annual report · rafaelina m. lee portfolio managers 1 gross domestic product is the value of goods...

DECEMBER 31, 2011

ANNUAL REPORT

DWS VARIABLE SERIES II

DWS Small Mid Cap Growth VIP

(formerly DWS Small Cap Growth VIP)

2 | DWS Variable Series II �DWS Small Mid Cap Growth VIP

Contents

3 Performance Summary

4 Management Summary

5 Portfolio Summary

6 Investment Portfolio

9 Statement of Assets and Liabilities

9 Statement of Operations

10 Statement of Changes in Net Assets

11 Financial Highlights

12 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 of smaller- and medium-sized companies involve greater risk than securities of larger, more-established companies. Stocksmay 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 Small Mid Cap Growth VIP

| 3

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.

The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2011 is 0.78% for Class A

shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.

Growth of an Assumed $10,000 Investment in DWS Small Mid Cap Growth VIP

��DWS Small Mid Cap Growth VIP � Class A

��Russell 2500� Growth Index

��Russell 2000� Growth Index

The Russell 2500� Growth Index is anunmanaged index that measures theperformance of the small to mid−cap growthsegment of the U.S. equity universe. Itincludes those Russell 2500 companies withhigher price−to−book ratios and higherforecasted growth values.*Effective May 1, 2011, the Russell 2500Growth Index replaces the Russell 2000Growth Index as the fund’s benchmark indexbecause the Advisor believes that it betterreflects the fund’s investment strategy.

The Russell 2000® Growth Index is anunmanaged, capitalization−weighted measureof 2,000 of the smallest capitalized U.S.companies with a greater−than−averagegrowth orientation and whose commonstocks trade on the NYSE, NYSE AlternextUS (formerly known as �Amex") andNasdaq.

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

’01

$16,644

$20,000

$0

’11|

’02|

’03|

’04

$10,381

|’05

|’10

$15,000

$10,000

|’06

|’07

|’08

|’09

$15,500

$5,000

Yearly periods ended December 31

Comparative Results

DWS Small Mid Cap Growth VIP 1-Year 3-Year 5-Year 10-Year

Class A Growth of $10,000 $9,609 $17,489 $9,379 $10,381

Average annual total return –3.91% 20.48% –1.27% 0.38%

Russell 2500 Growth Index* Growth of $10,000 $9,843 $17,967 $11,528 $16,644

Average annual total return –1.57% 21.57% 2.89% 5.23%

Russell 2000 Growth Index Growth of $10,000 $9,709 $16,853 $11,088 $15,500

Average annual total return –2.91% 19.00% 2.09% 4.48%

The growth of $10,000 is cumulative.


Management Summary December 31, 2011 (Unaudited)

The Fund was known as DWS Small Cap Growth VIP until May 1, 2011, when its name, the investment objective

and strategy changed. The most significant change was that the Fund could invest in common stock of small and

mid-sized U.S. companies in addition to foreign securities and other types of equity securities such as preferred

stocks or convertible securities.

In early 2011, investors were confident that the U.S. economy would avoid a �double-dip" recession, supported

by 3.2% gross domestic product (GDP) growth in the fourth quarter of 2010, steadier housing starts and signs of

improvement in payrolls.1 By March and April 2011, however, higher energy prices from growing social unrest in

the Middle East, as well as Japan’s earthquake and tsunami, sparked fears of a global slowdown. The market was

able to generally brush off these worries and continued its upward trajectory until early July 2011. During

mid-summer, the termination of the U.S. Federal Reserve Board’s (the Fed’s) quantitative easing program, fears of

potential contagion from Europe’s sovereign debt crisis and some disappointing U.S. economic data significantly

dampened investor confidence.2,3 In addition, political gridlock regarding U.S. debt limit discussions weighed on

sentiment. Following the United States credit rating downgrade by Standard & Poor’s® in early August 2011, the

market entered a prolonged period of bearishness and risk aversion.4,5 However, investor confidence reemerged

late in the year following early October lows as stronger U.S. leading indicator data buoyed sentiment, and as

optimism grew that the United States could possibly decouple from Europe’s sovereign problems and avoid

financial contagion.

For the 12-month period ended December 31, 2011, the Fund returned –3.91% (Class A shares, unadjusted for

contract charges), compared with the –1.57% return of the Russell 2500® Growth Index.6

The Fund’s underperformance of the benchmark came primarily from weak stock selection within information

technology, industrials and consumer staples.7 Only health care and energy benefitted from strong stock

selection. Sector allocation had a positive effect on returns, owing to an overweight in consumer staples and

underweights to materials, telecom services and financials.8 In contrast, an overweight to energy and a slight

underweight in industrials weighed on returns.

We continue to maintain a long-term perspective, investing in quality small- and mid-cap growth stocks.

Joseph Axtell, CFA

Rafaelina M. LeePortfolio Managers

1 Gross domestic product is the value of goods and services produced in an economy.2 Quantitative easing is a type of monetary policy whereby governments buy government or other types of securities from the market in

order to increase the money supply.3 Sovereign debt is government bonds issued in a foreign currency.4 Credit quality measures a bond issuer’s ability to repay interest and principal in a timely manner. Rating agencies assign letter

designations such as AAA, AA and so forth. The lower the rating, the higher the probability of default. Credit quality does not removemarket risk and is subject to change.

5 Standard & Poors is one of the rating agencies that assigns credit quality ratings to bonds.6 The Russell 2500 Growth Index is an unmanaged, capitalization-weighted measure of the performance of the small- to mid-cap growth

segment of the U.S. equity universe. It includes Russell 2500® Index companies with higher price-to-book ratios and higher forecastedgrowth values.

Index returns do not reflect fees or expenses and it is not possible to invest directly into an index.7 Consumer staples are the industries that manufacture and sell products such as food and beverages, prescription drugs, and household

products.8 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. �Underweight" means the

Fund holds a lower weighting.

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.


| 5

Portfolio Summary (Unaudited)

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

Common Stocks 98% 97%

Cash Equivalents 2% 3%

100% 100%

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

Information Technology 22% 25%

Industrials 19% 16%

Consumer Discretionary 17% 16%

Health Care 17% 20%

Energy 8% 9%

Financials 6% 6%

Materials 6% 5%

Consumer Staples 5% 3%

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 98.2%

Consumer Discretionary 16.9%

Auto Components 1.4%

BorgWarner, Inc.* (a) 18,970 1,209,148

TRW Automotive Holdings Corp.* 27,381 892,620

2,101,768

Hotels Restaurants & Leisure 1.7%

Panera Bread Co. "A"* 17,573 2,485,701

Household Durables 1.1%

Jarden Corp. 52,942 1,581,907

Internet & Catalog Retail 0.7%

Shutterfly, Inc.* (a) 48,423 1,102,107

Media 2.0%

Cinemark Holdings, Inc. 94,221 1,742,146

Interpublic Group of Companies, Inc. 117,895 1,147,119

2,889,265

Specialty Retail 7.5%

Advance Auto Parts, Inc. 21,496 1,496,767

Children’s Place Retail Stores,Inc.* (a) 39,540 2,100,365

DSW, Inc. "A" 43,305 1,914,514

Guess?, Inc. 47,672 1,421,579

PetSmart, Inc. 44,139 2,263,889

Ulta Salon, Cosmetics &Fragrance, Inc.* 27,274 1,770,628

10,967,742

Textiles, Apparel & Luxury Goods 2.5%

Deckers Outdoor Corp.* 25,982 1,963,460

Hanesbrands, Inc.* 74,985 1,639,172

3,602,632

Consumer Staples 5.2%

Food Products 2.0%

Diamond Foods, Inc. (a) 43,049 1,389,191

Green Mountain CoffeeRoasters, Inc.* (a) 15,542 697,059

TreeHouse Foods, Inc.* 12,613 824,638

2,910,888

Household Products 1.6%

Church & Dwight Co., Inc. 50,946 2,331,289

Personal Products 1.6%

Herbalife Ltd. 46,515 2,403,430

Energy 8.0%

Energy Equipment & Services 4.1%

Core Laboratories NV (a) 18,218 2,075,941

Dresser−Rand Group, Inc.* 38,749 1,933,963

Dril−Quip, Inc.* 30,365 1,998,624

6,008,528

Oil, Gas & Consumable Fuels 3.9%

Alpha Natural Resources, Inc.* 33,081 675,845

Approach Resources, Inc.* (a) 63,509 1,867,800

Clean Energy Fuels Corp.* (a) 33,803 421,185

Energy XXI (Bermuda) Ltd.* (a) 38,708 1,234,011

Rosetta Resources, Inc.* (a) 33,719 1,466,776

5,665,617

Shares Value ($)

Financials 5.6%

Capital Markets 2.0%

Affiliated Managers Group, Inc.* 19,549 1,875,726

Lazard Ltd. "A" 41,887 1,093,670

2,969,396

Consumer Finance 0.8%

DFC Global Corp.* 66,316 1,197,667

Insurance 1.8%

W.R. Berkley Corp. 74,422 2,559,372

Real Estate Management & Development 1.0%

CBRE Group, Inc.* 100,526 1,530,006

Health Care 16.8%

Biotechnology 0.4%

Onyx Pharmaceuticals, Inc.* 14,448 634,990

Health Care Equipment & Supplies 4.1%

Accuray, Inc.* (a) 230,587 975,383

Merit Medical Systems, Inc.* 78,093 1,044,884

Sirona Dental Systems, Inc.* 30,013 1,321,773

Thoratec Corp.* 49,752 1,669,677

Zeltiq Aesthetics, Inc.* (a) 82,306 934,996

5,946,713

Health Care Providers & Services 5.8%

Centene Corp.* 75,707 2,997,240

DaVita, Inc.* 25,134 1,905,409

ExamWorks Group, Inc.* (a) 132,933 1,260,205

Humana, Inc. 13,841 1,212,610

WellCare Health Plans, Inc.* 22,995 1,207,237

8,582,701

Health Care Technology 1.2%

SXC Health Solutions Corp.* (a) 32,240 1,820,915

Pharmaceuticals 5.3%

Pacira Pharmaceuticals, Inc.* (a) 180,297 1,559,569

Par PharmaceuticalCompanies, Inc.* (a) 51,389 1,681,962

Questcor Pharmaceuticals, Inc.* (a) 92,789 3,858,167

VIVUS, Inc.* (a) 65,348 637,143

7,736,841

Industrials 18.9%

Aerospace & Defense 1.2%

BE Aerospace, Inc.* 46,368 1,794,905

Commercial Services & Supplies 2.6%

Portfolio RecoveryAssociates, Inc.* (a) 32,546 2,197,506

United Stationers, Inc. 52,216 1,700,153

3,897,659

Construction & Engineering 2.0%

Chicago Bridge & Iron Co. NV 36,640 1,384,992

MYR Group, Inc.* 78,695 1,506,223

2,891,215

Electrical Equipment 2.5%

General Cable Corp.* (a) 30,175 754,677

The Babcock & Wilcox Co.* 34,191 825,370

Thomas & Betts Corp.* 37,093 2,025,278

3,605,325

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


| 7

Shares Value ($)

Machinery 6.7%

Altra Holdings, Inc.* (a) 83,109 1,564,943

Chart Industries, Inc.* 22,561 1,219,873

Gardner Denver, Inc. 19,970 1,538,888

Joy Global, Inc. 23,292 1,746,201

Sauer−Danfoss, Inc.* 42,764 1,548,484

Timken Co. 19,946 772,110

WABCO Holdings, Inc.* 34,460 1,495,564

9,886,063

Professional Services 1.2%

Robert Half International, Inc. (a) 62,533 1,779,689

Road & Rail 1.1%

Kansas City Southern* 23,073 1,569,195

Trading Companies & Distributors 1.6%

United Rentals, Inc.* (a) 80,889 2,390,270

Information Technology 21.5%

Communications Equipment 2.7%

Comverse Technology, Inc. 1,205 8,098

Finisar Corp.* 41,805 700,025

Harris Corp. (a) 31,404 1,131,800

Polycom, Inc.* 66,027 1,076,240

Sycamore Networks, Inc.* 58,522 1,047,544

3,963,707

Electronic Equipment, Instruments & Components 2.5%

Cognex Corp. 61,792 2,211,535

Coherent, Inc.* 28,729 1,501,665

3,713,200

Internet Software & Services 1.2%

Equinix, Inc.* (a) 16,709 1,694,293

IT Services 5.5%

Cardtronics, Inc.* (a) 91,952 2,488,221

MAXIMUS, Inc. 44,699 1,848,304

Syntel, Inc. 39,771 1,860,090

VeriFone Systems, Inc.* 54,287 1,928,274

8,124,889

Semiconductors & Semiconductor Equipment 1.8%

Atmel Corp.* 104,361 845,324

Cavium, Inc.* (a) 31,861 905,808

Cypress Semiconductor Corp.* (a) 53,862 909,729

2,660,861

Shares Value ($)

Software 7.8%

Concur Technologies, Inc.* (a) 22,333 1,134,293

Informatica Corp.* 37,106 1,370,325

MICROS Systems, Inc.* 33,130 1,543,195

NetQin Mobile, Inc. "A" (ADR)* (a) 97,896 515,912

OPNET Technologies, Inc. (a) 13,476 494,165

Red Hat, Inc.* 37,495 1,548,169

Rovi Corp.* 45,828 1,126,452

Taleo Corp. "A"* 48,652 1,882,346

Ultimate Software Group, Inc.* 27,459 1,788,130

11,402,987

Materials 5.3%

Chemicals 1.8%

CF Industries Holdings, Inc. 10,420 1,510,692

Solutia, Inc.* 60,429 1,044,213

2,554,905

Containers & Packaging 1.1%

Crown Holdings, Inc.* 48,858 1,640,652

Metals & Mining 2.4%

Allegheny Technologies, Inc. 20,715 990,177

Cliffs Natural Resources, Inc. 11,236 700,564

Detour Gold Corp.* 24,985 616,808

Haynes International, Inc. 6,649 363,035

Thompson Creek MetalsCo., Inc.* (a) 128,882 897,018

3,567,602

Total Common Stocks (Cost $135,278,857) 144,166,892

Securities Lending Collateral 23.8%

Daily Assets Fund Institutional,0.18% (b) (c) (Cost $35,020,323) 35,020,323 35,020,323

Cash Equivalents 2.2%

Central Cash Management Fund,0.07% (b) (Cost $3,293,047) 3,293,047 3,293,047

% of NetAssets Value ($)

Total Investment Portfolio(Cost $173,592,227)� 124.2 182,480,262

Other Assets and Liabilities, Net (24.2) (35,591,148)

Net Assets 100.0 146,889,114

* Non-income producing security.� The cost for federal income tax purposes was $174,156,103. At December 31, 2011, net unrealized appreciation for all securities based

on tax cost was $8,324,159. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess ofvalue over tax cost of $21,492,551 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax costover value of $13,168,392.

(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned atDecember 31, 2011 amounted to $34,096,654, which is 23.2% 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



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) $ 144,166,892 $ � $ � $ 144,166,892

Short-Term Investments (d) 38,313,370 � � 38,313,370

Total $ 182,480,262 $ � $ � $ 182,480,262

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.



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Statement ofAssets and Liabilitiesas of December 31, 2011

Assets

Investments:

Investments in non-affiliated securities, atvalue (cost $135,278,857) � including$34,096,654 of securities loaned $ 144,166,892

Investment in Daily Assets FundInstitutional (cost $35,020,323)* 35,020,323

Investment in Central Cash ManagementFund (cost $3,293,047) 3,293,047

Total investments in securities, atvalue (cost $173,592,227) 182,480,262

Cash 1,558

Foreign currency, at value (cost $772) 783

Receivable for investments sold 531,978

Receivable for Fund shares sold 968

Dividends receivable 28,025

Interest receivable 18,079

Foreign taxes recoverable 319

Other assets 4,015

Total assets 183,065,987

Liabilities

Payable upon return of securities loaned 35,020,323

Payable for investments purchased 694,008

Payable for Fund shares redeemed 248,198

Accrued management fee 69,826

Other accrued expenses and payables 144,518

Total liabilities 36,176,873

Net assets, at value $ 146,889,114

Net Assets Consist of

Distributions in excess of net investmentincome (45,601)

Net unrealized appreciation (depreciation) on:

Investments 8,888,035

Foreign currency 11

Accumulated net realized gain (loss) (35,197,406)

Paid-in capital 173,244,075

Net assets, at value $ 146,889,114

Class A

Net Asset Value, offering and redemption priceper share ($146,889,114 ÷ 11,094,343outstanding shares of beneficial interest, no parvalue, unlimited number of shares authorized) $ 13.24

* Represents collateral on securities loaned.

Statement of Operationsfor the year ended December 31, 2011

Investment Income

Income:

Dividends (net of foreign taxes withheldof $2,812) $ 587,747

Income distributions � Central CashManagement Fund 4,472

Securities lending income, including incomefrom Daily Assets Fund Institutional, net ofborrower rebates 116,414

Total income 708,633

Expenses:

Management fee 775,353

Administration fee 140,973

Services to shareholders 3,404

Custodian fee 13,192

Audit and tax fees 58,965

Legal fees 7,424

Reports to shareholders 15,965

Trustees’ fees and expenses 6,387

Other 4,989

Total expenses 1,026,652

Net investment income (loss) (318,019)

Realized and Unrealized Gain (Loss)

Net realized gain (loss) from:

Investments 15,187,312

Foreign currency (1,245)

Payment by affiliate (see Note F) 75,429

15,261,496

Change in net unrealizedappreciation (depreciation) on:

Investments (32,232,753)

Foreign currency 11

(32,232,742)

Net gain (loss) (16,971,246)

Net increase (decrease) in net assetsresulting from operations $ (17,289,265)



Statement of Changes in Net AssetsYears Ended December 31,

2011 2010

Operations:

Net investment income (loss) $ (318,019) $ (87,977)

Net realized gain (loss) 15,261,496 11,959,891

Change in net unrealized appreciation (depreciation) (32,232,742) 8,823,086

Net increase (decrease) in net assets resulting from operations (17,289,265) 20,695,000

Distributions to shareholders from:

Net investment income:

Class A (545,355) �

Total distributions (545,355) �

Fund share transactions:

Class A

Proceeds from shares sold 15,498,269 6,051,148

Net assets acquired in tax-free reorganization 93,892,921 �

Reinvestment of distributions 545,355 �

Cost of shares redeemed (33,642,074) (17,902,129)

Net increase (decrease) in net assets from Class A share transactions 76,294,471 (11,850,981)

Increase (decrease) in net assets 58,459,851 8,844,019

Net assets at beginning of period 88,429,263 79,585,244

Net assets at end of period (including distributions in excess of net investment income and undistributednet investment income of $45,601 and $516,412, respectively) $ 146,889,114 $ 88,429,263

Other Information

Class A

Shares outstanding at beginning of period 6,384,947 7,439,067

Shares sold 1,084,284 517,480

Shares issued in tax-free reorganization 6,003,455 �

Shares issued to shareholders in reinvestment of distributions 34,959 �

Shares redeemed (2,413,302) (1,571,600)

Net increase (decrease) in Class A shares 4,709,396 (1,054,120)

Shares outstanding at end of period 11,094,343 6,384,947



| 11

Financial Highlights

Class AYears Ended December 31,

2011 2010 2009 2008 2007

Selected Per Share Data

Net asset value, beginning of period $13.85 $10.70 $ 7.61 $15.07 $14.19

Income (loss) from investment operations:

Net investment income (loss)a (.03) (.01) (.02) (.01) (.01)

Net realized and unrealized gain (loss) (.50) 3.16 3.11 (7.45) .89

Total from investment operations (.53) 3.15 3.09 (7.46) .88

Less distributions from:

Net investment income (.08) � � � �

Net asset value, end of period $13.24 $13.85 $10.70 $ 7.61 $15.07

Total Return (%) (3.91) 29.44 40.60 (49.50)b 6.20b

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions) 147 88 80 69 174

Ratio of expenses before expense reductions (%) .73 .78 .77 .88 .75

Ratio of expenses after expense reductions (%) .73 .78 .77 .85 .72

Ratio of net investment income (loss) (%) (.23) (.12) (.22) (.04) (.09)

Portfolio turnover rate (%) 84 64 93 67 67

a Based on average shares outstanding during the period.b Total return would have been lower had certain expenses not been reduced.


Notes to Financial Statements

A. Organization and Significant Accounting Policies

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

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 are valued at the most recent sale price or official closing price reported on the exchange (U.S.or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities forwhich no sales are reported are valued at the calculated mean between the most recent bid and asked quotationson the relevant market or, if a mean cannot be determined, at the 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 aboutfair 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.

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 receives


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compensation 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 toits shareholders.

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 bases capital loss carryforward of approximately $29,395,000 ofpre−enactment losses of which $5,435,000 was inherited from its mergers with DWS Turner Mid Cap Growth VIPand DWS Mid Cap Growth VIP in the current year and which may be applied against any realized net taxablecapital gains of each succeeding year until fully utilized or until December 31, 2016 ($5,435,000) andDecember 31, 2017 ($23,960,000), the respective expiration dates, whichever occurs first and which maybe subject to certain limitations under Section 382−384 of the Internal Revenue Code.

In addition, from November 1, 2011 to December 31, 2011, the Fund elects to defer qualified late year losses ofapproximately $5,239,000 of net realized short-term capital losses and approximately $46,000 of net ordinarylosses. The Fund intends to elect to defer these losses and treat them as arising in the fiscal year endingDecember 31, 2012.

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 net operating losses and certain securities sold ata loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for areporting period may differ significantly from distributions during such period. Accordingly, the Fund mayperiodically make reclassifications among certain of its capital accounts without impacting the net asset value ofthe Fund.

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

Capital loss carryforwards $ (29,395,000)

Unrealized appreciation (depreciation) on investments $ 8,324,159

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* $ 545,355 $ �

* 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 of


foreign 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 $118,429,716 and $135,190,910, 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.

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 .550%

Next $750 million .525%

Over $1 billion .500%

Accordingly, for the year ended December 31, 2011, the fee pursuant to the Investment Management Agreementwas equivalent to an annual effective rate of 0.55% 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 $140,973, of which$12,696 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 aggregated $301, of which $87 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 $12,265, of which $3,276 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 $10,971.

D. Ownership of the Fund

At December 31, 2011, three Participating Insurance Companies were owners of record of 10% or more of thetotal outstanding Class A shares of the Fund, each owning 54%, 23% and 15%.

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 are


| 15

charged 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. Payment by Affiliate

In connection with the Fund’s investment strategy change effective May 1, 2011, the Advisor agreed to reimbursethe Fund for transaction costs of $75,429 incurred from the repositioning of the Fund’s investments.

G. Acquisition of Assets

On April 29, 2011, the Fund acquired all of the net assets of DWS Mid Cap Growth VIP and DWS Turner Mid CapGrowth VIP pursuant to a plan of reorganization approved by shareholders on January 12, 2011. The acquisitionwas accomplished by a tax-free exchange of 2,029,578 Class A shares of DWS Mid Cap Growth VIP and6,543,235 Class A shares of DWS Turner Mid Cap Growth VIP for 1,818,964 Class A shares and4,184,491 Class A shares of the Fund, respectively, outstanding on April 29, 2011. DWS Mid Cap Growth VIP andDWS Turner Mid Cap Growth VIP’s net assets at that date, $28,448,304 and $65,444,617, respectively, including$6,234,926 and $6,931,871 of net unrealized appreciation, respectively, were combined with those of the Fund.The aggregate net assets of the Fund immediately before the acquisition were $105,299,610. The combined netassets of the Fund immediately following the acquisition were $199,192,531.

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:

Net investment income* $ (531,751)

Net gain (loss) on investments $ (5,816,813)

Net increase (decrease) in net assets resulting from operations $ (6,348,564)

* Net investment income includes $42,719 of pro forma eliminated expenses.

Because the combined investment portfolio has been managed as a single integrated portfolio since theacquisitions were completed, it is not practicable to separate the amounts of revenue and earnings of DWS MidCap Growth VIP and DWS Turner Mid Cap Growth VIP that have been included in the Fund’s Statement ofOperations 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 Small Mid Cap Growth VIP:

We have audited the accompanying statement of assets and liabilities of DWS Small Mid Cap Growth VIP

(formerly DWS Small Cap Growth VIP) (the �Fund"), one of the funds constituting the DWS Variable Series II (the

�Trust"), 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 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 Small Mid Cap Growth 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


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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 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

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

Ending Account Value 12/31/11 $ 869.90

Expenses Paid per $1,000* $ 3.35

Hypothetical 5% Fund Return Class A

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

Ending Account Value 12/31/11 $1,021.63

Expenses Paid per $1,000* $ 3.62

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

Annualized Expense Ratio Class A

DWS Variable Series II � DWS Small Mid Cap Growth VIP .71%

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)

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.

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.

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 Small Mid Cap Growth VIP’s (formerly DWS Small CapGrowth VIP) investment management agreement (the �Agreement") with Deutsche Investment ManagementAmericas Inc. (�DWS") in September 2011.

In terms of the process that the Board followed prior to approving the Agreement, 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 Agreement, the Board also reviewed the terms of the Fund’s distributionagreement, administrative services agreement, transfer agency agreement and other material serviceagreements.

� 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 is part of Deutsche Bank, a major global banking institution that is engaged in a widerange of financial services. The Board believes that there are significant advantages to being part of a global assetmanagement business that offers a wide range of investing expertise and resources, including hundreds ofportfolio managers and analysts with research capabilities in many countries throughout the world.

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 personnel and such other issues as back-officeoperations, fund valuations, and compliance policies and procedures.

Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scopeof advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS providesportfolio management services to the Fund and that, pursuant to a separate administrative services agreement,DWS provides administrative services to the Fund. The Board considered the experience and skills of seniormanagement and investment personnel, the resources made available to such personnel, the ability of DWS toattract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewedthe Fund’s performance over short-term and long-term periods and compared those returns to variousagreed-upon performance measures, including market indices and a peer universe compiled by the independentfee consultant using information supplied by Lipper Inc. (�Lipper"). The Board also noted that it has put into placea process of identifying �Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peeruniverse compiled by an independent fund data service), and receives more frequent reporting and informationfrom DWS regarding such funds, along with DWS’s remedial plans to address underperformance. The Boardbelieves this process is an effective manner of identifying and addressing underperforming funds. Based on theinformation 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 2nd quartile, 4th quartile and 4th quartile, respectively, of theapplicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worstperformers). The Board also observed that the Fund has outperformed its benchmark in the one-year period andhas underperformed its benchmark in the three- and five-year periods ended December 31, 2010.


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 historically have been and continue to besatisfactory.

Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses,and total expense ratios, and comparative information provided by Lipper and the independent fee consultantregarding investment management fee rates paid to other investment advisors by similar funds (1st quartile beingthe most favorable and 4th quartile being the least favorable). With respect to management fees paid to otherinvestment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, whichinclude a 0.10% fee paid to DWS under the Fund’s administrative services agreement, were lower than themedian (1st quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31,2010). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be lowerthan the median (1st quartile) of the applicable Lipper expense universe (based on Lipper data provided as ofDecember 31, 2010, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees)(�Lipper Universe Expenses"). The Board considered the Fund’s management fee rate as compared to feescharged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund andfee structures between the DWS Funds. The Board also considered how the Fund’s total (net) operating expensescompared to the total (net) operating expenses of a more customized peer group selected by Lipper (based onsuch factors as asset 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.

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 alsoconsidered 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 of


| 21

DWS 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 Agreement 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 Agreement.


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.


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Notes


DWS Investments Distributors, Inc.

222 South Riverside Plaza

Chicago, IL�60606

(800) 621-1148

VS2SMCG-2 (R-025835-1 2/12)

annual report · rafaelina m. lee portfolio managers 1 gross domestic product is the value of goods...

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