annual report - fascore.com€¦ · average annual total return –0.36% 11.20% –0.35% 4.08%...

DECEMBER 31, 2011

ANNUAL REPORT

DWS VARIABLE SERIES II

DWS Large Cap Value VIP

2 | DWS Variable Series II �DWS Large Cap Value VIP

Contents

3 Performance Summary

4 Management Summary

5 Portfolio Summary

6 Investment Portfolio

8 Statement of Assets and Liabilities

8 Statement of Operations

9 Statement of Changes in Net Assets

10 Financial Highlights

11 Notes to Financial Statements

16 Report of Independent Registered Public Accounting Firm

17 Information About Your Fund’s Expenses

18 Tax Information

18 Proxy Voting

19 Investment Management Agreement Approval

22 Summary of Management Fee Evaluation by Independent Fee Consultant

24 Board Members and Officers

This report must be preceded or accompanied by a prospectus. To obtain an additional prospectus or summary

prospectus, if available, call (800) 728-3337 or your financial representative. We advise you to consider the

Fund’s objectives, risks, charges and expenses carefully before investing. The summary prospectus and

prospectus contain this and other important information about the Fund. Please read the prospectus carefully

before you invest.

Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility.Stocks may decline in value. The fund may lend securities to approved institutions. See the prospectus for details.

DWS Investments is part of Deutsche Bank’s Asset Management division and, within the U.S., represents the retail asset managementactivities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWSTrust Company.

NOT FDIC/NCUA INSURED�NO BANK GUARANTEE�MAY LOSE VALUE�NOT A DEPOSITNOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

DWS Variable Series II �DWS Large Cap Value VIP

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Performance Summary December 31, 2011 (Unaudited)

Fund performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not

guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when

redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the

performance data quoted. Please contact your participating insurance company for the Fund’s most recent month-end

performance. Performance doesn’t reflect charges and fees (�contract charges") associated with the separate account that

invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment

option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their

performance will differ.

The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2011 are 0.82% and 1.11% for

Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables

in this report.

Growth of an Assumed $10,000 Investment in DWS Large Cap Value VIP

��DWS Large Cap Value VIP � Class A

��Russell 1000� Value Index

The Russell 1000® Value Index is anunmanaged index that consists of thosestocks in the Russell 1000 Index withless−than-average growth orientation. Russell1000® Index is an unmanaged price−onlyindex of the 1,000 largest capitalizedcompanies that are domiciled in the U.S. andwhose common stocks are traded.

Index returns do not reflect any fees orexpenses and it is not possible to investdirectly into an index.

’01

$14,652

$20,000

$0

’11|

’02|

’03|

’04

$10,000

$14,584

|’05

|’10

$15,000

$5,000

|’06

|’07

|’08

|’09

Yearly periods ended December 31

Comparative Results

DWS Large Cap Value VIP 1-Year 3-Year 5-Year 10-Year

Class A Growth of $10,000 $9,993 $13,878 $9,987 $14,584

Average annual total return –0.07% 11.54% –0.03% 3.85%

Russell 1000 Value Index Growth of $10,000 $10,039 $13,879 $8,750 $14,652

Average annual total return 0.39% 11.55% –2.64% 3.89%

DWS Large Cap Value VIP 1-Year 3-Year 5-Year Life of Class*

Class B Growth of $10,000 $9,964 $13,751 $9,824 $14,623

Average annual total return –0.36% 11.20% –0.35% 4.08%

Russell 1000 Value Index Growth of $10,000 $10,039 $13,879 $8,750 $15,387

Average annual total return 0.39% 11.55% –2.64% 4.64%

The growth of $10,000 is cumulative.* The Fund commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.


Management Summary December 31, 2011 (Unaudited)

DWS Large Cap Value VIP delivered a total return of –0.07% in 2011 (Class A shares, unadjusted for contract

charges), but underperformed the 0.39% return of the benchmark, the Russell 1000® Value Index.1

We positioned the Fund in a defensive manner through most of the year. We did not have a great deal of faith in

the stock market rally of late 2010/early 2011, so we established above-benchmark weightings in sectors that tend

to perform better when the economy and stock prices are not particularly robust, such as health care,

telecommunication services, consumer staples and utilities.2,3 Along the same line, we held below-benchmark

weightings in the more volatile and economically sensitive market segments, such as industrials, information

technology and financials. This positioning acted as a headwind during the periods in which the market performed

very well, but it added quite a bit of value during the third quarter selloff.

In terms of individual security selection, our stock picks outperformed in consumer staples and financials, but

lagged in health care, energy and materials. The Fund’s leading individual contributors were its overweight

positions in H&R Block, Inc. and Marathon Oil Corp., while its primary detractors were Teva Pharmaceutical

Industries Ltd. and Lincoln National Corp.

We expect volatility to remain elevated in the year ahead. The market remains supported on one hand by

improving economic conditions and strong corporate performance in the United States, but pressured on the

other by the ongoing concerns about Europe and China. The good news, for us, is that heightened volatility

provides the opportunity to rotate out of more fully valued stocks that have performed well, including select

stocks in the utilities and telecommunication services sectors, and into more attractively valued names in the

economically sensitive areas of the market, such as financials and industrials. This process of shifting the portfolio

from a less defensive stance has been occurring gradually, in a reflection of our measured, long-term approach.

Overall, we believe our continued emphasis on undervalued, fundamentally sound large-cap companies remains

the most prudent approach at this stage of the cycle.

Thomas Schuessler, PhD.Lead Portfolio Manager

Volker Dosch

Oliver Pfeil, PhD.

Peter Steffen (since May 1, 2011)

Portfolio Managers

1 The Russell 1000 Value Index is an unmanaged index that consists of those stocks in the Russell 1000® Index with less-than-averagegrowth orientation. The Russell 1000 Index is an unmanaged price-only index of the 1,000 largest capitalized companies that are domiciledin the U.S. and whose common stocks are traded. Index returns do not reflect fees or expenses and it is not possible to invest directlyinto an index.

2 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. �Underweight" means theFund holds a lower weighting.

3 Consumer staples are the industries that manufacture and sell products such as food and beverages, prescription drugs, and householdproducts.

The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover.The management team’s views are subject to change at any time based on market and other conditions and should not be construed as arecommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.


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Portfolio Summary (Unaudited)

Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) 12/31/11 12/31/10

Common Stocks 94% 98%

Cash Equivalents 5% 2%

Exchange-Traded Fund 1% �

100% 100%

Sector Diversification (As a % of Common Stocks) 12/31/11 12/31/10

Energy 15% 18%

Financials 14% 13%

Health Care 13% 12%

Consumer Staples 13% 12%

Utilities 12% 10%

Materials 10% 5%

Information Technology 7% 8%

Telecommunication Services 6% 9%

Industrials 6% 6%

Consumer Discretionary 4% 7%

100% 100%

Asset allocation and sector diversification are subject to change.

For more complete details about the Fund’s investment portfolio, see page 6.

Following the Fund’s fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC onForm N-Q. The form will be available on the SEC’s Web site at www.sec.gov, and it also may be reviewed andcopied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the SEC’s PublicReference Room may be obtained by calling (800) SEC-0330. The Fund’s portfolio holdings are also posted onwww.dws-investments.com from time to time. Please see the Fund’s current prospectus for more information.


Investment Portfolio December 31, 2011

Shares Value ($)

Common Stocks 93.7%

Consumer Discretionary 3.5%

Auto Components 0.6%

TRW Automotive Holdings Corp.* 70,795 2,307,917

Distributors 1.3%

Genuine Parts Co. 84,601 5,177,581

Diversified Consumer Services 1.6%

H&R Block, Inc. 405,332 6,619,072

Consumer Staples 12.4%

Beverages 1.3%

PepsiCo, Inc. 76,929 5,104,239

Food & Staples Retailing 3.2%

CVS Caremark Corp. 217,479 8,868,794

Walgreen Co. (a) 112,305 3,712,803

12,581,597

Food Products 4.5%

General Mills, Inc. 107,614 4,348,682

Kellogg Co. 92,980 4,701,999

Mead Johnson Nutrition Co. 66,558 4,574,531

Sara Lee Corp. 227,252 4,299,608

17,924,820

Tobacco 3.4%

Altria Group, Inc. 291,185 8,633,635

Philip Morris International, Inc. 65,165 5,114,149

13,747,784

Energy 13.9%

Energy Equipment & Services 2.0%

Noble Corp.* 164,937 4,984,396

Transocean Ltd. 72,181 2,771,029

7,755,425

Oil, Gas & Consumable Fuels 11.9%

Canadian Natural Resources Ltd. 166,243 6,212,501

Chevron Corp. 70,370 7,487,368

ConocoPhillips 80,740 5,883,524

Marathon Oil Corp. 207,021 6,059,505

Marathon Petroleum Corp. 144,339 4,805,045

Nexen, Inc. 216,661 3,447,076

Occidental Petroleum Corp. 83,041 7,780,942

Suncor Energy, Inc. 208,119 6,000,071

47,676,032

Financials 13.3%

Capital Markets 0.7%

The Goldman Sachs Group, Inc. 32,418 2,931,560

Diversified Financial Services 1.7%

JPMorgan Chase & Co. 199,593 6,636,467

Insurance 10.9%

Assurant, Inc. 159,953 6,567,670

Fidelity National Financial,Inc. "A" (a) 318,854 5,079,344

HCC Insurance Holdings, Inc. 157,937 4,343,267

Lincoln National Corp. (a) 289,280 5,617,818

MetLife, Inc. 154,391 4,813,911

PartnerRe Ltd. 109,127 7,007,045

Prudential Financial, Inc. 107,916 5,408,750

Transatlantic Holdings, Inc. 88,479 4,842,456

43,680,261

Shares Value ($)

Health Care 12.5%

Health Care Equipment & Supplies 3.1%

Baxter International, Inc. 141,177 6,985,438

Becton, Dickinson & Co. 70,253 5,249,304

12,234,742

Health Care Providers & Services 5.6%

Aetna, Inc. 104,787 4,420,964

Humana, Inc. 65,959 5,778,668

McKesson Corp. 101,500 7,907,865

WellPoint, Inc. 66,236 4,388,135

22,495,632

Pharmaceuticals 3.8%

Merck & Co., Inc. 227,863 8,590,435

Teva Pharmaceutical IndustriesLtd. (ADR) (a) 161,051 6,500,018

15,090,453

Industrials 5.5%

Aerospace & Defense 4.0%

Northrop Grumman Corp. (a) 74,385 4,350,035

Raytheon Co. 134,514 6,507,787

United Technologies Corp. 68,101 4,977,502

15,835,324

Machinery 1.5%

Dover Corp. 106,411 6,177,159

Information Technology 6.4%

Communications Equipment 1.7%

Cisco Systems, Inc. 370,846 6,704,896

Computers & Peripherals 1.0%

Hewlett-Packard Co. 159,203 4,101,069

Semiconductors & Semiconductor Equipment 1.8%

Intel Corp. (a) 290,848 7,053,064

Software 1.9%

Microsoft Corp. 297,770 7,730,109

Materials 8.9%

Chemicals 4.2%

Air Products & Chemicals, Inc. 76,306 6,500,508

Potash Corp. of Saskatchewan, Inc. 90,214 3,724,034

Praxair, Inc. 61,379 6,561,415

16,785,957

Containers & Packaging 1.6%

Sonoco Products Co. 193,727 6,385,242

Metals & Mining 3.1%

Freeport-McMoRan Copper& Gold, Inc. 87,600 3,222,804

Goldcorp, Inc. 103,278 4,570,051

Newmont Mining Corp. 78,060 4,684,381

12,477,236

Telecommunication Services 5.9%

Diversified Telecommunication Services 4.2%

AT&T, Inc. (a) 266,081 8,046,290

CenturyLink, Inc. 229,917 8,552,912

16,599,202

Wireless Telecommunication Services 1.7%

Vodafone Group PLC (ADR) (a) 244,736 6,859,950

The accompanying notes are an integral part of the financial statements.


| 7

Shares Value ($)

Utilities 11.4%

Electric Utilities 10.4%

American Electric Power Co., Inc. 159,987 6,609,063

Duke Energy Corp. (a) 279,821 6,156,062

Entergy Corp. 93,878 6,857,788

Exelon Corp. 185,143 8,029,652

FirstEnergy Corp. 217,738 9,645,793

Southern Co. 90,927 4,209,011

41,507,369

Multi-Utilities 1.0%

PG&E Corp. 101,829 4,197,391

Total Common Stocks (Cost $337,763,501) 374,377,550

Exchange-Traded Fund 1.4%SPDR Gold Trust* (Cost $6,100,586) 35,836 5,446,714

Shares Value ($)

Securities Lending Collateral 5.9%Daily Assets Fund Institutional,

0.18% (b) (c) (Cost $23,746,925) 23,746,925 23,746,925

Cash Equivalents 4.9%Central Cash Management Fund,

0.07% (b) (Cost $19,515,043) 19,515,043 19,515,043

% of NetAssets Value ($)

Total Investment Portfolio(Cost $387,126,055)� 105.9 423,086,232

Other Assets and Liabilities, Net (5.9) (23,483,822)

Net Assets 100.0 399,602,410

* Non-income producing security.� The cost for federal income tax purposes was $389,698,469. At December 31, 2011, net unrealized appreciation for all securities based

on tax cost was $33,387,763. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess ofvalue over tax cost of $58,034,114 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax costover value of $24,646,351.

(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31,2011 amounted to $22,874,186, which is 5.7% of net assets.

(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield atperiod end.

(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.

ADR: American Depositary Receipt

SPDR: Standard & Poor’s Depositary Receipt

Fair Value Measurements

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in three broad levels. Level 1includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted pricesfor similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund’sown assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily anindication of the risk associated with investing in those securities.

The following is a summary of the inputs used as of December 31, 2011 in valuing the Fund’s investments. For information on the Fund’spolicy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to FinancialStatements.

Assets Level 1 Level 2 Level 3 Total

Common Stocks (d) $ 374,377,550 $ � $ � $ 374,377,550

Exchange-Traded Funds 5,446,714 � � 5,446,714

Short-Term Investments (d) 43,261,968 � � 43,261,968

Total $ 423,086,232 $ � $ � $ 423,086,232

There have been no transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2011.

(d) See Investment Portfolio for additional detailed categorizations.



Statement ofAssets and Liabilitiesas of December 31, 2011

Assets

Investments:

Investments in non-affiliated securities, atvalue (cost $343,864,087) � including$22,874,186 of securities loaned $ 379,824,264

Investment in Daily Assets Fund Institutional(cost $23,746,925) 23,746,925

Investment in Central Cash ManagementFund (cost $19,515,043) 19,515,043

Total investments in securities, at value(cost $387,126,055) 423,086,232

Foreign currency, at value (cost $31,425) 33,996

Receivable for Fund shares sold 10,428

Dividends receivable 1,082,805

Interest receivable 4,908

Foreign taxes recoverable 2,107

Other assets 11,027

Total assets 424,231,503

Liabilities

Payable upon return of securities loaned 23,746,925

Payable for Fund shares redeemed 557,503

Accrued management fee 216,934

Other accrued expenses and payables 107,731

Total liabilities 24,629,093

Net assets, at value $ 399,602,410

Net Assets Consist of

Undistributed net investment income 7,574,376

Net unrealized appreciation (depreciation) on:

Investments 35,960,177

Foreign currency 2,758

Accumulated net realized gain (loss) (150,833,826)

Paid-in capital 506,898,925

Net assets, at value $ 399,602,410

Class A

Net Asset Value, offering and redemption priceper share ($396,151,122 ÷ 34,282,579outstanding shares of beneficial interest, no parvalue, unlimited number of shares authorized) $ 11.56

Class B

Net Asset Value, offering and redemption priceper share ($3,451,288 ÷ 298,416 outstandingshares of beneficial interest, no par value,unlimited number of shares authorized) $ 11.57

Statement of Operationsfor the year ended December 31, 2011

Investment Income

Income:

Dividends (net of foreign taxes withheldof $51,949) $ 10,406,339

Income distributions � Central CashManagement Fund 20,192

Securities lending income, including incomefrom Daily Assets Fund Institutional, net ofborrower rebates 22,773

Total income 10,449,304

Expenses:

Management fee 2,279,690

Administration fee 355,288

Services to shareholders 8,319

Distribution service fee (Class B) 6,397

Record keeping fees (Class B) 1,352

Custodian fee 12,707

Professional fees 66,942

Reports to shareholders 58,071

Trustees’ fees and expenses 11,065

Other 23,995

Total expenses 2,823,826

Net investment income 7,625,478

Realized and Unrealized Gain (Loss)

Net realized gain (loss) from:

Investments (4,711,630)

Foreign currency 8,149

(4,703,481)

Change in net unrealized appreciation(depreciation) on:

Investments (23,492,091)

Foreign currency (3,494)

(23,495,585)

Net gain (loss) (28,199,066)

Net increase (decrease) in net assetsresulting from operations $ (20,573,588)



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Statement of Changes in Net Assets

Increase (Decrease) in Net Assets

Years Ended December 31,

2011 2010

Operations:

Net investment income (loss) $ 7,625,478 $ 4,298,825

Net realized gain (loss) (4,703,481) 8,028,746

Change in net unrealized appreciation (depreciation) (23,495,585) 7,889,692

Net increase (decrease) in net assets resulting from operations (20,573,588) 20,217,263

Distributions to shareholders from:

Net investment income:

Class A (4,120,416) (4,108,146)

Class B (23,046) (14,019)

Total distributions $ (4,143,462) $ (4,122,165)

Fund share transactions:

Class A

Proceeds from shares sold 16,221,346 8,671,405

Net assets acquired in tax-free reorganization 273,358,779 �

Reinvestment of distributions 4,120,416 4,108,146

Payments for shares redeemed (78,529,959) (36,788,065)

Net increase (decrease) in net assets from Class A share transactions 215,170,582 (24,008,514)

Class B

Proceeds from shares sold 1,297,157 506,629

Net assets acquired in tax-free reorganization 1,731,132 �

Reinvestment of distributions 23,046 14,019

Payments for shares redeemed (661,197) (88,091)

Net increase (decrease) in net assets from Class B share transactions 2,390,138 432,557

Increase (decrease) in net assets 192,843,670 (7,480,859)

Net assets at beginning of period 206,758,740 214,239,599

Net assets at end of period (including undistributed net investment income of $7,574,376 and$4,084,211, respectively) $ 399,602,410 $ 206,758,740

Other Information

Class A

Shares outstanding at beginning of period 17,416,427 19,667,770

Shares sold 1,390,527 778,508

Shares issued in tax-free reorganization 21,886,687 �

Shares issued to shareholders in reinvestment of distributions 332,559 366,145

Shares redeemed (6,743,621) (3,395,996)

Net increase (decrease) in Class A shares 16,866,152 (2,251,343)

Shares outstanding at end of period 34,282,579 17,416,427

Class B

Shares outstanding at beginning of period 105,172 66,594

Shares sold 108,601 45,434

Shares issued in tax-free reorganization 138,157 �

Shares issued to shareholders in reinvestment of distributions 1,856 1,246

Shares redeemed (55,370) (8,102)

Net increase (decrease) in Class B shares 193,244 38,578

Shares outstanding at end of period 298,416 105,172



Financial Highlights

Class AYears Ended December 31,

2011 2010 2009 2008 2007

Selected Per Share Data

Net asset value, beginning of period $11.80 $10.86 $ 8.92 $19.21 $17.96

Income (loss) from investment operations:

Net investment income (loss)a .25 .23 .21 .21 .26

Net realized and unrealized gain (loss) (.24) .93 1.97 (5.68) 1.98

Total from investment operations .01 1.16 2.18 (5.47) 2.24

Less distributions from:

Net investment income (.25) (.22) (.24) (.34) (.32)

Net realized gains � � � (4.48) (.67)

Total distributions (.25) (.22) (.24) (4.82) (.99)

Net asset value, end of period $11.56 $11.80 $10.86 $ 8.92 $19.21

Total Return (%) (.07) 10.77 25.37 (36.40)b 13.15b,c

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions) 396 206 214 118 229

Ratio of expenses before expense reductions (%) .79 .82 .76 .87 .83

Ratio of expenses after expense reductions (%) .79 .82 .76 .86 .82

Ratio of net investment income (loss) (%) 2.15 2.13 2.22 1.59 1.43

Portfolio turnover rate (%) 28 32 76 97 103

a Based on average shares outstanding during the period.b Total return would have been lower had certain expenses not been reduced.c Includes a reimbursement from the Advisor to reimburse the effect of losses incurred as the result of certain operation errors during the

period. Excluding this reimbursement, total return would have been 0.04% lower.

Class BYears Ended December 31,

2011 2010 2009 2008 2007

Selected Per Share Data

Net asset value, beginning of period $11.81 $10.86 $ 8.92 $19.20 $17.94

Income (loss) from investment operations:

Net investment income (loss)a .22 .20 .19 .12 .19

Net realized and unrealized gain (loss) (.25) .93 1.96 (5.64) 1.99

Total from investment operations (.03) 1.13 2.15 (5.52) 2.18

Less distributions from:

Net investment income (.21) (.18) (.21) (.28) (.25)

Net realized gains � � � (4.48) (.67)

Total distributions (.21) (.18) (.21) (4.76) (.92)

Net asset value, end of period $11.57 $11.81 $10.86 $ 8.92 $19.20

Total Return (%) (.36) 10.53 24.86 (36.64)b 12.77b,c

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions) 3 1 1 .29 8

Ratio of expenses before expense reductions (%) 1.10 1.11 1.06 1.28 1.21

Ratio of expenses after expense reductions (%) 1.10 1.11 1.06 1.26 1.20

Ratio of net investment income (loss) (%) 1.84 1.84 1.92 1.20 1.06

Portfolio turnover rate (%) 28 32 76 97 103

a Based on average shares outstanding during the period.b Total return would have been lower had certain expenses not been reduced.c Includes a reimbursement from the Advisor to reimburse the effect of losses incurred as the result of certain operation errors during the

period. Excluding this reimbursement, total return would have been 0.04% lower.


| 11

Notes to Financial Statements

A. Organization and Significant Accounting Policies

DWS Large Cap Value VIP (the �Fund") is a diversified series of DWS Variable Series II (the �Trust"), which isregistered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-endmanagement investment company organized as a Massachusetts business trust.

Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares andClass B shares). Sales of Class B shares are subject to recordkeeping fees up to 0.15% and Rule 12b-1 feesunder the 1940 Act equal to an annual rate of 0.25% of the average daily net assets of the Class B shares of theFund. Class A shares are not subject to such fees.

Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expensereductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of sharesexcept that each class bears certain expenses unique to that class (including the applicable Rule 12b-1 fee andrecordkeeping fees). Differences in class-level expenses may result in payment of different per share dividends byclass. All shares have equal rights with respect to voting subject to class-specific arrangements.

The Fund’s financial statements are prepared in accordance with accounting principles generally accepted in theUnited States of America which require the use of management estimates. Actual results could differ from thoseestimates. The policies described below are followed consistently by the Fund in the preparation of its financialstatements.

Security Valuation. Investments are stated at value determined as of the close of regular trading on the New YorkStock Exchange on each day the exchange is open for trading.

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in threebroad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes othersignificant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds,and credit risk). Level 3 includes significant unobservable inputs (including the Fund’s own assumptions indetermining the fair value of investments). The inputs or methodology used for valuing securities are notnecessarily an indication of the risk associated with investing in those securities.

Equity securities and exchange traded funds ("ETFs") are valued at the most recent sale price or official closingprice reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and arecategorized as Level 1 securities. Securities for which no sales are reported are valued at the calculated meanbetween the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, atthe most recent bid quotation.

Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par,are valued at amortized cost, which approximates value, and are categorized as Level 2. Investments in open-endinvestment companies are valued at their net asset value each business day and are categorized as Level 1.

Securities and other assets for which market quotations are not readily available or for which the above valuationprocedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value asdetermined in accordance with procedures approved by the Board and are generally categorized as Level 3. Inaccordance with the Fund’s valuation procedures, factors used in determining value may include, but are notlimited to, the type of the security; the size of the holding; the initial cost of the security; the existence of anycontractual restrictions on the security’s disposition; the price and extent of public trading in similar securities ofthe issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricingservices; information obtained from the issuer, analysts, and/or the appropriate stock exchange (forexchange-traded securities); an analysis of the company’s or issuer’s financial statements; an evaluation of theforces that influence the issuer and the market(s) in which the security is purchased and sold and with respect todebt securities; the maturity, coupon, creditworthiness, currency denomination and the movement of the marketin which the security is normally traded. The value determined under these procedures may differ from publishedvalues for the same securities.

Disclosure about the classification of fair value measurements is included in a table following the Fund’sInvestment Portfolio.

New Accounting Pronouncement. In May 2011, Accounting Standards Update 2011-04 (ASU 2011-04),Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP andIFRSs, was issued and is effective during interim and annual periods beginning after December 15, 2011. ASU2011-04 amends Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement. The amendmentsare the result of the work by the Financial Accounting Standards Board and the International AccountingStandards Board to develop common requirements for measuring fair value and for disclosing information about


fair value measurements in accordance with GAAP. Management is currently evaluating the application of ASU2011-04 and its impact, if any, on the Fund’s financial statements.

Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investmentsecurities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at theprevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses aretranslated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions.

Net realized and unrealized gains and losses on foreign currency transactions represent net gains and lossesbetween trade and settlement dates on securities transactions, the acquisition and disposition of foreigncurrencies, and the difference between the amount of net investment income accrued and the U.S. dollar amountactually received. That portion of both realized and unrealized gains and losses on investments that results fromfluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized andunrealized gain/appreciation and loss/depreciation on investments.

Securities Lending. The Fund lends securities to certain financial institutions. The Fund retains beneficialownership of the securities it has loaned and continues to receive interest and dividends paid by the issuer ofsecurities and to participate in any changes in their market value. The Fund requires the borrowers of thesecurities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having avalue at least equal to the value of the securities loaned. When the collateral falls below specified amounts, thelending agent will use its best effort to obtain additional collateral on the next business day to meet requiredamounts under the security lending agreement. The Fund may invest the cash collateral into a joint tradingaccount in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Fund receivescompensation for lending its securities either in the form of fees or by earning interest on invested cash collateralnet of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan.There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should theborrower of the securities fail financially. The Fund is also subject to all investment risks associated with thereinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity riskassociated with such investments.

Federal Income Taxes. The Fund’s policy is to comply with the requirements of the Internal Revenue Code, asamended, which are applicable to regulated investment companies and to distribute all of its taxable income to itsshareholders.

Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forwardindefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses werecarried forward for eight years and treated as short-term losses. As a transition rule, the Act requires thatpost-enactment net capital losses be used before pre-enactment net capital losses.

At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $148,261,000,including $143,482,000 of pre-enactment losses of which $102,395,000 was inherited from its merger with DWSStrategic Value VIP in the current year and $31,552,000 was inherited from its merger with another affiliated fundin a previous year and may be applied against any realized net taxable capital gains of each succeeding year untilfully utilized or until December 31, 2015 ($14,184,000), December 31, 2016 ($117,215,000) and December 31,2017 ($12,083,000), the respective expiration dates, whichever occurs first; and which may be subject to certainlimitations under Section 382–384 of the Internal Revenue Code, and $4,779,000 of post-enactment losses whichmay be applied against realized net taxable capital gains indefinitely, including short-term losses ($3,552,000) andlong-term losses ($1,227,000).

The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined thatno provision for income tax is required in the Fund’s financial statements. The Fund’s federal tax returns for theprior three fiscal years remain open subject to examination by the Internal Revenue Service.

Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed toshareholders annually. Net realized gains from investment transactions, in excess of available capital losscarryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders atleast annually. The Fund may also make additional distributions for tax purposes if necessary.

The timing and characterization of certain income and capital gain distributions are determined annually inaccordance with federal tax regulations which may differ from accounting principles generally accepted in theUnited States of America. These differences primarily relate to certain securities sold at a loss. As a result, netinvestment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differsignificantly from distributions during such period. Accordingly, the Fund may periodically make reclassificationsamong certain of its capital accounts without impacting the net asset value of the Fund.


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At December 31, 2011, the Fund’s components of distributable earnings on a tax basis were as follows:

Undistributed ordinary income* $ 7,574,376

Capital loss carryforwards $ (148,261,000)

Unrealized appreciation (depreciation) on investments $ 33,387,763

In addition, the tax character of distributions paid by the Fund is summarized as follows:

Years Ended December 31,

2011 2010

Distributions from ordinary income* $ 4,143,462 $ 4,122,165

* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.

Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trustexpenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust.

Contingencies. In the normal course of business, the Fund may enter into contracts with service providers thatcontain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknownas this would involve future claims that may be made against the Fund that have not yet been made. However,based on experience, the Fund expects the risk of loss to be remote.

Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset valuecalculations. However, for financial reporting purposes, investment transactions are reported on trade date.Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net offoreign withholding taxes. Realized gains and losses from investment transactions are recorded on an identifiedcost basis and may include proceeds from litigation.

B. Purchases and Sales of Securities

During the year ended December 31, 2011, purchases and sales of investment transactions (excluding short-terminvestments) aggregated $97,517,303 and $154,946,926, respectively.

C. Related Parties

Management Agreement. Under the Investment Management Agreement with Deutsche InvestmentManagement Americas Inc. (�DIMA" or the �Advisor"), an indirect, wholly owned subsidiary of Deutsche BankAG, the Advisor directs the investments of the Fund in accordance with its investment objectives, policies andrestrictions. The Advisor determines the securities, instruments and other contracts relating to investments to bepurchased, sold or entered into by the Fund or delegates such responsibility to the Fund’s subadvisor.

Prior to December 1, 2011, pursuant to a subadvisory agreement, Deutsche Asset Management InternationalGmbH (�DeAMi"), an affiliate of the Advisor, served as subadvisor with respect to investment and reinvestmentof assets of the Fund. The Advisor compensated DeAMi out of the management fee it received from the Fund.The Fund’s board approved the termination of DeAMi as the Fund’s subadvisor and effective December 1, 2011,the Advisor assumed all day-to-day advisory responsibilities for the Fund that were previously delegated toDeAMi. The Fund’s portfolio managers continue to provide advisory services to the Fund as employees of theAdvisor.

Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management feebased on the Fund’s average daily net assets, computed and accrued daily and payable monthly, at the followingannual rates:

First $250 million .650%

Next $750 million .625%

Next $1.5 billion .600%





Over $12.5 billion .475%

For the year ended December 31, 2011, the fee pursuant to the Investment Management Agreement wasequivalent to an annual effective rate of 0.64% of the Fund’s average daily net assets.


Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrativeservices to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMAan annual fee (�Administration Fee") of 0.10% of the Fund’s average daily net assets, computed and accrued dailyand payable monthly. For the year ended December 31, 2011, the Administration Fee was $355,288, of which$33,860 is unpaid.

Service Provider Fees. DWS Investments Service Company (�DISC"), an affiliate of the Advisor, is the transferagent, dividend-paying agent and shareholder service agent for the Fund. Pursuant to a sub-transfer agencyagreement between DISC and DST Systems, Inc. (�DST"), DISC has delegated certain transfer agent,dividend-paying agent and shareholder service agent functions to DST. DISC compensates DST out of theshareholder servicing fee it receives from the Fund. For the year ended December 31, 2011, the amounts chargedto the Fund by DISC were as follows:

Services to ShareholdersTotal

Aggregated

Unpaid atDecember 31,

2011

Class A $ 319 $ 98

Class B 114 42

$ 433 $ 140

Distribution Service Agreement. Under the Fund’s Class B 12b-1 plans, DWS Investments Distributors, Inc.(�DIDI") received a fee (�Distribution Service Fee") of 0.25% of average daily net assets of Class B shares. Forthe year ended December 31, 2011, the Distribution Service Fee aggregated $6,397, of which $738 is unpaid.

Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providingtypesetting and certain regulatory filing services to the Fund. For the year ended December 31, 2011, the amountcharged to the Fund by DIMA included in the Statement of Operations under �reports to shareholders"aggregated $12,874, of which $2,385 is unpaid.

Trustees’ Fees and Expenses. The Fund paid each Trustee not affiliated with the Advisor retainer fees plusspecified amounts for various committee services and for the Board Chairperson.

Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central CashManagement Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of theexpenses of Central Cash Management Fund. Central Cash Management Fund does not pay the Advisor aninvestment management fee. Central Cash Management Fund seeks a high level of current income consistentwith liquidity and the preservation of capital.

Securities Lending Agent Fees. Effective July 14, 2011, Deutsche Bank AG serves as securities lending agent forthe Fund. For the period from July 14, 2011 through December 31, 2011, the Fund incurred securities lendingagent fees to Deutsche Bank AG in the amount of $1,735.

D. Ownership of the Fund

At December 31, 2011, two Participating Insurance Companies were owners of record of 10% or more of thetotal outstanding Class A shares of the Fund, each owning 54% and 29%. Two Participating Insurance Companieswere owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 61%and 13%.

E. Line of Credit

The Fund and other affiliated funds (the �Participants") share in a $450 million revolving credit facility provided bya syndication of banks. The Fund may borrow for temporary or emergency purposes, including the meeting ofredemption requests that otherwise might require the untimely disposition of securities. The Participants arecharged an annual commitment fee which is allocated based on net assets, among each of the Participants.Interest is calculated at a rate per annum equal to the sum of the Federal Funds Rate plus 1.25 percent plus ifLIBOR exceeds the Federal Funds Rate the amount of such excess. The Fund may borrow up to a maximum of33 percent of its net assets under the agreement. The Fund had no outstanding loans at December 31, 2011.

F. Acquisition of Assets

On April 29, 2011, the Fund acquired all of the net assets of DWS Strategic Value VIP pursuant to a plan ofreorganization approved by shareholders on January 12, 2011. The acquisition was accomplished by a tax-freeexchange of 31,515,416 Class A shares and 198,385 Class B shares of DWS Strategic Value VIP for 21,886,687Class A shares and 138,157 Class B shares of the Fund, respectively, outstanding on April 29, 2011. DWSStrategic Value VIP’s net assets at that date, $275,089,911, including $20,489,725 of net unrealized appreciation,were combined with those of the Fund. The aggregate net assets of the Fund immediately before the acquisition


| 15

were $212,494,328. The combined net assets of the Fund immediately following the acquisition were$487,584,239.

The financial statements reflect the operations of the Fund for the period prior to the acquisition and thecombined portfolio for the period subsequent to the portfolio merger. Assuming the acquisition had beencompleted on January 1, 2011, the Fund’s pro forma results of operations for the year ended December 31, 2011,are as follows:

TotalAggregated

Net investment income* $ 8,423,504

Net gain (loss) on investments $ (6,816,003)

Net increase (decrease) in net assets resulting from operations $ 1,607,501

* Net investment income includes $36,372 of pro forma eliminated expenses.

Because the combined investment portfolio has been managed as a single integrated Fund since the acquisitionwas completed, it is not practicable to separate the amounts of revenue and earnings of DWS Strategic Value VIPthat have been included in the Fund’s Statement of Operations since April 29, 2011.


Report of Independent Registered Public Accounting Firm

To the Board of Trustees of DWS Variable Series II and Shareholders of DWS Large Cap Value VIP:

We have audited the accompanying statement of assets and liabilities of DWS Large Cap Value VIP, one of the

funds constituting the DWS Variable Series II (the �Fund"), including the investment portfolio, as of December 31,

2011, and the related statement of operations for the year then ended, the statement 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 December 31, 2011, by correspondence with the custodian and brokers. 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 DWS Large Cap Value VIP at December 31, 2011, 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 the

financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted

accounting principles.

Boston, Massachusetts

February 15, 2012


| 17

Information About Your Fund’s Expenses (Unaudited)

As an investor of the Fund, you incur two types of

costs: ongoing expenses and transaction costs.

Ongoing expenses include management fees,

distribution and service (12b-1) fees and other Fund

expenses. Examples of transaction costs include

contract charges and account maintenance fees,

which are not shown in this section. The following

tables are intended to help you understand your

ongoing expenses (in dollars) of investing in the Fund

and to help you compare these expenses with the

ongoing expenses of investing in other mutual funds.

The example in the table is based on an investment of

$1,000 invested at the beginning of the six-month

period and held for the entire period (July 1, 2011 to

December 31, 2011).

The tables illustrate your Fund’s expenses in two

ways:

� Actual Fund Return. This helps you estimate the

actual dollar amount of ongoing expenses (but not

transaction costs) paid on a $1,000 investment in

the Fund using the Fund’s actual return during the

period. To estimate the expenses 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 �Expenses Paid per $1,000"

line under the share class you hold.

� Hypothetical 5% Fund Return. This helps you to

compare your Fund’s ongoing expenses (but not

transaction costs) with those of other mutual

funds using the Fund’s actual expense ratio and a

hypothetical rate of return of 5% per year before

expenses. Examples using a 5% hypothetical Fund

return may be found in the shareholder reports of

other mutual funds. The hypothetical account

values and expenses may not be used to estimate

the actual ending account balance or expenses

you paid for the period.

Please note that the expenses shown in these tables

are meant to highlight your ongoing expenses only

and do not reflect any transaction costs. The

�Expenses Paid per $1,000" line of the tables is

useful in comparing ongoing expenses only and will

not help you determine the relative total expense of

owning different funds. If these transaction costs had

been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended December 31, 2011

Actual Fund Return Class A Class B

Beginning Account Value 7/1/11 $1,000.00 $1,000.00

Ending Account Value 12/31/11 $ 938.30 $ 936.80

Expenses Paid per $1,000* $ 3.86 $ 5.37

Hypothetical 5% Fund Return Class A Class B

Beginning Account Value 7/1/11 $1,000.00 $1,000.00

Ending Account Value 12/31/11 $1,021.22 $1,019.66

Expenses Paid per $1,000* $ 4.02 $ 5.60

* Expenses are equal to the Fund’s annualized expense ratio for each share class, multiplied by the average account value over the period,multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios Class A Class B

DWS Variable Series II � DWS Large Cap Value VIP .79% 1.10%

For more information, please refer to the Fund’s prospectus.

These tables do not reflect charges and fees (�contract charges") associated with the separate account thatinvests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is aninvestment option.


Tax Information (Unaudited)

For corporate shareholders, 100% of the ordinary dividends (i.e., income dividends plus short-term capital gains)

paid during the Fund’s fiscal year ended December 31, 2011, qualified for the dividends received deduction.

Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare

your tax returns. If you have specific questions about your account, please contact your insurance provider.

Proxy Voting

The Trust’s policies and procedures for voting proxies for portfolio securities and information about how the

Trust voted proxies related to its portfolio securities during the 12-month period ended June 30 are available on

our Web site � www.dws-investments.com (click on �proxy voting" at the bottom of the page) � or on the

SEC’s Web site � www.sec.gov. To obtain a written copy of the Trust’s policies and procedures without charge,

upon request, call us toll free at (800) 728-3337.


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Investment Management Agreement ApprovalThe Board of Trustees approved the renewal of DWS Large Cap Value VIP’s investment management agreement(the �Agreement") with Deutsche Investment Management Americas Inc. (�DWS") and sub-advisory agreement(the �Sub-Advisory Agreement" and together with the Agreement, the �Agreements") between DWS andDeutsche Asset Management International GmbH (�DeAMi"), an affiliate of DWS, in September 2011.

In terms of the process that the Board followed prior to approving the Agreements, shareholders should knowthat:

� In September 2011, all of the Fund’s Trustees were independent of DWS and its affiliates.

� The Trustees met frequently during the past year to discuss fund matters and dedicated a substantial amountof time to contract review matters. Over the course of several months, the Board’s Contract Committee, incoordination with the Board’s Equity Oversight Committee, reviewed comprehensive materials received fromDWS, independent third parties and independent counsel. These materials included an analysis of the Fund’sperformance, fees and expenses, and profitability compiled by the Fund’s independent fee consultant. TheBoard also received extensive information throughout the year regarding performance of the Fund.

� The Independent Trustees regularly meet privately with their independent counsel to discuss contract reviewand other matters. In addition, the Independent Trustees were also advised by the Fund’s independent feeconsultant in the course of their review of the Fund’s contractual arrangements and considered acomprehensive report prepared by the independent fee consultant in connection with their deliberations (the�IFC Report").

� In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund’s Rule 12b-1plan, distribution agreement, administrative services agreement, transfer agency agreement and othermaterial service agreements.

� Based on its evaluation of the information provided, the Contract Committee presented its findings andrecommendations to the Board. The Board then reviewed the Contract Committee’s findings andrecommendations.

In connection with the contract review process, the Contract Committee and the Board considered the factorsdiscussed below, among others. The Board also considered that DWS and its predecessors have managed theFund since its inception, and the Board believes that a long-term relationship with a capable, conscientiousadvisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest orremain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by theFund’s shareholders. DWS and DeAMi are part of Deutsche Bank, a major global banking institution that isengaged in a wide range of financial services. The Board believes that there are significant advantages to beingpart of a global asset management business that offers a wide range of investing expertise and resources,including hundreds of portfolio managers and analysts with research capabilities in many countries throughout theworld.

While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these andmany other factors, including the quality and integrity of DWS’s and DeAMi’s personnel and such other issues asback-office operations, fund valuations, and compliance policies and procedures.

Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scopeof advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS andDeAMi provide portfolio management services to the Fund and that, pursuant to a separate administrativeservices agreement, DWS provides administrative services to the Fund. The Board considered the experienceand skills of senior management and investment personnel, the resources made available to such personnel, theability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. TheBoard reviewed the Fund’s performance over short-term and long-term periods and compared those returns tovarious agreed-upon performance measures, including market indices and a peer universe compiled by theindependent fee consultant using information supplied by Lipper Inc. (�Lipper"). The Board also noted that it hasput into place a process of identifying �Focus Funds" (e.g., funds performing poorly relative to their benchmark ora peer universe compiled by an independent fund data service), and receives more frequent reporting andinformation from DWS regarding such funds, along with DWS’s remedial plans to address underperformance. TheBoard believes this process is an effective manner of identifying and addressing underperforming funds. Based onthe information provided, the Board noted that for the one-, three- and five-year periods ended December 31,2010, the Fund’s performance (Class A shares) was in the 4th quartile, 3rd quartile and 1st quartile, respectively,of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worstperformers). The Board also observed that the Fund has underperformed its benchmark in the one-year periodand has outperformed its benchmark in the three- and five-year periods ended December 31, 2010. The Board


noted the disappointing investment performance of the Fund in recent periods and continued to discuss withsenior management of DWS and DeAMi the factors contributing to such underperformance and actions beingtaken to improve performance. The Board observed that the Fund had experienced improved relative performanceduring the first seven months of 2011. The Board recognized that DWS has made significant changes in itsinvestment personnel and processes in recent years in an effort to improve long-term performance.

On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concludedthat the nature, quality and extent of services provided by DWS and DeAMi historically have been and continue tobe satisfactory.

Fees and Expenses. The Board considered the Fund’s investment management fee schedule, sub-advisory feeschedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and theindependent fee consultant regarding investment management fee rates paid to other investment advisors bysimilar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect tomanagement fees paid to other investment advisors by similar funds, the Board noted that the contractual feerates paid by the Fund, which include a 0.10% fee paid to DWS under the Fund’s administrative servicesagreement, were lower than the median (2nd quartile) of the applicable Lipper peer group (based on Lipper dataprovided as of December 31, 2010). With respect to the sub-advisory fee paid to DeAMi, the Board noted that thefee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund’s Class A sharestotal (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipperexpense universe (based on Lipper data provided as of December 31, 2010, and analyzing Lipper expenseuniverse Class A expenses less any applicable 12b-1 fees) (�Lipper Universe Expenses"). The Board alsoreviewed data comparing each share class’s total (net) operating expenses to the applicable Lipper UniverseExpenses. The Board considered the Fund’s management fee rate as compared to fees charged by DWS andcertain of its affiliates for comparable mutual funds and considered differences in fund and fee structuresbetween the DWS Funds. The Board also considered how the Fund’s total (net) operating expenses compared tothe total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors asasset size).

The information considered by the Board as part of its review of management fees included information regardingfees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily toEuropean investors (�DWS Europe funds"), in each case as applicable. The Board observed that advisory feerates for institutional accounts generally were lower than the management fees charged by similarly managedDWS U.S. mutual funds (�DWS Funds"), but also took note of the differences in services provided to DWS Fundsas compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates forDWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences inthe types of services provided to DWS Funds relative to DWS Europe funds made it difficult to compare suchfees.

On the basis of the information provided, the Board concluded that management fees were reasonable andappropriate in light of the nature, quality and extent of services provided by DWS and DeAMi.

Profitability. The Board reviewed detailed information regarding revenues received by DWS under theAgreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising theDWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Boardalso received information regarding the estimated enterprise-wide profitability of DWS and its affiliates withrespect to all fund services in totality and by fund. The Board and the independent fee consultant reviewedDWS’s methodology in allocating its costs to the management of the Fund. Based on the information provided,the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fundwere not unreasonable. The Board also reviewed information regarding the profitability of certain similarinvestment management firms. The Board noted that while information regarding the profitability of such firms islimited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates’ overallprofitability with respect to the DWS fund complex (after taking into account distribution and other servicesprovided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparablefirms for which such data was available.

Economies of Scale. The Board considered whether there are economies of scale with respect to themanagement of the Fund and whether the Fund benefits from any economies of scale. The Board noted that theFund’s management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedulerepresents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in themanagement of the Fund at current asset levels.

Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidentalbenefits received by DWS and its affiliates, including any fees received by DWS for administrative servicesprovided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also


| 21

considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to payfor research generated by parties other than the executing broker dealers, which pertain primarily to fundsinvesting in equity securities, along with the incidental public relations benefits to DWS related to DWS Fundsadvertising and cross-selling opportunities among DWS products and services. The Board concluded thatmanagement fees were reasonable in light of these fallout benefits.

Compliance. The Board considered the significant attention and resources dedicated by DWS to documentingand enhancing its compliance processes in recent years. The Board noted in particular (i) the experience andseniority of both DWS’s chief compliance officer and the Fund’s chief compliance officer; (ii) the large number ofDWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates tocompliance matters.

Based on all of the information considered and the conclusions reached, the Board unanimously determined thatthe continuation of the Agreements is in the best interests of the Fund. In making this determination, the Boarddid not give particular weight to any single factor identified above. The Board considered these factors over thecourse of numerous meetings, certain of which were in executive session with only the Independent Trusteesand their counsel present. It is possible that individual Trustees may have weighed these factors differently inreaching their individual decisions to approve the continuation of the Agreements.


Summary of Management Fee Evaluation by IndependentFee ConsultantSeptember 26, 2011

Pursuant to an Order entered into by Deutsche Investment Management Americas and affiliates (collectively, �DeAM")with the Attorney General of New York, I, Thomas H. Mack, have been appointed the Independent Fee Consultant forthe DWS Funds (formerly the DWS Scudder Funds). My duties include preparing an annual written evaluation of themanagement fees DeAM charges the Funds, considering among other factors the management fees charged by othermutual fund companies for like services, management fees DeAM charges other clients for like services, DeAM’s costsof supplying services under the management agreements and related profit margins, possible economies of scale if aFund grows larger, and the nature and quality of DeAM’s services, including fund performance. This report summarizesmy evaluation for 2011, including my qualifications, the evaluation process for each of the DWS Funds, considerationof certain complex-level factors, and my conclusions. I served in substantially the same capacity in 2007, 2008, 2009and 2010.

Qualifications

For more than 35 years I have served in various professional capacities within the investment management business. Ihave held investment analysis and advisory positions, including securities analyst, portfolio strategist and director ofinvestment policy with a large investment firm. I have also performed business management functions, includingbusiness development, financial management and marketing research and analysis.

Since 1991, I have been an independent consultant within the asset management industry. I have provided services toover 125 client organizations, including investment managers, mutual fund boards, product distributors and relatedorganizations. Over the past ten years I have completed a number of assignments for mutual fund boards, specificallyincluding assisting boards with management contract renewal.

I hold a Master of Business Administration degree, with highest honors, from Harvard University and Master ofScience and Bachelor of Science (highest honors) degrees from the University of California at Berkeley. I am anindependent director and audit committee financial expert for two closed-end mutual funds and have served in variousleadership and financial oversight capacities with non-profit organizations.

Evaluation of Fees for each DWS Fund

My work focused primarily on evaluating, fund-by-fund, the fees charged to each of the 109 mutual fund portfolios inthe DWS Fund family. For each Fund, I considered each of the key factors mentioned above, as well as any otherrelevant information. In doing so I worked closely with the Funds’ Independent Directors in their annual contractrenewal process, as well as in their approval of contracts for several new funds (documented separately).

In evaluating each Fund’s fees, I reviewed comprehensive materials provided by or on behalf of DeAM, includingexpense information prepared by Lipper Analytical, comparative performance information, profitability data, managerhistories, and other materials. I also accessed certain additional information from the Lipper and Morningstar databasesand drew on my industry knowledge and experience.

To facilitate evaluating this considerable body of information, I prepared for each Fund a document summarizing the keydata elements in each area as well as additional analytics discussed below. This made it possible to consider each keydata element in the context of the others.

In the course of contract renewal, DeAM agreed to implement a number of fee and expense adjustments requested bythe Independent Directors which will favorably impact future fees and expenses, and my evaluation includes the effectsof these changes.

Fees and Expenses Compared with Other Funds

The competitive fee and expense evaluation for each fund focused on two primary comparisons:

The Fund’s contractual management fee (the advisory fee plus the administration fee where applicable) comparedwith those of a group of typically 12–15 funds in the same Lipper investment category (e.g. Large CapitalizationGrowth) having similar distribution arrangements and being of similar size.

The Fund’s total expenses compared with a broader universe of funds from the same Lipper investment categoryand having similar distribution arrangements.

These two comparisons provide a view of not only the level of the fee compared with funds of similar scale but alsothe total expense the Fund bears for all the services it receives, in comparison with the investment choices available inthe Fund’s investment category and distribution channel. The principal figure-of-merit used in these comparisons wasthe subject Fund’s percentile ranking against peers.

DeAM’s Fees for Similar Services to Others

DeAM provided management fee schedules for all of its US domiciled fund and non-fund investment managementaccounts in any of the investment categories where there is a DWS Fund. These similar products included the otherDWS Funds, non-fund pooled accounts, institutional accounts and sub-advisory accounts. Using this information, Icalculated for each Fund the fee that would be charged to each similar product, at the subject Fund’s asset level.


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Evaluating information regarding non-fund products is difficult because there are varying levels of services required fordifferent types of accounts, with mutual funds generally requiring considerably more regulatory and administrativetypes of service as well as having more frequent cash flows than other types of accounts. Also, while mutual fund feesfor similar fund products can be expected to be similar, there will be some differences due to different pricingconditions in different distribution channels (e.g. retail funds versus those used in variable insurance products),differences in underlying investment processes and other factors.

Costs and Profit Margins

DeAM provided a detailed profitability analysis for each Fund. After making some adjustments so that the presentationwould be more comparable to the available industry figures, I reviewed profit margins from investment managementalone, from investment management plus other fund services (excluding distribution) provided to the Funds by DeAM(principally shareholder services), and DeAM profits from all sources, including distribution. A later section commentson overall profitability.

Economies of Scale

Economies of scale � an expected decline in management cost per dollar of fund assets as fund assets grow � arevery rarely quantified and documented because of inherent difficulties in collecting and analyzing relevant data.However, in virtually every investment category that I reviewed, larger funds tend to have lower fees and lower totalexpenses than smaller funds. To see how each DWS Fund compares with this industry observation, I reviewed:

The trend in Fund assets over the last five years and the accompanying trend in total expenses. This shows if theFund has grown and, if so, whether total expense (management fees as well as other expenses) have declined as apercent of assets.

Whether the Fund has break-points in its management fee schedule, the extent of the fee reduction built into theschedule and the asset levels where the breaks take effect, and in the case of a sub-advised Fund how the Fund’sbreak-points compare with those of the sub-advisory fee schedule.

How the Fund’s contractual fee schedule compares with trends in the industry data. To accomplish this, Iconstructed a chart showing how actual latest-fiscal-year contractual fees of the Fund and of other similar fundsrelate to average fund assets, with the subject Fund’s contractual fee schedule superimposed.

Quality of Service � Performance

The quality-of-service evaluation focused on investment performance, which is the principal result of the investmentmanagement service. Each Fund’s performance was reviewed over the past 1, 3, 5 and 10 years, as applicable, andcompared with that of other funds in the same investment category and with a suitable market index.

In addition, I calculated and reviewed risk-adjusted returns relative to an index of similar mutual funds’ returns and asuitable market index. The risk-adjusted returns analysis provides a way of determining the extent to which the Fund’sreturn comparisons are mainly the product of investment value-added (or lack thereof) or alternatively takingconsiderably more or less risk than is typical in its investment category.

I also received and considered the history of portfolio manager changes for each Fund, as this provided an importantcontext for evaluating the performance results.

Complex-Level Considerations

While this evaluation was conducted mainly at the individual fund level, there are some issues relating to thereasonableness of fees that can alternatively be considered across the whole fund complex:

I reviewed DeAM’s profitability analysis for all DWS Funds, with a view toward determining if the allocationprocedures used were reasonable and how profit levels compared with public data for other investment managers.

I considered whether DeAM and affiliates receive any significant ancillary or �fall-out" benefits that should beconsidered in interpreting the direct profitability results. These would be situations where serving as the investmentmanager of the Funds is beneficial to another part of the Deutsche Bank organization.

I considered how aggregated DWS Fund expenses had varied over the years, by asset class and in the context oftrends in asset levels.

I reviewed the structure of the DeAM organization, trends in staffing levels, and information on compensation ofinvestment management and other professionals compared with industry data.

Findings

Based on the process and analysis discussed above, which included reviewing a wide range of information frommanagement and external data sources and considering among other factors the fees DeAM charges other clients, thefees charged by other fund managers, DeAM’s costs and profits associated with managing the Funds, economies ofscale, possible fall-out benefits, and the nature and quality of services provided, in my opinion the management feescharged the DWS Funds are reasonable.

Thomas H. MackPresident, Thomas H. Mack & Co., Inc.


Board Members and OfficersThe following table presents certain information regarding the Board Members and Officers of the fund as ofDecember 31, 2011. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unlessotherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at leastthe most recent five years, although not necessarily in the same capacity; and (ii) the address of eachIndependent Board Member is c/o Paul K. Freeman, Independent Chairman, DWS Funds, PO Box 101833, Denver,CO 80250-1833. Except as otherwise noted below, the term of office for each Board Member is until the electionand qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwiseprovided in the governing documents of the fund. Because the fund does not hold an annual meeting ofshareholders, each Board Member will hold office for an indeterminate period. The Board Members may alsoserve in similar capacities with other funds in the fund complex. The Length of Time Served represents the yearin which the Board Member joined the Board of one or more DWS funds now overseen by the Board.

Independent Board Members

Name, Year ofBirth, Positionwith the Fundand Length ofTime Served1 Business Experience and Directorships During the Past Five Years

Numberof Fundsin DWSFundComplexOverseen

OtherDirectorshipsHeld by BoardMember

Paul K.Freeman(1950)

Chairpersonsince 2009

Board Membersince 1993

Consultant, World Bank/Inter−American Development Bank; Executive and Governing Council ofthe Independent Directors Council (Chairman of Education Committee); formerly: Project Leader,International Institute for Applied Systems Analysis (1998–2001); Chief Executive Officer, The EricGroup, Inc. (environmental insurance) (1986–1998)

110 �

John W.Ballantine(1946)


Retired; formerly, Executive Vice President and Chief Risk Management Officer, First ChicagoNBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President andHead of International Banking (1995–1996). Directorships: Chairman of the Board, Healthways,Inc. (provider of disease and care management services); Portland General Electric (utilitycompany); Stockwell Capital Investments PLC (private equity); former Directorships: First OakBrook Bancshares, Inc. and Oak Brook Bank; Prisma Energy International

110 �

Henry P.Becton, Jr.(1943)


Vice Chair and former President, WGBH Educational Foundation. Directorships: Association ofPublic Television Stations; Public Radio International; Public Radio Exchange (PRX); The PBSFoundation; former Directorships: Boston Museum of Science; American Public Television;Concord Academy; New England Aquarium; Mass. Corporation for EducationalTelecommunications; Committee for Economic Development; Public Broadcasting Service

110 Lead Director,BectonDickinson andCompany2

(medicaltechnologycompany);Lead Director,BeloCorporation2

(mediacompany)

Dawn-MarieDriscoll (1946)


President, Driscoll Associates (consulting firm); Executive Fellow, Center for Business Ethics,Bentley University; formerly, Partner, Palmer & Dodge (1988–1990); Vice President of CorporateAffairs and General Counsel, Filene’s (1978–1988). Directorships: Director of ICI Mutual InsuranceCompany (since 2007); Advisory Board, Center for Business Ethics, Bentley University; Trustee,Southwest Florida Community Foundation (charitable organization); former Directorships:Investment Company Institute (audit, executive, nominating committees) and IndependentDirectors Council (governance, executive committees)

110 Trustee,Sun CapitalAdvisers, Inc.(22 open-endmutual fundsadvised bySun CapitalAdvisers, Inc.)(since 2007)

Keith R. Fox,CFA (1954)


Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since1986). Directorships: Progressive International Corporation (kitchen goods importer anddistributor); BoxTop Media Inc. (advertising); The Kennel Shop (retailer); former Chairman, NationalAssociation of Small Business Investment Companies


Kenneth C.Froewiss(1945)


Adjunct Professor of Finance, NYU Stern School of Business (September 2009–present; ClinicalProfessor from 1997–September 2009); Member, Finance Committee, Association for AsianStudies (2002–present); Director, Mitsui Sumitomo Insurance Group (US) (2004–present); priorthereto, Managing Director, J.P. Morgan (investment banking firm) (until 1996)

110 �


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Name, Year ofBirth, Positionwith the Fundand Length ofTime Served1

OtherDirectorshipsHeld by BoardMember

Numberof Fundsin DWSFundComplexOverseenBusiness Experience and Directorships During the Past Five Years

Richard J.Herring (1946)


Jacob Safra Professor of International Banking and Professor, Finance Department, The WhartonSchool, University of Pennsylvania (since July 1972); Co-Director, Wharton Financial InstitutionsCenter (since July 2000); Co-Chair, U.S. Shadow Financial Regulatory Committee; ExecutiveDirector, Financial Economists Roundtable; formerly: Vice Dean and Director, WhartonUndergraduate Division (July 1995–June 2000); Director, Lauder Institute of InternationalManagement Studies (July 2000–June 2006)

110 Director, JapanEquity Fund,Inc. (sinceSeptember2007), ThaiCapital Fund,Inc. (sinceSeptember2007),SingaporeFund, Inc.(sinceSeptember2007),IndependentDirector ofBarclays BankDelaware(sinceSeptember2010)

WilliamMcClayton(1944)


Private equity investor (since October 2009); previously, Managing Director, DiamondManagement & Technology Consultants, Inc. (global consulting firm) (2001–2009); Directorship:Board of Managers, YMCA of Metropolitan Chicago; formerly: Senior Partner, Arthur AndersenLLP (accounting) (1966–2001); Trustee, Ravinia Festival

110 �

Rebecca W.Rimel (1951)


President and Chief Executive Officer, The Pew Charitable Trusts (charitable organization) (1994to present); Trustee, Washington College (2011 to present); formerly: Executive Vice President,The Glenmede Trust Company (investment trust and wealth management) (1983–2004); BoardMember, Investor Education (charitable organization) (2004–2005); Trustee, ExecutiveCommittee, Philadelphia Chamber of Commerce (2001–2007); Trustee, Pro Publica (charitableorganization) (2007–2010); Trustee, Thomas Jefferson Foundation (charitable organization)(1994 to 2011)

110 Director,CardioNet,Inc.2 (healthcare) (2009–present);Director,Viasys HealthCare2

(January 2007–June 2007)

William N.Searcy, Jr.(1946)


Private investor since October 2003; formerly: Pension & Savings Trust Officer, SprintCorporation2 (telecommunications) (November 1989–September 2003)


Jean GleasonStromberg(1943)


Retired. Formerly, Consultant (1997–2001); Director, Financial Markets US GovernmentAccountability Office (1996–1997); Partner, Fulbright & Jaworski, L.L.P. (law firm) (1978–1996).Directorships: The William and Flora Hewlett Foundation; former Directorships: Service Source,Inc., Mutual Fund Directors Forum (2002–2004), American Bar Retirement Association (fundingvehicle for retirement plans) (1987–1990 and 1994–1996)

110 �

Robert H.Wadsworth

(1940)


President, Robert H. Wadsworth & Associates, Inc. (consulting firm) (1983 to present); Director,The Phoenix Boys Choir Association

113 �

Officers4

Name, Year of Birth, Position with the Fund

and Length of Time Served5Principal Occupation(s) During Past 5 Years and Other Directorships Held

W. Douglas Beck, CFA6 (1967)

President, 2011–present

Managing Director3, Deutsche Asset Management (2006–present); President of DWS familyof funds and Head of Product Management, U.S. for DWS Investments; formerly, ExecutiveDirector, Head of Product Management (2002–2006) and President (2005–2006) of the UBSFunds at UBS Global Asset Management; Co-Head of Manager Research/Managed SolutionsGroup, Merrill Lynch (1998–2002)


Name, Year of Birth, Position with the Fund

and Length of Time Served5Principal Occupation(s) During Past 5 Years and Other Directorships Held

John Millette7 (1962)

Vice President and Secretary, 1999–present

Director3, Deutsche Asset Management

Paul H. Schubert6 (1963)

Chief Financial Officer, 2004–present

Treasurer, 2005–present

Managing Director3, Deutsche Asset Management (since July 2004); formerly, ExecutiveDirector, Head of Mutual Fund Services and Treasurer for UBS Family of Funds (1998–2004);Vice President and Director of Mutual Fund Finance at UBS Global Asset Management(1994–1998)

Caroline Pearson7 (1962)

Chief Legal Officer, 2010–present

Managing Director3, Deutsche Asset Management; formerly, Assistant Secretary for DWSfamily of funds (1997–2010)

Rita Rubin6 (1970)

Assistant Secretary, 2009–present

Director3 and Senior Counsel, Deutsche Asset Management (since October 2007); formerly,Vice President, Morgan Stanley Investment Management (2004–2007)

Paul Antosca7 (1957)

Assistant Treasurer, 2007–present

Director3, Deutsche Asset Management (since 2006); Vice President, The Manufacturers LifeInsurance Company (U.S.A.) (1990–2006)

Jack Clark7 (1967)


Director3, Deutsche Asset Management (since 2007); formerly, Vice President, State StreetCorporation (2002–2007)

Diane Kenneally7 (1966)


Director3, Deutsche Asset Management

John Caruso6 (1965)

Anti-Money Laundering Compliance Officer,2010–present

Managing Director3, Deutsche Asset Management

Robert Kloby6 (1962)

Chief Compliance Officer, 2006–present

Managing Director3, Deutsche Asset Management

1 The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currentlyoverseen by the Board.

2 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.3 Executive title, not a board directorship.4 As a result of their respective positions held with the Advisor, these individuals are considered �interested persons" of the Advisor within

the meaning of the 1940 Act. Interested persons receive no compensation from the fund.5 The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds.6 Address: 60 Wall Street, New York, NY 10005.7 Address: One Beacon Street, Boston, MA 02108.

The fund’s Statement of Additional Information (�SAI") includes additional information about the Board Members. The SAI is available, withoutcharge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.


| 27

Notes


DWS Investments Distributors, Inc.

222 South Riverside Plaza

Chicago, IL�60606

(800) 621-1148

VS2LCV−2 (R-025833-1 2/12)

annual report - fascore.com€¦ · average annual total return –0.36% 11.20% –0.35% 4.08%...

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