,708
______________
Total Preferred Stock (cost $217,750) 218,708
______________
________________________________________________________________________________
Warrant - 0.00%
________________________________________________________________________________
~ # Solutia 144A, exercise price $7.59,
expiration date 7/15/09 550 -
______________
Total Warrant (cost $46,787) -
______________
Total Market Value of Securities - 100.69%
(cost $183,978,829) 180,134,126
Liabilities Net of Receivables and
Other Assets - (0.69%) (1,230,081)
______________
Net Assets Applicable to 33,061,699
Shares Outstanding - 100.00% $178,904,045
______________
Net Asset Value - Delaware Extended Duration Bond Fund
Class A ($92,132,502 / 17,017,497 Shares) $5.41
_____
Net Asset Value - Delaware Extended Duration Bond Fund
Class B ($6,370,523 / 1,177,958 Shares) $5.41
_____
Net Asset Value - Delaware Extended Duration Bond Fund
Class C ($11,021,322 / 2,036,664 Shares) $5.41
_____
Net Asset Value - Delaware Extended Duration Bond Fund
Class R ($22,690 / 4,190.35 Shares) $5.41
_____
Net Asset Value - Delaware Extended Duration Bond Fund
Institutional Class ($69,357,008 / 12,825,390 Shares) $5.41
_____
Components of Net Assets at July 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $189,140,010
Distributions in excess of net investment income (75,228)
Accumulated net realized loss on investments (6,949,040)
Net unrealized depreciation of investments and
foreign currencies (3,211,697)
______________
Total net assets $178,904,045
______________
o 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
JPY - Japanese Yen
MXN - Mexican Peso
NZD - New Zealand Dollar
PLN - Polish Zloty
SEK - Swedish Krona
USD - U.S. Dollar
` Step coupon bond. Coupon increases periodically based on a predetermined
schedule. Stated interest rate in effect at July 31, 2006.
(continues) 23
<page>
Statements of net assets
Delaware Extended Duration Bond Fund
________________________________________________________________________________
________________________________________________________________________________
/ 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.
<< Senior Secured Loans in which the Fund 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.
~ Variable rate security. The interest rate shown is the rate as of July 31,
2006.
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
= Security is being fair valued in accordance with the Fund's fair valuation
policy. At July 31, 2006, the aggregate amount of fair valued securities
equaled $59,843, which represented 0.03% of the Fund's net assets. See Note 1
in "Notes to Financial Statements."
+ Non-income producing security for the year ended July 31, 2006.
@ Illiquid security. At July 31, 2006, the aggregate amount of illiquid
securities equaled $2,610,227, which represented 1.46% of the Fund's net
assets. See Note 10 in "Notes to Financial Statements."
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At July 31, 2006, the aggregate amount of Rule 144A
securities equaled $29,712,102, which represented 16.61% of the Fund's net
assets. See Note 10 in "Notes to Financial Statements."
oo Fully or partially pledged as collateral for financial futures contracts.
Summary of Abbreviations:
AMBAC - Insured by the AMBAC Assurance Corporation
CBO - Collateralized Bond Obligation
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
S.F. - Single Family
TBA - To be announced
yr - Year
Net Asset Value and Offering Price Per Share -
Delaware Extended Duration Bond Fund
Net asset value Class A (A) $ 5.41
Sales charge (4.50% of offering price) (B) 0.25
______
Offering price $ 5.66
______
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
The following foreign currency exchange contracts, forward foreign
cross-currency exchange contracts and futures contracts were outstanding at July
31, 2006:
Foreign Currency Exchange Contracts(1)
Unrealized
Contracts In Exchange Settlement Appreciation
Receive (Deliver) For Date (Depreciation)
________________ ___________ __________ ______________
AUD (1,144,990) USD 871,681 8/4/06 $(5,517)
CAD (754,150) USD 682,180 8/4/06 15,717
EUR 125,100 USD (159,934) 8/4/06 (106)
GBP (494,000) USD 912,212 8/4/06 (10,603)
JPY135,687,000 USD(1,198,183) 11/2/06 1,311
JPY 95,194,000 USD (840,143) 8/4/06 (9,523)
JPY 30,716,280 EUR (215,100) 8/4/06 (6,796)
NZD (323,800) USD 206,704 8/4/06 6,784
PLN (568,970) USD 189,954 8/4/06 5,656
SEK (4,356,000) USD 608,244 11/2/06 (887)
_________
$(3,964)
_________
Futures Contracts(2)
Notional Unrealized
Contracts to Cost Notional Expiration Appreciation
to Buy (Sell) (Proceeds) Value Date (Depreciation)
_____________ __________ ________ __________ ______________
(65) U.S. Treasury
2 year Notes $(13,231,440) $(13,225,469) 9/30/06 $ 5,971
(132) U.S. Treasury
5 year Notes (13,709,883) (13,756,875) 9/30/06 (46,992)
4 U.S. Treasury
10 year Notes 416,260 424,125 9/30/06 7,865
480 U.S. Treasury
long Bond 51,314,393 51,975,000 9/30/06 660,607
_________
$ 627,451
_________
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 Fund's total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Fund's net assets.
(1) See Note 8 in "Notes to Financial Statements."
(2) See Note 9 in "Notes to Financial Statements."
See accompanying notes
24
<page>
Statements of operations
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
Year Ended July 31, 2006
Delaware Extended
Delaware Corporate Duration
Bond Fund Bond Fund
Investment Income:
Interest $ 25,743,228 $ 9,751,366
Dividends 50,035 16,005
Foreign tax withheld 850 -
____________ ___________
25,794,113 9,767,371
____________ ___________
Expenses:
Management fees 2,238,307 873,794
Distribution expense - Class A 467,594 235,811
Distribution expense - Class B 239,185 69,080
Distribution expense - Class C 440,277 109,694
Distribution expense - Class R 23,552 11
Dividend disbursing and transfer agent fees and expenses 537,848 339,725
Accounting and administration expenses 179,986 63,949
Reports and statements to shareholders 138,911 35,393
Registration fees 101,043 85,026
Professional fees 85,904 23,063
Trustees' fees 23,096 8,194
Custodian fees 21,986 10,920
Insurance fees 14,474 6,298
Pricing fees 10,017 8,090
Taxes (other than taxes on income) 2,290 699
Other 14,808 8,764
____________ ___________
4,539,278 1,878,511
Less expenses absorbed or waived (851,058) (590,177)
Less waiver of distribution expenses - Class A (77,932) (39,302)
Less waiver of distribution expenses - Class R (3,925) (1)
Less expense paid indirectly - (1,477)
____________ ___________
Total operating expenses 3,606,363 1,247,554
____________ ___________
Net Investment Income 22,187,750 8,519,817
____________ ___________
Net Realized and Unrealized Loss on Investments and Foreign Currencies:
Net realized loss on:
Investments (5,701,780) (3,389,104)
Futures contracts (1,390,979) (3,058,419)
Foreign currencies (837,079) (275,553)
____________ ___________
Net realized loss (7,929,838) (6,723,076)
Net change in unrealized appreciation/depreciation of investments and foreign currencies (8,941,724) (6,030,443)
____________ ___________
Net Realized and Unrealized Loss on Investments and Foreign Currencies (16,871,562) (12,753,519)
____________ ___________
Net Increase (Decrease) in Net Assets Resulting from Operations $ 5,316,188 $(4,233,702)
____________ ___________
See accompanying notes
25
<page>
Statements of changes in net assets
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
Delaware Corporate Delaware Extended Duration
Bond Fund Bond Fund
Year Ended Year Ended
7/31/06 7/31/05 7/31/06 7/31/05
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 22,187,750 $ 13,422,941 $ 8,519,817 $ 4,591,784
Net realized gain (loss) on investments and foreign currencies (7,929,838) 4,050,027 (6,723,076) 3,757,115
Net change in unrealized appreciation/depreciation
of investments and foreign currencies (8,941,724) 2,537,346 (6,030,443) 1,401,740
____________ ____________ ____________ ____________
Net increase (decrease) in net assets resulting from operations 5,316,188 20,010,314 (4,233,702) 9,750,639
____________ ____________ ____________ ____________
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (8,637,844) (4,476,591) (4,371,012) (1,749,163)
Class B (1,135,624) (950,409) (328,905) (277,133)
Class C (2,096,816) (1,076,891) (526,030) (258,941)
Class R (206,642) (91,868) (99) -
Institutional Class (12,571,536) (8,153,570) (3,590,579) (2,587,552)
Net realized gain on investments:
Class A (527,705) (1,020,537) (665,542) (838,361)
Class B (89,966) (258,873) (65,519) (199,563)
Class C (158,079) (279,634) (95,451) (171,958)
Class R (10,588) (19,889) (9) -
Institutional Class (789,910) (1,397,911) (495,282) (1,463,367)
____________ ____________ ____________ ____________
(26,224,710) (17,726,173) (10,138,428) (7,546,038)
____________ ____________ ____________ ____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 116,965,373 67,510,111 70,033,345 44,757,568
Class B 5,480,756 6,587,587 1,596,666 2,260,874
Class C 26,840,816 16,718,033 7,767,959 4,847,769
Class R 5,286,473 2,294,745 22,712 -
Institutional Class 69,191,641 109,274,403 34,246,110 18,354,063
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 6,026,893 3,833,309 3,475,657 1,717,296
Class B 747,693 698,514 268,415 324,939
Class C 1,607,530 972,083 453,128 292,717
Class R 199,553 110,054 78 -
Institutional Class 8,720,594 5,784,351 1,194,150 1,087,272
Net assets from reorganization(1):
Class A 90,009,269 - - -
____________ ____________ ____________ ____________
331,076,591 213,783,190 119,058,220 73,642,498
____________ ____________ ____________ ____________
Cost of shares repurchased:
Class A $(65,553,470) $(30,692,383) $(32,301,474) $(8,613,255)
Class B (5,157,997) (4,094,480) (1,811,833) (1,379,079)
Class C (10,799,030) (6,046,918) (4,352,401) (2,089,944)
Class R (1,875,122) (666,356) (303) -
Institutional Class (34,395,149) (18,298,850) (13,025,806) (8,661,124)
____________ ____________ ____________ ____________
(117,780,768) (59,798,987) (51,491,817) (20,743,402)
____________ ____________ ____________ ____________
Increase in net assets derived from capital share transactions 213,295,823 153,984,203 67,566,403 52,899,096
____________ ____________ ____________ ____________
Net Increase in Net Assets 192,387,301 156,268,344 53,194,273 55,103,697
____________ ____________ ____________ ____________
Net Assets:
Beginning of year 376,935,105 220,666,761 125,709,772 70,606,075
____________ ____________ ____________ ____________
End of year $569,322,406 $376,935,105 $178,904,045 $125,709,772
____________ ____________ ____________ ____________
Undistributed (distributions in excess of) net investment income $ (753,270) $ 791,358 $ (75,228) $ 198,164
____________ ____________ ____________ ____________
(1) See Note 6 in "Notes to Financial Statements."
See accompanying notes
26
<page>
Financial highlights
Delaware Corporate Bond Fund Class A
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $ 5.780 $ 5.700 $ 5.620 $ 5.220 $ 5.370
Income (loss) from investment operations:
Net investment income (1) 0.276 0.260 0.296 0.339 0.364
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.239) 0.174 0.183 0.410 (0.152)
________ _______ _______ _______ _______
Total from investment operations 0.037 0.434 0.479 0.749 0.212
________ _______ _______ _______ _______
Less dividends and distributions:
Net investment income (0.306) (0.286) (0.307) (0.349) (0.362)
Net realized gain on investments (0.021) (0.068) (0.092) - -
________ _______ _______ _______ _______
Total dividends and distributions (0.327) (0.354) (0.399) (0.349) (0.362)
________ _______ _______ _______ _______
Net asset value, end of period $ 5.490 $ 5.780 $ 5.700 $ 5.620 $ 5.220
________ _______ _______ _______ _______
Total return (2) 0.70% 7.76% 8.65% 14.61% 4.02%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $256,776 $115,456 $73,867 $34,707 $17,932
Ratio of expenses to average net assets 0.81% 0.82% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.05% 1.08% 1.17% 1.32% 1.22%
Ratio of net investment income to average net assets 4.95% 4.48% 5.09% 5.98% 6.79%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.71% 4.22% 4.72% 5.46% 6.37%
Portfolio turnover 173% 232% 300% 861% 1044%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 27
<page>
Financial highlights
Delaware Corporate Bond Fund Class B
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $ 5.770 $ 5.700 $ 5.620 $ 5.220 $ 5.370
Income (loss) from investment operations:
Net investment income (1) 0.234 0.216 0.253 0.298 0.325
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.239) 0.164 0.183 0.410 (0.152)
_______ _______ _______ _______ _______
Total from investment operations (0.005) 0.380 0.436 0.708 0.173
_______ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.264) (0.242) (0.264) (0.308) (0.323)
Net realized gain on investments (0.021) (0.068) (0.092) - -
_______ _______ _______ _______ _______
Total dividends and distributions (0.285) (0.310) (0.356) (0.308) (0.323)
_______ _______ _______ _______ _______
Net asset value, end of period $ 5.480 $ 5.770 $ 5.700 $ 5.620 $ 5.220
_______ _______ _______ _______ _______
Total return (2) 0.13% 6.77% 7.85% 13.78% 3.25%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $23,792 $23,963 $20,510 $18,551 $11,709
Ratio of expenses to average net assets 1.56% 1.57% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.75% 1.78% 1.87% 2.03% 1.97%
Ratio of net investment income to average net assets 4.20% 3.73% 4.33% 5.23% 6.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.01% 3.52% 4.01% 4.75% 5.62%
Portfolio turnover 173% 232% 300% 861% 1044%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
28
<page>
Delaware Corporate Bond Fund Class C
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $ 5.780 $ 5.700 $ 5.620 $ 5.220 $ 5.370
Income (loss) from investment operations:
Net investment income (1) 0.234 0.216 0.253 0.297 0.324
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.239) 0.174 0.183 0.410 (0.152)
_______ _______ _______ _______ _______
Total from investment operations (0.005) 0.390 0.436 0.707 0.172
_______ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.264) (0.242) (0.264) (0.307) (0.322)
Net realized gain on investments (0.021) (0.068) (0.092) - -
_______ _______ _______ _______ _______
Total dividends and distributions (0.285) (0.310) (0.356) (0.307) (0.322)
_______ _______ _______ _______ _______
Net asset value, end of period $ 5.490 $ 5.780 $ 5.700 $ 5.620 $ 5.220
_______ _______ _______ _______ _______
Total return (2) (0.05%) 6.95% 7.86% 13.77% 3.24%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $48,425 $33,013 $21,139 $18,313 $ 6,063
Ratio of expenses to average net assets 1.56% 1.57% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.75% 1.78% 1.87% 2.03% 1.97%
Ratio of net investment income to average net assets 4.20% 3.73% 4.33% 5.23% 6.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.01% 3.52% 4.01% 4.75% 5.62%
Portfolio turnover 173% 232% 300% 861% 1044%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 29
<page>
Financial highlights
Delaware Corporate Bond Fund Class R
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
____________________________________________ 6/2/03 (1)
to
7/31/06 7/31/05 7/31/04 7/31/03
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $5.780 $5.700 $5.620 $5.930
Income (loss) from investment operations:
Net investment income (2) 0.262 0.240 0.273 0.030
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.239) 0.174 0.188 (0.300)
______ ______ ______ ______
Total from investment operations 0.023 0.414 0.461 (0.270)
______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.292) (0.266) (0.289) (0.040)
Net realized gain on investments (0.021) (0.068) (0.092) -
______ ______ ______ ______
Total dividends and distributions (0.313) (0.334) (0.381) (0.040)
______ ______ ______ ______
Net asset value, end of period $5.490 $5.780 $5.700 $5.620
______ ______ ______ ______
Total return(3) 0.45% 7.38% 8.33% (4.58%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $6,048 $2,608 $ 869 $ 0
Ratio of expenses to average net assets 1.06% 1.17% 1.15% 1.15%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.35% 1.38% 1.47% 1.57%
Ratio of net investment income to average net assets 4.70% 4.13% 4.73% 4.93%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.41% 3.92% 4.41% 4.51%
Portfolio turnover 173% 232% 300% 861% (4)
___________________________________________________________________________________________________________________________________
(1) Date of commencement of operations; ratios have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(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.
(4) Represents portfolio turnover for the Fund for the entire year.
See accompanying notes
30
<page>
Delaware Corporate Bond Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $ 5.770 $ 5.700 $ 5.620 $ 5.220 $ 5.370
Income (loss) from investment operations:
Net investment income (1) 0.289 0.274 0.310 0.354 0.378
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.238) 0.164 0.183 0.410 (0.152)
________ _______ _______ _______ _______
Total from investment operations 0.051 0.438 0.493 0.764 0.226
________ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.320) (0.300) (0.321) (0.364) (0.376)
Net realized gain on investments (0.021) (0.068) (0.092) - -
________ _______ _______ _______ _______
Total dividends and distributions (0.341) (0.368) (0.413) (0.364) (0.376)
________ _______ _______ _______ _______
Net asset value, end of period $ 5.480 $ 5.770 $ 5.700 $ 5.620 $ 5.220
________ ________ ________ _______ _______
Total return (2) 0.95% 7.84% 8.92% 14.92% 4.29%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $234,281 $201,895 $104,282 $72,744 $52,681
Ratio of expenses to average net assets 0.56% 0.57% 0.55% 0.55% 0.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.75% 0.78% 0.87% 1.03% 0.97%
Ratio of net investment income to average net assets 5.20% 4.73% 5.33% 6.23% 7.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.01% 4.52% 5.01% 5.75% 6.62%
Portfolio turnover 173% 232% 300% 861% 1044%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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
(continues) 31
Financial highlights
Delaware Extended Duration Bond Fund Class A
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $ 5.940 $ 5.770 $ 5.550 $ 5.050 $ 5.260
Income (loss) from investment operations:
Net investment income (1) 0.299 0.292 0.334 0.373 0.384
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.468) 0.390 0.322 0.500 (0.218)
_______ _______ _______ _______ _______
Total from investment operations (0.169) 0.682 0.656 0.873 0.166
_______ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.309) (0.312) (0.339) (0.373) (0.376)
Net realized gain on investments (0.052) (0.200) (0.097) - -
_______ _______ _______ _______ _______
Total dividends and distributions (0.361) (0.512) (0.436) (0.373) (0.376)
_______ _______ _______ _______ _______
Net asset value, end of period $ 5.410 $ 5.940 $ 5.770 $ 5.550 $ 5.050
_______ _______ _______ _______ _______
Total return (2) (2.89%) 12.17% 11.99% 17.55% 3.16%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $92,132 $58,003 $19,439 $ 9,539 $ 4,629
Ratio of expenses to average net assets 0.80% 0.84% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.22% 1.31% 1.30% 1.24% 1.23%
Ratio of net investment income to average net assets 5.35% 4.92% 5.72% 6.65% 7.34%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.93% 4.45% 5.22% 6.21% 6.91%
Portfolio turnover 184% 233% 267% 789% 923%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
32
<page>
Delaware Extended Duration Bond Fund Class B
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $5.930 $5.760 $5.550 $5.050 $5.260
Income (loss) from investment operations:
Net investment income (1) 0.257 0.247 0.291 0.332 0.343
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.458) 0.391 0.312 0.500 (0.218)
_______ _______ _______ _______ _______
Total from investment operations (0.201) 0.638 0.603 0.832 0.125
_______ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.267) (0.268) (0.296) (0.332) (0.335)
Net realized gain on investments (0.052) (0.200) (0.097) _ _
______ ______ ______ ______ ______
Total dividends and distributions (0.319) (0.468) (0.393) (0.332) (0.335)
______ ______ ______ ______ ______
Net asset value, end of period $5.410 $5.930 $5.760 $5.550 $5.050
______ ______ ______ ______ ______
Total return (2) (3.45%) 11.35% 10.98% 16.70% 2.37%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $6,371 $6,964 $5,597 $5,375 $3,413
Ratio of expenses to average net assets 1.55% 1.59% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.92% 2.01% 2.00% 1.95% 1.98%
Ratio of net investment income to average net assets 4.60% 4.17% 4.97% 5.90% 6.59%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.23% 3.75% 4.52% 5.50% 6.16%
Portfolio turnover 184% 233% 267% 789% 923%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 33
<page>
Financial highlights
Delaware Extended Duration Bond Fund Class C
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $5.930 $5.760 $5.550 $5.050 $5.260
Income (loss) from investment operations:
Net investment income (1) 0.257 0.248 0.291 0.331 0.343
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.450) 0.390 0.312 0.500 (0.218)
______ ______ ______ ______ ______
Total from investment operations (0.201) 0.638 0.603 0.831 0.125
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.267) (0.268) (0.296) (0.331) (0.335)
Net realized gain on investments (0.052) (0.200) (0.097) _ _
______ ______ ______ ______ ______
Total dividends and distributions (0.319) (0.468) (0.393) (0.331) (0.335)
______ ______ ______ ______ ______
Net asset value, end of period $5.410 $5.930 $5.760 $5.550 $5.050
______ ______ ______ ______ ______
Total return (2) (3.45%) 11.35% 10.98% 16.67% 2.37%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $11,021 $8,196 $5,025 $4,751 $1,431
Ratio of expenses to average net assets 1.55% 1.59% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.92% 2.01% 2.00% 1.95% 1.98%
Ratio of net investment income to average net assets 4.60% 4.17% 4.97% 5.90% 6.59%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.23% 3.75% 4.52% 5.50% 6.16%
Portfolio turnover 184% 233% 267% 789% 923%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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 and does not reflect the impact of a sales charge. 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
34
<page>
Delaware Extended Duration Bond Fund Class R
Selected data for each share of the Fund outstanding throughout each period were
as follows:
10/1/05 (1)
to
7/31/06
_____________________________________________________________________________________________________________________
Net asset value, beginning of period $5.820
Income (loss) from investment operations:
Net investment income (2) 0.236
Net realized and unrealized gain (loss) on investments and foreign currencies (0.391)
______
Total from investment operations (0.155)
______
Less dividends and distributions from:
Net investment income (0.203)
Net realized gain on investments (0.052)
______
Total dividends and distributions (0.255)
______
Net asset value, end of period $5.410
______
Total return (3) (2.67%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 23
Ratio of expenses to average net assets 1.05%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.52%
Ratio of net investment income to average net assets 5.12%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.65%
Portfolio turnover 184% (4)
_____________________________________________________________________________________________________________________
(1) Date of commencement of operations; ratios 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. Performance would have been lower had the expense limitation not been in effect.
(4) Represents portfolio turnover for the Fund for the entire year.
See accompanying notes
(continues) 35
<page>
Financial highlights
Delaware Extended Duration Bond Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_____________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
___________________________________________________________________________________________________________________________________
Net asset value, beginning of period $5.930 $5.760 $5.550 $5.050 $5.260
Income (loss) from investment operations:
Net investment income (1) 0.313 0.307 0.350 0.387 0.397
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.458) 0.391 0.312 0.500 (0.218)
_______ _______ _______ _______ _______
Total from investment operations (0.145) 0.698 0.662 0.887 0.179
_______ _______ _______ _______ _______
Less dividends and distributions from:
Net investment income (0.323) (0.328) (0.355) (0.387) (0.389)
Net realized gain on investments (0.052) (0.200) (0.097) _ _
_______ _______ _______ _______ _______
Total dividends and distributions (0.375) (0.528) (0.452) (0.387) (0.389)
_______ _______ _______ _______ _______
Net asset value, end of period $5.410 $5.930 $5.760 $5.550 $5.050
_______ _______ _______ _______ _______
Total return (2) (2.48%) 12.47% 12.10% 17.87% 3.43%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $69,357 $52,547 $40,545 $49,891 $56,664
Ratio of expenses to average net assets 0.55% 0.59% 0.55% 0.55% 0.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.92% 1.01% 1.00% 0.95% 0.98%
Ratio of net investment income to average net assets 5.60% 5.17% 5.97% 6.90% 7.59%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.23% 4.75% 5.52% 6.50% 7.16%
Portfolio turnover 184% 233% 267% 789% 923%
___________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2006, 2005 and
2004.
(2) 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
36
Notes to financial statements
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
July 31, 2006
Delaware Group Income Funds (the "Trust") is organized as a Delaware statutory
trust and offers four series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund and Delaware High-Yield Opportunities
Fund. These financial statements and the related notes pertain to the Delaware
Corporate Bond Fund and Delaware Extended Duration Bond Fund (each referred to
as a "Fund" or collectively as the "Funds"). The Trust is an open-end investment
company. The Funds are considered diversified under the Investment Company Act
of 1940, as amended, and offer Class A, Class B, Class C, Class R and
Institutional Class shares. Class A shares are sold with a front-end sales
charge of up to 4.50%. Class B shares are sold with a contingent deferred sales
charge that declines from 4% to zero depending upon the period of time the
shares are held. Class B shares will automatically convert to Class A shares on
a quarterly basis approximately eight years after purchase. Class C shares are
sold with a contingent deferred sales charge of 1%, if redeemed during the first
12 months. Class R and Institutional Class shares are not subject to a sales
charge and are offered for sale exclusively to a limited group of investors.
The investment objective of the Funds is to seek to provide investors with total
return.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Funds.
Security Valuation - Equity securities, except those traded on the Nasdaq Stock
Markets, 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 each Fund 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 and forward foreign cross-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. 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 Funds' 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 - Each Fund 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.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing each Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Although each Fund's tax
positions are currently being evaluated, management does not expect the adoption
of FIN 48 to have a material impact on each Fund's financial statements.
Class Accounting - Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Funds. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Funds 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 - Each Fund 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 each Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 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 is 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 Funds isolate
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 Funds report 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.
(continues) 37
<page>
Notes to financial statements
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
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. Witholding taxes on foreign interest have been recorded in accordance
with each Fund's understanding of the applicable country's tax rules and rates.
Each Fund 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, annually.
The Funds receive earnings credits from their 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 Statements 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 respective investment management agreement,
each Fund pays Delaware Management Company (DMC), a series of Delaware
Management Business Trust and the investment manager, an annual fee, which is
calculated based on each Fund's average daily net assets as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
_________ _________
On the first $500 million 0.500% 0.550%
On the next $500 million 0.475% 0.500%
On the next $1.5 billion 0.450% 0.450%
In excess of $2.5 billion 0.425% 0.425%
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse each Fund 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 0.55% of average daily net assets for each Fund through November 30,
2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Each Fund pays
DSC a monthly fee computed at the annual rate 0.04% of the Fund's average daily
net assets for accounting and administration services. The Funds pay DSC a
monthly fee based on the number of shareholder accounts for dividend disbursing
and transfer agent services.
Pursuant to a distribution agreement and distribution plan, each Fund 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 Class A shares, 1.00% of the average daily net assets of the Class
B and C shares and 0.60% of the average daily net assets of Class R shares.
Institutional Class shares pay no distribution and service expenses. DDLP has
contracted to waive distribution and service fees through November 30, 2006 in
order to prevent distribution and service fees of Class A shares from exceeding
0.25% of average daily net assets and distribution and service fees of Class R
shares from exceeding 0.50% of average daily net assets.
At July 31, 2006, each Fund had receivables due from or liabilities payable to
affiliates as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
_________ _________
Investment Management fee payable
(receivable) to DMC $81,501 $(4,660)
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC 75,710 39,507
Distribution fees payable to DDLP 117,523 34,665
Other expenses payable to DMC and affiliates* 18,803 5,573
* DMC, as part of its administrative services, pays operating expenses on behalf
of each Fund and is reimbursed on a periodic basis. Such expenses include
items such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, each Fund bears the cost of
certain legal services, including internal legal services provided to the Funds
by DMC employees. For the year ended July 31, 2006, the Delaware Corporate Bond
Fund and Extended Duration Bond Fund were charged $25,684 and $8,982,
respectively for internal legal services provided by DMC.
For the year ended July 31, 2006, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Corporate Bond Fund $55,819
Delaware Extended Duration Bond Fund 30,806
For the year ended July 31, 2006, DDLP received gross contingent deferred sales
charge commissions on redemption of each Fund's Class A, Class B, and Class C
shares, respectively, and these commissions were entirely used to offset
up-front commissions previously paid by DDLP to broker-dealers on sales of those
shares. The amounts received were as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
_________ _________
Class A $ 5 $ 100
Class B 49,111 15,330
Class C 11,750 5,236
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 Funds.
38
<page>
3. Investments
For the year ended July 31, 2006, the Funds made purchases and sales of
investments securities other than short-term investments as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
____________ _____________
Purchases other than U.S.
government securities $599,750,255 $232,098,852
Purchases of U.S. government securities 290,741,731 121,643,764
Sales other than U.S.
government securities 482,322,226 161,873,187
Sales of U.S. government securities 281,323,974 124,453,520
At July 31, 2006, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
____________ _____________
Cost of investments $581,154,076 $184,743,216
____________ _____________
Aggregate unrealized appreciation $ 4,774,534 $ 1,816,003
Aggregate unrealized depreciation (15,817,731) (6,425,093)
____________ _____________
Net unrealized depreciation $(11,043,197) $ (4,609,090)
____________ _____________
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 years ended July 31, 2006 and July
31, 2005 was as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
________________________ _______________________
2006 2005 2006 2005
Ordinary income $25,115,850 $16,740,938 $ 9,450,017 $6,102,484
Long-term capital gain 1,108,860 985,235 688,411 1,443,554
___________ ___________ ___________ __________
Total $26,224,710 $17,726,173 $10,138,428 $7,546,038
___________ ___________ ___________ __________
As of July 31, 2006, the components of net assets on a tax basis were as
follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
____________ _____________
Shares of beneficial interest $590,759,627 $189,140,010
Undistributed ordinary income 251,883 255,880
Post-October currency losses (869,564) (306,345)
Post-October capital losses (6,881,777) (4,737,415)
Capital loss carryforwards (2,675,762) (807,298)
Other temporary differences (205,952) (41,216)
Unrealized depreciation on investments
and foreign currency (11,056,049) (4,599,571)
____________ _____________
Net Assets $569,322,406 $178,904,045
____________ _____________
Post-October losses represent losses realized on investments and foreign
currency transactions from November 1, 2005 through July 31, 2006 that, in
accordance with federal income tax regulations, the Funds have elected to defer
and treat as having arisen in the following fiscal year.
The differences between book basis and tax basis components of the net assets
are primarily attributable to tax deferral of losses on wash sales,
mark-to-market on futures contracts, mark-to-market on foreign currency
contracts, straddle deferrals 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, dividends
and distributions, market discount and premium on certain debt instruments and
paydowns of mortgage- and asset-backed securities. Results of operations and net
assets were not affected by these reclassifications. For the year ended July 31,
2006, the Funds recorded the following reclassifications.
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
__________ __________
Undistributed net investment income $954,283 $23,416
Accumulated net realized gain (loss) (954,283) (23,416)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at July 31, 2006 will expire as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
__________ __________
2013 $2,155,797 $ -
2014 519,965 807,298
__________ __________
Total $2,675,762 $807,298
__________ __________
(continues) 39
<page>
Notes to financial statements
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
5. Capital Shares
Transactions in capital shares were as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
__________________________ __________________________
Year Ended Year Ended
7/31/06 7/31/05 7/31/06 7/31/05
Shares sold:
Class A 20,908,895 11,643,840 12,487,326 7,551,366
Class B 979,102 1,135,587 281,248 380,255
Class C 4,772,696 2,881,177 1,364,818 810,930
Class R 956,999 394,848 4,232 -
Institutional Class 12,395,281 18,818,176 6,109,855 3,097,764
Shares issued upon reinvestment of dividends and distributions:
Class A 1,083,532 660,807 623,213 290,331
Class B 134,081 120,430 47,845 55,046
Class C 288,687 167,604 81,050 49,563
Class R 35,933 18,974 14 -
Institutional Class 1,565,057 998,303 213,796 183,972
Shares issued from reorganization (1):
Class A 16,637,573 - - -
__________ __________ __________ __________
59,757,836 36,839,746 21,213,397 12,419,227
__________ __________ __________ __________
Shares repurchased:
Class A (11,804,693) (5,282,196) (5,860,545) (1,445,379)
Class B (923,707) (706,318) (324,962) (232,505)
Class C (1,949,500) (1,043,542) (790,258) (351,126)
Class R (341,933) (114,773) (56) -
Institutional Class (6,192,917) (3,154,442) (2,356,425) (1,458,597)
__________ __________ __________ __________
(21,212,750) (10,301,271) (9,332,246) (3,487,607)
__________ __________ __________ __________
Net increase 38,545,086 26,538,475 11,881,151 8,931,620
__________ __________ __________ __________
(1) See note 6.
For the years ended July 31, 2006 and 2005, Class B shares converted to Class A shares as follows*:
Year Year
Ended Ended
7/31/06 7/31/05
Class B Class A Class B Class A
Shares Shares Value Shares Shares Value
_______ _______ ________ _______ _______ ________
Corporate Bond 114,996 114,996 $643,345 20,782 20,782 $120,347
Extended Duration 27,279 27,300 152,445 6,859 6,848 40,811
* The respective amounts are included in Class B redemptions and Class A subscriptions in the table above and the
Statements of Changes in Net Assets.
6. Fund Reorganization
Effective June 16, 2006, the Delaware Corporate Bond Fund completed the
acquisition of the net assets of the Lincoln National Income Fund,Inc. ("LND
Fund") pursuant to an Agreement and Plan of Acquisition (the "Plan of
Acquisition") approved by the shareholders of LND Fund at a reconvened Special
Meeting of Shareholders held on June 1, 2006. The transaction, which was
structured as a tax-free reorganization, entailed (i) the acquisition of all of
the assets of LND Fund by Delaware Corporate Bond Fund in exchange for Class
A shares of Delaware Corporate Bond Fund and (ii) the pro rata distribution of
such shares to LND Fund's shareholders in exchange for their shares of LND Fund.
LND Fund was a closed-end, non-diversified investment management company managed
by Delaware Management Company. The net assets, net unrealized depreciation and
accumulated realized losses of LND Fund as of the close of business on June 16,
2006, were as follows:
Accumulated Net
Net Investment Net Unrealized
Net Assets Loss Realized Loss Depreciation
__________ _____________ _____________ ____________
Lincoln National
Income Fund $90,009,269 $(38,199) $(2,585,050) $(2,605,091)
The net assets of the Delaware Corporate Bond Fund prior to the acquisition were
$466,560,627.
7. Line of Credit
Each Fund, 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
Funds had no amounts outstanding as of July 31, 2006, or at any time during the
year.
8. Foreign Currency Exchange Contracts
Each Fund may enter into forward foreign currency exchange contracts and forward
foreign cross currency exchange contracts as a way of managing foreign exchange
rate risk. Each Fund 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 Funds may also use these contracts to hedge the U.S. dollar value of
securities they already own 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 Funds could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts. The unrealized gain (loss) is included in liabilities
net of receivables and other assets on the Statement of Net Assets.
9. Futures Contracts
Each Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in value caused by changes in
prevailing market interest rates. Upon entering into a futures contract,
40
<page>
each Fund 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 each Fund as unrealized gains or losses until the contracts
are closed. When the contracts are closed, each Fund 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. Risk 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. The unrealized gain (loss) is included
in liabilities net of receivables and other assets on the Statement of Net
Assets.
10. Credit and Market Risk
Each Fund may invest in high yield fixed income securities, which carry ratings
of BB or lower by Standard and Poor's Rating Group and/or Ba or lower by Moody's
Investor Services, 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.
Each Fund 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 obligation 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 effect on each Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, each Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
Each Fund 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 each Fund 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 Fund's the 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 Fund's limitation on investments in
illiquid assets. Rule 144A and illiquid securities have been identified on the
Statements of Net Assets.
11. Contractual Obligations
The Funds enter into contracts in the normal course of business that contain a
variety of indemnifications. The Funds' maximum exposure under these
arrangements is unknown. However, the Funds have not had prior claims or losses
pursuant to theses contracts. Management has reviewed the Funds' existing
contracts and expects the risk of loss to be remote.
12. Tax Information (Unaudited)
The Information set forth below is for each Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2006, each Fund designates distributions paid
during the year as follows:
Delaware
Delaware Extended
Corporate Duration
Bond Fund Bond Fund
_________ _________
(A) Long Term Capital Gains
Distributions (Tax Basis) 4% 7%
(B) Ordinary Income
Distributions (Tax Basis)* 96% 93%
Total Distributions (Tax Basis) 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
* For the fiscal year ended July 31, 2006, certain interest income paid by
the Funds, determined to be Qualified Interest Income and Short-Term
Capital Gains, may be subject to relief from U.S. withholding for foreign
shareholders, as provided by the American Jobs Creation Act of 2004. For
the fiscal year ended July 31, 2006, the Delaware Corporate Bond Fund and
the Delaware Extended Duration Bond Fund have designated a maximum
distribution of $23,938,796 and $8,814,717 of Qualified Interest Income,
respectively.
41
<page>
Report of independent
registered public accounting firm
To the Shareholders and Board of Trustees
Delaware Group Income Funds - Delaware Corporate Bond Fund and Delaware Extended
Duration Bond Fund
We have audited the accompanying statements of net assets of Delaware Corporate
Bond Fund and Delaware Extended Duration Bond Fund (two of the series
constituting Delaware Group Income Funds) (the "Funds") as of July 31, 2006, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware Corporate Bond Fund and the Delaware Extended Duration Bond Fund series
of Delaware Group Income Funds at July 31,2006, the results of their operations
for the year then ended, the changes in their net assets for each of the two
years in the period then ended, and their financial highlights for each of the
periods indicated therein, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst and Young LLP
Philadelphia, Pennsylvania
September 13, 2006
42
<page>
Other Fund information
Delaware Corporate Bond Fund
Board Consideration of Delaware Corporate Bond Fund and Delaware Extended
Duration Bond Fund 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 Agreements for the Delaware
Corporate Bond Fund and Delaware Extended Duration Bond Fund (each a "Fund" and
collectively the "Funds"). 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 Fund 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 Funds, the costs of such services to the Funds, 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 each Fund's 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 Fund 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 each Fund, 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 Fund 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 Funds and their 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 Funds, compliance of portfolio
managers with the investment policies, strategies and restrictions for the
Funds, 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 Funds' investment advisor and management's efforts to
strengthen and deepen portfolio management teams 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 Fund
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. Additionally, the Board noted the extent of benefits provided to Fund
shareholders for being part of the Delaware Investments Family of Funds,
including the privilege to exchange investments between the same class of shares
of funds without a sales charge, the ability to reinvest Fund dividends into
other funds and the privilege to combine holdings in other funds to obtain a
reduced sales charge. 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 Funds. The Board was pleased with DMC's investment performance. The
Board placed significant emphasis on the investment performance of the Funds 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 each Fund showed the
investment performance of its Class A 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 performance 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
Funds was shown for the past one, three and five year periods ended January 31,
2006. The Board noted its objective that each Fund's performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraphs summarize the performance results for each Fund and the Board's view
of such performance.
(continues) 43
<page>
Other fund information
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund
Delaware Corporate Bond Fund - The Performance Universe for the Fund consisted
of the Fund and all retail and institutional BBB-rated corporate debt funds as
selected by Lipper. The Lipper report comparison showed that the Fund's 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
and five year periods was in the first quartile. The Board noted that the Fund's
performance results were mixed, but on an overall basis tended toward above
median, which was acceptable.
Delaware Extended Duration Bond Fund - The Performance Universe for the Fund
consisted of the Fund and all retail and institutional BBB-rated corporate debt
funds as selected by Lipper. The Lipper report comparison showed that the Fund's
total return for the one year period was in the fourth quartile of such
Performance Universe. The report further showed that the Fund's total return for
the three and five year periods was in the first quartile. The Board noted that
the Fund's performance results were mixed, but on an overall basis tended toward
median, which was acceptable.
Comparative Expenses. The Board considered expense data for the Delaware
Investments(R) Family of Funds. Management provided the Board with information
on pricing levels and fee structures for the Funds. The Board focused
particularly on the comparative analysis of the management fees and total
expense ratios of each Fund and the management fees and expense ratios of a
group of similar funds as selected by Lipper (the "Expense Group"). In reviewing
comparative costs, each Fund's contractual management fee and the actual
management fee incurred by the Fund were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Fund) 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. Each Fund's total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Class A shares and compared total expenses including 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
each Fund's total expense ratio to an acceptable range as compared to the median
of the Expense Group. The following paragraph summarizes the expense results for
each Fund and the Board's view of such expenses.
Delaware Corporate Bond Fund - The expense comparisons for the Fund 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 fees and total expenses of the Fund in comparison to its Expense
Group as shown in the Lipper report.
Delaware Extended Duration Bond Fund - The expense comparisons for the Fund
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 fees and total expenses of the Fund 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 Funds.
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
relationships with the Funds and the Delaware Investments Family of Funds
required negotiation of reduction of fees.
Economies of Scale. The Trustees considered whether economies of scale are
realized by Delaware Investments as each Fund's 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 each Fund's management contract fell within the
standard structure. Although the Funds have not reached a size at which they can
take advantage of breakpoints, the Board recognized that the fees were
structured so that when the Funds grow economies of scale may be shared.
44
<page>
Board of trustees/directors
and officers addendum
Delaware Investments(R) Family of Funds
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor, and others who perform services for the
fund. The independent fund trustees, in particular, are advocates for
shareholder interests. Each trustee has served in that capacity since he or she
was elected to or appointed to the Board of Trustees, and will continue to serve
until his or her retirement or the election of a new trustee in his or her
place. The following is a list of the Trustees and Officers with certain
background and related information.
Number of
Porfolios in Fund Other
Name, Complex Overseen Directorships
Address, Position(s) Length of Principal Occupation(s) by Trustee Held by
and Birth Date Held with Fund(s) Time Served During Past 5 Years or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Interested Trustees
____________________________________________________________________________________________________________________________________
Patrick P. Coyne(1) Chairman, Chairman and Trustee Patrick P. Coyne has served in 83 None
2005 Market Street President, since August 16, 2006 various executive capacities
Philadelphia, PA Chief Executive at different times at
19103 Officer, and President and Delaware Investments.(2)
Trustee Chief Executive Officer
April 14, 1963 since August 1, 2006
____________________________________________________________________________________________________________________________________
Independent Trustees
____________________________________________________________________________________________________________________________________
Thomas L. Bennett Trustee Since Private Investor - 83 None
2005 Market Street March 2005 (March 2004-Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984-March 2004)
____________________________________________________________________________________________________________________________________
John A. Fry Trustee Since President - 83 Director -
2005 Market Street January 2001 Franklin & Marshall College Community Health
Philadelphia, PA (June 2002-Present) Systems
19103
Executive Vice President - Director -
May 28, 1960 University of Pennsylvania Allied Barton
(April 1995-June 2002) Security Holdings
____________________________________________________________________________________________________________________________________
Anthony D. Knerr Trustee Since Founder and Managing Director - 83 None
2005 Market Street April 1990 Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990-Present)
December 7, 1938
____________________________________________________________________________________________________________________________________
Lucinda S. Landreth Trustee Since Chief Investment Officer - 83 None
2005 Market Street March 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002-2004)
June 24, 1947
____________________________________________________________________________________________________________________________________
Ann R. Leven Trustee Since Owner - 83 Director and
2005 Market Street September 1989 ARL Associates, Audit Committee
Philadelphia, PA Strategic Financial Planning Chairperson - Andy
19103 Consulting Firm Warhol Foundation
(1983-Present)
November 1, 1940 Director and Audit
Committee Member -
Systemax, Inc.
____________________________________________________________________________________________________________________________________
46
<page>
Number of
Porfolios in Fund Other
Name, Complex Overseen Directorships
Address, Position(s) Length of Principal Occupation(s) by Trustee Held by
and Birth Date Held with Fund(s) Time Served During Past 5 Years or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Interested Trustees (continued)
____________________________________________________________________________________________________________________________________
Thomas F. Madison Trustee Since President and Chief 83 Director -
2005 Market Street May 1999 Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director-
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993-Present)
Director and Audit
Committee Member -
Digital River, Inc.
Director and Audit
Committee Member -
Rimage
Corporation
Director - Valmont
Industries, Inc.
____________________________________________________________________________________________________________________________________
Janet L. Yeomans Trustee Since Vice President 83 None
2005 Market Street April 1999 (January 2003-Present)
Philadelphia, PA and Treasurer
19103 (January 2006-Present)
3M Corporation
July 31, 1948
Ms. Yeomans has held
various management positions
at 3M Corporation since 1983.
____________________________________________________________________________________________________________________________________
J. Richard Zecher Trustee Since Founder - 83 Director and Audit
2005 Market Street March 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999-Present)
Director and Audit
July 3, 1940 Founder - Committee Member -
Sutton Asset Management Oxigene, Inc.
(Hedge Fund)
(September 1998-Present)
____________________________________________________________________________________________________________________________________
Officers
____________________________________________________________________________________________________________________________________
Michael P. Bishof Senior Chief Financial Michael P. Bishof has served in 83 None(3)
2005 Market Street Vice President Officer since various executive capacities
Philadelphia, PA and February 2005 at different times at
19103 Chief Financial Delaware Investments.
Officer
August 18, 1962
____________________________________________________________________________________________________________________________________
David F. Connor Vice President, Vice President since David F. Connor has served as 83 None(3)
2005 Market Street Deputy General September 21, 2000 Vice President and Deputy
Philadelphia, PA Counsel, and Secretary and Secretary General Counsel of
19103 since Delaware Investments
October 2005 since 2000.
December 2, 1963
____________________________________________________________________________________________________________________________________
David P. O'Connor Senior Vice Senior Vice President, David P. O'Connor has served in 83 None(3)
2005 Market Street President, General Counsel, and various executive and legal
Philadelphia, PA General Counsel, Chief Legal Officer capacities at different times
19103 and Chief since at Delaware Investments.
Legal Officer October 2005
February 21, 1966
____________________________________________________________________________________________________________________________________
John J. O'Connor Senior Vice President Treasurer John J. O'Connor has served in 83 None(3)
2005 Market Street and Treasurer since various executive capacities
Philadelphia, PA February 2005 at different times at
19103 Delaware Investments.
June 16, 1957
____________________________________________________________________________________________________________________________________
(1) Mr. Coyne is considered to be an "Interested Trustee" because he is an executive officer of the Fund's(s') investment advisor.
(2) Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund's(s')
investment advisor, principal underwriter, and its transfer agent.
(3) Michael P. Bishof, David F. Connor, David P. O'Connor, and John J. O'Connor serve in similar capacities for the six portfolios
of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant.
John J. O'Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, which has the same investment
advisor as the registrant.
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is
available, without charge, upon request by calling 800 523-1918.
47
<page>
About the organization
This annual report is for the information of Delaware Corporate Bond Fund and
Delaware Extended Duration Bond Fund shareholders, but it may be used with
prospective investors when preceded or accompanied by a current prospectus for
Delaware Corporate Bond Fund and Delaware Extended Duration Bond Fund and the
Delaware Investments(R) Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the funds. You should read the
prospectus carefully before you invest. The figures in this report represent
past results that are not a guarantee of future results. The return and
principal value of an investment in the funds will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
Board of trustees
Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Owner - ARL Associates,
Strategic Financial Planning Consulting Firm
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated officers
Michael P. Bishof
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA
David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA
Contact information
Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA
National distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For shareholders
800 523-1918
For securities dealers and financial
institutions representatives only
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the marketing name of Delaware Management Holdings, Inc.
and its subsidiaries.
Each Fund 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. Each Fund's Forms N-Q, as well as a description of the policies and
procedures that each Fund uses to determine how to vote proxies (if any)
relating to portfolio securities are available without charge (i) upon request,
by calling 800 523-1918; (ii) on each Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. Each Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C.; information on the
operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how each Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through each Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
48
<page>
Get shareholder reports and prospectuses online instead of in the mail.
> Visit www.delawareinvestments.com/edelivery
<page>
Simplify your life.
Manage your investments online!
Get Account Access, the Delaware Investments(R) secure Web site that allows
you to conduct your business online. Gain 24-hour access to your account and
one of the highest levels of Web security available. You also get:
o Hassle-free investing - Make online purchases and redemptions at any time.
o Simplified tax processing - Automatically retrieve your Delaware Investments
accounts' 1099 information and import it directly into your 1040 tax return.
Available only with Turbo Tax (R) Online (SM) and Desktop software -
www.turbotax.com.
o Less mail clutter - Get instant access to your fund materials online with
Delaware eDelivery.
Register for Account Access today! Please visit us at
www.delawareinvestments.com, select Individual Investors, and click Account
Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through
Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any
questions.
[DELAWARE INVESTMENTS LOGO]
831 Printed in the USA
AR-460 [7/06] CGI 9/06 MF-06-08-023 PO11210
Annual Report Delaware
Delchester Fund
July 31, 2006
Fixed income mutual fund
[DELAWARE INVESTMENTS LOGO] [LOGO] POWERED BY RESEARCH(R)
Table of contents
> Portfolio management review .................................................1
> Performance summary .........................................................4
> Disclosure of Fund expenses .................................................6
> Sector allocation and credit rating breakdown ...............................7
> Statement of net assets .....................................................8
> Statement of assets and liabilities ........................................12
> Statement of operations ....................................................13
> Statements of changes in net assets ........................................14
> Financial highlights .......................................................15
> Notes to financial statements ..............................................19
> Report of independent registered public accounting firm ....................23
> Other Fund information .....................................................24
> Board of trustees/directors and officers addendum ..........................26
> About the organization .....................................................28
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series
of Delaware Management Business Trust, which is a registered investment advisor.
[C] 2006 Delaware Distributors, L.P.
Portfolio management review
Delaware Delchester Fund
July 31, 2006
Timothy L. Rabe
Senior Portfolio Manager
The manager of Delaware Delchester Fund provided the answers to the questions
below as a review of the Fund's activities over the fiscal year ending July 31,
2006. Please see page 5 to learn more about the portfolio manager.
What was the investment climate for high yield fixed income investments during
the fiscal year ended July 31, 2006?
Overall, the U.S. economy provided a relatively favorable backdrop for the high
yield fixed income market. The economy recovered nicely from Hurricanes Rita and
Katrina early in our fiscal year, and then grew at a robust pace while interest
rates, although rising, remained relatively low. This setting helped foster an
environment, that kept default rates near their all-time lows and contributed to
positive total returns for high yield bonds.
In particular, high yield bonds with CCC credit ratings performed well based on
the returns of Lehman Brothers credit indices (ratings below BBB are generally
considered high yield, higher risk bonds that are deemed below investment
grade). This performance in CCC-rated bonds was primarily the result of a
rebound among automotive industry debt. After experiencing credit downgrades in
the last calendar quarter of 2005, Ford and General Motors securities performed
consistently well throughout 2006, which boosted high yield debt performance
throughout the auto industry. Furthermore, the supply of high yield debt
remained healthy, with several large companies, including Hertz, Neiman Marcus,
and HRC bringing issues to market (source: AMG Data Services).
How did the Fund perform for the fiscal year?
Delaware Delchester Fund achieved positive gains for the fiscal year ended July
31, 2006 with all but a few sectors making contributions. Class A shares
returned 6.42% at net asset value and 1.53% at the maximum offer price (both
figures represent all distributions reinvested). For complete, annualized
performance for Delaware Delchester Fund, please see the table on page 4.
By comparison, the Bear Stearns High Yield Index, which serves as the Fund's
benchmark, gained 3.80% during the same period. The Fund's peers in the Lipper
High Current Yield Funds category also averaged a gain of 3.80% for the period.
What broad strategies influenced Fund performance?
We continued to focus on security selection as the primary driver of the Fund's
performance. Although the economic climate and other big-picture factors were
influential in the high yield market, company-specific characteristics and
influences generally played larger roles in overall performance during the
fiscal year. As such, we generally avoided making significant sector "bets,"
preferring instead to focus on our in-depth research efforts to uncover
attractively valued securities throughout the high yield universe.
We believe these efforts helped the Fund outperform the benchmark at net asset
value for the one-year period ended July 31, 2006. There were no "themes" or
significant sector-performance advantages that generated specific positive
results. Instead, the Fund's performance was realized from a wide array of
individual fixed income securities, selected for their overall value and yield
advantages. From a quality standpoint, Delaware Delchester Fund held a lesser
weighting than the Bear Stearns High Yield Index in BB-rated bonds because we
preferred to hold more B-rated securities. By focusing on bonds with B
credit-quality ratings, we were able to capture extra yield, compared to the
benchmark, as well as good value. This strategy helped the Fund's total return
at net asset value compared to that of its benchmark index.
Which holdings were significant performers within the Fund over the fiscal year?
There were notable performers on both the positive and negative side of
performance. The Fund benefited from a number of mergers and acquisitions, and
initial public offerings. In terms of individual bonds, holdings of Mirant
Americas Generation, an Atlanta-based power company, provided positive return
during the year.
(continues) 1
Portfolio management review
Delaware Delchester Fund
July 31, 2006
Mirant is a holding that we first purchased before the corporation filed for
bankruptcy in July 2003. We held onto our position throughout its bankruptcy
proceedings and when the company reorganized and emerged from bankruptcy in
January 2006, the bonds posted strong performance. We also held a position in
paper company Georgia-Pacific, which declined slightly during the first eight
months of the fiscal year and then rallied after the company agreed to a buyout
by Koch Industries. Horizon Lines, a shipping company represented in the Fund,
reported strong financials and eventually announced an initial public offering,
which caused the company's bonds to rally.
Comparatively, the Fund realized disappointing results from Uno Restaurant. The
company's bonds have underperformed since they came to market, primarily because
of the company's inclination for promoting shareholder value through dividend
payments. In addition, our position in Anchor Glass (later sold by the Fund)
detracted from the Fund's overall performance after the company filed for
bankruptcy because it was unable to meet its creditors' demands. From an
industry standpoint, our positions in Canadian paper companies suffered losses.
The strength of the Canadian dollar compared to other currencies generally made
Canadian paper manufacturers less attractive to global investors.
At fiscal year end, how was the portfolio positioned?
We continue to hold a broadly diversified portfolio of securities that we
believe offer value and yield advantages. We do not favor any single industry or
sector, preferring to generate return potential and manage risk on a
security-by-security basis.
An example of this is our approach to the auto industry, which has heavily
influenced performance of the high yield market, but where our
security-by-security analysis has led us to be cautious. Throughout the one-year
period, auto industry bonds, particularly Ford and General Motors, were
significant market movers and represented approximately 15% of the Bear Stearns
High Yield Index. We maintain a significantly lighter weighting than the index
when it comes to auto bonds. This approach is also reflective of our belief that
a single industry comprised of only two available bond issues should not
represent such a large component of the portfolio.
In terms of individual securities, we continue to believe that there is
compelling value among the larger leveraged buyouts coming to market. We believe
the size, scale, and complexity of these new issues make them more attractive
from a historical perspective. Of course, we continue to monitor the economic
backdrop because a significant slowdown in growth could hurt the high yield
market from a macroeconomic perspective. In addition, we continue to closely
watch the supply-and-demand forces at work in the high yield market.
2
Performance summary
Delaware Delchester Fund
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Adverse conditions may affect the issuer's ability to pay interest
and principal on securities held by the Fund. A rise or fall in the interest
rates can have a significant impact on bond prices and the NAV (net asset
value) of the Fund. Funds that invest in bonds can lose their value as interest
rates rise, and an investor can lose principal. Please obtain the performance
data for the most recent month end by calling 800 523-1918 or by visiting www.
delawareinvestments.com/performance.
You should consider the investment objectives, risks, charges, and expenses of
the investment carefully before investing. Delaware Delchester Fund prospectus
contains this and other important information about the investment company.
Please request a prospectus through your financial advisor or by calling 800
523-1918 or visiting our Web site. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
Fund Performance
Average Annual Total Returns
Through July 31, 2006 1 Year 5 Years 10 Years Lifetime
________________________________________________________________________________
Class A (Est. 8/20/70)
Excluding Sales Charge 6.42% 10.39% 3.30% 7.81%
Including Sales Charge 1.53% 9.35% 2.83% 7.67%
________________________________________________________________________________
Class B (Est. 5/2/94)
Excluding Sales Charge 5.34% 9.59% 2.72% 3.39%
Including Sales Charge 1.41% 9.38% 2.72% 3.39%
________________________________________________________________________________
Class C (Est. 11/29/95)
Excluding Sales Charge 5.65% 9.64% 2.57% 2.89%
Including Sales Charge 4.67% 9.64% 2.57% 2.89%
________________________________________________________________________________
Delaware Delchester Fund invests primarily in high yield bonds (commonly known
as "junk bonds"), which involve greater risk than higher-quality
investment-grade bonds.
Returns reflect the reinvestment of distributions and any applicable sales
charges as noted below. Performance for Class B and C shares, excluding sales
charges, assumes either that contingent deferred sales charges did not apply or
that the investment was not redeemed.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%. Ten-year and lifetime performance figures
for Class B shares reflect conversion to Class A shares after eight years.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
Class R shares are available only for certain retirement plan products. They are
sold without a sales charge and have an annual distribution and service fee of
up to 0.60%. The distributor has contracted to limit distribution and service
fee to 0.50% through November 30, 2006. No Class R shares were made available
during the periods shown.
The average annual total returns for the 1-year, 5-year, 10-year, and lifetime
(since August 20, 1970) periods ended July 31, 2006 for Delaware Delchester
Fund's Institutional Class were +6.72%, +10.70%, +3.58%, and +7.95%,
respectively. Institutional Class shares, were first made available on June 1,
1992 and are available without sales or asset-based distribution charges only to
certain eligible institutional accounts. Institutional Class performance prior
to June 1, 1992 for Delaware Delchester Fund is based on Class A performance and
was adjusted to eliminate the sales charges, but not the asset-based
distribution charge of Class A shares.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
An expense limitation was in effect for all classes of Delaware Delchester Fund
during some periods shown. Performance would have been lower had the expense
limitation not been in effect.
4
Fund basics
As of July 31, 2006
________________________________________________________________________________
Fund objective
________________________________________________________________________________
The Fund seeks total return and, as a secondary objective, high current income.
________________________________________________________________________________
Total Fund net assets
________________________________________________________________________________
$283 million
________________________________________________________________________________
Number of holdings
________________________________________________________________________________
176 (excludes security lending collateral holdings)
________________________________________________________________________________
Fund start date
________________________________________________________________________________
August 20, 1970
________________________________________________________________________________
Your Fund manager
________________________________________________________________________________
Timothy L. Rabe, CFA, joined Delaware Investments in 2000. He is head of the
high yield trading department responsible for investing strategy. Prior to
joining Delaware Investments, Timothy L. Rabe was a high yield portfolio manager
for Conseco Capital Management for five years. Prior to that, he worked as a tax
analyst for the Northern Trust Company. He received a bachelor's degree in
finance from the University of Illinois.
________________________________________________________________________________
Nasdaq symbols CUSIPs
________________________________________________________________________________
Class A DETWX 245908207
Class B DHYBX 245908405
Class C DELCX 245908504
Institutional Class DETIX 245908306
[PERFORMANCE OF A $10,000 INVESTMENT LINE CHART]
Chart assumes $10,000 invested on July 31, 1996 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. The Bear Stearns High Yield Bond Index is an unmanaged index that
generally measures the performance of domestic high yield bonds. An index is
unmanaged and does not incur the costs of operating a mutual fund, such as the
costs of buying, selling, and holding securities. You cannot invest directly in
an index.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
An expense limitation was in effect for Class A shares of Delaware Delchester
Fund during some periods shown. Performance would have been lower had the
expense limitation not been in effect. Past performance is not a guarantee of
future results.
5
Disclosure of Fund expenses
For the period February 1, 2006 to July 31, 2006
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period February 1, 2006 to July 31, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund 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 this 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 Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. 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. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
Delaware Delchester Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/06 to
2/1/06 7/31/06 Ratios 7/31/06*
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $1,039.70 1.20% $6.07
Class B 1,000.00 1,036.00 1.91% 9.64
Class C 1,000.00 1,035.90 1.91% 9.64
Institutional Class 1,000.00 1,041.10 0.91% 4.61
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,018.84 1.20% $6.01
Class B 1,000.00 1,015.32 1.91% 9.54
Class C 1,000.00 1,015.32 1.91% 9.54
Institutional Class 1,000.00 1,020.28 0.91% 4.56
________________________________________________________________________________
*"Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
6
Sector allocation and credit rating breakdown
Delaware Delchester Fund
As of July 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector of Net Assets
________________________________________________________________________________
Collateralized Bond Obligations 0.04%
________________________________________________________________________________
Commercial Mortgage-Backed Securities 0.72%
________________________________________________________________________________
Commercial Paper 0.34%
________________________________________________________________________________
Convertible Bonds 0.32%
________________________________________________________________________________
Corporate Bonds 88.47%
Banking 0.67%
Basic Industry 10.68%
Brokerage 1.63%
Capital Goods 5.68%
Consumer Cyclical 8.08%
Consumer Non-Cyclical 9.53%
Energy 6.82%
Finance & Investments 0.48%
Media 9.53%
Real Estate 1.37%
Services Cyclical 11.72%
Services Non-Cyclical 6.13%
Technology & Electronics 2.27%
Telecommunications 10.05%
Utilities 3.83%
________________________________________________________________________________
Emerging Markets Bonds 1.49%
________________________________________________________________________________
Common Stock 1.46%
________________________________________________________________________________
Warrants 0.00%
________________________________________________________________________________
Securities Lending Collateral 19.16%
Fixed Rate Notes 3.26%
Variable Rate Notes 15.90%
________________________________________________________________________________
Total Market Value of Securities 112.00%
________________________________________________________________________________
Obligation to Return Securities Lending Collateral (19.16%)
________________________________________________________________________________
Receivables and Other Assets Net of Liabilities 7.16%
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
Credit Rating Breakdown
(as a % of fixed income investments)
________________________________________________________________________________
AAA 7.16%
AA 0.25%
A 0.09%
BBB 1.38%
BB 18.81%
B 53.61%
CCC 13.89%
C 0.02%
D 0.64%
NR 4.15%
________________________________________________________________________________
Total 100.00%
________________________________________________________________________________
7
Statement of net assets
Delaware Delchester Fund
July 31, 2006
Principal Market
Amount (U.S.$) Value (U.S.$)
________________________________________________________________________________
Collateralized Bond Obligations - 0.04%
________________________________________________________________________________
#=@~ Merrill Lynch CBO VII Series
1997-C3 144A 5.824% 3/23/08 $ 576,246 $ 46,646
#=@ South Street CBO Series
1999-1A A1 144A 7.16% 7/1/11 52,272 52,533
__________
Total Collateralized Bond Obligations
(cost $377,024) 99,179
__________
________________________________________________________________________________
Commercial Mortgage-Backed Securities - 0.72%
________________________________________________________________________________
# First Union National Bank Commercial
Mortgage Series 2001-C2 L 144A
6.46% 1/12/43 2,025,000 2,022,967
__________
Total Commercial Mortgage-Backed Securities
(cost $2,055,296) 2,022,967
__________
________________________________________________________________________________
Commercial Paper - 0.34%
________________________________________________________________________________
[ Cox Enterprises 5.545% 8/1/06 960,000 960,000
__________
Total Commercial Paper (cost $960,000) 960,000
__________
________________________________________________________________________________
Convertible Bonds - 0.32%
________________________________________________________________________________
# Charter Communications 144A
5.875% 11/16/09, exercise price
$2.42, expiration date 11/16/09 1,080,000 907,200
__________
Total Convertible Bonds (cost $1,054,650) 907,200
__________
________________________________________________________________________________
Corporate Bonds - 88.47%
________________________________________________________________________________
Banking - 0.67%
*# iPayment 144A 9.75% 5/15/14 1,170,000 1,175,850
Western Financial Bank
9.625% 5/15/12 645,000 712,142
__________
1,887,992
__________
Basic Industry - 10.68%
Abitibi-Consolidated
6.95% 12/15/06 125,000 126,250
* 7.875% 8/1/09 1,180,000 1,144,600
* AK Steel 7.875% 2/15/09 1,970,000 1,970,000
Bowater 9.50% 10/15/12 3,375,000 3,391,875
Donohue Forest Products
7.625% 5/15/07 1,000,000 1,007,500
Georgia-Pacific 9.50% 12/1/11 1,825,000 1,925,375
* Gold Kist 10.25% 3/15/14 1,261,000 1,330,355
*# Nell AF Sarl 144A 8.375% 8/15/15 1,825,000 1,781,656
NewPage 10.00% 5/1/12 1,555,000 1,621,088
Norske Skog Canada 8.625% 6/15/11 2,225,000 2,180,500
# Port Townsend Paper 144A
12.00% 4/15/11 2,735,000 2,338,425
Potlatch 13.00% 12/1/09 2,100,000 2,472,546
Rhodia 8.875% 6/1/11 1,320,000 1,349,700
*++ Solutia 6.72% 10/15/37 2,335,000 2,136,525
Tembec Industries 8.625% 6/30/09 5,310,000 2,880,675
# Verso Paper 144A 9.125% 8/1/14 1,125,000 1,130,625
Witco 6.875% 2/1/26 1,520,000 1,375,600
__________
30,163,295
__________
Brokerage - 1.63%
E Trade Financial 8.00% 6/15/11 1,250,000 1,290,625
LaBranche & Co.
9.50% 5/15/09 1,310,000 1,355,850
11.00% 5/15/12 1,825,000 1,952,750
__________
4,599,225
__________
Capital Goods - 5.68%
Armor Holdings 8.25% 8/15/13 2,050,000 2,152,499
# Compression Polymer 144A
10.50% 7/1/13 1,285,000 1,323,550
* Graham Packaging 9.875% 10/15/14 1,375,000 1,344,063
Interface 10.375% 2/1/10 1,470,000 1,613,325
Interline Brands 8.125% 6/15/14 325,000 329,063
Intertape Polymer 8.50% 8/1/14 1,850,000 1,720,500
*{ Mueller Holdings 14.75% 4/15/14 2,151,000 1,839,105
*{ NTK Holdings 10.75% 3/1/14 1,715,000 1,209,075
# RBS Global & Rexnord 144A
9.50% 8/1/14 1,370,000 1,376,850
* Solo Cup 8.50% 2/15/14 1,500,000 1,305,000
* Trimas 9.875% 6/15/12 1,970,000 1,827,175
__________
16,040,205
__________
Consumer Cyclical - 8.08%
* Accuride 8.50% 2/1/15 1,540,000 1,439,900
# Baker & Taylor 144A 11.50% 7/1/13 1,125,000 1,130,625
Boyd Gaming 8.75% 4/15/12 1,825,000 1,916,250
Ford Motor Credit 7.375% 10/28/09 1,735,000 1,637,725
* General Motors 8.375% 7/15/33 945,000 779,625
General Motors Acceptance
Corporation
6.875% 9/15/11 2,225,000 2,156,730
* 8.00% 11/1/31 1,570,000 1,543,812
Landry's Restaurant 7.50% 12/15/14 950,000 885,875
* Metaldyne 10.00% 11/1/13 2,105,000 2,026,063
* Neiman Marcus 9.00% 10/15/15 1,000,000 1,058,750
*# NPC International 144A
9.50% 5/1/14 1,985,000 1,915,525
* O'Charleys 9.00% 11/1/13 2,050,000 2,101,250
*# Uno Restaurant 144A
10.00% 2/15/11 1,075,000 835,813
Visteon
* 7.00% 3/10/14 465,000 381,300
* 8.25% 8/1/10 1,680,000 1,554,000
Warnaco 8.875% 6/15/13 1,435,000 1,472,669
__________
22,835,912
__________
Consumer Non-Cyclical - 9.53%
# Angiotech Pharmaceuticals 144A
7.75% 4/1/14 1,450,000 1,410,125
Biovail 7.875% 4/1/10 3,635,000 3,707,699
Constellation Brands
8.125% 1/15/12 1,225,000 1,267,875
* Cott Beverages 8.00% 12/15/11 1,330,000 1,349,950
* Dole Food 8.875% 3/15/11 1,550,000 1,457,000
# Healthsouth 144A 10.75% 6/15/16 1,875,000 1,800,000
Ingles Markets 8.875% 12/1/11 1,700,000 1,785,000
8
Principal Market
Amount (U.S.$) Value (U.S.$)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Consumer Non-Cyclical (continued)
# Le-Natures 144A 10.00% 6/15/13 $1,500,000 $1,597,500
* Marsh Supermarkets 8.875% 8/1/07 625,000 623,438
National Beef Packing 10.50% 8/1/11 1,975,000 2,058,938
*# Penhall International 144A
12.00% 8/1/14 1,000,000 1,037,500
Pilgrim's Pride 9.625% 9/15/11 1,575,000 1,657,688
Pinnacle Foods 8.25% 12/1/13 670,000 659,950
* Playtex Products 9.375% 6/1/11 1,480,000 1,552,150
# Reynolds American 144A
7.875% 5/15/09 850,000 886,196
True Temper Sports 8.375% 9/15/11 1,190,000 1,085,875
* Warner Chilcott 8.75% 2/1/15 2,995,000 2,987,512
__________
26,924,396
__________
Energy - 6.82%
# Basic Energy Service 144A
7.125% 4/15/16 555,000 520,313
Bluewater Finance 10.25% 2/15/12 1,355,000 1,385,488
# Brigham Exploration 144A
9.625% 5/1/14 595,000 587,563
Compton Petroleum Finance
7.625% 12/1/13 805,000 778,838
Copano Energy 8.125% 3/1/16 605,000 611,050
El Paso Natural Gas 7.625% 8/1/10 1,350,000 1,380,375
# El Paso Performance Linked Trust 144A
7.75% 7/15/11 995,000 1,006,194
El Paso Production Holding
7.75% 6/1/13 1,825,000 1,863,780
# Hilcorp Energy 144A
9.00% 6/1/16 1,475,000 1,533,999
Inergy Finance
6.875% 12/15/14 1,395,000 1,321,763
* 8.25% 3/1/16 490,000 502,250
# Mariner Energy 144A 7.50% 4/15/13 540,000 523,800
# Markwest Energy 144A 8.50% 7/15/16 325,000 329,875
# PetroHawk Energy 144A
9.125% 7/15/13 1,950,000 2,003,624
~ Secunda International
13.507% 9/1/12 1,395,000 1,466,494
Tennessee Gas Pipeline
8.375% 6/15/32 1,265,000 1,384,443
# VeraSun Energy 144A
9.875% 12/15/12 740,000 791,800
Whiting Petroleum 7.25% 5/1/13 1,270,000 1,266,825
__________
19,258,474
__________
Finance & Investments - 0.48%
FINOVA Group 7.50% 11/15/09 4,607,850 1,359,316
__________
1,359,316
__________
Media - 9.53%
} Adelphia Communications
8.125% 12/15/06 2,600,000 1,527,500
# Affinion Group 144A
11.50% 10/15/15 600,000 604,500
*++ Century Communications
9.50% 9/1/06 2,800,000 3,045,000
Charter Communications Holdings
11.125% 1/15/11 1,225,000 888,125
13.50% 1/15/11 4,620,000 3,534,300
~# Cleveland Unlimited 144A
13.579% 12/15/10 820,000 877,400
CSC Holdings
8.125% 7/15/09 600,000 617,250
8.125% 8/15/09 2,100,000 2,160,375
Insight Midwest 10.50% 11/1/10 4,110,000 4,294,949
* Lodgenet Entertainment
9.50% 6/15/13 2,450,000 2,621,500
* Mediacom Capital 9.50% 1/15/13 2,045,000 2,080,788
RH Donnelley 8.875% 1/15/16 1,350,000 1,351,688
Sheridan Group 10.25% 8/15/11 1,240,000 1,258,600
* Vertis 10.875% 6/15/09 510,000 508,088
* Warner Music Group 7.375% 4/15/14 1,615,000 1,566,550
__________
26,936,613
__________
Real Estate - 1.37%
American Real Estate Partners
8.125% 6/1/12 1,961,000 2,000,220
BF Saul REIT 7.50% 3/1/14 1,820,000 1,874,600
__________
3,874,820
__________
Services Cyclical - 11.72%
Adesa 7.625% 6/15/12 1,600,000 1,580,000
American Airlines 7.377% 5/23/19 744,679 670,212
Corrections Corporation of America
7.50% 5/1/11 2,500,000 2,537,499
FTI Consulting 7.625% 6/15/13 1,460,000 1,481,900
*# Galaxy Entertainment Finance 144A
9.875% 12/15/12 3,150,000 3,307,499
Gaylord Entertainment
8.00% 11/15/13 1,100,000 1,120,625
{ H-Lines Finance Holdings
11.00% 4/1/13 2,773,000 2,419,443
# Hertz 144A
8.875% 1/1/14 1,080,000 1,131,300
* 10.50% 1/1/16 480,000 524,400
Horizon Lines 9.00% 11/1/12 1,065,000 1,088,963
Kansas City Southern Railway
9.50% 10/1/08 1,610,000 1,694,525
# Knowledge Learning 144A
7.75% 2/1/15 1,575,000 1,456,875
Mandalay Resort Group
9.50% 8/1/08 1,480,000 1,568,800
OMI 7.625% 12/1/13 2,345,000 2,368,450
# Pokagon Gaming Authority 144A
10.375% 6/15/14 1,475,000 1,548,750
Royal Caribbean Cruises
7.25% 3/15/18 565,000 553,142
Seabulk International 9.50% 8/15/13 1,605,000 1,781,550
Stena 9.625% 12/1/12 1,660,000 1,801,100
{ Town Sports International
11.00% 2/1/14 1,450,000 1,152,750
Wheeling Island Gaming
10.125% 12/15/09 3,200,000 3,319,999
__________
33,107,782
__________
(continues) 9
Statement of net assets
Delaware Delchester Fund
Principal Market
Amount (U.S.$) Value (U.S.$)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Services Non-Cyclical - 6.13%
Aleris International 9.00% 11/15/14 $1,405,000 $ 1,587,650
Allied Waste North America
9.25% 9/1/12 1,500,000 1,601,250
Brickman Group 11.75% 12/15/09 710,000 766,800
Casella Waste Systems 9.75% 2/1/13 2,800,000 2,954,000
# CRC Health 144A 10.75% 2/1/16 2,087,000 2,128,740
* Geo Subordinate 11.00% 5/15/12 2,135,000 2,156,350
US Oncology 10.75% 8/15/14 1,805,000 1,967,450
*{ Vanguard Health 11.25% 10/1/15 3,635,000 2,589,938
# WCA Waste 144A 9.25% 6/15/14 1,525,000 1,559,313
__________
17,311,491
__________
Technology & Electronics - 2.27%
* MagnaChip Semiconductor
8.00% 12/15/14 3,850,000 2,569,875
* STATS ChipPAC 7.50% 7/19/10 1,600,000 1,564,000
Sungard Data System
10.25% 8/15/15 1,480,000 1,507,750
# UGS Capital II PIK 144A
10.38% 6/1/11 775,000 771,125
__________
6,412,750
__________
Telecommunications - 10.05%
++ Allegiance Telecommunication
11.75% 2/15/08 2,045,000 910,025
American Tower 7.125% 10/15/12 1,630,000 1,646,300
* Cincinnati Bell 8.375% 1/15/14 1,490,000 1,467,650
*# Digicel Limited 144A 9.25% 9/1/12 1,600,000 1,676,000
*# Hughes Network Systems 144A
9.50% 4/15/14 1,225,000 1,225,000
{ Inmarsat Finance 10.375% 11/15/12 3,600,000 3,095,999
# Intelsat Bermuda 144A
11.25% 6/15/16 1,850,000 1,877,750
* Intelsat Subsidiary Holding
8.625% 1/15/15 975,000 970,125
* iPCS 11.50% 5/1/12 1,445,000 1,625,625
~ IWO Holdings 9.257% 1/15/12 235,000 243,813
# Mobile Service Group 144A
9.75% 8/1/14 1,135,000 1,154,863
Rural Cellular
* 9.875% 2/1/10 1,410,000 1,466,400
*~ 10.899% 11/1/12 1,025,000 1,066,000
# Telcordia Technologies 144A
10.00% 3/15/13 2,475,000 1,992,375
Triton Communications
9.375% 2/1/11 1,645,000 1,213,188
~ US LEC 13.62% 10/1/09 1,300,000 1,387,750
# Vimpel Communication 144A
8.25% 5/23/16 1,300,000 1,296,750
*# Wind Acquisition 144A
10.75% 12/1/15 2,490,000 2,695,425
# Windstream 144A 8.625% 8/1/16 1,325,000 1,384,625
__________
28,395,663
__________
Utilities - 3.83%
++# Calpine 144A 9.90% 7/15/07 1,827,925 1,814,216
Elwood Energy 8.159% 7/5/26 1,100,475 1,204,344
Midwest Generation
8.30% 7/2/09 1,909,127 1,932,991
8.75% 5/1/34 1,250,000 1,335,938
* Mirant Americas Generation
8.30% 5/1/11 2,870,000 2,812,599
Orion Power Holdings
12.00% 5/1/10 1,490,000 1,709,775
=++# USGen New England 144A
7.459% 1/2/15 38,286 25,840
___________
10,835,703
___________
Total Corporate Bonds (cost $253,780,624) 249,943,637
___________
_______________________________________________________________________________
Emerging Markets Bonds - 1.49%
_______________________________________________________________________________
*# C&M Finance 144A
8.10% 2/1/16 825,000 783,197
* Republic of El Salvador
7.65% 6/15/35 1,500,000 1,521,000
Venezuela Government
6.00% 12/9/20 2,110,000 1,907,440
___________
Total Emerging Markets Bonds
(cost $4,252,138) 4,211,637
___________
Number
of Shares
_______________________________________________________________________________
Common Stock - 1.46%
_______________________________________________________________________________
=@+II Avado Brands 9,305 8,747
* B&G Foods 4,000 66,800
*+ Foster Wheeler 42,375 1,616,173
+ Mirant 56,423 1,499,159
*+ Petrojarl ADR 15,331 97,445
*+ Petroleum Geo-Services ADR 15,331 844,278
___________
Total Common Stock (cost $2,865,039) 4,132,602
___________
_______________________________________________________________________________
Warrants - 0.00%
_______________________________________________________________________________
+# Solutia 144A, exercise price $7.59,
expiration date 7/15/09 4,410 0
___________
Total Warrants (cost $367,920) 0
___________
Total Market Value of Securities Before
Securities Lending Collateral - 92.84%
___________
(cost $265,712,691) 262,277,222
___________
Principal
Amount (U.S.$)
_______________________________________________________________________________
Securities Lending Collateral** - 19.16%
_______________________________________________________________________________
Short-Term Investments - 19.16%
Fixed Rate Notes - 3.26%
Citigroup Global Markets
5.32% 8/1/06 $9,227,483 9,227,483
___________
9,227,483
___________
~ Variable Rate Notes - 15.90%
American Honda Finance
5.32% 2/21/07 1,547,454 1,547,454
ANZ National 5.32% 8/31/07 343,879 343,879
Australia New Zealand
5.40% 8/31/07 1,719,393 1,719,393
Bank of America 5.32% 2/23/07 2,235,211 2,235,211
10
Principal Market
Amount (U.S.$) Value (U.S.$)
________________________________________________________________________________
Securities Lending Collateral (continued)
________________________________________________________________________________
Short-Term Investments (continued)
Variable Rate Notes (continued)
Bank of New York 5.34% 8/31/07 $1,375,514 $ 1,375,514
Barclays New York 5.31% 5/18/07 2,235,211 2,235,211
Bayerische Landesbank
5.45% 8/25/06 1,719,393 1,719,393
Bear Stearns 5.40% 1/31/07 2,063,272 2,063,272
BNP Paribas 5.14% 8/31/07 1,719,393 1,719,393
Canadian Imperial Bank
5.32% 11/22/06 1,719,393 1,719,393
5.38% 8/31/07 859,696 859,696
CDC Financial Products
5.41% 8/31/06 2,235,211 2,235,211
Citigroup Global Markets 5.38% 8/7/06 2,235,211 2,235,211
Commonwealth Bank 5.37% 8/31/07 1,719,393 1,719,393
Goldman Sachs 5.45% 7/31/07 2,235,211 2,235,211
Manufacturers & Traders 5.38% 9/26/06 1,719,386 1,719,321
Marshall & Ilsley Bank 5.35% 8/31/07 1,891,332 1,891,332
Merrill Lynch Mortgage Capital
5.41% 8/3/06 1,547,454 1,547,454
National Australia Bank 5.31% 3/7/07 2,132,047 2,132,047
National City Bank 5.32% 3/2/07 2,063,398 2,063,848
National Rural Utilities 5.34% 8/31/07 2,716,641 2,716,641
Nordea Bank New York 5.31% 5/16/07 859,687 859,654
Nordea Bank Norge 5.33% 8/31/07 1,719,393 1,719,393
Royal Bank of Scotland 5.38% 8/31/07 1,719,393 1,719,393
Societe Generale 5.32% 8/31/07 859,697 859,697
Wells Fargo 5.38% 8/31/07 1,719,393 1,719,393
_____________
44,911,008
_____________
Total Securities Lending Collateral
(cost $54,138,491) 54,138,491
_____________
Total Market Value of Securities - 112.00%
(cost $319,851,182) 316,415,713 !
Obligation to Return Securities
Lending Collateral** - (19.16%) (54,138,491)
Receivables and Other Assets Net
of Liabilities - 7.16% 20,240,167
_____________
Net Assets Applicable to
86,432,668 Shares Outstanding - 100.00% $ 282,517,389
_____________
Net Asset Value - Delaware Delchester Fund
Class A ($225,352,496 / 68,967,864 Shares) $3.27
_____
Net Asset Value - Delaware Delchester Fund
Class B ($28,313,681 / 8,647,765 Shares) $3.27
_____
Net Asset Value - Delaware Delchester Fund
Class C ($12,706,543 / 3,876,695 Shares) $3.28
_____
Net Asset Value - Delaware Delchester Fund
Institutional Class ($16,144,669 / 4,940,344 Shares) $3.27
_____
Components of Net Assets at July 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $924,798,722
Accumulated net realized loss on investments (638,845,864)
Net unrealized depreciation of investments (3,435,469)
_____________
Total net assets $282,517,389
_____________
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At July 31, 2006, the aggregate amount of Rule 144A
securities equaled $59,902,697, which represented 21.20% of the Fund's net
assets. See Note 8 in "Notes to Financial Statements."
II 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 July 31, 2006, the aggregate
amount of the restricted security equaled $8,747 or 0.00% of the Fund's net
assets. See Note 8 in "Notes to Financial Statements."
{ 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.
* Fully or partially on loan.
** See note 7 in "Notes to Financial Statements."
! Includes $52,991,734 of securities loaned.
~ Variable rate security. The interest rate shown is the rate as of July 31,
2006.
+ Non-income producing security for the year ended July 31, 2006.
++ Non-income producing security. Security is currently in default.
} 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.
@ Illiquid security. At July 31, 2006, the aggregate amount of illiquid
securities equaled $107,926, which represented 0.04% of the Fund's net
assets. See Note 8 in "Notes to Financial Statements."
= Security is being fair valued in accordance with the Fund's fair valuation
policy. At July 31, 2006, the aggregate amount of fair valued securities
equaled $133,766, which represented 0.05% of the Fund's net assets. See
Note 1 in "Notes to Financial Statements."
[ The interest rate shown is the effective yield as of the time of purchase.
Summary of Abbreviations:
ADR - American Depositary Receipts
CBO - Collateralized Bond Obligation
PIK - Pay-in-Kind
REIT - Real Estate Investment Trust
Net Asset Value and Offering Price per Share -
Delaware Delchester Fund
Net asset value Class A (A) $3.27
Sales charge (4.50% of offering price) (B) 0.15
_____
Offering price $3.42
_____
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
11
Statement of assets and liabilities
Delaware Delchester Fund
July 31, 2006
Assets:
Investments at market (including $52,991,734 of securities loaned) $262,277,222
Short-term investments held as collateral for loaned securities 54,138,491
Subscriptions receivable 17,279,507
Interest receivable 5,325,223
Receivable for securities sold 4,256,256
Other assets 1,822
____________
Total assets 343,278,521
____________
Liabilities:
Obligations to return securities lending collateral 54,138,491
Payable for securities purchased 5,391,029
Distributions payable 490,334
Liquidations payable 361,111
Due to manager and affiliates 291,567
Other accrued expenses 75,676
Other liabilities 12,924
____________
Total liabilities 60,761,132
____________
Total Net Assets $282,517,389
____________
Investments at Cost $265,712,691
____________
Cost of short-term investments held as collateral for loaned securities $ 54,138,491
____________
See accompanying notes
12
Statement of operations
Delaware Delchester Fund
Year Ended July 31, 2006
Investment Income:
Interest $26,785,454
Securities lending income 215,834
Dividends 42,120 $27,043,408
___________ ___________
Expenses:
Management fees 1,944,259
Distribution expenses - Class A 668,550
Distribution expenses - Class B 363,832
Distribution expenses - Class C 141,868
Dividend disbursing and transfer agent fees and expenses 687,286
Accounting and administration expenses 120,771
Registration fees 86,507
Reports and statements to shareholders 61,732
Legal and professional fees 60,868
Custodian fees 27,898
Trustees' fees 15,971
Insurance fees 7,059
Pricing fees 5,159
Other 11,080 4,202,840
___________ ___________
Less expenses absorbed or waived (303,793)
___________
Total operating expenses 3,899,047
___________
Net Investment Income 23,144,361
___________
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments 969,389
Net change in unrealized appreciation/depreciation of investments (6,404,110)
___________
Net Realized and Unrealized Loss on Investments (5,434,721)
___________
Net Increase in Net Assets Resulting from Operations $17,709,640
___________
See accompanying notes
13
Statements of changes in net assets
Delaware Delchester Fund
Year Ended
7/31/06 7/31/05
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 23,144,361 $ 25,877,808
Net realized gain on investments 969,389 20,059,634
Net change in unrealized appreciation/depreciation of investments (6,404,110) (800,316)
_____________ ____________
Net increase in net assets resulting from operations 17,709,640 45,137,126
_____________ ____________
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (17,992,334) (20,606,367)
Class B (2,545,021) (3,987,176)
Class C (991,894) (1,157,169)
Institutional Class (1,301,764) (1,745,099)
_____________ ____________
(22,831,013) (27,495,811)
_____________ ____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 62,659,889 86,807,210
Class B 3,341,549 6,503,838
Class C 7,393,332 7,835,958
Institutional Class 5,091,797 14,999,421
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 10,339,947 11,323,524
Class B 1,278,905 1,773,712
Class C 654,386 674,100
Institutional Class 1,236,304 1,588,434
_____________ ____________
91,996,109 131,506,197
_____________ ____________
Cost of shares repurchased:
Class A (112,766,868) (106,102,348)
Class B (21,543,944) (27,460,989)
Class C (11,400,686) (8,397,656)
Institutional Class (7,273,814) (19,126,027)
_____________ ____________
(152,985,312) (161,087,020)
_____________ ____________
Decrease in net assets derived from capital share transactions (60,989,203) (29,580,823)
_____________ ____________
Net Decrease in Net Assets (66,110,576) (11,939,508)
Net Assets:
Beginning of year 348,627,965 360,567,473
_____________ ____________
End of year (including undistributed net investment income of $- and $12,265, respectively) $ 282,517,389 $348,627,965
_____________ ____________
See accompanying notes
14
Financial highlights
Delaware Delchester Fund Class A
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
__________________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $3.320 $3.180 $3.000 $2.580 $3.110
Income (loss) from investment operations:
Net investment income (1) 0.258 0.243 0.258 0.303 0.317
Net realized and unrealized gain (loss) on investments (0.054) 0.155 0.186 0.399 (0.543)
______ ______ ______ ______ ______
Total from investment operations 0.204 0.398 0.444 0.702 (0.226)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.254) (0.258) (0.264) (0.282) (0.304)
______ ______ ______ ______ ______
Total dividends and distributions (0.254) (0.258) (0.264) (0.282) (0.304)
______ ______ ______ ______ ______
Net asset value, end of period $3.270 $3.320 $3.180 $3.000 $2.580
______ ______ ______ ______ ______
Total return (2) 6.42% 12.84% 15.22% 28.67% (7.94%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $225,352 $269,002 $263,960 $253,966 $188,736
Ratio of expenses to average net assets 1.20% 1.25% 1.34% 1.47% 1.32%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.30% 1.27% 1.34% 1.47% 1.32%
Ratio of net investment income to average net assets 7.84% 7.36% 8.19% 10.93% 10.76%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.74% 7.34% 8.19% 10.93% 10.76%
Portfolio turnover 138% 254% 674% 788% 441%
____________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2003 and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 15
Financial highlights
Delaware Delchester Fund Class B
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Year Ended
__________________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $3.330 $3.180 $3.010 $2.590 $3.120
Income (loss) from investment operations:
Net investment income (1) 0.234 0.219 0.236 0.283 0.295
Net realized and unrealized gain (loss) on investments (0.064) 0.165 0.176 0.399 (0.543)
______ ______ ______ ______ ______
Total from investment operations 0.170 0.384 0.412 0.682 (0.248)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.230) (0.234) (0.242) (0.262) (0.282)
______ ______ ______ ______ ______
Total dividends and distributions (0.230) (0.234) (0.242) (0.262) (0.282)
______ ______ ______ ______ ______
Net asset value, end of period $3.270 $3.330 $3.180 $3.010 $2.590
______ ______ ______ ______ ______
Total return (2) 5.34% 12.37% 14.02% 27.68% (8.28%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $28,314 $45,973 $62,243 $82,345 $79,507
Ratio of expenses to average net assets 1.91% 1.97% 2.06% 2.19% 2.04%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 2.01% 1.99% 2.06% 2.19% 2.04%
Ratio of net investment income to average net assets 7.13% 6.64% 7.48% 10.21% 10.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.03% 6.62% 7.48% 10.21% 10.04%
Portfolio turnover 138% 254% 674% 788% 441%
____________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2003 and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
16
Delaware Delchester Fund Class C
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Year Ended
__________________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $3.330 $3.180 $3.010 $2.590 $3.120
Income (loss) from investment operations:
Net investment income (1) 0.234 0.219 0.235 0.283 0.295
Net realized and unrealized gain (loss) on investments (0.054) 0.165 0.176 0.399 (0.543)
______ ______ ______ ______ ______
Total from investment operations 0.180 0.384 0.411 0.682 (0.248)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.230) (0.234) (0.241) (0.262) (0.282)
______ ______ ______ ______ ______
Total dividends and distributions (0.230) (0.234) (0.241) (0.262) (0.282)
______ ______ ______ ______ ______
Net asset value, end of period $3.280 $3.330 $3.180 $3.010 $2.590
______ ______ ______ ______ ______
Total return (2) 5.65% 12.35% 14.00% 27.68% (8.28%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $12,706 $16,271 $15,337 $16,965 $11,176
Ratio of expenses to average net assets 1.91% 1.97% 2.06% 2.19% 2.04%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 2.01% 1.99% 2.06% 2.19% 2.04%
Ratio of net investment income to average net assets 7.13% 6.64% 7.48% 10.21% 10.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.03% 6.62% 7.48% 10.21% 10.04%
Portfolio turnover 138% 254% 674% 788% 441%
____________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2003 and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 17
Financial highlights
Delaware Delchester Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Year Ended
__________________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $3.320 $3.180 $3.000 $2.590 $3.110
Income (loss) from investment operations:
Net investment income (1) 0.267 0.252 0.267 0.311 0.325
Net realized and unrealized gain (loss) on investments (0.054) 0.155 0.186 0.389 (0.533)
______ ______ ______ ______ ______
Total from investment operations 0.213 0.407 0.453 0.700 (0.208)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.263) (0.267) (0.273) (0.290) (0.312)
______ ______ ______ ______ ______
Total dividends and distributions (0.263) (0.267) (0.273) (0.290) (0.312)
______ ______ ______ ______ ______
Net asset value, end of period $3.270 $3.320 $3.180 $3.000 $2.590
______ ______ ______ ______ ______
Total return (2) 6.72% 13.16% 15.17% 29.46% (7.69%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $16,145 $17,382 $19,027 $17,296 $10,542
Ratio of expenses to average net assets 0.91% 0.97% 1.06% 1.19% 1.04%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.01% 0.99% 1.06% 1.19% 1.04%
Ratio of net investment income to average net assets 8.13% 7.64% 8.48% 11.21% 11.04%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 8.03% 7.62% 8.48% 11.21% 11.04%
Portfolio turnover 138% 254% 674% 788% 441%
____________________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2003 and 2002.
(2) 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
18
Notes to financial statements
Delaware Delchester Fund
July 31, 2006
Delaware Group Income Funds (the "Trust") is organized as a Delaware statutory
trust and offers four Series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund and Delaware High-Yield Opportunities
Fund. These financial statements and the related notes pertain to Delaware
Delchester Fund (the "Fund"). The Trust is an open-end investment company. The
Fund is considered diversified under the Investment Company Act of 1940, as
amended, and offers Class A, Class B, Class C, Class R and Institutional Class
shares. Class A shares are sold with a front-end sales charge of up to 4.50%.
Class A share purchases of $1,000,000 or more will incur a contingent deferred
sales charge of up to 1% if redeemed during the first two years, provided that a
financial advisor was paid commission on the purchase of those shares. Class B
shares are sold with a contingent deferred sales charge that declines from 4% to
zero depending upon the period of time the shares are held. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately eight
years after purchase. Class C shares are sold with a contingent deferred sales
charge of 1%, if redeemed during the first 12 months. Class R and Institutional
Class shares are not subject to a sales charge and are offered for sale
exclusively to a limited group of investors. As of July 31, 2006, Class R has
not commenced operations.
The investment objective of the Fund 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 Fund.
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.
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 Fund's 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 Fund 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.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented, and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Although the Fund's tax
positions are currently being evaluated, management does not expect the adoption
of FIN 48 to have a material impact on the Fund's financial statements.
Class Accounting - Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund 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 Fund 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 Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 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 Fund 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, annually.
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
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 Fund,
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.
(continues) 19
Notes to financial statements
Delaware Delchester Fund
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 Fund 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 0.91% of average daily net assets of the Fund through November 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee computed at the annual rate of 0.04% of the Fund's average
daily net assets for accounting and administration services. The Fund pays DSC a
monthly fee based on the number of shareholder accounts for dividend disbursing
and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund 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 Class A shares, 1.00% of the average daily net assets of the Class
B and C shares and 0.60% of the average daily net assets of the Class R shares.
DDLP has contracted to limit distribution and service fees through November 30,
2006 in order to prevent distribution and service fees of Class R shares from
exceeding 0.50% of average daily net assets. Institutional Class shares pay no
distribution and service expenses.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for
the Fund's Class A shares that went into effect on June 1, 1992. The total 12b-1
fees to be paid by Class A shareholders of the Fund will be the sum of 0.10% of
the average daily net assets representing shares that were acquired prior to
June 1, 1992 and 0.30% of the average daily net assets representing shares that
were acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1
fees at the same rate, the blended rate based upon the allocation of the 0.10%
and 0.30% rates described above.
At July 31, 2006, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $135,365
Dividend disbursing, transfer agent, accounting and
administration fees and other expenses payable to DSC 61,863
Distribution fee payable to DDLP 84,856
Other expenses payable to DMC and affiliates* 9,483
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Fund and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services, including internal legal services provided to the Fund
by DMC employees. For the year ended July 31, 2006, the Fund was charged $17,052
for internal legal services provided by DMC.
For the year ended July 31, 2006, DDLP earned $17,227 for commissions on sales
of the Fund's Class A shares. For the year ended July 31, 2006, DDLP received
gross contingent deferred sales charge commissions of $474, $43,498 and $2,995
on redemption of the Fund's Class A, Class B and Class C shares, respectively,
and these commissions were entirely used to offset up-front commissions
previously paid by DDLP to broker-dealers on sales of those shares.
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 Fund.
3. Investments
For the year ended July 31, 2006, the Fund made purchases of $401,730,119 and
sales of $476,127,388 of investment securities other than short-term
investments.
At July 31, 2006, the cost of investments for federal income tax purposes was
$320,334,537. At July 31, 2006, net unrealized depreciation was $3,918,824, of
which $6,712,942 related to unrealized appreciation of investments and
$10,631,766 related to unrealized depreciation of investments.
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 years
ended July 31, 2006 and 2005 was as follows:
Year Ended
7/31/06 7/31/05
_________ _________
Ordinary income $22,831,013 $27,495,811
As of July 31, 2006, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $924,798,722
Capital loss carryforwards (638,362,509)
Unrealized depreciation of investments (3,918,824)
____________
Net assets $282,517,389
____________
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 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 year ended July 31, 2006, the Fund recorded the following reclassifications.
Undistributed net investment income $(325,613)
Accumulated net realized gain (loss) 325,613
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $694,887 was utilized in 2006.
Capital loss carryforwards remaining at July 31, 2006 will expire as follows:
$122,795,424 expires in 2008, $284,053,994 expires in 2009, $211,481,773 expires
in 2010 and $20,031,318 expires in 2011.
20
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/06 7/31/05
Shares sold:
Class A 19,221,892 26,432,120
Class B 1,023,016 1,990,820
Class C 2,266,941 2,375,096
Institutional Class 1,561,744 4,523,623
Shares issued upon reinvestment of
dividends and distributions:
Class A 3,156,106 3,431,877
Class B 390,108 536,838
Class C 199,497 203,703
Institutional Class 377,850 480,197
__________ __________
28,197,154 39,974,274
__________ __________
Shares repurchased:
Class A (34,377,137) (32,008,734)
Class B (6,578,407) (8,276,203)
Class C (3,473,709) (2,512,311)
Institutional Class (2,230,435) (5,762,194)
__________ __________
(46,659,688) (48,559,442)
__________ __________
Net decrease (18,462,534) (8,585,168)
__________ __________
For the years ended July 31, 2006 and 2005, 2,331,339 Class B shares were
converted to 2,334,775 Class A shares valued at $7,633,584 and 2,838,347 Class B
shares were converted to 2,844,669 Class A shares valued at $9,448,878,
respectively. The respective amounts are included in Class B redemptions and
Class A subscriptions in the table above and the Statements of Changes in Net
Assets.
6. Line of Credit
The Fund, 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 funds' allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Fund had no amounts outstanding as of July 31, 2006, or at any time during the
year.
7. Securities Lending
The Fund, 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. 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 Fund, or at the discretion
of the lending agent, replace the loaned securities. The Fund 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 Fund 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 Fund records security
lending income net of such allocation.
At July 31, 2006, the market value of the securities on loan was $52,991,734,
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 Fund 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 Fund 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 Fund 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 Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. Rule
144A and illiquid securities have been identified on the Statement of Net
Assets.
9. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
(continues) 21
Notes to financial statements
Delaware Delchester Fund
10. Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2006, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total
Distributions Distributions* Distributions
(Tax Basis) (Tax Basis) (Tax Basis)
_____________ ______________ _____________
0% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
* For the fiscal year ended July 31, 2006, certain interest income paid by
the Fund, determined to be Qualified Interest Income and Short-Term
Capital Gains, may be subject to relief from U.S. withholding for foreign
shareholders, as provided by the American Jobs Creation Act of 2004. For
the fiscal year ended July 31, 2006, the Delaware Delchester Fund has
designated a maximum distribution of $22,782,776 of Qualified Interest
Income.
22
Report of independent
registered public accounting firm
To the Shareholders and Board of Trustees
Delaware Group Income Funds - Delaware Delchester Fund
We have audited the accompanying statement of net assets and statement of assets
and liabilities of Delaware Delchester Fund (one of the series constituting
Delaware Group Income Funds) (the "Fund") as of July 31, 2006, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware Delchester Fund series of Delaware Group Income Funds at July 31, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst and Young LLP
Philadelphia, Pennsylvania
September 13, 2006
23
Other Fund information
Delaware Delchester Fund
Board Consideration of Delaware Delchester Fund 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 Delaware
Delchester Fund (the "Fund"). 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 Fund 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 Fund, 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 Fund's 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 Fund 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 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 Fund, 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 Fund 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 Fund 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 Fund, compliance of portfolio managers
with the investment policies, strategies and restrictions for the Fund, 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 Fund's investment advisor and management's efforts to strengthen
and deepen portfolio management teams 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 Fund 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. Additionally, the
Board noted the extent of benefits provided to Fund shareholders for being part
of the Delaware Investments Family of Funds, including the privilege to exchange
investments between the same class of shares of funds without a sales charge,
the ability to reinvest Fund dividends into other funds and the privilege to
combine holdings in other funds to obtain a reduced sales charge. 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 Fund. The Board was pleased with DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Fund 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 Fund showed the investment
performance of its Class A 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 performance 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
Fund was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Fund's performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Fund and the
Board's view of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and
institutional high current yield funds as selected by Lipper. The Lipper report
comparison showed that the Fund's total return for the one and three year
periods was in the first quartile of such Performance Universe. The report
further showed that the Fund's total return for the five and 10 year periods was
in the third and fourth quartiles, respectively. The Board noted that the Fund's
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.
24
Comparative Expenses. The Board considered expense data for the Delaware
Investments Family of Funds. Management provided the Board with information on
pricing levels and fee structures for the Fund. The Board focused particularly
on the comparative analysis of the management fees and total expense ratios of
the Fund 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
Fund's contractual management fee and the actual management fee incurred by the
Fund were compared with the contractual management fees (assuming all funds in
the Expense Group were similar in size to the Fund) 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 Fund's total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Class A shares and
compared total expenses including 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 Fund's 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 Fund and the Board's view of
such expenses.
The expense comparisons for the Fund showed that its actual management fee was
in the quartile with the second lowest expenses of its Expense Group and its
total expenses were in the quartile with the highest expenses of its Expense
Group. The Board gave favorable consideration to the Fund's management fee, but
noted that the Fund's total expenses were not in line with the Board's
objective. In evaluating the total expenses, the Board considered waivers in
place through November 2006 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 Fund's 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 Fund.
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
relationships with the Fund and the Delaware Investments Family of Funds
required negotiation of reduction of fees.
Economies of Scale. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's 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 Fund's management contract fell within the standard
structure. Although the Fund has not reached a size at which it can take
advantage of breakpoints, the Board recognized that the fee was structured so
that when the Fund grows, economies of scale may be shared.
25
Board of trustees/directors
and officers addendum
Delaware Investments(R) Family of Funds
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor, and others who perform services for the
fund. The independent fund trustees, in particular, are advocates for
shareholder interests. Each trustee has served in that capacity since he or she
was elected to or appointed to the Board of Trustees, and will continue to serve
until his or her retirement or the election of a new trustee in his or her
place. The following is a list of the Trustees and Officers with certain
background and related information.
Number of
Portfolios in Fund Other
Name, Complex Overseen Directorships
Address, Position(s) Length of Principal Occupation(s) by Trustee Held by
and Birth Date Held with Fund(s) Time Served During Past 5 Years or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Interested Trustees
____________________________________________________________________________________________________________________________________
Patrick P. Coyne (1) Chairman, Chairman and Trustee Patrick P. Coyne has served in 83 None
2005 Market Street President, since August 16, 2006 various executive capacities
Philadelphia, PA Chief Executive at different times at
19103 Officer, and President and Delaware Investments.(2)
Trustee Chief Executive Officer
April 14, 1963 since August 1, 2006
____________________________________________________________________________________________________________________________________
Independent Trustees
____________________________________________________________________________________________________________________________________
Thomas L. Bennett Trustee Since Private Investor - 83 None
2005 Market Street March 2005 (March 2004-Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984-March 2004)
____________________________________________________________________________________________________________________________________
John A. Fry Trustee Since President - 83 Director -
2005 Market Street January 2001 Franklin & Marshall College Community Health
Philadelphia, PA (June 2002-Present) Systems
19103
Executive Vice President - Director -
May 28, 1960 University of Pennsylvania Allied Barton
(April 1995-June 2002) Security Holdings
____________________________________________________________________________________________________________________________________
Anthony D. Knerr Trustee Since Founder and Managing Director - 83 None
2005 Market Street April 1990 Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990-Present)
December 7, 1938
____________________________________________________________________________________________________________________________________
Lucinda S. Landreth Trustee Since Chief Investment Officer - 83 None
2005 Market Street March 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002-2004)
June 24, 1947
____________________________________________________________________________________________________________________________________
Ann R. Leven Trustee Since Owner - 83 Director and
2005 Market Street September 1989 ARL Associates, Audit Committee
Philadelphia, PA Strategic Financial Planning Chairperson - Andy
19103 Consulting Firm Warhol Foundation
(1983-Present)
November 1, 1940 Director and Audit
Committee Member -
Systemax, Inc.
____________________________________________________________________________________________________________________________________
26
Number of
Portfolios in Fund Other
Name, Complex Overseen Directorships
Address, Position(s) Length of Principal Occupation(s) by Trustee Held by
and Birth Date Held with Fund(s) Time Served During Past 5 Years or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Independent Trustees (continued)
____________________________________________________________________________________________________________________________________
Thomas F. Madison Trustee Since President and Chief 83 Director -
2005 Market Street May 1999 Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993-Present)
Director and Audit
Committee Member -
Digital River, Inc.
Director and Audit
Committee Member -
Rimage
Corporation
Director - Valmont
Industries, Inc.
____________________________________________________________________________________________________________________________________
Janet L. Yeomans Trustee Since Vice President 83 None
2005 Market Street April 1999 (January 2003-Present)
Philadelphia, PA and Treasurer
19103 (January 2006-Present)
3M Corporation
July 31, 1948
Ms. Yeomans has held
various management positions
at 3M Corporation since 1983.
____________________________________________________________________________________________________________________________________
J. Richard Zecher Trustee Since Founder - 83 Director and Audit
2005 Market Street March 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999-Present)
Director and Audit
July 3, 1940 Founder - Committee Member -
Sutton Asset Management Oxigene, Inc.
(Hedge Fund)
(September 1998-Present)
____________________________________________________________________________________________________________________________________
Officers
____________________________________________________________________________________________________________________________________
Michael P. Bishof Senior Chief Financial Michael P. Bishof has served in 83 None (3)
2005 Market Street Vice President Officer since various executive capacities
Philadelphia, PA and February 2005 at different times at
19103 Chief Financial Delaware Investments.
Officer
August 18, 1962
____________________________________________________________________________________________________________________________________
David F. Connor Vice President, Vice President since David F. Connor has served as 83 None (3)
2005 Market Street Deputy General September 21, 2000 Vice President and Deputy
Philadelphia, PA Counsel, and Secretary and Secretary General Counsel of
19103 since Delaware Investments
October 2005 since 2000.
December 2, 1963
____________________________________________________________________________________________________________________________________
David P. O'Connor Senior Vice Senior Vice President, David P. O'Connor has served in 83 None (3)
2005 Market Street President, General Counsel, and various executive and legal
Philadelphia, PA General Counsel, Chief Legal Officer capacities at different times
19103 and Chief since at Delaware Investments.
Legal Officer October 2005
February 21, 1966
____________________________________________________________________________________________________________________________________
John J. O'Connor Senior Vice President Treasurer John J. O'Connor has served in 83 None (3)
2005 Market Street and Treasurer since various executive capacities
Philadelphia, PA February 2005 at different times at
19103 Delaware Investments.
June 16, 1957
____________________________________________________________________________________________________________________________________
(1) Mr. Coyne is considered to be an "Interested Trustee" because he is an executive officer of the Fund's(s') investment advisor.
(2) Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund's(s')
investment advisor, principal underwriter, and its transfer agent.
(3) Michael P. Bishof, David F. Connor, David P. O'Connor, and John J. O'Connor serve in similar capacities for the six portfolios
of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant.
John J. O'Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, which has the same investment
advisor as the registrant.
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is
available, without charge, upon request by calling 800 523-1918.
27
About the organization
This semiannual report is for the information of Delaware Delchester Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Delchester Fund and the
Delaware Investments(R) Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the Fund. You should read the
prospectus carefully before you invest. The figures in this report represent
past results that are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Board of trustees
Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Owner - ARL Associates,
Strategic Financial Planning
Consulting Firm
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated officers
Michael P. Bishof
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA
David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA
Contact information
Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA
National distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For shareholders
800 523-1918
For securities dealers and financial
institutions representatives only
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the marketing name of Delaware Management Holdings, Inc.
and its subsidiaries.
The Fund 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 Fund's Forms N-Q, as well as a description of the policies
and procedures that the Fund uses to determine how to vote proxies (if any)
relating to portfolio securities are available without charge (i) upon
request, by calling 800 523-1918; (ii) on the Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C.; information on the
operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended
June 30 is available without charge (i) through the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
28
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Register for Account Access today! Please visit us at
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Please call our Shareholder Service Center at 800 523-1918 Monday through Friday
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[DELAWARE INVESTMENTS LOGO]
833 Printed in the USA
AR-024 [7/06] CGI 9/06 MF-06-08-024 PO11208
Annual Report Delaware
High-Yield Opportunities Fund
July 31, 2006
Fixed income mutual fund
[DELAWARE INVESTMENTS LOGO] [LOGO] POWERED BY RESEARCH (R)
<page>
Table of contents
> Portfolio management review ................................................1
> Performance summary ........................................................4
> Disclosure of Fund expenses ................................................6
> Sector allocation and credit rating breakdown ..............................7
> Statement of net assets ....................................................8
> Statement of operations ...................................................13
> Statements of changes in net assets .......................................14
> Financial highlights ......................................................15
> Notes to financial statements .............................................20
> Report of independent registered public accounting firm ...................23
> Other Fund information ....................................................24
> Board of trustees/directors and officers addendum .........................26
> About the organization ....................................................28
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series
of Delaware Management Business Trust, which is a registered investment advisor.
(C) 2006 Delaware Distributors, L.P.
<page>
Portfolio management review
Delaware High-Yield Opportunities Fund
July 31, 2006
Timothy L. Rabe
Senior Portfolio Manager
The manager of Delaware High-Yield Opportunities Fund provided the answers to
the questions below as a review of the Fund's activities over the fiscal year
ended July 31, 2006. Please see page 5 to learn more about the portfolio
manager.
Q: What was the investment climate among high yield fixed income investments
during the fiscal year ended July 31, 2006?
A: Overall, the economic environment provided a relatively favorable backdrop
for the high yield fixed income market. The U.S. economy continued to grow at a
robust pace and interest rates, although rising, remained relatively low. This
setting helped foster an environment, that kept default rates near their
all-time lows and contributed to positive overall returns for high yield bonds.
In particular, bonds with CCC credit ratings performed well, primarily because
of a rebound among automotive industry bonds. After experiencing credit
downgrades in the last calendar quarter of 2005, Ford and General Motors
securities performed consistently well throughout 2006, which boosted high yield
debt performance throughout the auto industry.
In addition, the market experienced significant cash inflows, as investors
throughout the world turned to the U.S. debt market to capture yield (source:
AMG Data Services). Furthermore, the supply of high yield debt remained healthy,
with several large companies, including Hertz, Neiman-Marcus and Healthsouth,
bringing issues to market.
Q: How did the Fund perform for the fiscal year?
A: Delaware High-Yield Opportunities Fund achieved positive gains for the fiscal
year ended July 31, 2006 with all but a few sectors making contributions. Class
A shares returned 5.49% at net asset value and 0.64% at the maximum offer price
(both figures represent all distributions reinvested). For complete, annualized
performance for Delaware High-Yield Opportunities Fund, please see the table on
page 4.
By comparison, the Bear Stearns High Yield Index, which serves as the Fund's
benchmark, gained 3.80% during the same period.
Q: What broad strategies influenced Fund performance during the fiscal year?
A: We continued to focus on security selection as the primary driver of the
Fund's performance. Although the economic climate and other "big picture"
factors were influential in the high yield market, company-specific
characteristics and influences generally played larger roles in overall
performance during the fiscal year. As such, we generally avoided making
significant sector "bets," preferring instead to focus on our in-depth research
that attempts to uncover attractively valued securities throughout the high
yield universe.
We believe these efforts helped the Fund outperform the benchmark at net asset
value for the one-year period ended July 31, 2006. There were no "themes" or
significant sector-performance advantages that generated our positive results.
Instead, the Fund's performance was realized from a wide array of individual
fixed income securities, selected for their overall value and yield advantages.
From a quality standpoint, Delaware High-Yield Opportunities Fund held a lesser
weighting than the Bear Stearns High Yield Index in BB-rated credits, because we
preferred to hold more B-rated securities. By focusing on bonds with B
credit-quality ratings, we were able to capture extra yield, compared to the
benchmark, as well as good value. This strategy helped the Fund's overall return
compared to that of its benchmark index.
Q: Which holdings were significant performers within the Fund over the fiscal
year?
A: Overall, the Fund benefited from a number of mergers and acquisitions, and
initial public offerings (IPOs). In terms of individual bonds, our holdings of
Mirant Americas Generation, an Atlanta-based power company, provided positive
return during the year. We purchased Mirant bonds before the corporation filed
for bankruptcy
(continues) 1
<page>
Portfolio management review
Delaware High-Yield Opportunities Fund
July 31, 2006
in July 2003, and we held the position throughout the bankruptcy proceedings.
When the company reorganized and emerged from bankruptcy in January 2006, the
bonds posted strong performance. We also held a position in paper company
Georgia-Pacific, which declined slightly during the first eight months of the
fiscal year and then rallied after Georgia-Pacific agreed to a buyout by Koch
Industries. Horizon Lines, a shipping company represented in the Fund's
portfolio, reported strong financials and eventually announced an initial public
offering, which caused the company's bonds to rally.
Comparatively, the Fund realized disappointing results from Uno Restaurant. The
company's bonds have underperformed since they came to market, primarily because
of the company's inclination for promoting shareholder value through dividend
payments. In addition, our position in Anchor Glass (later sold by the Fund)
detracted from the Fund's overall performance, after the company filed for
bankruptcy because it was unable to meet its creditors' demands. From an
industry standpoint, our positions in Canadian paper companies suffered losses
for the Fund. The strength of the Canadian dollar compared to other currencies
made Canadian paper manufacturers less attractive to global investors.
Q: At fiscal year end, how was the portfolio positioned?
A: We continue to hold a broadly diversified portfolio of securities that we
believe offer value and yield advantages. We do not favor any single industry or
sector, preferring to generate return potential and manage risk on a
security-by-security basis.
An example of this is our approach to the auto industry. Throughout the one-year
period, auto industry bonds, particularly Ford and General Motors, were
significant market movers and represented approximately 15% of the high yield
benchmark, the Bear Stearns High Yield Index. We maintain a significantly
lighter weighting than the index when it comes to auto bonds. This approach is
also reflective of our belief that a single industry should not represent such a
large component of the portfolio.
In terms of individual securities, we continue to believe that there is
compelling value among the larger leveraged buyouts coming to market. We believe
the size, scale, and complexity of these new issues make them more attractive
from an historical perspective. Of course, we continue to monitor the economic
backdrop, because a significant slowdown in growth could hurt the high yield
market from a macroeconomic perspective. In addition, we continue to closely
watch the supply-and-demand forces at work in the high yield market.
2
Performance summary
Delaware High-Yield Opportunities Fund
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Adverse conditions may affect the issuer's ability to pay interest
and principal on securities held by the Fund. A rise or fall in the interest
rates can have a significant impact on bond prices and the NAV (net asset value)
of the Fund. Funds that invest in bonds can lose their value as interest rates
rise, and an investor can lose principal. Please obtain the performance data for
the most recent month end by calling 800 523-1918 or by visiting our Web site at
www.delawareinvestments.com/performance.
You should consider the investment objectives, risks, charges, and expenses of
the investment carefully before investing. The Delaware High-Yield Opportunities
Fund prospectus contains this and other important information about the Fund.
Please request a prospectus through your financial advisor, or by calling 800
523-1918 or visiting our Web site. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
Fund Performance
Average Annual Total Returns
Through July 31, 2006 1 Year 5 Years Lifetime
_______________________________________________________________________________
Class A (Est. 12/30/96)
Excluding Sales Charge +5.49% +10.74% +6.92%
Including Sales Charge +0.64% +9.71% +6.41%
______________________________________________________________________________
Class B (Est. 2/17/98)
Excluding Sales Charge +4.75% +9.92% +4.55%
Including Sales Charge +0.85% +9.72% +4.55%
______________________________________________________________________________
Class C (Est. 2/17/98)
Excluding Sales Charge +4.75% +9.91% +4.51%
Including Sales Charge +3.77% +9.91% +4.51%
_______________________________________________________________________________
The Fund invests primarily in high yield bonds (commonly known as "junk bonds"),
which involve greater risk than investing in higher-quality investment-grade
bonds. The portfolio may be invested in foreign high yield corporate bonds,
which have special risks that include currency fluctuations, economic and
political changes, and different accounting standards.
Returns reflect the reinvestment of distributions and any applicable sales
charges as noted below. Performance for Class B and C shares, excluding sales
charges, assumes either that contingent deferred sales charges did not apply or
the investment was not redeemed.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending on the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%. Lifetime performance figures for Class B
shares reflect conversion to Class A shares after eight years.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The average annual total return for the one-year and lifetime periods ended July
31, 2006 for Class R shares of the Delaware High-Yield Opportunities Fund were
+5.27% and +10.33%, respectively. Class R shares were first made available on
June 2, 2003 and are available only for certain retirement plan products. They
are sold without a sales charge and have an annual distribution and service fee
of up to 0.60%. The distributor has contracted to limit distribution and service
fees to 0.50% through November 30, 2006.
The average annual total returns for the one-year, five-year, and lifetime
periods ended July 31, 2006 for Institutional Class shares of Delaware
High-Yield Opportunities Fund were +5.80%, +11.08%, and +7.22%, respectively.
Institutional Class shares were first made available on December 30, 1996 and
are available without sales or asset-based distribution charges only to certain
eligible institutional accounts.
An expense limitation was in effect for all classes of Delaware High-Yield
Opportunities Fund during some periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
<page>
Fund basics
As of July 31, 2006
_______________________________________________________________________________
Fund objective
_______________________________________________________________________________
The Fund seeks total return and, as a secondary objective, high current income.
_______________________________________________________________________________
Total Fund net assets
_______________________________________________________________________________
$111 million
_______________________________________________________________________________
Number of holdings
_______________________________________________________________________________
178
_______________________________________________________________________________
Fund start date
_______________________________________________________________________________
December 30, 1996
_______________________________________________________________________________
Your Fund manager
_______________________________________________________________________________
Timothy L. Rabe, CFA, joined Delaware Investments in 2000. He is head of the
high yield trading department responsible for investing strategy. Prior to
joining Delaware Investments, Timothy L. Rabe was a high yield portfolio manager
for Conseco Capital Management for five years. Prior to that, he worked as a tax
analyst for the Northern Trust Company. He received a bachelor's degree in
finance from the University of Illinois.
_______________________________________________________________________________
Nasdaq symbols CUSIPs
_______________________________________________________________________________
Class A DHOAX 245908876
Class B DHOBX 245908868
Class C DHOCX 245908850
Class R DHIRX 245908736
Institutional Class DHOIX 245908843
[DELAWARE PERFORMANCE GRAPH]
Chart assumes $10,000 invested on December 30, 1996 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Bear Stearns High Yield Index is an unmanaged index that generally
tracks the performance of high yield bonds. An index is unmanaged and does not
incur the costs of operating a mutual fund, such as the costs of buying,
selling, and holding securities. You cannot invest directly in an index.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares. An expense
limitation was in effect for Class A shares of Delaware High-Yield Fund during
the periods shown. Performance would have been lower had the expense limitation
not been in effect. Past performance is not a guarantee of future results.
5
<page>
Disclosure of Fund expenses
For the period February 1, 2006 to July 31, 2006
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period February 1, 2006 to July 31, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund 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 this 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 Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. 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. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
Delaware High-Yield Opportunities Fund Expense Analysis of an Investment of
$1,000
_______________________________________________________________________________
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/06 to
2/1/06 7/31/06 Ratios 7/31/06 *
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $1,035.00 1.13% $5.70
Class B 1,000.00 1,031.40 1.83% 9.22
Class C 1,000.00 1,031.40 1.83% 9.22
Class R 1,000.00 1,033.90 1.33% 6.71
Institutional Class 1,000.00 1,036.50 0.83% 4.19
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,019.19 1.13% $5.66
Class B 1,000.00 1,015.72 1.83% 9.15
Class C 1,000.00 1,015.72 1.83% 9.15
Class R 1,000.00 1,018.20 1.33% 6.66
Institutional Class 1,000.00 1,020.68 0.83% 4.16
________________________________________________________________________________
* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
6
<page>
Sector allocation and credit rating breakdown
Delaware High-Yield Opportunities Fund
As of July 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector of Net Assets
________________________________________________________________________________
Collateralized Bond Obligations 0.02%
________________________________________________________________________________
Commercial Mortgage-Backed Securities 0.72%
________________________________________________________________________________
Convertible Bonds 0.23%
________________________________________________________________________________
Corporate Bonds 92.24%
Banking 0.55%
Basic Industry 10.46%
Brokerage 1.85%
Capital Goods 5.92%
Consumer Cyclical 8.38%
Consumer Non-Cyclical 10.53%
Energy 6.13%
Finance & Investments 0.49%
Media 9.15%
Real Estate 1.86%
Services Cyclical 12.83%
Services Non-Cyclical 6.60%
Technology & Electronics 2.35%
Telecommunications 10.64%
Utilities 4.50%
________________________________________________________________________________
Emerging Markets Bonds 1.24%
________________________________________________________________________________
Common Stock 1.10%
________________________________________________________________________________
Warrants 0.00%
________________________________________________________________________________
Repurchase Agreements 3.31%
________________________________________________________________________________
Total Market Value of Securities 98.86%
________________________________________________________________________________
Receivables and Other Assets Net of Liabilities 1.14%
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
Credit Rating Breakdown
(as a % of fixed income investments)
________________________________________________________________________________
AAA 4.44%
AA 0.26%
A 0.12%
BBB 1.18%
BB 20.20%
B 57.58%
CCC 13.43%
C 0.01%
D 0.54%
NR 2.24%
________________________________________________________________________________
Total 100.00%
________________________________________________________________________________
7
<page>
Statement of net assets
Delaware High-Yield Opportunities Fund
July 31, 2006
Principal Market
Amount Value
(U.S. $) (U.S. $)
________________________________________________________________________________
Collateralized Bond Obligations - 0.02%
________________________________________________________________________________
#@=~ Merrill Lynch CBO VII Series
1997-C3A A 144A 5.824%
3/23/08 $ 142,871 $ 11,565
#@= South Street CBO Series 1999-1A
A1 144A 7.16% 7/1/11 11,616 11,674
__________
Total Collateralized Bond Obligations
(cost $92,904) 23,239
__________
________________________________________________________________________________
Commercial Mortgage-Backed Securities - 0.72%
________________________________________________________________________________
# First Union National Bank
Commercial Mortgage Series
2001-C2 L 144A
6.46% 1/12/43 800,000 799,197
__________
Total Commercial Mortgage-Backed
Securities (cost $811,969) 799,197
__________
________________________________________________________________________________
Convertible Bonds - 0.23%
________________________________________________________________________________
# Charter Communications 144A
5.875% 11/16/09, exercise price
$2.42, expiration date 11/16/09 300,000 252,000
__________
Total Convertible Bonds
(cost $290,075) 252,000
__________
________________________________________________________________________________
Corporate Bonds - 92.24%
________________________________________________________________________________
Banking - 0.55%
# iPayment 144A 9.75% 5/15/14 325,000 326,625
Western Financial Bank
9.625% 5/15/12 260,000 287,065
__________
613,690
__________
Basic Industry - 10.46%
Abitibi-Consolidated
6.95% 12/15/06 50,000 50,500
7.875% 8/1/09 375,000 363,750
AK Steel 7.875% 2/15/09 805,000 805,000
Bowater 9.50% 10/15/12 1,335,000 1,341,674
Donohue Forest Products
7.625% 5/15/07 550,000 554,125
Georgia-Pacific 9.50% 12/1/11 775,000 817,625
Gold Kist 10.25% 3/15/14 515,000 543,325
# Nell AF Sarl 144A 8.375% 8/15/15 825,000 805,406
NewPage 10.00% 5/1/12 610,000 635,925
Norske Skog Canada
8.625% 6/15/11 875,000 857,500
# Port Townsend Paper 144A
12.00% 4/15/11 910,000 778,050
Potlatch 13.00% 12/1/09 850,000 1,000,792
Rhodia 8.875% 6/1/11 600,000 613,500
++ Solutia 6.72% 10/15/37 770,000 704,550
Tembec Industries 8.625% 6/30/09 1,405,000 762,213
# Verso Paper 144A 9.125% 8/1/14 475,000 477,375
Witco 6.875% 2/1/26 525,000 475,125
__________
11,586,435
__________
Brokerage - 1.85%
E Trade Financial 8.00% 6/15/11 695,000 717,588
LaBranche & Co.
9.50% 5/15/09 500,000 517,500
11.00% 5/15/12 760,000 813,200
__________
2,048,288
__________
Capital Goods - 5.92%
Armor Holdings 8.25% 8/15/13 825,000 866,250
# Compression Polymer 144A
10.50% 7/1/13 300,000 309,000
Graham Packaging
9.875% 10/15/14 600,000 586,500
Interface 10.375% 2/1/10 695,000 762,763
Interline Brands 8.125% 6/15/14 125,000 126,563
Intertape Polymer 8.50% 8/1/14 970,000 902,099
{ Mueller Holdings 14.75% 4/15/14 829,000 708,795
{ NTK Holdings 10.75% 3/1/14 710,000 500,550
# RBS Global & Rexnord 144A
9.50% 8/1/14 475,000 477,375
Solo Cup 8.50% 2/15/14 625,000 543,750
# TransDigm 144A 7.75% 7/15/14 100,000 100,250
Trimas 9.875% 6/15/12 730,000 677,075
__________
6,560,970
__________
Consumer Cyclical - 8.38%
Accuride 8.50% 2/1/15 600,000 561,000
# Baker & Taylor 144A
11.50% 7/1/13 450,000 452,250
Boyd Gaming 8.75% 4/15/12 775,000 813,750
Carrols 9.00% 1/15/13 150,000 149,250
Ford Motor Credit
7.375% 10/28/09 700,000 660,754
General Motors 8.375% 7/15/33 375,000 309,375
General Motors Acceptance
Corporation
6.875% 9/15/11 925,000 896,618
8.00% 11/1/31 585,000 575,242
Landry's Restaurant
7.50% 12/15/14 550,000 512,875
Metaldyne 10.00% 11/1/13 1,005,000 967,312
Neiman Marcus 9.00% 10/15/15 485,000 513,494
# NPC International 144A
9.50% 5/1/14 395,000 381,175
O'Charleys 9.00% 11/1/13 775,000 794,375
# Uno Restaurant 144A
10.00% 2/15/11 450,000 349,875
8
Principal Market
Amount Value
(U.S. $) (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Consumer Cyclical (continued)
Visteon
7.00% 3/10/14 $ 175,000 $ 143,500
8.25% 8/1/10 650,000 601,250
Warnaco 8.875% 6/15/13 590,000 605,488
____________
9,287,583
____________
Consumer Non-Cyclical - 10.53%
# Angiotech Pharmaceuticals
144A 7.75% 4/1/14 650,000 632,125
Biovail 7.875% 4/1/10 1,600,000 1,631,999
Constellation Brands
8.125% 1/15/12 500,000 517,500
Cott Beverages 8.00% 12/15/11 920,000 933,800
Dole Food 8.875% 3/15/11 625,000 587,500
# Healthsouth 144A 10.75% 6/15/16 750,000 720,000
Ingles Markets 8.875% 12/1/11 700,000 735,000
# Le-Natures 144A
10.00% 6/15/13 485,000 516,525
Marsh Supermarkets
8.875% 8/1/07 275,000 274,313
National Beef Packing
10.50% 8/1/11 825,000 860,063
# Penhall International 144A
12.00% 8/1/14 400,000 415,000
Pilgrim's Pride 9.625% 9/15/11 775,000 815,688
Pinnacle Foods 8.25% 12/1/13 575,000 566,375
Playtex Products 9.375% 6/1/11 915,000 959,605
# Reynolds American 144A
7.875% 5/15/09 350,000 364,904
True Temper Sports
8.375% 9/15/11 480,000 438,000
Warner Chilcott 8.75% 2/1/15 700,000 698,250
____________
11,666,647
____________
Energy - 6.13%
# Basic Energy Service 144A
7.125% 4/15/16 225,000 210,938
Bluewater Finance 10.25% 2/15/12 550,000 562,375
# Brigham Exploration 144A
9.625% 5/1/14 225,000 222,188
Compton Petroleum Finance
7.625% 12/1/13 325,000 314,438
Copano Energy 8.125% 3/1/16 225,000 227,250
El Paso Natural Gas 7.625% 8/1/10 310,000 316,975
# El Paso Performance Linked Trust
144A 7.75% 7/15/11 400,000 404,500
El Paso Production Holding
7.75% 6/1/13 700,000 714,874
# Hilcorp Energy 144A 9.00% 6/1/16 625,000 649,999
Inergy Finance
6.875% 12/15/14 425,000 402,688
8.25% 3/1/16 200,000 205,000
# MarkWest Energy 144A
8.50% 7/15/16 125,000 126,875
# PetroHawk Energy 144A
9.125% 7/15/13 800,000 821,999
~ Secunda International
13.507% 9/1/12 570,000 599,213
Tennessee Gas Pipeline
8.375% 6/15/32 270,000 295,494
# VeraSun Energy 144A
9.875% 12/15/12 290,000 310,300
Whiting Petroleum 7.25% 5/1/13 410,000 408,975
____________
6,794,081
____________
Finance & Investments - 0.49%
FINOVA Group 7.50% 11/15/09 1,851,300 546,134
____________
546,134
____________
Media - 9.15%
} Adelphia Communications
8.125% 12/15/06 800,000 470,000
# Affinion Group 144A
11.50% 10/15/15 250,000 251,875
Charter Communications Holdings
11.125% 1/15/11 525,000 380,625
13.50% 1/15/11 1,465,000 1,120,725
~# Cleveland Unlimited 144A
13.579% 12/15/10 325,000 347,750
CSC Holdings
8.125% 7/15/09 235,000 241,756
8.125% 8/15/09 900,000 925,875
Insight Midwest 10.50% 11/1/10 1,720,000 1,797,400
Lodgenet Entertainment
9.50% 6/15/13 1,115,000 1,193,050
Mediacom Capital 9.50% 1/15/13 1,250,000 1,271,875
RH Donnelley 8.875% 1/15/16 650,000 650,813
Sheridan Group 10.25% 8/15/11 350,000 355,250
Vertis 10.875% 6/15/09 215,000 214,194
Warner Music Group
7.375% 4/15/14 945,000 916,650
____________
10,137,838
____________
Real Estate - 1.86%
American Real Estate Partners
8.125% 6/1/12 1,025,000 1,045,500
BF Saul REIT 7.50% 3/1/14 845,000 870,350
# Rouse 144A 6.75% 5/1/13 150,000 149,261
____________
2,065,111
____________
(continues) 9
Statement of net assets
Delaware High-Yield Opportunities Fund
Principal Market
Amount Value
(U.S. $) (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Services Cyclical - 12.83%
Adesa 7.625% 6/15/12 $ 875,000 $ 864,063
American Airlines 7.377% 5/23/19 308,143 277,329
Corrections Corporation of America
7.50% 5/1/11 1,025,000 1,040,374
FTI Consulting 7.625% 6/15/13 675,000 685,125
# Galaxy Entertainment Finance
144A 9.875% 12/15/12 1,305,000 1,370,249
Gaylord Entertainment
8.00% 11/15/13 610,000 621,438
{ H-Lines Finance Holding
11.00% 4/1/13 1,162,000 1,013,845
# Hertz 144A
8.875% 1/1/14 445,000 466,138
10.50% 1/1/16 180,000 196,650
Horizon Lines 9.00% 11/1/12 421,000 430,473
Kansas City Southern Railway
9.50% 10/1/08 775,000 815,688
# Knowledge Learning 144A
7.75% 2/1/15 580,000 536,500
Mandalay Resort Group
9.50% 8/1/08 915,000 969,900
OMI 7.625% 12/1/13 1,170,000 1,181,699
# Pokagon Gaming Authority
144A 10.375% 6/15/14 600,000 630,000
Royal Caribbean Cruises
7.25% 3/15/18 220,000 215,383
Seabulk International
9.50% 8/15/13 465,000 516,150
Stena 9.625% 12/1/12 675,000 732,375
{ Town Sports International
11.00% 2/1/14 550,000 437,250
Wheeling Island Gaming
10.125% 12/15/09 1,175,000 1,219,062
____________
14,219,691
____________
Services Non-Cyclical - 6.60%
Aleris International
9.00% 11/15/14 520,000 587,600
Allied Waste North America
9.25% 9/1/12 675,000 720,563
Brickman Group 11.75% 12/15/09 290,000 313,200
Casella Waste Systems
9.75% 2/1/13 1,200,000 1,266,000
# CRC Health 144A 10.75% 2/1/16 805,000 821,100
Geo Subordinate 11.00% 5/15/12 805,000 813,050
US Oncology 10.75% 8/15/14 880,000 959,200
{ Vanguard Health Holding
11.25% 10/1/15 1,680,000 1,197,000
# WCA Waste 144A 9.25% 6/15/14 625,000 639,063
____________
7,316,776
____________
Technology & Electronics - 2.35%
MagnaChip Semiconductor
8.00% 12/15/14 1,625,000 1,084,688
STATS ChipPAC 7.50% 7/19/10 650,000 635,375
Sungard Data Systems
10.25% 8/15/15 600,000 611,250
~# UGS Capital II PIK 144A
10.38% 6/1/11 275,000 273,625
____________
2,604,938
____________
Telecommunications - 10.64%
++ Allegiance Telecommunication
11.75% 2/15/08 255,000 113,475
American Tower 7.125% 10/15/12 665,000 671,650
Cincinnati Bell 8.375% 1/15/14 1,110,000 1,093,350
# Digicel Limited 144A 9.25% 9/1/12 700,000 733,250
# Hughes Network Systems 144A
9.50% 4/15/14 675,000 675,000
{ Inmarsat Finance
10.375% 11/15/12 1,450,000 1,246,999
# Intelsat Bermuda 144A
11.25% 6/15/16 775,000 786,625
Intelsat Subsidiary Holding
8.625% 1/15/15 425,000 422,875
iPCS 11.50% 5/1/12 200,000 225,000
~ IWO Holdings 9.257% 1/15/12 125,000 129,688
# Mobile Service Group 144A
9.75% 8/1/14 475,000 483,313
# Nordic Telephone Company
Holdings 144A 8.875% 5/1/16 375,000 388,125
Rural Cellular
9.875% 2/1/10 600,000 624,000
~ 10.899% 11/1/12 415,000 431,600
# Telcordia Technologies 144A
10.00% 3/15/13 900,000 724,500
Triton Communications
9.375% 2/1/11 670,000 494,125
~ US LEC 13.62% 10/1/09 325,000 346,938
# Vimpel Communication 144A
8.25% 5/23/16 500,000 498,750
# Wind Acquisition 144A
10.75% 12/1/15 1,070,000 1,158,274
# Windstream 144A 8.625% 8/1/16 525,000 548,625
____________
11,796,162
____________
Utilities - 4.50%
++~# Calpine 144A 9.90% 7/15/07 606,050 601,505
Elwood Energy 8.159% 7/5/26 759,656 831,357
Midwest Generation
8.30% 7/2/09 684,310 692,864
8.75% 5/1/34 645,000 689,344
10
Principal Market
Amount Value
(U.S. $) (U.S. $)
________________________________________________________________________________
Corporate Bonds (continued)
________________________________________________________________________________
Utilities (continued)
Mirant Americas Generation
8.30% 5/1/11 $ 1,150,000 $ 1,126,999
Orion Power Holdings
12.00% 5/1/10 655,000 751,613
# Tenaska Alabama Partners 144A
7.00% 6/30/21 293,171 290,055
=++# USGen New England 144A
7.459% 1/2/15 5,630 3,800
____________
4,987,537
____________
Total Corporate Bonds
(cost $103,619,118) 102,231,881
____________
________________________________________________________________________________
Emerging Markets Bonds - 1.24%
________________________________________________________________________________
# C&M Finance 144A 8.10% 2/1/16 250,000 237,333
Republic of El Salvador
7.65% 6/15/35 555,000 562,770
Venezuela Government
6.00% 12/9/20 640,000 578,560
____________
Total Emerging Markets Bonds
(cost $1,389,568) 1,378,663
____________
Number of
Shares
________________________________________________________________________________
Common Stock - 1.10%
________________________________________________________________________________
@=+|| Avado Brands 906 852
B&G Foods 2,000 33,400
+ Foster Wheeler 14,383 548,558
+ Mirant 20,559 546,253
+ Petrojarl ADR 1,491 9,477
+ Petroleum Geo-Services ADR 1,491 82,109
____________
Total Common Stock
(cost $711,641) 1,220,649
____________
________________________________________________________________________________
Warrants - 0.00%
________________________________________________________________________________
+# Solutia 144A, exercise price $7.59,
expiration date 7/15/09 450 0
____________
Total Warrants
(cost $38,281) 0
____________
________________________________________________________________________________
Repurchase Agreements - 3.31%
________________________________________________________________________________
With BNP Paribas 5.22%
8/1/06 (dated 7/31/06,
to be repurchased at
$1,941,281, collateralized
by $1,181,000 U.S. Treasury
Bills due 1/25/07, market
value $1,152,264, $587,000
U.S. Treasury Notes 3.375%
due 9/15/09, market value
$567,987 and $246,000
U.S. Treasury Notes 6.00%
due 8/15/09, market value
$259,953) 1,941,000 1,941,000
With Cantor Fitzgerald 5.22%
8/1/06 (dated 7/31/06, to be
repurchased at $984,143,
collateralized by $148,000
U.S. Treasury Notes 3.00%
due 2/15/09, market value
$142,879, $111,000 U.S.
Treasury Notes 3.625%
due 7/15/09, market value
$107,600, $246,000 U.S.
Treasury Notes 3.875%
due 5/15/09, market value
$241,168, $246,000 U.S.
Treasury Notes 5.50%
due 5/15/09, market value
$252,589 and $246,000
U.S. Treasury Notes 6.00%
due 8/15/09, market value
$259,953) 984,000 984,000
With UBS Warburg 5.20%
8/1/06 (dated 7/31/06, to be
repurchased at $738,107,
collateralized by $768,000
U.S. Treasury Notes 3.875%
due 5/15/09, market value
$753,158) 738,000 738,000
____________
Total Repurchase Agreements
(cost $3,663,000) 3,663,000
____________
(continues) 11
Statement of net assets
Delaware High-Yield Opportunities Fund
________________________________________________________________________________
________________________________________________________________________________
Total Market Value of Securities - 98.86%
(cost $110,616,556) $109,568,629
Receivables and Other Assets Net
of Liabilities - 1.14% 1,259,520
____________
Net Assets Applicable to 25,997,878
Shares Outstanding - 100.00% $110,828,149
____________
Net Asset Value - Delaware High-Yield Opportunities
Fund Class A ($63,405,416 / 14,874,226 Shares) $4.26
_____
Net Asset Value - Delaware High-Yield Opportunities
Fund Class B ($13,597,212 / 3,191,301 Shares) $4.26
_____
Net Asset Value - Delaware High-Yield Opportunities
Fund Class C ($16,285,008 / 3,818,693 Shares) $4.26
_____
Net Asset Value - Delaware High-Yield Opportunities
Fund Class R ($3,703,449 / 867,256 Shares) $4.27
_____
Net Asset Value - Delaware High-Yield Opportunities
Fund Institutional Class ($13,837,064 / 3,246,402
Shares) $4.26
_____
Components of Net Assets at July 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $116,782,740
Distributions in excess of net investment income (59)
Accumulated net realized loss on investments (4,906,605)
Net unrealized depreciation of investments (1,047,927)
____________
Total net assets $110,828,149
____________
+ Non-income producing security for the year ended July 31, 2006.
++ Non-income producing security. Security is currently in default.
~ Variable rate security. The interest rate shown is the rate as of July 31,
2006.
# Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. At July 31, 2006, the aggregate amount of Rule 144A
securities equaled $23,738,536, which represented 21.42% of the Fund's net
assets. See Note 7 in "Notes to Financial Statements."
|| 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 July 31, 2006, the
aggregate amount of the restricted security equaled $852 or 0.00% of the
Fund's net assets. See Note 7 in "Notes to Financial Statements."
{ 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 is being fair valued in accordance with the Fund's fair valuation
policy. At July 31, 2006, the aggregate amount of fair valued securities
equaled $27,891, which represented 0.03% of the Fund's net assets. See Note 1
in "Notes to Financial Statements."
@ Illiquid security. At July 31, 2006, the aggregate amount of illiquid
securities equaled $24,091, which represented 0.02% of the Fund's net assets.
See Note 7 in "Notes to Financial Statements."
} Security is currently in default. The issue has missed the maturity date.
Bankruptcy proceedings are in the process to determine distribution of assets.
The date listed is the estimate of when the proceedings will be finalized.
Summary of Abbreviations:
ADR - American Depositary Receipt
CBO - Collateralized Bond Obligation
PIK - Pay-in-Kind
REIT - Real Estate Investment Trust
Net Asset Value and Offering Price per Share - Delaware High-Yield
Opportunities Fund
Net asset value Class A (A) $4.26
Sales charge (4.50% of offering price) (B) 0.20
_____
Offering price $4.46
_____
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
12
Statement of operations
Delaware High-Yield Opportunities Fund
Year Ended July 31, 2006
Investment Income:
Interest $10,023,927
Dividends 14,752 $10,038,679
___________ ___________
Expenses:
Management fees 763,089
Distribution expenses - Class A 215,503
Distribution expenses - Class B 151,683
Distribution expenses - Class C 169,256
Distribution expenses - Class R 17,146
Dividend disbursing and transfer agent fees and expenses 207,874
Registration fees 63,477
Accounting and administration expenses 47,336
Legal and professional fees 25,689
Reports and statements to shareholders 25,620
Custodian fees 10,484
Trustees' fees 6,227
Pricing fees 5,306
Insurance fees 3,094
Taxes (other than taxes on income) 603
Other 7,364 1,719,751
___________
Less expenses absorbed or waived (190,468)
Less waiver of distribution expenses - Class R (2,858)
Less expense paid indirectly (961)
___________
Total operating expenses 1,525,464
___________
Net Investment Income 8,513,215
___________
Net Realized and Unrealized Loss on Investments:
Net realized loss on investments (47,672)
Net change in unrealized appreciation/depreciation of investments (2,476,130)
___________
Net Realized and Unrealized Loss on Investments (2,523,802)
___________
Net Increase in Net Assets Resulting from Operations $ 5,989,413
___________
See accompanying notes
13
Statements of changes in net assets
Delaware High-Yield Opportunities Fund
Year Ended
7/31/06 7/31/05
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 8,513,215 $ 6,467,649
Net realized gain (loss) on investments (47,672) 3,043,673
Net change in unrealized appreciation/depreciation of investments (2,476,130) 637,493
____________ ____________
Net increase in net assets resulting from operations 5,989,413 10,148,815
____________ ____________
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (5,485,597) (4,849,108)
Class B (1,054,790) (1,128,412)
Class C (1,177,168) (933,276)
Class R (214,464) (46,738)
Institutional Class (844,522) (281,747)
____________ ____________
(8,776,541) (7,239,281)
____________ ____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 34,354,450 70,584,839
Class B 2,092,236 5,349,318
Class C 5,268,964 12,078,605
Class R 2,306,896 2,031,372
Institutional Class 6,327,418 6,748,592
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 3,905,915 3,385,760
Class B 449,109 467,373
Class C 623,802 533,685
Class R 210,938 43,848
Institutional Class 644,516 242,707
____________ ____________
56,184,244 101,466,099
____________ ____________
Cost of shares repurchased:
Class A (56,093,384) (37,336,171)
Class B (5,212,040) (4,728,835)
Class C (6,694,409) (4,258,285)
Class R (787,376) (66,598)
Institutional Class (865,281) (251,115)
____________ ____________
(69,652,490) (46,641,004)
____________ ____________
Increase (decrease) in net assets derived from capital share transactions (13,468,246) 54,825,095
____________ ____________
Net Increase (Decrease) in Net Assets (16,255,374) 57,734,629
Net Assets:
Beginning of year 127,083,523 69,348,894
____________ ____________
End of year (including distributions in excess of net investment income of $59 $110,828,149 $127,083,523
____________ ____________
and $59, respectively)
See accompanying notes
14
Financial highlights
Delaware High-Yield Opportunities Fund Class A
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
_____________________________________________________________________________________________________________________________
Net asset value, beginning of period $4.360 $4.210 $3.970 $3.420 $3.950
Income (loss) from investment operations:
Net investment income (1) 0.319 0.292 0.335 0.377 0.344
Net realized and unrealized gain (loss) on investments (0.090) 0.184 0.243 0.532 (0.488)
______ ______ ______ ______ ______
Total from investment operations 0.229 0.476 0.578 0.909 (0.144)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.329) (0.326) (0.338) (0.359) (0.386)
______ ______ ______ ______ ______
Total dividends and distributions (0.329) (0.326) (0.338) (0.359) (0.386)
______ ______ ______ ______ ______
Net asset value, end of period $4.260 $4.360 $4.210 $3.970 $3.420
______ ______ ______ ______ ______
Total return (2) 5.49% 11.61% 14.97% 28.02% (3.87%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $63,405 $82,988 $44,428 $29,385 $14,767
Ratio of expenses to average net assets 1.13% 1.16% 1.13% 1.13% 1.13%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.29% 1.28% 1.38% 1.56% 1.44%
Ratio of net investment income to average net assets 7.42% 6.68% 8.05% 10.36% 9.05%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.26% 6.56% 7.80% 9.93% 8.74%
Portfolio turnover 151% 229% 644% 832% 609%
_____________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2004, 2003,
and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 15
Financial highlights
Delaware High-Yield Opportunities Fund Class B
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
______________________________________________________________________________________________________________________________
Net asset value, beginning of period $4.360 $4.210 $3.970 $3.420 $3.960
Income (loss) from investment operations:
Net investment income (1) 0.289 0.262 0.305 0.352 0.317
Net realized and unrealized gain (loss) on investments (0.090) 0.184 0.244 0.532 (0.498)
______ ______ ______ ______ ______
Total from investment operations 0.199 0.446 0.549 0.884 (0.181)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.299) (0.296) (0.309) (0.334) (0.359)
______ ______ ______ ______ ______
Total dividends and distributions (0.299) (0.296) (0.309) (0.334) (0.359)
______ ______ ______ ______ ______
Net asset value, end of period $4.260 $4.360 $4.210 $3.970 $3.420
______ ______ ______ ______ ______
Total return (2) 4.75% 10.85% 14.19% 27.14% (4.80%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $13,597 $16,661 $15,015 $15,464 $9,435
Ratio of expenses to average net assets 1.83% 1.86% 1.83% 1.83% 1.83%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.99% 1.98% 2.08% 2.26% 2.14%
Ratio of net investment income to average net assets 6.72% 5.98% 7.35% 9.66% 8.35%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.56% 5.86% 7.10% 9.23% 8.04%
Portfolio turnover 151% 229% 644% 832% 609%
______________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2004, 2003,
and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
16
Delaware High-Yield Opportunities Fund Class C
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
______________________________________________________________________________________________________________________________
Net asset value, beginning of period $4.360 $4.210 $3.970 $3.420 $3.960
Income (loss) from investment operations:
Net investment income (1) 0.289 0.262 0.305 0.352 0.317
Net realized and unrealized gain (loss) on investments (0.090) 0.184 0.243 0.532 (0.498)
______ ______ ______ ______ ______
Total from investment operations 0.199 0.446 0.548 0.884 (0.181)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.299) (0.296) (0.308) (0.334) (0.359)
______ ______ ______ ______ ______
Total dividends and distributions (0.299) (0.296) (0.308) (0.334) (0.359)
______ ______ ______ ______ ______
Net asset value, end of period $4.260 $4.360 $4.210 $3.970 $3.420
______ ______ ______ ______ ______
Total return (2) 4.75% 10.84% 14.16% 27.13% (4.80%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $16,285 $17,474 $8,824 $5,916 $2,905
Ratio of expenses to average net assets 1.83% 1.86% 1.83% 1.83% 1.83%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.99% 1.98% 2.08% 2.26% 2.14%
Ratio of net investment income to average net assets 6.72% 5.98% 7.35% 9.66% 8.35%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.56% 5.86% 7.10% 9.23% 8.04%
Portfolio turnover 151% 229% 644% 832% 609%
______________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2004, 2003,
and 2002.
(2) 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 and does not reflect the impact of a sales charge. 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
(continues) 17
Financial highlights
Delaware High-Yield Opportunities Fund Class R
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended 6/2/03 (1)
________________________________ to
7/31/06 7/31/05 7/31/04 7/31/03
_____________________________________________________________________________________________________________
Net asset value, beginning of period $4.370 $4.210 $3.970 $3.960
Income (loss) from investment operations:
Net investment income (2) 0.310 0.279 0.322 0.050
Net realized and unrealized gain (loss) on investments (0.090) 0.194 0.242 0.010
______ ______ ______ ______
Total from investment operations 0.220 0.473 0.564 0.060
______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.320) (0.313) (0.324) (0.050)
______ ______ ______ ______
Total dividends and distributions (0.320) (0.313) (0.324) (0.050)
______ ______ ______ ______
Net asset value, end of period $4.270 $4.370 $4.210 $3.970
______ ______ ______ ______
Total return (3) 5.27% 11.52% 14.55% 1.49%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $3,704 $2,030 $16 $-
Ratio of expenses to average net assets 1.33% 1.46% 1.43% 1.43%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.59% 1.58% 1.68% 2.25%
Ratio of net investment income to average net assets 7.22% 6.38% 7.75% 9.57%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.96% 6.26% 7.50% 8.75%
Portfolio turnover 151% 229% 644% 832%
_____________________________________________________________________________________________________________
(1) Date of commencement of operations. Ratios have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information for the year ended July
31, 2004 and the period ended July 31, 2003.
(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
18
Delaware High-Yield Opportunities Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Year Ended
_________________________________________________________
7/31/06 7/31/05 7/31/04 7/31/03 7/31/02
______________________________________________________________________________________________________________________________
Net asset value, beginning of period $4.360 $4.210 $3.970 $3.420 $3.950
Income (loss) from investment operations:
Net investment income (1) 0.332 0.306 0.347 0.388 0.355
Net realized and unrealized gain (loss) on investments (0.090) 0.184 0.244 0.532 (0.487)
______ ______ ______ ______ ______
Total from investment operations 0.242 0.490 0.591 0.920 (0.132)
______ ______ ______ ______ ______
Less dividends and distributions from:
Net investment income (0.342) (0.340) (0.351) (0.370) (0.398)
______ ______ ______ ______ ______
Total dividends and distributions (0.342) (0.340) (0.351) (0.370) (0.398)
______ ______ ______ ______ ______
Net asset value, end of period $4.260 $4.360 $4.210 $3.970 $3.420
______ ______ ______ ______ ______
Total return (2) 5.80% 11.96% 15.33% 28.40% (3.57%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $13,837 $7,931 $1,066 $3,316 $2,569
Ratio of expenses to average net assets 0.83% 0.86% 0.83% 0.83% 0.83%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.99% 0.98% 1.08% 1.26% 1.14%
Ratio of net investment income to average net assets 7.72% 6.98% 8.35% 10.66% 9.35%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.56% 6.86% 8.10% 10.23% 9.04%
Portfolio turnover 151% 229% 644% 832% 609%
______________________________________________________________________________________________________________________________
(1) The average shares outstanding method has been applied for per share information for the years ended July 31, 2004, 2003,
and 2002.
(2) 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
19
Notes to financial statements
Delaware High-Yield Opportunities Fund
July 31, 2006
Delaware Group Income Funds (the "Trust") is organized as a Delaware statutory
trust and offers four Series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund and Delaware High-Yield Opportunities
Fund. These financial statements and the related notes pertain to Delaware
High-Yield Opportunities Fund (the "Fund"). The Trust is an open-end investment
company. The Fund is considered diversified under the Investment Company Act of
1940, as amended, and offers Class A, Class B, Class C, Class R and
Institutional Class shares. Class A shares are sold with a front-end sales
charge of up to 4.50%. Class A share purchases of $1,000,000 or more will incur
a contingent deferred sales charge of up to 1% if redeemed during the first two
years, provided that, a financial advisor was paid commission on the purchase of
those shares. Class B shares are sold with a contingent deferred sales charge
that declines from 4% to zero depending upon the period of time the shares are
held. Class B shares will automatically convert to Class A shares on a quarterly
basis approximately eight years after purchase. Class C shares are sold with a
contingent deferred sales charge of 1%, if redeemed during the first 12 months.
Class R and Institutional Class shares are not subject to a sales charge and are
offered for sale exclusively to a limited group of investors.
The investment objective of the Fund 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 Fund.
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
Fund's 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 Fund 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.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Although the Fund's tax
positions are currently being evaluated, management does not expect the adoption
of FIN 48 to have a material impact on the Fund's financial statements.
Class Accounting - Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund 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 Fund 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 Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 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 Fund 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, annually.
The Fund 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."
20
<page>
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
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 Fund,
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 Fund 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 0.83% of average daily net assets of the Fund through November 30, 2006.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee computed at the annual rate of 0.04% of the Fund's average
daily net assets for accounting and administration services. The Fund pays DSC a
monthly fee based on the number of shareholder accounts for dividend disbursing
and transfer agent services.
Pursuant to the distribution agreement and distribution plan, the Fund 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 Class A shares, 1.00% of the average daily net assets of the Class
B and C shares, and 0.60% of the average daily net assets of Class R shares.
DDLP has contracted to limit distribution and service fees through November 30,
2006 in order to prevent distribution and service fees of Class R shares from
exceeding 0.50% of average daily net assets. Institutional Class shares pay no
distribution and service expenses.
At July 31, 2006, the Fund had liabilities payable to affiliates as follows
Investment management fee payable to DMC $34,037
Dividend disbursing, transfer agent,
accounting and administration fees and
other expenses payable to DSC 21,651
Distribution fee payable to DDLP 42,435
Other expenses payable to DMC and affiliates* 3,249
* DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services, including internal legal services provided to the Fund
by DMC employees. For the year ended July 31, 2006, the Fund was charged $6,762
for internal legal services provided by DMC.
For the year ended July 31, 2006, DDLP earned $30,988 for commissions on sales
of the Fund's Class A shares. For the year ended July 31, 2006, DDLP received
gross contingent deferred sales charge commissions of $5,769, $47,652 and $5,948
on redemption of the Fund's Class A, Class B and Class C shares, respectively,
and these commissions were entirely used to offset up-front commissions
previously paid by DDLP to broker-dealers on sales of those shares.
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 Fund.
3. Investments
For the year ended July 31, 2006, the Fund made purchases of $170,947,619 and
sales of $181,531,401 of investment securities other than short-term
investments.
At July 31, 2006, the cost of investments for federal income tax purposes was
$111,126,603. At July 31, 2006, net unrealized depreciation was $1,557,974, of
which $1,981,514 related to unrealized appreciation of investments and
$3,539,488 related to unrealized depreciation of investments.
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 years
ended July 31, 2006 and 2005 was as follows:
Year Ended
7/31/06 7/31/05
_______ _______
Ordinary income $8,776,541 $7,239,281
As of July 31, 2006, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $116,782,740
Other temporary differences (59)
Capital loss carryforwards (4,396,558)
Unrealized depreciation of investments (1,557,974)
____________
Net assets $110,828,149
____________
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 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 year ended July 31, 2006, the Fund recorded the following reclassifications.
Undistributed net investment income $263,326
Accumulated net realized gain (loss) (263,326)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at July 31, 2006 will expire as follows: $3,971,857 expires in 2010
and $424,701 expires in 2014.
(continues) 21
<page>
Notes to financial statements
Delaware High-Yield Opportunities Fund
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/06 7/31/05
Shares sold:
Class A 8,017,272 16,251,597
Class B 486,900 1,232,222
Class C 1,225,582 2,768,340
Class R 536,316 466,102
Institutional Class 1,478,455 1,566,148
Shares issued upon reinvestment of
dividends and distributions:
Class A 912,687 779,426
Class B 104,992 107,654
Class C 145,725 122,839
Class R 49,237 10,143
Institutional Class 150,666 55,865
___________ ___________
13,107,832 23,360,336
___________ ___________
Shares repurchased:
Class A (13,077,892) (8,568,072)
Class B (1,220,940) (1,088,072)
Class C (1,556,900) (983,589)
Class R (183,002) (15,381)
Institutional Class (201,040) (57,219)
___________ ___________
(16,239,774) (10,712,333)
___________ ___________
Net increase (decrease) (3,131,942) 12,648,003
___________ ___________
For the years ended July 31, 2006 and 2005, 87,453 Class B shares were converted
to 87,415 Class A shares valued at $373,970 and 84,575 Class B shares were
converted to 84,507 Class A shares valued at $368,395, respectively. The
respective amounts are included in Class B redemptions and Class A subscriptions
in the table above and the Statements of Changes in Net Assets.
6. Line of Credit
The Fund, 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 funds' allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Fund had no amounts outstanding as of July 31, 2006, or at any time during the
year.
7. Credit and Market Risk
The Fund 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 Fund 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 Fund 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 Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. Rule
144A and illiquid securities have been identified on the Statement of Net
Assets.
8. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
9. Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2006, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Capital Ordinary Income Total
Gain Distributions Distributions Distributions
(Tax Basis) (Tax Basis)* (Tax Basis)
____________________ _________________ _______________
0% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
*For the fiscal year ended July 31, 2006, certain interest income paid by the
Fund, determined to be Qualified Interest Income and Short-Term Capital Gains,
may be subject to relief from U.S. withholding for foreign shareholders, as
provided by the American Jobs Creation Act of 2004. For the fiscal year ended
July 31, 2006, the Delaware High-Yield Opportunities Fund has designated a
maximum distribution of $8,763,973 of Qualified Interest Income.
22
<page>
Report of independent registered public accounting firm
To the Shareholders and Board of Trustees
Delaware Group Income Funds - Delaware High-Yield
Opportunities Fund
We have audited the accompanying statement of net assets of Delaware High-Yield
Opportunities Fund (one of the series constituting Delaware Group Income Funds)
(the "Fund") as of July 31, 2006, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware High-Yield Opportunities Fund series of Delaware Group Income Funds at
July 31, 2006, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the periods indicated therein, in
conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 13, 2006
23
<page>
Other Fund information
Delaware High-Yield Opportunities Fund
Board Consideration of Delaware High-Yield Opportunities Fund 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 Delaware
High-Yield Opportunities Fund (the "Fund"). 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 Fund 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 Fund, 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 Fund's 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 Fund 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 Fund, 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 Fund 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 Fund 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 Fund, compliance of portfolio managers
with the investment policies, strategies and restrictions for the Fund, 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 Fund's investment advisor and management's efforts to strengthen
and deepen portfolio management teams 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 Fund 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. Additionally, the
Board noted the extent of benefits provided to Fund shareholders for being part
of the Delaware Investments Family of Funds, including the privilege to exchange
investments between the same class of shares of funds without a sales charge,
the ability to reinvest Fund dividends into other funds and the privilege to
combine holdings in other funds to obtain a reduced sales charge. 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 Fund. The Board was pleased with DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Fund 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 Fund showed the investment
performance of its Class A 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 performance 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
Fund was shown for the past one, three and five year periods ended January 31,
2006. The Board noted its objective that the Fund's performance for the periods
considered be at or above the median of its Performance Universe. The following
paragraph summarizes the performance results for the Fund and the Board's view
of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and
institutional high current yield funds as selected by Lipper. The Lipper report
comparison showed that the Fund's total return for the one and five year periods
was in the second quartile of such Performance Universe. The report further
showed that the Fund's total return for the three year period was in the first
quartile. The Board was satisfied with such performance.
24
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Other Fund information
Delaware High-Yield Opportunities Fund
Board Consideration of Delaware High-Yield Opportunities Fund Investment
Advisory Agreement (continued)
Comparative Expenses. The Board considered expense data for the Delaware
Investments(R) Family of Funds. Management provided the Board with information
on pricing levels and fee structures for the Fund. The Board focused
particularly on the comparative analysis of the management fees and total
expense ratios of the Fund 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 Fund's contractual management fee and the actual
management fee incurred by the Fund were compared with the contractual
management fees (assuming all funds in the Expense Group were similar in size to
the Fund) 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 Fund's total expenses were also compared with those of its Expense
Group. The Lipper total expenses, for comparative consistency, were shown by
Lipper for Class A shares and compared total expenses including 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 Fund's 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 Fund and the Board's view of such expenses.
The expense comparisons for the Fund showed that its actual management fee was
in the quartile with the second lowest expenses of its Expense Group and its
total expenses were in the quartile with the highest expenses of its Expense
Group. The Board gave favorable consideration to the Fund's management fee, but
noted that the Fund's total expenses were not in line with the Board's
objective. In evaluating the total expenses, the Board considered waivers in
place through November 2006 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 Fund's 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 Fund.
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
relationships with the Fund and the Delaware Investments Family of Funds
required negotiation of reduction of fees.
Economies of Scale. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's 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 Fund's management contract fell within the standard
structure. Although the Fund has not reached a size at which it can take
advantage of breakpoints, the Board recognized that the fees were structured so
that when the Fund grows, economies of scale may be shared.
25
<page>
Board of trustees/directors
and officers addendum
Delaware Investments(R) Family of Funds
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor, and others who perform services for the
fund. The independent fund trustees, in particular, are advocates for
shareholder interests. Each trustee has served in that capacity since he or she
was elected to or appointed to the Board of Trustees, and will continue to serve
until his or her retirement or the election of a new trustee in his or her
place. The following is a list of the Trustees and Officers with certain
background and related information.
Number of
Porfolios in Other
Name, Fund Complex Directorships
Address, Position(s) Held Length of Principal Occupation(s) Overseen by Held by
and Birth Date with Fund(s) Time Served During Past 5 Years Trustee or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Interested Trustees
____________________________________________________________________________________________________________________________________
Patrick P. Coyne (1) Chairman, Chairman and Trustee Patrick P. Coyne has served in 83 None
2005 Market Street President, since August 16, 2006 various executive capacities
Philadelphia, PA Chief Executive at different times at
19103 Officer, and President and Delaware Investments.(2)
Trustee Chief Executive Officer
April 14, 1963 since August 1, 2006
____________________________________________________________________________________________________________________________________
Independent Trustees
____________________________________________________________________________________________________________________________________
Thomas L. Bennett Trustee Since Private Investor - 83 None
2005 Market Street March 2005 (March 2004-Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984-March 2004)
____________________________________________________________________________________________________________________________________
John A. Fry Trustee Since President - 83 Director -
2005 Market Street January 2001 Franklin & Marshall College Community Health
Philadelphia, PA (June 2002-Present) Systems
19103
Executive Vice President - Director -
May 28, 1960 University of Pennsylvania Allied Barton
(April 1995-June 2002) Security Holdings
____________________________________________________________________________________________________________________________________
Anthony D. Knerr Trustee Since Founder and Managing Director - 83 None
2005 Market Street April 1990 Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990-Present)
December 7, 1938
____________________________________________________________________________________________________________________________________
Lucinda S. Landreth Trustee Since Chief Investment Officer - 83 None
2005 Market Street March 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002-2004)
June 24, 1947
____________________________________________________________________________________________________________________________________
Ann R. Leven Trustee Since Owner - 83 Director and Audit
2005 Market Street September 1989 ARL Associates, Committee
Philadelphia, PA Strategic Financial Planning Chairperson -
19103 Consulting Firm Andy Warhol Foundation
(1983-Present)
November 1, 1940 Director and Audit
Committee Member -
Systemax, Inc.
____________________________________________________________________________________________________________________________________
26
<page>
Number of
Porfolios in Other
Name, Fund Complex Directorships
Address, Position(s) Held Length of Principal Occupation(s) Overseen by Held by
and Birth Date with Fund(s) Time Served During Past 5 Years Trustee or Officer Trustee or Officer
____________________________________________________________________________________________________________________________________
Interested Trustees (continued)
____________________________________________________________________________________________________________________________________
Thomas F. Madison Trustee Since President and Chief 83 Director -
2005 Market Street May 1999 Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director-
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993-Present)
Director and Audit
Committee Member -
Digital River, Inc.
Director and Audit
Committee Member -
Rimage
Corporation
Director - Valmont
Industries, Inc.
____________________________________________________________________________________________________________________________________
Janet L. Yeomans Trustee Since Vice President 83 None
2005 Market Street April 1999 (January 2003-Present)
Philadelphia, PA and Treasurer
19103 (January 2006-Present)
3M Corporation
July 31, 1948
Ms. Yeomans has held
various management positions
at 3M Corporation since 1983.
____________________________________________________________________________________________________________________________________
J. Richard Zecher Trustee Since Founder - 83 Director and Audit
2005 Market Street March 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999-Present)
Director and Audit
July 3, 1940 Founder - Committee Member -
Sutton Asset Management Oxigene, Inc.
(Hedge Fund)
(September 1998-Present)
____________________________________________________________________________________________________________________________________
Officers
____________________________________________________________________________________________________________________________________
Michael P. Bishof Senior Chief Financial Michael P. Bishof has served in 83 None(3)
2005 Market Street Vice President Officer since various executive capacities
Philadelphia, PA and February 2005 at different times at
19103 Chief Financial Delaware Investments.
Officer
August 18, 1962
____________________________________________________________________________________________________________________________________
David F. Connor Vice President, Vice President since David F. Connor has served as 83 None(3)
2005 Market Street Deputy General September 21, 2000 Vice President and Deputy
Philadelphia, PA Counsel, and Secretary General Counsel of
19103 and Secretary since Delaware Investments
October 2005 since 2000.
December 2, 1963
____________________________________________________________________________________________________________________________________
David P. O'Connor Senior Vice Senior Vice President, David P. O'Connor has served 83 None(3)
2005 Market Street President, General Counsel, and in various executive and legal
Philadelphia, PA General Counsel, Chief Legal Officer capacities at different times at
19103 and Chief since Delaware Investments.
Legal Officer October 2005
February 21, 1966
____________________________________________________________________________________________________________________________________
John J. O'Connor Senior Vice Treasurer John J. O'Connor has served in 83 None(3)
2005 Market Street President and since various executive capacities
Philadelphia, PA Treasurer February 2005 at different times at
19103 Delaware Investments.
June 16, 1957
____________________________________________________________________________________________________________________________________
(1) Mr. Coyne is considered to be an "Interested Trustee" because he is an executive officer of the Fund's(s') investment advisor.
(2) Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund's(s')
investment advisor, principal underwriter, and its transfer agent.
(3) Michael P. Bishof, David F. Connor, David P. O'Connor, and John J. O'Connor serve in similar capacities for the six portfolios
of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant.
John J. O'Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, which has the same investment
advisor as the registrant.
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is
available, without charge, upon request by calling 800 523-1918.
27
About the organization
This annual report is for the information of Delaware High-Yield Opportunities
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware High-Yield Opportunities
Fund and the Delaware Investments(R) Performance Update for the most recently
completed calendar quarter. The prospectus sets forth details about charges,
expenses, investment objectives, and operating policies of the Fund. You should
read the prospectus carefully before you invest. The figures in this report
represent past results that are not a guarantee of future results. The return
and principal value of an investment in the Fund will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
Board of trustees
Patrick P. Coyne
Chairman, President,
and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Owner - ARL Associates,
Strategic Financial Planning
Consulting Firm
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated officers
Michael P. Bishof
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA
David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA
Contact information
Investment Manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA
National distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For shareholders
800 523-1918
For securities dealers and financial
institutions representatives only
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the marketing name of Delaware Management Holdings, Inc.
and its subsidiaries.
The Fund 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 Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities are available without charge (i) upon request, by
calling 800 523-1918; (ii) on the Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C.; information on the
operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
28
<page>
Get shareholder reports and prospectuses online instead of in the mail.
> Visit www.delawareinvestments.com/edelivery
<page>
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Manage your investments online!
Get Account Access, the Delaware Investments(R) secure Web site that allows
you to conduct your business online. Gain 24-hour access to your account and
one of the highest levels of Web security available. You also get:
o Hassle-free investing - Make online purchases and redemptions at any time.
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accounts' 1099 information and import it directly into your 1040 tax return.
Available only with Turbo Tax (R) Online (SM) and Desktop software -
www.turbotax.com.
o Less mail clutter - Get instant access to your fund materials online with
Delaware eDelivery.
Register for Account Access today! Please visit us at
www.delawareinvestments.com, select Individual Investors, and click Account
Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through
Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any
questions.
[DELAWARE INVESTMENTS LOGO]
(838) Printed in the USA
AR-137 [7/06] CGI 9/06 MF-06-08-025 PO11209
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. A copy of the registrant's Code of Business Ethics has been posted
on Delaware Investments' internet website at www.delawareinvestments.com. Any
amendments to the Code of Business Ethics, and information on any waiver from
its provisions granted by the registrant, will also be posted on this website
within five business days of such amendment or waiver and will remain on the
website for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant's Board of Trustees/Directors has determined that each
member of the registrant's Audit Committee is an audit committee financial
expert, as defined below. For purposes of this item, an "audit committee
financial expert" is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
An "audit committee financial expert" shall have acquired such attributes
through:
a. Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant, or auditor or experience in
one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer, principal
accounting officer, controller, public accountant, auditor, or person performing
similar functions;
c. Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing, or evaluation of
financial statements; or
d. Other relevant experience.
The registrant's Board of Trustees/Directors has also determined that each
member of the registrant's Audit Committee is independent. In order to be
"independent" for purposes of this item, the Audit Committee member may not: (i)
other than in his or her capacity as a member of the Board of Trustees/Directors
or any committee thereof, accept directly or indirectly any consulting, advisory
or other compensatory fee from the issuer; or (ii) be an "interested person" of
the registrant as defined in Section 2(a)(19) of the Investment Company Act of
1940.
The names of the audit committee financial experts on the registrant's
Audit Committee are set forth below:
Thomas L. Bennett (1)
Thomas F. Madison
Janet L. Yeomans (1)
J. Richard Zecher
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
__________
The aggregate fees billed for services provided to the registrant by its
independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $76,800 for
the fiscal year ended July 31, 2006.
____________________
(1) The instructions to Form N-CSR require disclosure on the relevant experience
of persons who qualify as audit committee financial experts based on "other
relevant experience." The Board of Trustees/Directors has determined that Mr.
Bennett qualifies as an audit committee financial expert by virtue of his
education, Chartered Financial Analyst designation, and his experience as a
credit analyst, portfolio manager and the manager of other credit analysts and
portfolio managers. The Board of Trustees/Directors has determined that Ms.
Yeomans qualifies as an audit committee financial expert by virtue of her
education and experience as the Treasurer of a large global corporation.
The aggregate fees billed for services provided to the registrant by its
independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $67,200 for
the fiscal year ended July 31, 2005.
(b) Audit-related fees.
__________________
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended July 31, 2006.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $33,700 for the registrant's fiscal year ended
July 31, 2006. The percentage of these fees relating to services approved by the
registrant's Audit Committee pursuant to the de minimis exception from the
pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These audit-related services were as follows: issuance of report concerning
transfer agent's system of internal accounting control pursuant to Rule 17Ad-13
of the Securities Exchange Act; and issuance of agreed upon procedures reports
to the registrant's Board in connection with the pass-through of internal legal
cost relating to the operations of the registrant.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended July 31, 2005.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $159,700 for the registrant's fiscal year ended
July 31, 2005. The percentage of these fees relating to services approved by the
registrant's Audit Committee pursuant to the de minimis exception from the
pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These audit-related services were as follows: issuance of report concerning
transfer agent's system of internal accounting control pursuant to Rule 17Ad-13
of the Securities Exchange Act; issuance of agreed upon procedures reports to
the registrant's Board in connection with the annual transfer agent and fund
accounting service agent contract renewals and the pass-through of internal
legal cost relating to the operations of the registrant; and preparation of
Report on Controls Placed in Operation and Tests of Operating Effectiveness
Relating to the Retirement Plan Services Division ("SAS 70 report").
(c) Tax fees.
________
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $12,900 for the fiscal year
ended July 31, 2006. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax returns and
review of annual excise distribution calculations.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's investment adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the registrant were $0 for the
registrant's fiscal year ended July 31, 2006.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $12,800 for the fiscal year
ended July 31, 2005. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax returns and
review of annual excise distribution calculations.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's adviser and other service
providers under common control with the adviser and that relate directly to the
operations or financial reporting of the registrant were $0 for the registrant's
fiscal year ended July 31, 2005.
(d) All other fees.
______________
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2006.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended July
31, 2006.
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2005.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended July
31, 2005.
(e) The registrant's Audit Committee has established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X
(the "Pre-Approval Policy") with respect to services provided by the
registrant's independent auditors. Pursuant to the Pre-Approval Policy, the
Audit Committee has pre-approved the services set forth in the table below with
respect to the registrant up to the specified fee limits. Certain fee limits are
based on aggregate fees to the registrant and other registrants within the
Delaware Investments Family of Funds.
______________________________________________________________________________________________________________________
Service Range of Fees
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Audit Services
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Statutory audits or financial audits for new Funds up to $25,000 per Fund
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Services associated with SEC registration statements (e.g., Form N-1A, Form
N-14, etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings (e.g., comfort letters up to $10,000 per Fund
for closed-end Fund offerings, consents), and assistance in responding to SEC
comment letters
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Consultations by Fund management as to the accounting or disclosure treatment of
transactions or events and/or the actual or potential impact of final or
proposed rules, standards or interpretations by the SEC, FASB, or other up to $25,000 in the aggregate
regulatory or standard-setting bodies (Note: Under SEC rules, some consultations
may be considered "audit-related services" rather than "audit services")
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Audit-Related Services
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Consultations by Fund management as to the accounting or disclosure treatment of
transactions or events and /or the actual or potential impact of final or
proposed rules, standards or interpretations by the SEC, FASB, or other up to $25,000 in the aggregate
regulatory or standard-setting bodies (Note: Under SEC rules, some consultations
may be considered "audit services" rather than "audit-related services")
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Tax Services
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
U.S. federal, state and local and international tax planning and advice (e.g.,
consulting on statutory, regulatory or administrative developments, evaluation up to $25,000 in the aggregate
of Funds' tax compliance function, etc.)
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
U.S. federal, state and local tax compliance (e.g., excise distribution reviews, up to $5,000 per Fund
etc.)
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Review of federal, state, local and international income, franchise and other up to $5,000 per Fund
tax returns
______________________________________________________________________________________________________________________
Under the Pre-Approval Policy, the Audit Committee has also
pre-approved the services set forth in the table below with respect to the
registrant's investment adviser and other entities controlling, controlled by or
under common control with the investment adviser that provide ongoing services
to the registrant (the "Control Affiliates") up to the specified fee limit. This
fee limit is based on aggregate fees to the investment adviser and its Control
Affiliates.
______________________________________________________________________________________________________________________
Service Range of Fees
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Non-Audit Services
______________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________
Services associated with periodic reports and other documents filed with the SEC up to $10,000 in the aggregate
and assistance in responding to SEC comment
letters
______________________________________________________________________________________________________________________
The Pre-Approval Policy requires the registrant's independent auditors
to report to the Audit Committee at each of its regular meetings regarding all
services initiated since the last such report was rendered, including those
services authorized by the Pre-Approval Policy.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant's independent
auditors for services rendered to the registrant and to its investment adviser
and other service providers under common control with the adviser were $201,280
and $343,860 for the registrant's fiscal years ended July 31, 2006 and July 31,
2005, respectively.
(h) In connection with its selection of the independent auditors, the
registrant's Audit Committee has considered the independent auditors' provision
of non-audit services to the registrant's investment adviser and other service
providers under common control with the adviser that were not required to be
pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit
Committee has determined that the independent auditors' provision of these
services is compatible with maintaining the auditors' independence.
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
Company 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 fourth 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 Group Income Funds
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: October 4, 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.
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: October 4, 2006
MICHAEL P. BISHOF
________________________________
By: Michael P. Bishof
Title: Chief Financial Officer
Date: October 4, 2006