N-CSRS 1 g32059rs.txt RS INVESTMENTS SAR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-05159 --------------- RS Investment Trust ------------------------------------------------------------ (Exact name of registrant as specified in charter) 388 Market Street San Francisco, CA 94111 ------------------------------------------------------------ (Address of principal executive offices) (Zip code) Terry R. Otton c/o RS Investments 388 Market Street San Francisco, CA 94111 ------------------------------------------------------------ (Name and address of agent for service) Registrant's telephone number, including area code: 800-766-3863 ------------- Date of fiscal year end: December 31 ------------ Date of reporting period: June 30, 2006 -------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. RS INVESTMENT TRUST 2006 SEMIANNUAL REPORT [GRAPHIC OMITTED] RS INVESTMENT TRUST 2006 SEMIANNUAL REPORT GROWTH RS DIVERSIFIED GROWTH FUND RS EMERGING GROWTH FUND RS GROWTH FUND THE INFORMATION AGE FUND(R) RS INTERNET AGE FUND(R) RS MIDCAP OPPORTUNITIES FUND RS SMALLER COMPANY GROWTH FUND VALUE RS GLOBAL NATURAL RESOURCES FUND RS INVESTORS FUND RS PARTNERS FUND RS VALUE FUND RS | INVESTMENTS RS FUNDS PHONE: 1-800-766-FUND (3863) WEB: WWW.RSINVESTMENTS.COM E-MAIL: FUNDS@RSINVESTMENTS.COM 24-HOUR ACCOUNT ACCESS PHONE: 1-800-624-8025 WEB: ENTER MY ACCOUNT ON THE RS INVESTMENTS WEB SITE PERFORMANCE UPDATE As of 6/30/06
Annualized Year-to- 1-Year 3-Year 5-Year 10-Year Return Ticker Inception Date Total Annualized Annualized Annualized Since RS GROWTH FUNDS Symbol Date Return Return Return Return Return Inception RS Diversified Growth Fund RSDGX 8/1/96 0.49% 5.06% 9.08% -1.42% -- 13.00% RS Emerging Growth Fund RSEGX 11/30/87 3.04% 9.06% 13.53% -1.45% 9.86% 15.51% RS Growth Fund RSGRX 5/12/92 0.76% 11.69% 14.87% 3.95% 7.07% 11.46% The Information Age Fund(R) RSIFX 11/15/95 -4.46% 4.20% 12.06% 0.77% 8.13% 8.33% RS Internet Age Fund(R) RIAFX 12/1/99 -8.38% 5.65% 13.99% 3.66% -- -5.05% RS MidCap Opportunities Fund RSMOX 7/12/95 4.87% 15.52% 16.53% 4.49% 9.76% 11.75% RS Smaller Company Growth Fund RSSGX 8/15/96 0.99% 8.77% 17.90% 5.23% -- 12.07% RS VALUE FUNDS RS Global Natural Resources Fund RSNRX 11/15/95 10.54% 42.46% 37.80% 26.74% 13.11% 14.53% RS Investors Fund RSINX 11/15/05 1.72% -- -- -- -- 6.20% 1 RS Partners Fund 2 RSPFX 7/12/95 4.97% 12.98% 26.02% 20.09% 14.47% 16.35% RS Value Fund RSVAX 6/30/93 4.11% 10.68% 25.93% 17.59% 5.83% 8.32%
1 RS INVESTORS FUND'S "since inception" return is not annualized and represents cumulative total return. (Inception date: 11/15/05.) 2 RS PARTNERS FUND is currently offered (by purchase or exchange) only to investors purchasing shares through certain financial intermediaries. See "Other Information About Purchasing Shares" on page 42 of the Prospectus. PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in high-technology and Internet-related sectors may be highly volatile. Funds that concentrate investments in a certain sector may be subject to greater risk than funds that invest more broadly, as companies in that sector may share common characteristics and may react similarly to market developments or other factors affecting their values. Investments in companies in natural resources industries may involve risks including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international political and economic developments. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. THIS REPORT MAY BE USED ONLY WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS. YOU SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE RS FUNDS BEFORE MAKING AN INVESTMENT DECISION. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION - PLEASE READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY. EXCEPT AS NOTED, NUMBERS ARE UNAUDITED. PFPC Distributors, Inc. distributor, 760 Moore Road, King of Prussia, PA 19406 TABLE OF CONTENTS RS INVESTMENTS OVERVIEW HIGHLIGHTS .................................................. 2 CEO LETTER .................................................. 4 PORTFOLIO MANAGER BIOGRAPHIES ............................... 6 RS GROWTH FUNDS RS DIVERSIFIED GROWTH FUND .................................. 9 RS EMERGING GROWTH FUND ..................................... 15 RS GROWTH FUND .............................................. 21 THE INFORMATION AGE FUND(R) ................................. 27 RS INTERNET AGE FUND(R) ..................................... 33 RS MIDCAP OPPORTUNITIES FUND ................................ 39 RS SMALLER COMPANY GROWTH FUND .............................. 45 RS VALUE FUNDS RS GLOBAL NATURAL RESOURCES FUND ............................ 51 RS INVESTORS FUND ........................................... 59 RS PARTNERS FUND + .......................................... 67 RS VALUE FUND ............................................... 77 UNDERSTANDING YOUR FUND'S EXPENSES ............................ 86 FINANCIAL INFORMATION SCHEDULES OF INVESTMENTS .................................... 88 STATEMENT OF ASSETS AND LIABILITIES ......................... 108 STATEMENT OF OPERATIONS ..................................... 110 STATEMENT OF CHANGES IN NET ASSETS .......................... 112 FINANCIAL HIGHLIGHTS ........................................ 116 NOTES TO FINANCIAL STATEMENTS ............................... 120 SUPPLEMENTAL INFORMATION .................................... 128 ADMINISTRATION ................................................ 136 RS INVESTMENTS' SENIOR MANAGEMENT BIOGRAPHIES ................. 137 INVESTING WITH RS ............................................. 140 This Semiannual Report to Shareholders contains some forward-looking statements providing current expectations or forecasts of future events; they do not necessarily relate to historical or current facts. There can be no guarantee that any forward-looking statement will be realized. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. + RS PARTNERS FUND is currently offered (by purchase or exchange) only to investors purchasing shares through certain financial intermediaries. See "Other Information About Purchasing Shares" on page 42 of the Prospectus. HIGHLIGHTS [GRAPHIC OMITTED] RS FUNDS RECEIVE FOUR- AND FIVE-STAR OVERALL MORNINGSTAR RATINGS(TM) 1 The RS Funds noted in the chart below received Overall Morningstar Ratings(TM) of four or five stars from Morningstar, a proprietary research firm, as of June 30, 2006. Ratings are based on risk-adjusted returns. The Overall Morningstar Rating(TM) for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating(TM) metrics. FOUR- AND FIVE-STAR OVERALL MORNINGSTAR RATINGS(TM) As of 6/30/06 RS Fund Overall Morningstar Rating(TM) RS PARTNERS FUND ***** (out of 463 small blend funds) RS GLOBAL NATURAL RESOURCES FUND **** (out of 96 specialty-natural resources funds) RS GROWTH FUND **** (out of 1,361 large growth funds) RS INTERNET AGE FUND(R) **** (out of 282 specialty-technology funds) RS MIDCAP OPPORTUNITIES FUND **** (out of 823 mid-cap growth funds) [GRAPHIC OMITTED] TOP DECILE AND QUARTILE RS FUNDS 2 The following RS Funds were ranked in the top decile or quartile of their peer groups by Lipper for the three- and five-year periods ended June 30, 2006. Rankings are based on total return. THREE-YEAR RANKINGS As of 6/30/06 Top Decile Top Quartile RS Fund RS PARTNERS FUND X (number 16 out of 508 funds in the small-cap core funds category) It also ranked number 341 out of 640 funds for the one-year period and 14 out of 103 funds for the 10-year period. RS VALUE FUND X (number 7 out of 215 funds in the mid-cap value funds category) It also ranked number 161 out of 264 funds for the one-year period and 51 out of 52 funds for the 10-year period. RS GROWTH FUND X (number 69 out of 355 funds in the multi-cap growth funds category) It also ranked number 160 out of 414 funds for the one-year period and 38 out of 97 funds for the 10-year period. RS INTERNET AGE FUND(R) X (number 44 out of 257 funds in the science and technology funds category) It also ranked number 199 out of 287 funds for the one-year period. RS SMALLER COMPANY GROWTH FUND X (number 92 out of 454 funds in the small-cap growth funds category) It also ranked number 410 out of 533 funds for the one-year period and 111 out of 360 funds for the five-year period. 2 | CALL 1-800-766-FUND [GRAPHIC OMITTED] TOP DECILE AND QUARTILE RS FUNDS 2 (Continued) FIVE-YEAR RANKINGS As of 6/30/06 Top Decile Top Quartile RS Fund RS INTERNET AGE FUND(R) X (number 14 out of 222 funds in the science and technology funds category) RS PARTNERS FUND X (number 3 out of 391 funds in the small-cap core funds category) RS VALUE FUND X (number 6 out of 142 funds in the mid-cap value funds category) RS GLOBAL NATURAL RESOURCES FUND X (number 10 out of 69 funds in the natural resources funds category) It also ranked number 41 out of 101 funds for the one-year period and 20 out of 29 funds for the 10-year period. RS GROWTH FUND X (number 62 out of 284 funds in the multi-cap growth funds category) It also ranked number 160 out of 414 funds for the one-year period and 38 out of 97 for the 10-year period. THE INFORMATION AGE FUND(R) X (number 30 out of 222 funds in the science and technology funds category) It also ranked number 228 out of 287 funds for the one-year period and 12 out of 31 for the 10-year period. The information contained herein was obtained from sources we believe to be reliable and we have attempted to insure accuracy. Investors relying on information contained herein are encouraged to verify this information directly with the rating agency or through independent sources. 1 (C) 2006 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers is responsible for any damages or losses arising from any use of this information. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating(TM) for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating(TM) metrics. RS Partners Fund was rated against the following numbers of U.S.-domiciled Small Blend funds over the following time periods: 463 funds in the last three years, 357 funds in the last five years, and 95 funds in the last 10 years. With respect to these Small Blend funds, RS Partners Fund received a Morningstar Rating of 5 stars for the three- and five-year periods, and 4 stars for the 10-year period, respectively. RS Global Natural Resources Fund was rated against the following numbers of U.S.-domiciled Specialty - Natural Resources funds over the following time periods: 96 funds in the last three years, 83 funds in the last five years, and 38 in the last 10 years. With respect to these Specialty - Natural Resources funds, RS Global Natural Resources Fund received a Morningstar Rating of 4 stars, 5 stars, and 3 stars for the three-, five-, and 10-year periods, respectively. RS Growth Fund was rated against the following numbers of U.S.-domiciled Large Growth funds over the following time periods: 1,361 funds in the last three years, 1,081 funds in the last five years, and 402 funds in the last 10 years. With respect to these Large Growth funds, RS Growth Fund received a Morningstar Rating of 5 stars, 4 stars, and 3 stars for the three-, five-, and 10-year periods, respectively. RS Internet Age Fund(R) was rated against the following numbers of U.S.-domiciled Specialty-Technology funds over the following time periods: 282 funds in the last three years and 243 funds in the last five years. With respect to these Specialty-Technology funds, RS Internet Age Fund(R) received a Morningstar Rating of 4 stars for the three- and five-year periods, respectively. RS MidCap Opportunities Fund was rated against the following numbers of U.S.-domiciled Mid-Cap Growth funds over the following time periods: 823 funds in the last three years, 642 funds in the last five years, and 231 funds in the last 10 years. With respect to these Mid-Cap Growth funds, RS MidCap Opportunities Fund received a Morningstar Rating of 4 stars, 3 stars, and 4 stars for the three-, five-, and 10-year periods, respectively. Past performance is no guarantee of future results. 2 (C) 2006 REUTERS. Lipper rankings are based on total return with dividends reinvested and do not take into account or reflect sales charges. Lipper, a wholly owned subsidiary of Reuters, is a leading global provider of mutual fund information and analysis to fund companies, financial intermediaries, and media organizations. Lipper clients manage more than 95% of U.S. fund assets. The firm, founded in 1973 and headquartered in New York, tracks 125,000 funds worldwide through its offices in major financial capitals in North America, Europe, and Asia. Read the following restrictions: Information on this page has been sourced from Lipper, a Reuters Company ("Lipper Content"). All such information is protected by copyright: (C) 2006 REUTERS. All rights reserved. Any copying, republication, or redistribution of Lipper Content is expressly prohibited without the prior written consent of Lipper. Lipper and its parent and affiliated companies will not be liable for any errors or delays in the content or for any actions taken in reliance thereon. LIPPER and the LIPPER Corporate Marks are proprietary trademarks of Lipper, a Reuters Company. For additional information on the other Lipper Services, please visit the Lipper Web site at http://www.lipperweb.com. Market volatility can affect short-term performance. Favorable ratings do not necessarily indicate positive returns. Please visit www.RSinvestments.com for more information on the RS Funds. WWW.RSINVESTMENTS.COM | 3 CEO LETTER [PHOTO OMITTED] TERRY R. OTTON CEO, RS INVESTMENTS Dear Fellow Shareholders, I am pleased to share with you that as of May 17, 2006, we have entered into an agreement pursuant to which The Guardian Life Insurance Company of America (Guardian) will take a 65% ownership position in RS Investments. The remaining 35% ownership stake will remain with investment professionals and business managers of RS Investments. The transaction is subject to approval by the board and the shareholders of the RS Funds as well as by regulators. Once the transaction is approved, RS Investments will operate as an independent subsidiary of Guardian under my leadership team. The firm will maintain its current operations and continue to serve all of its investors and clients, and there will be no changes to the RS portfolio management teams. We plan to integrate all Guardian-sponsored funds into the RS Funds family later this year, subject to approval of the boards of trustees of both fund families and the shareholders of the Guardian-sponsored funds. There are many benefits that prompted us to enter into this relationship at this time, and I would like to share some of them with you. First, we believe that the transaction will bring together the complementary advantages enjoyed by each of RS Investments and Guardian Investor Services LLC (GIS), Guardian's indirect wholly-owned subsidiary which serves as the investment adviser to the Guardian-sponsored funds. With GIS's focus on core equity and fixed-income products and RS Investments' expertise in growth and value products, a combined mutual fund family will include a more diversified range of funds than either company currently offers. In addition, like many employee-owned firms, RS Investments faced the challenge of continuing ownership across generations. Looking strategically at our business over the past 18 months, we realized that we needed to find a way to perpetuate what the founding partners started more than 20 years ago: We wanted to create a structure that would allow our investment professionals to retain a meaningful stake in the business, attract new investment talent, and establish a means for generational transfer. We believe that this structure will provide the means to perpetuate our culture and ensure that our investment processes remain consistent and dependable. Further, as the compliance and regulatory environment in this industry continues to expand and grow more complicated, we believe that there is merit in having deeper resources behind us. We think that these resources can provide valuable stability to our organization, particularly to the investment process. Finally, our relationship with Guardian will give us access to services, distribution, and operational resources that we think can improve efficiencies and deliver a better service experience for our clients and investors. We anticipate the official closing of this transaction to be in late August. 4 | CALL 1-800-766-FUND Everyone at RS Investments has a high degree of confidence that this partnership will result in a strong, enduring firm that will continue to be driven by a culture of investment excellence. I want to assure you that we are absolutely committed to continuing to improve our firm and to meeting and exceeding your expectations in managing your, or your client's, capital. Moving on to a semiannual update of the RS Funds, performance continues to stay on track with strong industry rankings. At the end of the second quarter, half of our eligible Funds* had a 4- or 5-Star Overall Morningstar Rating(TM) 1. Six of our Funds* were ranked in Lipper's 1 top decile or quartile for the five-year period ended June 30, 2006 (with five of our Funds ranked in this same category for the three-year period). We have had some notable press year to date: John Wallace, portfolio manager of the RS Growth Fund and the RS MidCap Opportunities Fund, was profiled in FINANCIAL ADVISOR this past January; BARRON'S featured co-portfolio manager Allison Thacker's insights on burgeoning Chinese tech companies after she returned from China in April; and Bill Wolfenden, portfolio manager of the RS Smaller Company Growth Fund, and MacKenzie Davis, co-portfolio manager of the RS Global Natural Resources Fund, were interviewed on CNBC's CLOSING BELL segment in May and April, respectively. Finally, I am pleased to announce recent analyst hires on the Value Team -- Ernst Schleimer and Andy Henderson -- and the arrival of our new chief financial officer, Jim Klescewski. We are delighted to have them on board. Thank you as always for entrusting us with your investments. Sincerely, /s/ Terry R. Otton Terry R. Otton Chief Executive Officer totton@rsinvestments.com ---------- 1 See previous page for ratings information. * Only 10 of our 11 Funds were eligible for this time period. The RS Investors Fund commenced operations on November 15, 2005, and will not be eligible for inclusion until it has established a longer track record. WWW.RSINVESTMENTS.COM | 5 PORTFOLIO MANAGER BIOGRAPHIES [PHOTOS OMITTED] OUR PEOPLE AT RS INVESTMENTS WE BELIEVE THAT OUR PEOPLE AND THEIR PROCESSES ARE WHAT SET US APART AND DIFFERENTIATE OUR FAMILY OF FUNDS. BY BUILDING ON A FOUNDATION OF HIGH-QUALITY INDIVIDUALS WITH EXTENSIVE INVESTMENT EXPERIENCE, EXCEPTIONAL EDUCATIONAL BACKGROUNDS, AND A WIDE VARIETY OF PROFESSIONAL EXPERIENCE AND KNOWLEDGE, WE HAVE ESTABLISHED A MOST REMARKABLE ORGANIZATION. STEVE BISHOP has been co-portfolio manager of the RS Internet Age Fund(R) since February 2001 and of The Information Age Fund(R) since July 2001. Mr. Bishop joined RS Investments in 1996 as a research analyst, primarily covering the technology sector. Prior to joining the firm, he worked as an analyst in the corporate finance department of Dean Witter Reynolds, Inc. for three years. Mr. Bishop holds a B.A. in economics from the University of Notre Dame and an M.B.A. from Harvard Business School. JIM CALLINAN has managed the RS Emerging Growth Fund since 1996. Prior to joining the firm in 1996, Mr. Callinan was portfolio manager of the Putnam OTC Emerging Growth Fund for two years and served on the investment team of Putnam's growth group for nine years. He received an A.B. in economics from Harvard College, an M.S. in accounting from New York University, and an M.B.A. from Harvard Business School. Mr. Callinan is also a Chartered Financial Analyst. JOHN SEABERN is the portfolio manager of the RS Diversified Growth Fund and has served on the Fund's management team since its inception (and as co-portfolio manager from October 1997 through April 2005). Prior to joining the firm in 1993, he was a performance analyst at Duncan-Hurst Capital Management for two years. Mr. Seabern holds a B.S. degree in finance from the University of Colorado, and is a Chartered Financial Analyst. 6 | CALL 1-800-766-FUND [PHOTOS OMITTED] FROM LEFT TO RIGHT: GROWTH GROUP STEVE BISHOP JIM CALLINAN JOHN SEABERN ALLISON THACKER JOHN WALLACE BILL WOLFENDEN ALLISON THACKER has been a co-portfolio manager of the RS Internet Age Fund(R) and The Information Age Fund(R) since April 2003. Prior to joining RS Investments in 2000 as an analyst covering Internet and consumer discretionary stocks, she worked as a summer associate at Putnam Investments, and, prior to that, she was an analyst in the energy group at Merrill Lynch & Company for two years. Ms. Thacker holds a B.A. in economics from Rice University and an M.B.A. from Harvard Business School. JOHN WALLACE has managed the RS MidCap Opportunities Fund since its inception and the RS Growth Fund since July 2001. Mr.Wallace was also the co-portfolio manager of the RS Diversified Growth Fund from August 1996 through April 2005. Prior to joining the firm in 1995, he spent nine years at Oppenheimer Management Corporation, where he managed the Oppenheimer Main Street Income and Growth Fund for five years. Mr.Wallace holds a B.A. from the University of Idaho and an M.B.A. from Pace University. BILL WOLFENDEN has managed the RS Smaller Company Growth Fund since joining RS Investments in April 2001. Prior to that time, Mr.Wolfenden had been at Dresdner RCM Global Investors since 1994, where he served on the micro-cap and small-cap growth investment management teams. Previously, he spent four years in commercial banking for Westamerica Bank and the Bank of California. Mr. Wolfenden holds a B.A. in economics from Southern Methodist University and an M.B.A. with a dual concentration in finance and accounting from Vanderbilt University. WWW.RSINVESTMENTS.COM | 7 PORTFOLIO MANAGER BIOGRAPHIES (Continued) [PHOTOS OMITTED] FROM LEFT TO RIGHT: VALUE GROUP MACKENZIE DAVIS DAVID KELLEY ANDREW PILARA JOE WOLF MACKENZIE DAVIS has been a co-portfolio manager of the RS Global Natural Resources Fund since January 2005. Prior to joining RS Investments in March 2004 as an analyst in the RS Value Group, Mr. Davis spent four years as a high yield analyst at Fidelity Management & Research Company. Previously, he was a vice president at Fidelity Capital Markets. He was also an analyst at Goldman Sachs & Company. Mr. Davis holds an A.B. from Brown University in mathematical economics and modern American history. He is a Chartered Financial Analyst. DAVID KELLEY has been a co-portfolio manager of the RS Partners Fund and the RS Value Fund since January 2004 and of the RS Investors Fund since its inception. Prior to joining RS Investments in 2002 as an analyst in the RS Value Group, Mr. Kelley was a small-cap analyst at Pequot Capital Management from 2001 to 2002. Previously, he had served as an analyst for three years with Crestwood Capital, an ING-affiliated hedge fund group, and spent three years at Goldman Sachs & Company in the mergers and acquisitions department. Mr. Kelley earned a B.A. in history from Yale University and an M.B.A. from Harvard Business School. ANDREW PILARA has managed the RS Partners Fund, the RS Global Natural Resources Fund, and the RS Investors Fund since their inceptions. Mr. Pilara has been responsible for the management of the RS Value Fund since January 2001 and has been a member of that Fund's management team since 1999. Prior to joining the firm in 1993, he was president of Pilara Associates, an investment management firm he established in 1974. He has been involved in the securities business for over thirty years, with experience in portfolio management, research, trading, and sales. Mr. Pilara holds a B.A. in economics from Saint Mary's College. JOE WOLF has been a co-portfolio manager of the RS Partners Fund and the RS Value Fund since January 2004 and of the RS Investors Fund since its inception. Prior to joining RS Investments in 2001 as an analyst in the RS Value Group, Mr.Wolf was the founder, director, and vice president of corporate development for zUniversity, an affinity marketing company focused on university students and alumni. Previously, he had worked as a senior financial analyst at Goldman Sachs & Company for four years in both the equities division and the strategic consulting group. Mr.Wolf holds a B.A. in medicine and psychology from Vanderbilt University and an M.B.A. from Harvard Business School. -------------------------------------------------------------------------------- The Statement of Additional Information provides further information about the Portfolio Managers, including information regarding their compensation, other accounts they manage, and their ownership interests in the Funds. For information on how to receive a copy of the Statement of Additional Information, please see the back cover of the Prospectus or visit our web site at WWW.RSINVESTMENTS.COM. 8 | CALL 1-800-766-FUND RS DIVERSIFIED GROWTH FUND FOCUSING ON SMALL-CAP GROWTH COMPANIES [PHOTO OMITTED] JOHN SEABERN Portfolio Manager For bio see page 6 RS DIVERSIFIED GROWTH FUND INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS DIVERSIFIED GROWTH FUND IS AN ACTIVELY MANAGED PORTFOLIO THAT SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING PRINCIPALLY IN SMALL-CAP GROWTH STOCKS. OUR FUNDAMENTAL RESEARCH IS COMBINED WITH TREND ANALYSIS AND STRICT VALUATION CRITERIA TO IDENTIFY INVESTMENT OPPORTUNITIES WITH ACCEPTABLE RISK/REWARD PROFILES. INVESTMENT PROCESS Our fundamental bottom-up approach is focused on companies that we believe have superior business model dynamics combined with trend analysis and strict valuation criteria. Our ideal investment is a company with sustainable (three to five years) earnings and cash flow growth above 20%, a high degree of revenue visibility, significant unrecognized operating leverage, and a healthy balance sheet to fund future growth initiatives. We invest alongside managers who are significant stakeholders themselves, with track records of being excellent stewards of shareholder capital. Our formula for long-term success also includes a disciplined approach to risk management: We seek to minimize losses quickly, we monitor industry diversification closely, and we seek to manage position sizes to achieve optimal risk-adjusted returns. PERFORMANCE Following a quarter of strong market performance and robust economic growth, the second quarter marked the first period since the cyclical bull market began in 2003 in which major equity indexes corrected over 10%. Fears over escalating inflation and continued monetary tightening have caused many investors to focus on the impending economic slowdown. Long-duration equities, especially fast-growing small-cap companies, declined aggressively as investors looked to reduce volatility and focus on short-term and defensive strategies. This resulted in the RS Diversified Growth Fund's decline in the second quarter of 7.62% compared with a loss of 7.25% for the Fund's benchmark, the Russell 2000(R) Growth Index 4. Year-to-date returns for the Fund and its benchmark were 0.49% and 6.07%, respectively. We recognize that rising discount rates are a negative factor for our investments, but we also think that the myopic focus on short-term prospects combined with a reduction in embedded growth expectations has created many attractive long-term investment opportunities. PORTFOLIO REVIEW Second-quarter performance felt the positive impact of good stock selection in producer durables, which added about 50 basis points of alpha. InterDigital Communications (1.01% of assets as of 6/30/06) was a big winner for us, up 42% during the quarter. InterDigital has developed an extensive patent portfolio of 2G and 3G cellular and 802.11 wireless technologies that many leading original equipment manufacturers (OEMs) license worldwide. InterDigital recently announced major licensing deals with some of the largest handset manufacturers in the world - LG Electronics (0.00%) and Nokia (0.00%) -- which materially changed the company's competitive positioning in the rapidly emerging 3G wireless network rollout. We believe that InterDigital will collect royalties of $1 to $2 per 3G handset, which potentially may double its revenues in the next two to three years while generating significant cash flow. We still like the long-term prospects for the company, but we've recently reduced our 10 | CALL 1-800-766-FUND position as the stock approached our short-term price objective. A stock that didn't perform well for us in the producer durables sector was Champion Enterprises (0.00%), which declined 38% during the quarter. Champion is one of the largest producers of manufactured housing, an industry that has recently emerged from a five- to six-year downturn. We invested in Champion because we believed it had completed a successful restructuring, which has yielded significant operating leverage and we felt that it was positioned to benefit from the residential home rebuilding efforts in the Gulf Coast region. We were forced to cut our losses due to our strict risk management process but will continue to monitor Champion as a potential future investment. Another sector that had positive attribution during the quarter was the consumer sector due to better stock selection and a slight underweighting relative to the Russell 2000 Growth Index. We have been very selective in our consumer investments, avoiding companies that sell highly discretionary products and services and those focused on lower-income-bracket demographics and instead concentrating on companies with unique franchises that offer high value relative to their product's cost. Nutri/System (1.43%) is a company that offers weight management programs to its members under the Nourish trademark. We believe Nourish is turnkey, healthy, highly effective, and more affordable than both daily food costs for a consumer not on a particular meal plan and competing alternatives. These program attributes result in a high number of referrals and reactivations by former members, which have a material impact on profitability and the company's ability to maintain an extremely capital-efficient business model. With just over 750,000 cumulative members today, we think Nutri/System has barely scratched the surface in penetrating what some experts think could be a 20-million-plus member opportunity. However, one consumer-related investment that did not perform well during the quarter was Build-A-Bear Workshop (1.23%), which was down 30% due to the company's reports of comparable-store sales (comps) that were slightly below plan and analysts' expectations. As with many high-growth specialty retailers, the investment community is narrowly focused on monthly comp sales to gauge the financial health and the growth prospects of a particular company. Although we acknowledge that comps are important, they don't indicate how profitable the average Build-A-Bear store is today nor what the growth prospects for the concept are. We think more-relevant metrics that speak to the health of the business model are sales per square foot, return on invested capital, and free cash flow. By our calculations, Build-A-Bear generates more than $600 in sales per square foot, over 100% return on invested capital, and generates free cash flow even after opening 25 to 30 new stores each year. We continue to hold our position because we think the company has the potential to double the store base over the next three to five years, launch two new concept stores, and in the process grow earnings and cash flow greater than 25% annually, even if it doesn't grow its comparable-store sales. Second-quarter performance felt the negative impact of poor stock selection and an overweighting in technology, which was the worst-performing index sector during the quarter, down more than 12% as concerns over a cyclical downturn were compounded by widespread options pricing investigations. M-Systems Flash Disk Pioneers (1.17%), a longtime holding of the Fund, was up 15% during the quarter even WWW.RSINVESTMENTS.COM | 11 RS DIVERSIFIED GROWTH FUND (Continued) with the semiconductor segment of the Russell 2000 Growth Index down 17%. M-Systems is a leading producer of NAND flash storage systems, a rapidly growing market that continues to gain traction, due, we believe, to it possibly becoming the memory solution of choice in portable consumer electronic devices such as cellular phones, USB flash drives, game consoles, and MP3 players. M-Systems has built core competencies in embedded software applications such as security, which has enabled the company to receive key design wins with major consumer electronic OEMs. We think the company can continue to grow revenues and earnings above 25% for the foreseeable future even if the overall semi-conductor industry faces a cyclical downturn. An investment that didn't meet my expectations was Neoware (0.32%), down more than 50% during the quarter as the company announced that it would fall short of meeting its second-quarter revenue forecast. Neoware is the market share leader in thin client terminals, which are devices that many large enterprises are using in place of traditional PCs due to superior security control and lower information technology administration costs. Neoware focuses on adding value through software functionality while its largest competitors try to compete on hardware costs, which we thought would position the company well for the Linux upgrade cycle. While our thesis played out correctly over the past six months, the severity of the revenue shortfall is concerning, and we've since reduced our position. Performance was also negatively affected by suboptimal stock selection in financial services. The Fund has generated significant alpha from this sector over the past nine months, but as we stated earlier, the severe decline in the financial markets during the quarter caused investors to flee high-growth stocks, especially those tied to the capital markets' activity. Although we don't make macro bets on capital market activity, interest rates, or credit quality, most of our financial services-related investments will have short-term fluctuations that are highly correlated to these variables. A position that performed well for us during the quarter was Heartland Payment Systems (1.30%), up 13% even though index financials declined roughly 4%. Heartland is the sixth-largest merchant processing company in the United States with approximately 2% of total purchase volume. The company has 125,000 customers today due to its transparent pricing value proposition, and it has a goal of more than 1 million customers over the long term. We like the Heartland business model because of the high recurring revenues, significant operating leverage, and industry-leading volume attrition statistics, which we believe is another sign that its customers see value in the service. Our worst-performing financial position during the quarter was Online Resources (1.30%), which declined 20% amid fears over a recent acquisition and related near-term integration issues. Online Resources provides outsourced Internet banking and electronic bill pay services for more than 850 small and midsized financial institutions. Online bill pay is very early in the adoption curve, with less than 15% household penetration in the United States and is a key driver of future revenue growth and profitability. The company recently announced the acquisition of Princeton eCom, a provider of online bill pay services to both financial institutions and billers. We think the combination makes good strategic rationale because Online Resources will benefit from leveraging more transaction volume over its fixed-cost platform and will have the opportunity to offer end-to-end real-time payments with its newly acquired biller relationships. We think Online Resources is positioned to grow revenue 12 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) TETRA Technologies, Inc. 0.54% -------------------------------------------------------------------------------- Century Aluminum Co. 0.48% -------------------------------------------------------------------------------- InterDigital Communications Corp. 0.47% -------------------------------------------------------------------------------- Illumina, Inc. 0.47% -------------------------------------------------------------------------------- Equinix, Inc. 0.39% -------------------------------------------------------------------------------- RPC, Inc. 0.38% -------------------------------------------------------------------------------- Digital River, Inc. 0.37% -------------------------------------------------------------------------------- FormFactor, Inc. 0.36% -------------------------------------------------------------------------------- Scientific Games Corp. 0.36% -------------------------------------------------------------------------------- Imax Corp. 0.34% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Linktone Ltd. -0.47% -------------------------------------------------------------------------------- Build-A-Bear-Workshop, Inc. -0.42% -------------------------------------------------------------------------------- Neoware, Inc. -0.41% -------------------------------------------------------------------------------- Matria Healthcare, Inc. -0.40% -------------------------------------------------------------------------------- Champion Enterprises, Inc. -0.38% -------------------------------------------------------------------------------- Hexcel Corp. -0.37% -------------------------------------------------------------------------------- Marchex, Inc. -0.36% -------------------------------------------------------------------------------- Radiation Therapy Services, Inc. -0.31% -------------------------------------------------------------------------------- O2Micro International Ltd. -0.31% -------------------------------------------------------------------------------- InPhonic, Inc. -0.31% -------------------------------------------------------------------------------- and earnings in excess of the electronic bill pay market growth of 20% to 25% over the long term. OUTLOOK I still expect a midcycle slowdown similar to what we saw in the 1994/1995 timeframe, which could eventually lead to lower short-term interest rates and lower inflation. This assumption is based mostly on the lag affect from Federal Reserve Board rate hikes and a flattening yield curve combined with a slowdown in consumer spending. We continue to take a slightly defensive stance on cyclical growth sectors due to our view that we are entering a slowing economic growth phase. Based on our work, many industrial companies that we follow are trading near historically high valuations on what we feel may be peak earnings. Our process is to balance upside opportunity with conservative downside protection, so we don't see proper risk/reward opportunities in most cyclical sectors today and thus remain underweighted. If this scenario plays out, stock selection will become even more critical as more economically sensitive companies are faced with diminishing growth prospects. We think there could be a shift back to growth stocks from value stocks, and premium valuations will be placed on companies with strong secular growth prospects. Our goal is to remain as objective as possible if any of these risks become reality and to adjust our portfolio risk profile accordingly. As a fellow shareholder, I thank you for your continued interest and support. /s/ John Seabern John Seabern Portfolio Manager + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in smaller companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in technology companies may be highly volatile. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 13 RS DIVERSIFIED GROWTH FUND (Continued) ASSETS UNDER MANAGEMENT: $293.8 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 3.9% Consumer Discretionary 20.3% Consumer Staples 1.0% Financial Services 15.2% Health Care 16.7% Integrated Oils 0.0% Materials and Processing 3.6% Other Energy 8.1% Producer Durables 7.9% Technology 22.1% Utilities 0.0% Other 0.1% Cash 1.1% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Cache, Inc. 1.89% -------------------------------------------------------------------------------- Cymer, Inc. 1.53% -------------------------------------------------------------------------------- MasTec, Inc. 1.47% -------------------------------------------------------------------------------- Nutri/System, Inc. 1.43% -------------------------------------------------------------------------------- Affiliated Managers Group, Inc. 1.42% -------------------------------------------------------------------------------- Oil States International, Inc. 1.40% -------------------------------------------------------------------------------- Amerisafe, Inc. 1.34% -------------------------------------------------------------------------------- Portfolio Recovery Associates, Inc. 1.31% -------------------------------------------------------------------------------- Online Resources Corp. 1.30% -------------------------------------------------------------------------------- FTI Consulting, Inc. 1.30% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Return Since Return Since Return Total Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------ RS Diversified Growth Fund 0.49% 5.06% 9.08% -1.42% 13.00% 236.02% ------------------------------------------------------------------------------------------------------------------------ Russell 2000(R) Growth Index 4 6.07% 14.58% 16.27% 3.49% 5.39% 68.27% ------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.69% 128.59% ------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 8/1/96 RS Diversified Growth Fund Russell 2000[R] Growth Index 4 8/1/96 $10,000 9/96 $11,110 $11,137 12/96 $12,420 $11,166 3/97 $11,870 $9,995 6/97 $13,320 $11,750 9/97 $16,670 $13,738 12/97 $16,077 $12,612 3/98 $18,665 $14,110 6/98 $17,199 $13,300 9/98 $14,405 $10,326 12/98 $18,694 $12,767 3/99 $20,976 $12,552 6/99 $27,070 $14,403 9/99 $28,705 $13,695 12/99 $46,774 $18,268 3/00 $58,683 $19,964 6/00 $47,057 $18,492 9/00 $44,633 $17,758 12/00 $34,186 $14,171 3/01 $30,383 $12,016 6/01 $36,088 $14,176 9/01 $25,486 $10,195 12/01 $34,830 $12,863 3/02 $31,940 $12,611 6/02 $25,711 $10,632 9/02 $19,302 $8,344 12/02 $21,204 $8,971 3/03 $19,032 $8,623 6/03 $25,891 $10,705 9/03 $28,856 $11,825 12/03 $33,483 $13,325 3/04 $33,932 $14,069 6/04 $33,228 $14,082 9/04 $29,979 $13,235 12/04 $33,977 $15,231 3/05 $31,296 $14,192 6/05 $31,985 $14,686 9/05 $34,546 $15,613 12/05 $33,438 $15,864 3/06 $36,373 $18,142 6/06 $33,602 $16,827 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: August 1, 1996. 4 The Russell 2000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 14 | CALL 1-800-766-FUND RS EMERGING GROWTH FUND SEEKING TO INVEST IN AMERICA'S MOST DYNAMIC, GROWTH-ORIENTED COMPANIES [PHOTO OMITTED] JIM CALLINAN Portfolio Manager For bio see page 6 RS EMERGING GROWTH FUND INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS EMERGING GROWTH FUND SEEKS CAPITAL APPRECIATION BY INVESTING PRINCIPALLY IN SMALLER, RAPIDLY GROWING EMERGING COMPANIES. THE FUND IS ACTIVELY MANAGED, USING HANDS-ON, FUNDAMENTAL RESEARCH THAT INCLUDES EXTENSIVE TRAVEL AND VISITS WITH COMPANY MANAGEMENT. THE FUND SEEKS TO INVEST IN COMPANIES THAT ARE GROWING AT LEAST 20% ANNUALLY, ARE MARKET-SHARE LEADERS, AND ARE MANAGED BY EXECUTIVES WHO CAN LEVERAGE A COMPETITIVE ADVANTAGE AND CONSISTENTLY EXECUTE IN TODAY'S BUSINESS ENVIRONMENT. THE FUND IS INTENDED FOR INVESTORS WITH LONG-TERM INVESTMENT GOALS. INVESTMENT PROCESS The RS Emerging Growth Fund seeks capital appreciation by investing in smaller-capitalization growth stocks in an attempt to discover the faster-growing firms in the emerging sectors of the economy. We seek revenue and earnings growth rates that are superior to those of our benchmark, the Russell 2000(R) Growth Index 4. As a consequence, the Fund's valuation levels are often higher than the benchmark's and those of other funds in this classification, and the Fund may experience much higher levels of volatility and be riskier than the benchmark. Because of the volatile financial and operating results of these smaller firms, our investments in emerging companies frequently require us to generate high levels of trading activity. The Fund is appropriate only for investors with a long-term investment horizon and should constitute only a small portion of an overall allocation to growth equities. PERFORMANCE The RS Emerging Growth Fund declined 7.42% in the second quarter compared with a loss of 7.25% for its benchmark, the Russell 2000 Growth Index. For the year-to-date time period, the Fund gained 3.04% compared with a gain of 6.07% for the index. PORTFOLIO REVIEW Despite evidence that the economy is relatively strong, the small-cap market corrected itself across the board. We believe that this is due to fears that higher interest rates will hurt investment and consumer spending. Only energy, consumer staples, and transportation had positive returns within the index for the quarter. We believe oil prices do not yet reflect a global slowdown in demand, and investors remain fixated on the lack of new supply for oil. Transportation stocks are benefiting from energy-related spending in the Gulf and inland waterways. We remain significantly underweighted in transportation, materials, and producer durables, believing that these are vulnerable to increasingly difficult growth hurdles. We remain overweighted in technology and health care due to our belief that these areas offer more long-term emerging growth opportunities. Our best-performing stocks included LifeCell (2.11% of assets as of 6/30/06), which manufactures artificial skin for complex hernia repair and breast reconstruction, and j2 Global Communications (1.60%), which provides Internet fax services to individuals, small offices, and enterprises, plays in a $500-billion-unit market per year, and has only about a 1% unit 16 | CALL 1-800-766-FUND share. Another excellent performer was RSA Security, which provides numerous Internet and enterprise-security solutions and was bought out by EMC (0.00%). This was yet another high-profile acquisition in our portfolio, reinforcing the attractiveness of growth companies to larger, slower-growth firms. Investors may recall from last quarter Lifeline Systems, which was acquired by Phillips (0.00%). M-Systems Flash Disk Pioneers (1.56%), one of our worst-performing stocks last quarter, became one of our leaders in this period, reflecting the mercurial nature of the small-cap growth technology sector. Investors have been inclined to sell quickly in technology in recent years on any hint of negative news. This volatile price action provides ample opportunities to buy more shares. We believe this volatility is amplified by the proclivity of hedge funds to invest a large percentage of their equity assets in small-cap growth stocks. A number of our worst performers were in technology and biotechnology. Atheros Communications (1.34%), which makes the semiconductors that enable "wi-fi" networks, performed poorly, though we believe it has a technology lead over its two competitors, Marvel (0.00%) and Broadcom (0.00%), in what we anticipate will be a huge market. Openwave Systems (0.19%), which develops and installs data communication software for cell phone carriers, was hit twice. The first hit was the option pricing scandal, which presumably will affect neither the company's shareholders nor its management (since the CFO and the CEO are both new in the past 18 months). The second, and more serious hit, was the giving away for free to Motorola (0.00%) its next-generation browser, which we had hoped would garner much higher revenue per unit. We believe this is what got Openwave in trouble in the dot-com bust. We trimmed the stock during the second quarter and eliminated it altogether early in the third quarter. In biotech the news is not much better. We tried to concentrate in the best names within the industry. PDL BioPharma (0.57%), which has developed novel "fully humanized" proteins that are used in numerous biotech drug development programs, fell 44% during the quarter on news that one of its voluminous programs had a disappointment -- in our view hardly a reason to cost the company half its value. In financial services, optionsXpress Holdings (0.94%), which was one of our better performers in the first quarter, did not perform as well in the second quarter due, we believe, to a correction of stock market trends. The company provides a discount brokerage business for the market niche of options trading. As such, we believe optionsXpress has surprising market power among its exchange clients, who are the most active in options volumes, and covets their business. OUTLOOK I am confident that as the world economy cools due to high energy prices, foreign low-cost competition, and higher interest rates, our holdings -- which are skewed toward traditional growth industries such as networking, semiconductors, Internet services, low-cost health care services, and medical devices -- will provide solid earnings growth. We believe the relative premium speed of earnings growth will result in premium valuation levels where currently we are at about parity with the Russell 2000 Growth Index. The Fund's valuation level of 31 times is at a slight premium to the index's price/earnings ratio of 29 times 2006 earnings-per-share estimates. The index's earnings growth rate is expected to grow 15%, but we expect a significantly faster WWW.RSINVESTMENTS.COM | 17 RS EMERGING GROWTH FUND (Continued) GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Dril-Quip, Inc. 0.81% -------------------------------------------------------------------------------- Illumina, Inc. 0.80% -------------------------------------------------------------------------------- LifeCell Corp. 0.68% -------------------------------------------------------------------------------- Ctrip.com International Ltd. 0.63% -------------------------------------------------------------------------------- j2 Global Communications, Inc. 0.50% -------------------------------------------------------------------------------- Zumiez, Inc. 0.50% -------------------------------------------------------------------------------- WebEx Communications, Inc. 0.45% -------------------------------------------------------------------------------- American Commercial Lines, Inc. 0.42% -------------------------------------------------------------------------------- Equinix, Inc. 0.40% -------------------------------------------------------------------------------- RSA Security, Inc. 0.36% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Merge Technologies, Inc. -0.38% -------------------------------------------------------------------------------- Matria Healthcare, Inc. -0.38% -------------------------------------------------------------------------------- DOV Pharmaceutical, Inc. -0.32% -------------------------------------------------------------------------------- PDL BioPharma, Inc. -0.31% -------------------------------------------------------------------------------- American Science and Engineering, Inc. -0.30% -------------------------------------------------------------------------------- Linktone Ltd. -0.30% -------------------------------------------------------------------------------- Neoware, Inc. -0.30% -------------------------------------------------------------------------------- ViroPharma, Inc. -0.28% -------------------------------------------------------------------------------- eResearch Technology, Inc. -0.27% -------------------------------------------------------------------------------- Ixia -0.26% -------------------------------------------------------------------------------- growth rate of about 35% using our internal analyst's estimates. As always, I am confident that we have the resources, the experience, and the drive to seek solid opportunities in the emerging growth, smaller-capitalization sector. We appreciate your confidence in us. /s/ Jim Callinan Jim Callinan Portfolio Manager + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in smaller companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in technology companies may be highly volatile. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. 18 | CALL 1-800-766-FUND ASSETS UNDER MANAGEMENT: $808.3 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 0.6% Consumer Discretionary 21.4% Consumer Staples 0.4% Financial Services 14.9% Health Care 21.6% Integrated Oils 0.0% Materials and Processing 1.3% Other Energy 7.9% Producer Durables 2.1% Technology 25.8% Utilities 0.7% Other 0.0% Cash 3.3% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 LifeCell Corp. 2.11% -------------------------------------------------------------------------------- Dril-Quip, Inc. 1.83% -------------------------------------------------------------------------------- Portfolio Recovery Associates, Inc. 1.61% -------------------------------------------------------------------------------- Kyphon, Inc. 1.61% -------------------------------------------------------------------------------- j2 Global Communications, Inc. 1.60% -------------------------------------------------------------------------------- M-Systems Flash Disk Pioneers Ltd. 1.56% -------------------------------------------------------------------------------- aQuantive, Inc. 1.47% -------------------------------------------------------------------------------- FormFactor, Inc. 1.47% -------------------------------------------------------------------------------- Digital River, Inc. 1.46% -------------------------------------------------------------------------------- Atheros Communications 1.34% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ---------------------------------------------------------------------------------------------------------------------------------- RS Emerging Growth Fund 3.04% 9.06% 13.53% -1.45% 9.86% 15.51% 1,360.69% ---------------------------------------------------------------------------------------------------------------------------------- Russell 2000(R) Growth Index 4 6.07% 14.58% 16.27% 3.49% 4.12% 9.30% 422.31% ---------------------------------------------------------------------------------------------------------------------------------- S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 12.14% 741.86% ----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 11/30/87 RS Emerging Growth Fund Russell 2000[R] Growth Index 4 11/87 $10,000 12/87 $12,611 $11,040 3/88 $13,892 $12,963 6/88 $15,222 $13,786 9/88 $14,114 $13,406 12/88 $14,383 $13,289 3/89 $15,728 $14,276 6/89 $16,709 $15,200 9/89 $18,924 $16,558 12/89 $20,776 $15,970 3/90 $21,139 $15,545 6/90 $24,638 $16,526 9/90 $19,290 $12,214 12/90 $22,765 $13,189 3/91 $29,339 $17,219 6/91 $26,862 $16,622 9/91 $31,544 $18,415 12/91 $36,140 $19,940 3/92 $35,561 $20,486 6/92 $29,428 $18,026 9/92 $28,974 $18,375 12/92 $35,218 $21,490 3/93 $30,891 $21,105 6/93 $30,744 $21,713 9/93 $35,365 $23,740 12/93 $37,759 $24,364 3/94 $38,578 $23,371 6/94 $35,428 $21,898 9/94 $41,014 $23,944 12/94 $40,765 $23,772 3/95 $43,213 $25,076 6/95 $42,392 $27,563 9/95 $49,180 $30,698 12/95 $49,045 $31,151 3/96 $50,730 $32,941 6/96 $57,062 $34,866 9/96 $57,884 $34,569 12/96 $59,585 $34,660 3/97 $51,242 $31,025 6/97 $62,969 $36,471 9/97 $76,240 $42,642 12/97 $70,633 $39,147 3/98 $83,544 $43,798 6/98 $85,280 $41,282 9/98 $65,347 $32,052 12/98 $90,424 $39,628 3/99 $115,680 $38,962 6/99 $135,341 $44,708 9/99 $145,861 $42,509 12/99 $255,502 $56,705 3/00 $305,069 $61,968 6/00 $271,463 $57,400 9/00 $260,303 $55,120 12/00 $191,531 $43,986 3/01 $134,664 $37,299 6/01 $157,158 $44,003 9/01 $108,035 $31,647 12/01 $139,232 $39,927 3/02 $126,484 $39,145 6/02 $99,507 $33,001 9/02 $77,013 $25,899 12/02 $83,322 $27,844 3/03 $80,407 $26,765 6/03 $99,812 $33,228 9/03 $110,428 $36,706 12/03 $122,268 $41,361 3/04 $129,056 $43,670 6/04 $127,664 $43,710 9/04 $120,571 $41,083 12/04 $140,805 $47,278 3/05 $128,752 $44,051 6/05 $133,930 $45,584 9/05 $139,456 $48,464 12/05 $141,762 $49,242 3/06 $157,774 $56,314 6/06 $146,069 $52,231 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: November 30, 1987. 4 The Russell 2000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. WWW.RSINVESTMENTS.COM | 19 This page left blank intentionally. 20 | CALL 1-800-766-FUND RS GROWTH FUND SEEKING CAPITAL APPRECIATION FOR THE LONG-TERM INVESTOR [PHOTO OMITTED] JOHN WALLACE Portfolio Manager For bio see page 7 RS GROWTH FUND INVESTMENT STYLE --------------------------------------------- LARGE-CAP MID-CAP SMALL-CAP --------------------------------------------- VALUE BLEND GROWTH --------------------------------------------- FUND PHILOSOPHY THE RS GROWTH FUND SEEKS LONG-TERM CAPITAL GROWTH BY INVESTING PRINCIPALLY IN GROWTH COMPANIES. WE SEEK TO IDENTIFY BUSINESS SECTORS POISED TO BENEFIT FROM MAJOR CHANGES IN THE MARKETPLACE AND SOCIETAL TRENDS. WITHIN THESE SECTORS, WE CONDUCT BOTTOM-UP RESEARCH, LOOKING FOR WELL-MANAGED AND LARGER, MORE ESTABLISHED COMPANIES WITH STRONG GROWTH RATES AND REASONABLE STOCK VALUATIONS. INVESTMENT PROCESS We seek longer-term capital appreciation through the active management of growth-oriented companies. We typically focus on companies whose market capitalizations exceed $1.5 billion. Both bottom-up fundamental research and quantitative screens drive our investment process. We attempt to identify a catalyst that will drive earnings growth, such as new management, new products, and new markets. Occasionally, a contrary opinion is an important ingredient to success as is the recognition of value -- including undervaluation and overvaluation. PERFORMANCE Despite a sharp rally in the last week of June, the second quarter of 2006 goes down among the worst in recent years. The RS Growth Fund declined 4.31% in the second quarter, which was slightly worse than its benchmark, the Russell 1000(R) Growth Index 4, which declined 3.90%. Despite a volatile five-week market sell-off (May 10 to June 14), our year-to-date performance was a positive 0.76%, and we continue to outperform the benchmark, which ended the first half of 2006 in negative territory (down 0.93%). From that standpoint we are pleased with our returns. The Federal Reserve Board raised interest rates for the sixteenth consecutive time on May 10, and investor sentiment turned very pessimistic. The market began the sharpest sell-off since 2004. Uncertainty over the continuation of the bull market drivers including strong economic growth, low (containable) inflation, and demand in emerging economies, drove several indexes to double-digit losses during the sell-off. The malaise was not limited to the U.S. market: most foreign-market indexes also declined with the emerging markets of India, Brazil, and Korea hit especially hard. Here at home no index was spared as the Nasdaq Composite Index 6 declined 7.17% for the quarter (-1.51% year to date), the S&P 500(R) Index 5 was down 1.46% (+2.76% year to date), and the Russell 2000(R) Growth Index 7 was down 7.25% (+6.07% year to date). PORTFOLIO REVIEW As the market began to slide in May, investors were quick to take profits across the board. Enthusiasm for growth stocks turned sour as conventional wisdom embraced the idea that the U.S. economy is headed for a sharp downturn (a.k.a. recession). Materials and processing, one of our top sectors in the first quarter, continued to do well for us, while consumer discretionary stocks also provided significant relative returns. Technology was our worst performing sector. We remain roughly market-weighted in technology stocks, and we continue to believe that the rationale for owning these companies remains strong. Order flow and backlogs are still quite 22 | CALL 1-800-766-FUND solid, and high levels of cash on U.S. corporate balance sheets should further fuel demand for increased capital expenditures. The second half of 2006 could be a surprisingly good period for technology stocks. Nortel Networks (0.00% of assets as of 6/30/06) and Microsoft (2.00%) were among the technology detractors in the second quarter. Microsoft -- the largest software company in the world -- provides an array of products, including operating systems for personal computers and servers, software development tools, and video game consoles. Microsoft is in front of several large product ramps: Windows Vista, Office 2007, and Xbox, which we believe, if successful, can drive earnings and valuations higher during the next 12 to 24 months. When earnings were announced in late April, the Street was disappointed with Microsoft's guidance for fiscal 2007. The company has decided to invest heavily in marketing and research to accelerate growth, especially in the online arena. We believe new growth initiatives will have an impact on earnings in the short run, but longer-term investors should be rewarded. After the news, we think investors' overreacted by selling Microsoft's shares down some 20% in the following weeks. We held our position despite the hit to short-term performance. We believe the new product launches have huge potential, valuation is compelling, and with more than $3 per share in cash, the company is now selling at about 15 times calendar 2007 estimates. Nortel Networks was another tech underperformer during the quarter, and we sold our position. Nortel's new management has attempted to reorganize and reposition this large telecom company to improve products, margins, and profitability. So far it has failed to achieve these objectives, and after nearly six months I cut my losses and redeployed the assets into other technology holdings at favorable prices. Fears of an economic slowdown put a lot of pressure on consumer-oriented stocks during the second quarter. Urban Outfitters (0.00%) was a disappointment, and we sold the stock. This specialty retailer's business took a lackluster turn this spring as some merchandising mistakes and excess inventory forced management to increase summer markdowns causing a slight reduction in earnings. I underestimated the dramatic stock sell-off in the company's shares and was later forced to cut my losses. American Eagle Outfitters (1.72%) was a notable winner for us in the consumer area. The company, which focuses on affordable jeans, apparel, and accessories for young men and women, operates approximately 800 stores in the United States and Canada. It is delivering strong results driven by a great response to its summer assortment, which I think bodes well heading into the back-to-school season. If the economy is indeed moving into a midcycle slowdown, I believe investors will begin to sense an end to the Federal Reserve's two year rate hike cycle. A more accommodative Fed should help the financial services sector. I think we are close to ending rate hikes and have, accordingly, maintained an overweight position relative to the benchmark (11.5% versus 9.9%). Our best-performing stock during the quarter was Alliance Data Systems (2.14%), the largest specialty retail credit card processor. The company markets credit services, loyalty programs, and risk management WWW.RSINVESTMENTS.COM | 23 RS GROWTH FUND (Continued) services to midsized retailers across the United States, and, I think it is poised to continue its double-digit growth over the next several quarters. Another winner for us was Comcast (1.91%), the largest cable system operator in the United States, with more than 21 million subscribers. Investors have long been concerned about the company's growth rate and competitive dynamics. New product initiatives such as Internet telephony and digital programming have put the company's growth rate back into the double-digit range. We think that new service growth can continue and that this will further support share price appreciation. The RS Growth Fund remains overweighted in energy stocks relative to the benchmark (8.4% versus 4.2%), and we believe the rationale for this overweighting remains intact: Global demand for crude oil and other hydrocarbons remains high; pricing is still high due to geopolitical concerns; and earnings visibility is quite strong across most energy sectors. In the short term, however, we think it's a different story on the natural gas front. Domestically, there remains a glut of natural gas in storage, prices are low relative to oil, and investors are bearish on the outlook for most exploration and production companies. The price of natural gas declined another 15% during the quarter and is down 45% year to date. As gas prices declined, so did most energy stocks. The good news was that we were able to book gains in Quicksilver Resources (0.00%) and National Oilwell Varco (0.00%). The bad news (in the short-term) was that we held on to our Southwestern Energy (1.58%) position. I think that Southwestern is one of the best-positioned gas companies in the country. Engaged in exploration and production of oil and natural gas in Arkansas, Texas, and Louisiana, the company has 20%-25% organic production growth. With a drilling program that is almost double that of last year, we think its growth could be even higher. I think gas prices are bottoming and that the stocks are already discounting further bad news. We believe Southwestern's risk/reward from this point forward is quite compelling. OUTLOOK Late in the second quarter the Federal Reserve boosted its short-term interest rate target (now 5.25%) for the seventeenth consecutive time. We believe the U.S. economy remains in very good shape but is already slowing from its strong first-quarter gross domestic product growth rate of more than 5%. We think this slowdown will ultimately take the pressure off the Fed to continue to raise rates. Inflation expectations are slowly rolling over (various commodities like gold, copper, and lumber are off their recent highs), and one or two more rate hikes to 5.50% or 5.75% won't kill this expansion. My opinion is at odds with those of many investors, who fear an "end of cycle recession" vs. a "midcycle slowdown." The past two midcycle slowdowns were in 1985 and 1995 -- years that were very positive for equities. I believe any negative economic impact of a weaker consumer will be more than offset by continued strong business lending and a capital-spending environment that remains robust. If I am right, corporate earnings, which remain strong, will continue to grow, albeit at a slower rate than in 2005/2006. In my opinion, equity valuations are extremely attractive and are at levels not seen in a long time. The S&P 500 Index currently trades at 24 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Nucor Corp. 0.76% -------------------------------------------------------------------------------- ABB LTD. 0.44% -------------------------------------------------------------------------------- American Eagle Outfitters, Inc. 0.42% -------------------------------------------------------------------------------- Alliance Data Systems Corp. 0.40% -------------------------------------------------------------------------------- Comcast Corporation 0.40% -------------------------------------------------------------------------------- Advanced Micro Devices, Inc. 0.36% -------------------------------------------------------------------------------- International Game Technology 0.36% -------------------------------------------------------------------------------- Marathon Oil Corp. 0.30% -------------------------------------------------------------------------------- Starbucks Corp. 0.30% -------------------------------------------------------------------------------- IntercontinentalExchange, Inc. 0.29% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Yahoo! Inc. -0.32% -------------------------------------------------------------------------------- Southwestern Energy Co. -0.32% -------------------------------------------------------------------------------- Nortel Networks Corporation -0.31% -------------------------------------------------------------------------------- St. Jude Medical, Inc. -0.29% -------------------------------------------------------------------------------- Adobe Systems, Inc. -0.25% -------------------------------------------------------------------------------- THQ, Inc. -0.24% -------------------------------------------------------------------------------- Medtronic, Inc. -0.24% -------------------------------------------------------------------------------- Microsoft Corp. -0.22% -------------------------------------------------------------------------------- Marvell Technology Group Ltd. -0.22% -------------------------------------------------------------------------------- QUALCOMM, Inc. -0.22% -------------------------------------------------------------------------------- about 16 times trailing earnings per share and 13 times 2007 bottom-up consensus estimates. By comparison, the RS Growth Fund trades at about 14.9 times forecast 2007 earnings, cheaper than the benchmark Russell 1000 Growth Index at 15.9 times. At less than a market multiple, our larger-cap equities are at attractive levels, trading at much better valuations than small- and mid-cap stocks. With an economy that is still growing, valuations that I believe are very reasonable, and a Fed that will likely become more accommodative, I remain positive about the U.S. equity market. I believe that, as we go into the second half of 2006, the risk/reward ratio of owning equities is in our favor. As a fellow shareholder of the Fund, I remain focused and committed to our investment goal: long-term growth of capital. I appreciate your continued confidence and support. /s/ John Wallace John Wallace Portfolio Manager + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in technology companies may be highly volatile. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 25 RS GROWTH FUND (Continued) ASSETS UNDER MANAGEMENT: $197.8 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 2.7% Consumer Discretionary 15.5% Consumer Staples 3.8% Financial Services 11.5% Health Care 12.8% Integrated Oils 1.8% Materials and Processing 1.8% Other Energy 8.4% Producer Durables 6.8% Technology 19.7% Utilities 7.1% Other 4.4% Cash 3.7% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Alliance Data Systems Corp. 2.14% -------------------------------------------------------------------------------- Microsoft Corp. 2.00% -------------------------------------------------------------------------------- Comcast Corporation 1.91% -------------------------------------------------------------------------------- EnCana Corp. 1.90% -------------------------------------------------------------------------------- Adobe Systems, Inc. 1.84% -------------------------------------------------------------------------------- Nucor Corp. 1.82% -------------------------------------------------------------------------------- Costco Wholesale Corp. 1.73% -------------------------------------------------------------------------------- Countrywide Financial Corp. 1.73% -------------------------------------------------------------------------------- American Eagle Outfitters, Inc. 1.72% -------------------------------------------------------------------------------- Cephalon, Inc. 1.67% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ----------------------------------------------------------------------------------------------------------------------------------- RS Growth Fund 0.76% 11.69% 14.87% 3.95% 7.07% 11.46% 363.85% ----------------------------------------------------------------------------------------------------------------------------------- Russell 1000(R) Growth Index 4 -0.93% 6.12% 8.35% -0.76% 5.42% 8.08% 200.03% ----------------------------------------------------------------------------------------------------------------------------------- S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 10.30% 299.92% -----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 5/12/92 RS Growth Fund Russell 1000[R] Growth Index 4 5/12/92 $10,000 6/92 $9,801 $9,766 9/92 $10,099 $10,193 12/92 $11,004 $10,903 3/93 $11,933 $10,810 6/93 $11,943 $10,643 9/93 $12,843 $10,801 12/93 $13,378 $11,217 3/94 $13,890 $10,722 6/94 $13,276 $10,611 9/94 $15,560 $11,428 12/94 $16,469 $11,511 3/95 $18,927 $12,607 6/95 $23,086 $13,845 9/95 $27,536 $15,102 12/95 $23,501 $15,790 3/96 $22,651 $16,638 6/96 $23,429 $17,696 9/96 $24,964 $18,334 12/96 $26,819 $19,441 3/97 $26,198 $19,545 6/97 $30,483 $23,242 9/97 $35,511 $24,989 12/97 $30,523 $25,368 3/98 $34,486 $29,212 6/98 $36,066 $30,538 9/98 $31,352 $27,764 12/98 $38,898 $35,187 3/99 $42,710 $37,424 6/99 $43,746 $38,864 9/99 $40,909 $37,441 12/99 $49,958 $46,855 3/00 $57,100 $50,194 6/00 $53,620 $48,838 9/00 $48,924 $46,212 12/00 $44,416 $36,348 3/01 $39,744 $28,751 6/01 $38,228 $31,172 9/01 $31,391 $25,121 12/01 $35,344 $28,925 3/02 $33,998 $28,176 6/02 $29,484 $22,915 9/02 $24,929 $19,467 12/02 $25,612 $20,859 3/03 $25,736 $20,637 6/03 $30,602 $23,589 9/03 $32,445 $24,512 12/03 $36,941 $27,065 3/04 $37,751 $27,277 6/04 $38,455 $27,806 9/04 $37,388 $26,353 12/04 $41,356 $28,770 3/05 $41,058 $27,594 6/05 $41,530 $28,274 9/05 $45,154 $29,409 12/05 $46,036 $30,284 3/06 $48,476 $31,221 6/06 $46,385 $30,003 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: May 12, 1992. 4 The Russell 1000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 1000(R) Index (which consists of the 1,000 largest U.S. companies based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 6 The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. You may not invest in the index and, unlike the Fund, the index does not incur fees or expenses. 7 The Russell 2000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 26 | CALL 1-800-766-FUND THE INFORMATION AGE FUND(R) TARGETING INVESTMENTS IN THE INFORMATION TECHNOLOGY SECTOR [PHOTOS OMITTED] STEVE BISHOP Co-Portfolio Manager For bio see page 6 ALLISON THACKER Co-Portfolio Manager For bio see page 7 THE INFORMATION AGE FUND(R) INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE INFORMATION AGE FUND(R) SEEKS TO ACHIEVE LONG-TERM CAPITAL APPRECIATION BY AGGRESSIVELY INVESTING IN COMPANIES PRINCIPALLY WITHIN THE INFORMATION TECHNOLOGY SECTOR. THE FUND IS DESIGNED FOR INVESTORS WHO BELIEVE THAT AGGRESSIVE INVESTMENT IN THESE COMPANIES PROVIDES SIGNIFICANT OPPORTUNITY FOR CAPITAL APPRECIATION. INVESTMENT PROCESS The Information Age Fund(R) seeks long-term capital appreciation from growth-oriented technology companies. We will own companies of any market capitalization in technology but tend to focus on smaller- to mid-cap companies as they tend to have the best growth characteristics. We use fundamental, bottom-up research combined with quantitative screens to drive our investment process. We are looking for significant long-term revenue growth (at least 15% annually) from new emerging technology products or markets. We will occasionally invest in down-and-out companies that have had temporary missteps, with the belief that they will return to fast growth over the intermediate to longer term. The Fund is primarily for risk-oriented investors with a high tolerance for volatility. PERFORMANCE The second quarter was particularly weak for technology, with The Information Age Fund(R) down 13.41% compared with the benchmark, the Goldman Sachs Technology Composite Index 4, which was down 9.35%.Year to date, the Fund is down 4.46%, outperforming the benchmark's negative return of 5.47% by 1.01%. In general, semiconductors and certain software stocks performed poorly, and the Internet/e-commerce segment tended to outperform on a relative basis. This is essentially the opposite of what occurred in the first quarter. The combination of a worrisome macroeconomic backdrop, slow seasonal tech demand, and some minor inventory issues in PCs and cell phones clearly weighed on tech stock prices. PORTFOLIO REVIEW In the hardware and semiconductor sector, we had solid performance from M-Systems Flash Disk Pioneers (4.02% of assets as of 6/30/06) as investors digested the weaker gross margin news in the first quarter and focused on the bullish medium- and long-term outlook. The company also announced its revolutionary X4 technology, which we believe could potentially give it the significant competitive advantage of essentially becoming the low-cost producer in the NAND chip marketplace. M-Systems expects to prove in 2007 that this technology works in high-volume production; if successful, this development makes us even more bullish about the company's long-term prospects. M-Systems remains a large position. FormFactor (1.37%) also performed well as the company is seeing strong demand for its wafer probe cards that are used to test DRAM chips. The probe cards essentially lower the cost of testing for chip manufacturers. Even though end demand for PCs and servers is not very strong, 28 | CALL 1-800-766-FUND there is a transition to higher-density DRAM chips. Each transition to a higher density or a new manufacturing node requires new probe cards, which we believe bodes well for FormFactor. O2Micro International (4.36%), a designer of analog power management semiconductors, performed poorly as the company reported weaker-than-expected profits in the first quarter related to a temporary manufacturing glitch at its Chinese foundry for some of its newly designed chips. In addition, the notebook computer market has been relatively weak and modest excess inventories of flat-panel glass for the LCD monitor and TV market have weighed on the stock. Despite this we think the company's fundamentals remain largely intact and that revenues should grow 20% or better this year and next. We think the stock appears to be significantly over-sold. We expect the LCD TV market to snap back quickly as TV glass prices are cut to clear the inventories and as the elasticity of demand kicks in -- good for chip unit volumes and good for O2Micro. The stock is trading at just over 10 times our 2007 estimated earnings per share, plus it has $3 of cash per share. We think the stock is very cheap at these prices, and it remains a large position. Marvell Technology Group (3.12%) was also a weak performer despite its strong fundamentals. Fears of a slower hard-disk-drive storage business and a significant but modestly dilutive acquisition caused weak stock performance. We continue to believe that Marvell, at 20 times 2007 estimated earnings per share, is one of the best-positioned semiconductor companies to capitalize on high-growth opportunities in data storage, communications networking, consumer, and wireless. PDF Solutions (0.96%), a maker of semiconductor design software, experienced temporary delays from customers when trying to sign new licensing agreements. The royalty piece of the business has been above plan, but we chose to trim the position and wait for more visibility into the trajectory of revenue growth. We have recently increased our exposure to the semiconductor and hardware sector, taking advantage of the big sell-off by purchasing Silicon Laboratories (1.14%), a leading designer of wireless and wireline semiconductors, and Rackable Systems (0.39%), a maker of low-cost, high-density, low-power servers. Akamai Technologies (3.11%) was one of our top-performing positions during the quarter. The company's technology and software provide global delivery services for Internet content and streaming media. We continue to hear from industry sources that demand for rich media and streaming media content is exceptionally high from both consumers and online advertisers. This led us to increase our position in Akamai on the June pullback of the stock. On the negative side, our position in Openwave Systems (1.77%), a provider of infrastructure software for the cellular industry, was a very poor performer during the second quarter. The company reported a disappointing first quarter in April as it appeared to sign several deals late in the quarter and saw balance sheet deterioration due to a rise in unbilled receivables. We did trim our position in June, but our industry checks lead us to believe that Openwave's products are still key for WWW.RSINVESTMENTS.COM | 29 THE INFORMATION AGE FUND(R) (Continued) wireless carriers that are enabling data services on mobile phones. Several of our Internet stocks were positive contributors during the second quarter, although 2006 overall has been a weak year for the Internet, with the Piper Jaffray Internet Index down 10.3% year to date. We believe that the stocks will rise with fall's seasonal strength in advertising and e-commerce, and we have been selectively adding to our Internet weighting. During the second quarter, Ctrip.com International (1.93%), the market share leader (60% share) of online bookings of travel in China, was a very positive performer. With only 8% of the Chinese population online, we believe there is huge growth in the potential customers for Ctrip. Today only 1.5% of Chinese who have online connections actually book their travel online. As these consumers become more comfortable with online Web sites and using payment services over the Internet, we believe Ctrip should be able to sell travel to a much larger group of consumers. Additionally, as China's gross domestic product grows, we expect consumers will have more disposable income to spend on leisure travel. Our position in Digitas (2.35%), a direct marketing and online advertising agency, was weak during the quarter despite a very strong outlook for online advertising spending. Today 4% of total U.S. advertising is spent online, while more than 15% of people's media time is spent online. Digitas helps large media spenders rationalize their market spending and improve the return on investment of those dollars. Given the negative headlines on two of Digitas's clients (Delta [0.00%] and General Motors [0.00%]), the stock has fallen. The stock is trading at only 17 times 2006 projected earnings, has strong earnings growth of greater than 25% year over year, and has more than $180 million in cash on the balance sheet. The company bought back almost $10 million worth of stock during the first quarter. We continue to like Digitas and believe that it is taking market share from traditional media agencies. OUTLOOK We mentioned in our previous letter that we expected some volatility after a strong first quarter, but we didn't expect such a severe sell-off. We generally think that tech has been oversold, and if the overall economy holds together in the second half, we foresee a fairly strong environment for tech stocks. In fact, we see what we believe are some real bargains in the portfolio. The Fund is trading at a price/earnings growth ratio of 0.65 times 2007 earnings, which is a very attractive valuation level. We appreciate your continued confidence in our investments, and we believe that our emerging growth style of technology investing has us positioned to outperform. /s/ Steve Bishop /s/ Allison Thacker Steve Bishop Allison Thacker Co-Portfolio Manager Co-Portfolio Manager 30 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) WebEx Communications, Inc. 1.87% -------------------------------------------------------------------------------- Redback Networks, Inc. 0.98% -------------------------------------------------------------------------------- Akamai Technologies, Inc. 0.88% -------------------------------------------------------------------------------- Ctrip.com International Ltd. 0.73% -------------------------------------------------------------------------------- Broadcom Corp. 0.60% -------------------------------------------------------------------------------- FormFactor, Inc. 0.54% -------------------------------------------------------------------------------- PLX Technology, Inc. 0.54% -------------------------------------------------------------------------------- Ultratech, Inc. 0.45% -------------------------------------------------------------------------------- NeuStar, Inc. 0.36% -------------------------------------------------------------------------------- Digital River, Inc. 0.36% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Openwave Systems, Inc. -1.25% -------------------------------------------------------------------------------- O2Micro International Ltd. -1.17% -------------------------------------------------------------------------------- Cogent, Inc. -0.80% -------------------------------------------------------------------------------- Marvell Technology Group Ltd. -0.68% -------------------------------------------------------------------------------- Blue Coat Systems, Inc. -0.59% -------------------------------------------------------------------------------- Google, Inc. -0.59% -------------------------------------------------------------------------------- Sigma Designs, Inc. -0.54% -------------------------------------------------------------------------------- Neoware, Inc. -0.54% -------------------------------------------------------------------------------- Ixia -0.52% -------------------------------------------------------------------------------- AMICAS, Inc. -0.51% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Funds that concentrate investments in a certain sector may be subject to greater risk than funds that invest more broadly, as companies in that sector may share common characteristics and may react similarly to market developments or other factors affecting their values. Investments in high-technology and Internet-related sectors may be highly volatile. Companies in these sectors operate in markets that are characterized by rapid change, evolving industry standards, frequent new service and product announcements, introductions, enhancements, and changing customer demands. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 31 THE INFORMATION AGE FUND(R) (Continued) ASSETS UNDER MANAGEMENT: $79.5 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 0.0% Consumer Discretionary 24.3% Consumer Staples 0.0% Financial Services 0.0% Health Care 0.0% Integrated Oils 0.0% Materials and Processing 0.0% Other Energy 0.0% Producer Durables 1.4% Technology 64.6% Utilities 0.0% Other 0.0% Cash 9.7% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Google, Inc. 4.69% -------------------------------------------------------------------------------- Yahoo! Inc. 4.43% -------------------------------------------------------------------------------- O2Micro International Ltd. 4.36% -------------------------------------------------------------------------------- M-Systems Flash Disk Pioneer Ltd. 4.02% -------------------------------------------------------------------------------- aQuantive, Inc. 3.60% -------------------------------------------------------------------------------- Marvell Technology Group Ltd. 3.12% -------------------------------------------------------------------------------- Akamai Technologies, Inc. 3.11% -------------------------------------------------------------------------------- PLX Technology, Inc. 2.87% -------------------------------------------------------------------------------- Digitas, Inc. 2.35% -------------------------------------------------------------------------------- WebEx Communications, Inc. 2.21% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ The Information Age Fund(R) -4.46% 4.20% 12.06% 0.77% 8.13% 8.33% 134.09% ------------------------------------------------------------------------------------------------------------------------------------ Goldman Sachs Technology -5.47% 3.83% 7.54% -4.99% 6.37% 6.89% 102.99% Composite Index 4 ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 9.17% 154.18% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 11/15/95 The Information Goldman Sachs Technology S&P 500 Age Fund[R] Composite Index 4 Index 5 11/15/95 $10,000 $10,000 $10,000 12/95 $9,300 $9,503 $10,398 3/96 $9,340 $9,988 $10,958 6/96 $10,710 $10,950 $11,442 9/96 $11,790 $11,904 $11,801 12/96 $11,785 $12,971 $12,788 3/97 $10,351 $12,548 $13,130 6/97 $12,276 $15,245 $15,415 9/97 $15,982 $18,076 $16,571 12/97 $12,509 $15,979 $17,053 3/98 $14,269 $18,925 $19,430 6/98 $14,958 $20,241 $20,059 9/98 $13,421 $19,341 $18,069 12/98 $19,040 $26,969 $21,925 3/99 $22,114 $29,886 $23,009 6/99 $24,637 $34,067 $24,626 9/99 $26,959 $35,835 $23,086 12/99 $43,072 $50,860 $26,535 3/00 $50,522 $58,896 $27,132 6/00 $47,345 $53,710 $26,410 9/00 $42,134 $48,483 $26,153 12/00 $27,959 $31,585 $24,107 3/01 $22,679 $22,875 $21,249 6/01 $22,532 $26,214 $22,487 9/01 $14,913 $16,887 $19,178 12/01 $21,776 $22,524 $21,236 3/02 $18,763 $20,872 $21,292 6/02 $12,649 $15,076 $18,430 9/02 $8,378 $10,980 $15,257 12/02 $11,315 $13,419 $16,533 3/03 $12,379 $13,338 $16,021 6/03 $16,635 $16,321 $18,490 9/03 $19,423 $18,168 $18,964 12/03 $22,375 $20,618 $21,264 3/04 $23,364 $20,384 $21,647 6/04 $23,245 $20,743 $22,026 9/04 $20,262 $18,440 $21,594 12/04 $24,009 $21,147 $23,585 3/05 $20,997 $19,285 $23,083 6/05 $22,465 $19,550 $23,400 9/05 $23,859 $20,896 $24,243 12/05 $24,503 $21,474 $24,736 3/06 $27,036 $22,393 $25,795 6/06 $23,409 $20,299 $25,418 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. If a holding is not classified by Russell, it is assigned a Russell designation by RS Investments. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: November 15, 1995. 4 The Goldman Sachs Technology Composite Index is a modified capitalization-weighted index based on a universe of technology-related stocks. Index results do not assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index and, unlike the Fund, the index does not incur fees or expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 32 | CALL 1-800-766-FUND RS INTERNET AGE FUND(R) INVESTING IN COMPANIES LIKELY TO BENEFIT FROM THE DEVELOPMENT OF THE INTERNET [PHOTOS OMITTED] STEVE BISHOP Co-Portfolio Manager For bio see page 6 ALLISON THACKER Co-Portfolio Manager For bio see page 7 RS INTERNET AGE FUND(R) INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS INTERNET AGE FUND(R) SEEKS LONG-TERM CAPITAL APPRECIATION BY IDENTIFYING HIGH-QUALITY COMPANIES AND BUSINESS MODELS IN EMERGING AND RAPID-GROWTH SECTORS, WHOSE PROSPECTS ARE LIKELY TO BENEFIT FROM THE DEVELOPMENT OF THE INTERNET. INVESTMENT CRITERIA INCLUDE INCREASING MARKET SHARE, HIGH MARGIN POTENTIAL, A PROPRIETARY ADVANTAGE, AND A MANAGEMENT TEAM ABLE TO LEVERAGE THAT ADVANTAGE. WE CONDUCT FUNDAMENTAL RESEARCH, INCLUDING EXTENSIVE TRAVEL AND FREQUENT VISITS WITH COMPANY MANAGEMENT TEAMS. WE SEEK TO ADAPT QUICKLY TO INDUSTRY DEVELOPMENTS. THE FUND IS INTENDED FOR INVESTORS WITH LONG-TERM INVESTMENT HORIZONS. INVESTMENT PROCESS The RS Internet Age Fund(R) seeks long-term capital appreciation from companies that we believe are likely to benefit from the development of the Internet. We will own companies of any market capitalization, in or outside the United States, particularly if they are leaders in their market segments. We have historically invested a significant portion of the Fund in small- to mid-cap companies because they often have the best growth characteristics. We use fundamental, bottom-up research combined with quantitative screens to drive our investment process. We are looking for significant long-term revenue growth (at least 15% annually) and may invest in companies outside of the technology sector if we believe them to be primary beneficiaries of the development of the Internet. We will occasionally invest in down-and-out companies that have had temporary missteps, with the belief that they will return to fast growth over the intermediate to longer term. The Fund is primarily for risk-oriented investors with a high tolerance for volatility. PERFORMANCE In the second quarter the RS Internet Age Fund(R) was down 12.97% compared with its benchmark, TheStreet.com Internet Sector (DOT(SM)) Index 4, which was down 5.31% and the Goldman Sachs Technology Composite Index 5, which was down 9.35%. Year to date, the Fund was down 8.38%, underperforming the benchmark, which was down 1.36% and the Goldman Sachs Technology Composite Index, which was down 5.47%. During the quarter, we had relatively strong performances in selected Internet media and e-commerce stocks and weak performances in software and hardware stocks. PORTFOLIO REVIEW It has been a tough year for Internet stocks as the Merrill Lynch Internet HOLDRs Trust Index which declined another 8.36% in the second quarter after an 11.65% decline in the first quarter for a total year-to-date decline of 19.03%. Overall, investors seem impatient with Internet companies' reinvestment plans and skeptical that these investments will drive long-term revenue and margin upside. We generally believe that Internet stocks will be looked upon much more favorably once the strong seasonal trends of fall and winter are visible. After the recent declines in Internet stocks, many of them are trading at similar valuations to traditional media or retail companies despite showing much faster revenue growth. 34 | CALL 1-800-766-FUND We have been adding to our Internet holdings in the areas of online advertising (Marchex [3.97% of assets as of 6/30/06], aQuantive [5.89%], Yahoo! [6.67%]) and selective e-commerce stocks (Digital River [3.74%], Blue Nile [0.74%]). Today approximately 4% of total U.S. advertising dollars are spent online, yet about 15% of consumers' media consumption time is spent online. We believe that this gap will close over the next five years and that the biggest beneficiaries will be owners of Web media properties and companies that enable online advertising. The Fund is invested in both areas. A good performer during the quarter was aQuantive, a leading online advertising agency. aQuantive helps clients like Coca-Cola (0.00%), Expedia (0.00%), Kodak (0.00%), and Carnival Cruise Lines (0.00%) improve their Web sites, place and track online advertising, and interact with customers online. We continue to have a large position in aQuantive because we believe as Web advertising becomes more complex, companies are going to need an agency to help them, and we believe that aQuantive is a leading choice. Somewhat surprisingly, two of our weaker performers during the quarter were companies that are "owners" of Web media properties/destinations. CNET Networks (0.00%) is the leading network of sites dedicated to technology trends. Unfortunately for CNET, technology advertising is weak this year due to Microsoft's (0.00%) delay of its new operating system -- Vista -- and Sony's (0.00%) awaited year-end launch of the PS3. We sold our position this quarter as it became clear that while revenues were lower than expected for CNET, costs were far higher than we had hoped to see. We would consider reinvesting in CNET if we saw more cost discipline from the company and believed that revenue growth would reaccelerate. Marchex was another poor performer during the quarter. Although the company does provide some advice to advertisers about spending online, the main reason we own Marchex is its real estate portfolio of 225,000-plus Web sites. The company is pioneering technology that will enable it to improve the content on these Web sites, which are mostly travel, entertainment, financial, and business oriented. We believe this should significantly improve the value of these sites and their cash flows. We have been adding to our position in Marchex opportunistically this quarter and believe it will do well in the back half of the year. During the second quarter, Ctrip.com International (3.35%) was a very positive performer for the Fund. Ctrip is the market share leader (60% share) of online bookings for travel in China. With only 8% of the Chinese population online, we believe there is huge growth in the potential customers for Ctrip. Today only 1.5% of Chinese who have online connections actually book their travel online. As these consumers become more comfortable with Web sites and using payment services over the Internet, we believe Ctrip should be able to sell travel to a much larger group of consumers. Additionally, as China's gross domestic product grows, we expect consumers will have more disposable income to use on leisure travel. WWW.RSINVESTMENTS.COM | 35 RS INTERNET AGE FUND(R) (Continued) In software our weakest performer was Openwave Systems (1.80%), a provider of infrastructure software for the cellular industry. Openwave provides to cellular carriers the software they need to roll out and grow data services, including Web access via mobile phones. Growing data services is a top priority of the cellular carriers, and we believe Openwave should have a very strong market for sales. It appears, however, that as carriers have continued to merge, selling these big-infrastructure deals has become a slower and more complicated process, which is hurting Openwave. The company reported a disappointing first quarter in April as it appeared to sign several deals late in the quarter and saw balance sheet deterioration due to a rise in unbilled receivables. We did trim our position in June, but our industry checks lead us to believe that Openwave's products are still key for wireless carriers that are enabling data services on mobile phones. In the hardware and semiconductor sector, we had a positive contribution from F5 Networks (1.34%), a maker of Internet networking equipment. We opportunistically bought the stock after a major pullback -- post its first-quarter conference call -- and weaker-than-expected guidance. We think the company's competitive position remains very strong and that the market for its switches is growing 25% to 30%. We also had solid relative performance from M-Systems Flash Disk Pioneer (3.69%) as investors digested the weaker gross margin news in the first quarter and focused on the bullish medium- and long-term outlook. The company also announced its revolutionary X4 technology, which we think could potentially give it a significant competitive advantage, essentially in becoming the low-cost producer in the NAND chip marketplace. M-Systems expects to prove in 2007 that this technology works in high-volume production; if successful, this development makes us even more bullish than about the company's long-term prospects. M-Systems remains a large position. After a strong first quarter Netlogic Microsystems (2.23%), a designer of Internet data packet processing chips, was a weaker performer despite strong fundamentals. Fears of increased competition from Cisco (0.00%), Netlogic's largest customer, drove the stock down. We remain positive as Netlogic continues to see strength in the 10-gigabits-per-second co-processor market at Cisco, Huawei (a Chinese networking equipment maker) (0.00%), and Alaxala (a joint venture between NEC and Fujitsu) (0.00%). Netlogic also has a large new product line selling security-related processor chips to security vendors such as F5 Networks and McAfee (0.00%). We believe this could double the company's addressable market and be a big driver in 2007. O2Micro International (5.00%) also performed poorly as it reported weaker-than-expected profits in the first quarter related to a temporary manufacturing glitch. The notebook computer market has been relatively weak, and there has been excess flat-panel glass supply for the LCD monitor and TV market -- all weighing on the stock. Despite this we think the company's fundamentals remain intact and that revenues could grow 20% or better this year. The stock appears to be significantly oversold. We expect the LCD TV market to snap back fast as TV glass prices are cut to clear the inventories and as the elasticity of demand kicks in -- good for chip unit volumes 36 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) WebEx Communications, Inc. 1.60% -------------------------------------------------------------------------------- Ctrip.com International Ltd. 1.17% -------------------------------------------------------------------------------- Digital River, Inc. 0.78% -------------------------------------------------------------------------------- Rackable Systems, Inc. 0.64% -------------------------------------------------------------------------------- Akamai Technologies, Inc. 0.61% -------------------------------------------------------------------------------- PLX Technology, Inc. 0.55% -------------------------------------------------------------------------------- Trident Microsystems, Inc. 0.34% -------------------------------------------------------------------------------- Photon Dynamics, Inc. 0.29% -------------------------------------------------------------------------------- Netlogic Microsystems, Inc. 0.29% -------------------------------------------------------------------------------- RightNow Technologies, Inc. 0.22% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) O2Micro International Ltd. -1.33% -------------------------------------------------------------------------------- Openwave Systems, Inc. -1.13% -------------------------------------------------------------------------------- Linktone Ltd. -0.95% -------------------------------------------------------------------------------- Marchex, Inc. -0.92% -------------------------------------------------------------------------------- CNET Networks, Inc. -0.91% -------------------------------------------------------------------------------- AMICAS, Inc. -0.79% -------------------------------------------------------------------------------- Blue Coat Systems, Inc. -0.63% -------------------------------------------------------------------------------- Optimal Group, Inc. -0.62% -------------------------------------------------------------------------------- Google, Inc. -0.59% -------------------------------------------------------------------------------- Cogent, Inc. -0.52% -------------------------------------------------------------------------------- and good for O2Micro. The stock is trading at just over 10 times our estimated 2007 earnings per share, plus it has $3 of cash per share. We think the stock is very cheap at these prices, and it remains a large position. OUTLOOK We believe that the remainder of 2006 will be an improvement over the first half. In the most recent quarter, the Fund had 43% year-over-year revenue growth and is trading at a price/earnings growth ratio of less than 0.65 times. This has historically been a very attractive valuation level, and we feel bullish about our holdings' ability to grow revenues and earnings. Assuming that the economy remains relatively strong for the remainder of the year, technology spending should be steady, leading to solid earnings. We continue to own significant weightings in Internet media and online advertising names as well as Internet infrastructure companies, and we believe that our emerging growth style of technology investing has us positioned to outperform in this environment. /s/ Steve Bishop /s/ Allison Thacker Steve Bishop Allison Thacker Co-Portfolio Manager Co-Portfolio Manager + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Funds that concentrate investments in a certain sector may be subject to greater risk than funds that invest more broadly, as companies in that sector may share common characteristics and may react similarly to market developments or other factors affecting their values. Investments in high-technology and Internet-related sectors may be highly volatile. Companies in these sectors operate in markets that are characterized by rapid change, evolving industry standards, frequent new service and product announcements, introductions, enhancements, and changing customer demands. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 37 RS INTERNET AGE FUND(R) (Continued) ASSETS UNDER MANAGEMENT: $69.2 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 0.0% Consumer Discretionary 43.7% Consumer Staples 0.0% Financial Services 1.7% Health Care 0.0% Integrated Oils 0.0% Materials and Processing 0.0% Other Energy 0.0% Producer Durables 1.2% Technology 50.0% Utilities 0.0% Other 0.0% Cash 3.4% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Yahoo! Inc. 6.67% -------------------------------------------------------------------------------- aQuantive, Inc. 5.89% -------------------------------------------------------------------------------- Google, Inc. 5.37% -------------------------------------------------------------------------------- O2Micro International Ltd. 5.00% -------------------------------------------------------------------------------- Marchex, Inc. 3.97% -------------------------------------------------------------------------------- Netflix, Inc. 3.89% -------------------------------------------------------------------------------- Digitas, Inc. 3.76% -------------------------------------------------------------------------------- Digital River, Inc. 3.74% -------------------------------------------------------------------------------- M-Systems Flash Disk Pioneers Ltd. 3.69% -------------------------------------------------------------------------------- Ctrip.com International Ltd. 3.35% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Return Since Return Since Return Total Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS Internet Age Fund(R) -8.38% 5.65% 13.99% 3.66% -5.05% -28.90% ------------------------------------------------------------------------------------------------------------------------------------ TheStreet.com Internet Sector (DOT(SM)) Index 4 -1.36% 9.05% 19.39% -3.24% -20.32% -77.58% ------------------------------------------------------------------------------------------------------------------------------------ Goldman Sachs Technology Composite Index 5 -5.47% 3.83% 7.54% -4.99% -10.80% -52.89% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 6 2.76% 8.62% 11.19% 2.48% 0.12% 0.80% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 12/1/99
RS Internet TheStreet.com Internet S&P 500[R] Index Goldman Sachs Technology Age Fund[R] Sector (DOT SM) Index 4 Index 6 Composite Index 5 12/1/99 $10,000 $10,000 $10,000 $10,000 12/99 $12,180 $12,477 $10,522 $11,803 3/00 $14,300 $11,965 $10,759 $13,668 6/00 $12,010 $9,098 $10,473 $12,465 9/00 $10,820 $7,712 $10,371 $11,252 12/00 $6,530 $3,249 $9,560 $7,330 3/01 $4,790 $2,423 $8,427 $5,309 6/01 $5,940 $2,644 $8,917 $6,084 9/01 $3,750 $1,287 $7,605 $3,919 12/01 $5,760 $2,085 $8,421 $5,227 3/02 $5,220 $1,687 $8,443 $4,844 6/02 $3,620 $1,038 $7,308 $3,499 9/02 $2,380 $731 $6,050 $2,548 12/02 $3,270 $926 $6,556 $3,114 3/03 $3,510 $977 $6,353 $3,095 6/03 $4,800 $1,317 $7,332 $3,788 9/03 $5,680 $1,445 $7,520 $4,216 12/03 $6,580 $1,654 $8,432 $4,785 3/04 $6,900 $1,745 $8,584 $4,731 6/04 $6,830 $1,915 $8,734 $4,814 9/04 $5,980 $1,799 $8,563 $4,279 12/04 $7,190 $2,251 $9,353 $4,908 3/05 $6,300 $2,002 $9,154 $4,476 6/05 $6,730 $2,056 $9,279 $4,537 9/05 $7,360 $2,198 $9,614 $4,849 12/05 $7,760 $2,273 $9,809 $4,983 3/06 $8,170 $2,368 $10,229 $5,197 6/06 $7,110 $2,242 $10,080 $4,711
PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: December 1, 1999. 4 TheStreet.com Internet Sector (DOT(SM)) Index is an unmanaged, equal dollar-weighted index composed of leading companies involved in Internet commerce, service, and software. Index results do not assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index and, unlike the Fund, the index does not incur fees or expenses. 5 The Goldman Sachs Technology Composite Index is a modified capitalization-weighted index based on a universe of technology related stocks. Index results do not assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index and, unlike the Fund, the index does not incur fees and expenses. 6 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 38 | CALL 1-800-766-FUND RS MIDCAP OPPORTUNITIES FUND SEEKING GROWTH IN MID-CAP COMPANIES WHILE ATTEMPTING TO MODERATE RISK [PHOTO OMITTED] JOHN WALLACE Portfolio Manager For bio see page 7 RS MIDCAP OPPORTUNITIES FUND INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS MIDCAP OPPORTUNITIES FUND SEEKS TO ACHIEVE LONG-TERM CAPITAL GROWTH BY INVESTING PRINCIPALLY IN MID-CAP COMPANIES. OUR FLEXIBLE, BOTTOM-UP APPROACH IS BASED ON VALUE RECOGNITION AND TREND ANALYSIS. WE LOOK FOR WELL-MANAGED COMPANIES WITH IMPROVING FUNDAMENTALS THAT MAY BE POSITIONED FOR GROWTH. OUR FORMULA FOR LONG-TERM SUCCESS ALSO INCLUDES A DISCIPLINED APPROACH TO MANAGING RISK: LOSSES ARE MINIMIZED QUICKLY, AND WE CONSTANTLY LOOK FOR ATTRACTIVE OPPORTUNITIES. INVESTMENT PROCESS We seek capital appreciation through the active management of growth-oriented mid-cap companies (those with market capitalizations between $1.5 billion and up to 120% of the largest stock in the Russell Midcap(R) Index 8). We attempt to identify a catalyst that will drive earnings growth (such as new management, new products, and new markets) through the use of quantitative screens and bottom-up fundamental research. The Fund is designed for investors who aim to capture upside performance of the asset class with less volatility than in many growth portfolios. PERFORMANCE Despite a sharp rally in the last week of June, the second quarter of 2006 goes down as the worst for the Russell Midcap(R) Growth Index 4 since 2002. The RS MidCap Opportunities Fund declined 4.57%, which was better than our benchmark, the Russell Midcap Growth Index, which declined 4.69%. Despite a volatile five-week market sell-off (May 10 to June 14), our year-to-date performance number was positive (4.87%), and we continued to outperform the benchmark (up 2.56%) by more than 200 basis points. From that standpoint we are pleased with our returns. After the Federal Reserve Board raised interest rates for the sixteenth consecutive time (on May 10), investor sentiment turned very pessimistic. The market began the sharpest sell-off since 2004. Uncertainty over the continuation of the bull market drivers including strong economic growth, low (containable) inflation, and demand in emerging economies, drove several indexes to double-digit losses during the sell-off. The malaise was not limited to the U.S. market; most foreign-market indexes also declined. Especially hard hit were the emerging markets of India, Brazil, and Korea. Here at home no index was spared as the Nasdaq Composite Index 7 declined 7.17% for the quarter (down 1.51% year to date); the S&P 500(R) Index 5 was down 1.46% (+2.76% year to date) and the Russell 2000(R) Growth Index 6 was down 7.25% (+6.07% year to date). PORTFOLIO REVIEW As the market began to slide in May, investors were quick to take profits across the board. Two of our top-performing sectors in the first quarter, technology and materials and processing, were among our worst performers in the second quarter. Enthusiasm for growth stocks turned sour as conventional wisdom embraced the idea that the U.S. economy is headed for a 40 | CALL 1-800-766-FUND sharp downturn (a.k.a. recession). During the quarter lower-beta and more-defensive groups did better. Consumer Staples (4.3% of the Fund) was our best-performing sector and also a top relative performer due to an overweighting and good stock picking. I remain overweighted in technology stocks, and I continue to believe that the rationale for owning these companies, especially telecommunications equipment vendors, is still strong. Order flow and backlogs remain quite solid, and high levels of cash on U.S. corporate balance sheets should further fuel demand for increased capital expenditures. The second half of 2006 could be a surprisingly good period for technology stocks. In the telecom space, Ciena (1.45% of assets as of 6/30/06), Tellabs (1.68%), and Nortel Networks (0.00%) declined in the second-quarter. Ciena is a leading supplier of optical networking and broadband access equipment. During the quarter the company reported strong quarterly results, well ahead of Wall Street expectations. New products are selling well, and we believe the fundamental outlook remains strong. Nevertheless, the stock declined some 28% during the quarter before rebounding, as investors fretted about the level of capital expenditure spending in the telecom equipment sector. Tellabs, which remains one of our favorite telecom stocks in this space, was affected by the same issue. The company designs and develops digital cross-connects and routers for optical networking and broadband data. I believe it is well positioned to benefit from a major network upgrade cycle as its customers (Verizon [0.00%], AT&T [0.00%], and Bellsouth [0.00%]) upgrade their networks to compete with cable. Like Ciena, Tellabs has sold off some 22% from its April high on no change to its fundamentals. Nortel Networks was sold during the quarter. New management has attempted to reorganize and reposition this large telecom company to improve products, margins, and profitability. I believe it has failed so far to achieve these objectives, and after nearly six months I cut my losses and redeployed the assets into Ciena, Tellabs, and other technology holdings at favorable prices. All was not doom and gloom in the telecom industry during the second quarter, however. InterDigital Communications (1.48%) was a big winner in a down market. InterDigital designs circuits and also licenses wireless technology to some of the world's largest manufacturers of cell phones. During the quarter Nokia (0.00%) signed a large royalty agreement that I think will likely influence other global players (Sony-Ericsson [0.00%] and Samsung [0.00%]) to sign deals with the company in 2006. As investors shifted to lower-beta, more-conservative investments, our positions in Herbalife (1.26%) and Hansen Natural (1.03%) benefited. Both of these companies were among our best performers during the quarter, have visible revenue and earnings momentum, and are perceived to be somewhat "recession-proof." Herbalife markets nutritional supplements as well as weight management and skincare products worldwide. It is a leading player in the fast-growing direct-selling industry. Hansen manufactures energy drinks, fruit juices, WWW.RSINVESTMENTS.COM | 41 RS MIDCAP OPPORTUNITIES FUND (Continued) smoothies, and natural sodas. I believe the firm is well positioned to gain market share in the energy drink segment. Hansen has plenty of room to grow as energy drinks represent less than 1% of the caffeinated beverage segment. Not all of our consumer-oriented stocks did well during the second quarter. Urban Outfitters (1.21%) was a disappointment. This specialty retailer's business took a lackluster turn this spring, and excess inventory forced management to increase summer markdowns causing a slight reduction in earnings. I underestimated the dramatic stock sell-off in the company's shares and did not cut my losses. I do believe, however, that management has addressed merchandising problems, and we should see improvement this fall. With the stock down more than 30% year to date, I added to our position during the quarter. If the economy is moving into a midcycle slowdown, it will take the pressure off the Fed to continue to raise interest rates. A more accommodative Federal Reserve should help the financial services sector. Because I believe that the Fed is close to ending rate hikes, I increased our weightings in this sector from a slight underweighting to an overweighting versus the benchmark (15.5% vs. 11.6%). Our investment in First Marblehead (1.43%) added to our performance last quarter. This company provides loan securitization for undergraduate and graduate student loans in the United States. I think new management has done a great job of signing up new customers and leveraging its proprietary database to structure loans for the secondary market. OUTLOOK Late in the second quarter the Federal Reserve boosted its short-term interest rate target (now 5.25%) for the seventeenth consecutive time. I believe the U.S. economy remains in very good shape but is already slowing from its strong first-quarter gross domestic product growth rate of more than 5%. I think this slowdown will ultimately take the pressure off the Fed to continue to raise rates. Inflation expectations are slowly rolling over (various commodities like gold, copper, and lumber are off their recent highs), and I think one or two more rate hikes to 5.50% to 5.75% won't kill this expansion. My opinion is at odds with those of many investors, who fear an "end-of-cycle recession" vs. a "midcycle slowdown." The past two midcycle slowdowns were in 1985 and 1995 and were positive for the equity markets. I believe any negative economic impact of a weaker consumer will be more than offset by continued strong business lending and a capital-spending environment that remains robust. If I am right, corporate earnings, which remain strong, will continue to grow, albeit at a slower rate than in 2005/2006. Equity valuations are extremely attractive and are at levels not seen in a long time. The S&P 500 Index currently trades at about 16 times trailing earnings-per-share and 13 times 2007 bottom-up consensus estimates. By comparison the RS MidCap Opportunities Fund trades at 42 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED+ Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Hansen Natural Corp. 0.89% -------------------------------------------------------------------------------- InterDigital Communications Corp. 0.65% -------------------------------------------------------------------------------- McDermott International, Inc. 0.50% -------------------------------------------------------------------------------- The First Marblehead Corp. 0.49% -------------------------------------------------------------------------------- Scientific Games Corp. 0.45% -------------------------------------------------------------------------------- Gemstar-TV Guide International, Inc. 0.37% -------------------------------------------------------------------------------- Armor Holdings, Inc. 0.36% -------------------------------------------------------------------------------- Broadcom Corp. 0.34% -------------------------------------------------------------------------------- Hanover Compressor Co. 0.34% -------------------------------------------------------------------------------- Advanced Micro Devices, Inc. 0.32% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME+ Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Nortel Networks Corporation -0.60% -------------------------------------------------------------------------------- Openwave Systems, Inc. -0.47% -------------------------------------------------------------------------------- Avid Technology, Inc. -0.36% -------------------------------------------------------------------------------- JetBlue Airways Corp. -0.32% -------------------------------------------------------------------------------- Yahoo! Inc. -0.30% -------------------------------------------------------------------------------- Suntech Power Holdings Co. Ltd. -0.30% -------------------------------------------------------------------------------- Urban Outfitters, Inc. -0.30% -------------------------------------------------------------------------------- STATS ChipPAC Ltd. -0.25% -------------------------------------------------------------------------------- Cogent, Inc. -0.24% -------------------------------------------------------------------------------- Chartered Semiconductor Manufacturing Ltd. -0.22% -------------------------------------------------------------------------------- about 16 times forecast 2007 earnings, roughly in line with the benchmark, the Russell Midcap Growth Index. With an economy that is still growing, valuations that are very reasonable, and a Federal Reserve Board that will become more accommodative, I remain constructive on the U.S. equity market. As we go into the second half of 2006, I believe the risk/reward ratio of owning equities is dramatically in our favor. As a fellow shareholder of the Fund, I remain focused and committed to our investment goal: long-term growth of capital. I appreciate your continued confidence and support. /s/ John Wallace John Wallace Portfolio Manager + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in technology companies may be highly volatile. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 43 RS MIDCAP OPPORTUNITIES FUND (Continued) ASSETS UNDER MANAGEMENT: $259.6 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 3.1% Consumer Discretionary 18.6% Consumer Staples 4.3% Financial Services 15.5% Health Care 12.2% Integrated Oils 0.0% Materials and Processing 7.3% Other Energy 6.6% Producer Durables 7.9% Technology 20.6% Utilities 1.2% Other 1.2% Cash 1.5% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Landstar System, Inc. 1.82% -------------------------------------------------------------------------------- Oregon Steel Mills, Inc. 1.80% -------------------------------------------------------------------------------- Mueller Water Products, Inc. 1.78% -------------------------------------------------------------------------------- Palm, Inc. 1.74% -------------------------------------------------------------------------------- Tellabs, Inc. 1.68% -------------------------------------------------------------------------------- Gemstar-TV Guide International, Inc. 1.63% -------------------------------------------------------------------------------- Amylin Pharmaceuticals, Inc. 1.56% -------------------------------------------------------------------------------- Grant Prideco, Inc. 1.55% -------------------------------------------------------------------------------- Cephalon, Inc. 1.55% -------------------------------------------------------------------------------- THQ, Inc. 1.50% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS MidCap Opportunities Fund 4.87% 15.52% 16.53% 4.49% 9.76% 11.75% 238.40% ------------------------------------------------------------------------------------------------------------------------------------ Russell Midcap(R) Growth Index 4 2.56% 13.04% 16.86% 4.76% 8.46% 9.35% 166.66% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 9.54% 171.74% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 7/12/95 RS MidCap Opportunities Fund Russell Midcap[R] Growth Index 4 7/12/95 $10,000 $10,000 9/95 $10,760 $10,519 12/95 $11,240 $10,718 3/96 $12,200 $11,409 6/96 $13,330 $11,835 9/96 $13,340 $12,237 12/96 $13,956 $12,591 3/97 $13,526 $12,132 6/97 $15,216 $13,917 9/97 $17,850 $15,865 12/97 $17,082 $15,429 3/98 $19,103 $17,270 6/98 $18,396 $17,260 9/98 $15,907 $14,378 12/98 $19,071 $18,185 3/99 $20,416 $18,806 6/99 $23,567 $20,765 9/99 $22,358 $19,726 12/99 $29,773 $27,512 3/00 $35,178 $33,324 6/00 $30,409 $30,856 9/00 $30,540 $31,634 12/00 $27,905 $24,280 3/01 $25,533 $18,189 6/01 $27,162 $21,133 9/01 $19,928 $15,258 12/01 $23,995 $19,387 3/02 $22,979 $19,045 6/02 $19,617 $15,567 9/02 $16,569 $12,893 12/02 $17,658 $14,074 3/03 $17,924 $14,072 6/03 $21,383 $16,711 9/03 $23,052 $17,908 12/03 $26,221 $20,086 3/04 $27,212 $21,057 6/04 $27,479 $21,278 9/04 $26,656 $20,357 12/04 $29,462 $23,195 3/05 $28,543 $22,807 6/05 $29,293 $23,590 9/05 $31,615 $25,135 12/05 $32,268 $26,001 3/06 $35,461 $27,979 6/06 $33,840 $26,666 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: July 12, 1995. 4 The Russell Midcap(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell Midcap(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell Midcap(R) Index measures the performance of the 800 smallest companies in the Russell 1000(R) Index, which consists of the 1,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 6 The Russell 2000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 7 The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. You may not invest in the index, and, unlike the Fund, the index does not incur fees or expenses. 8 The Russell Midcap(R) Index measures the performance of the 800 smallest companies in the Russell 1000(R) Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. You may not invest in the index, and, unlike the Fund, the index does not incur fees or expenses. 44 | CALL 1-800-766-FUND RS SMALLER COMPANY GROWTH FUND FOCUSING ON SMALLER MARKET-CAP COMPANIES [PHOTO OMITTED] BILL WOLFENDEN Portfolio Manager For bio see page 7 RS SMALLER COMPANY GROWTH FUND INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS SMALLER COMPANY GROWTH FUND INVESTS PRINCIPALLY IN SMALLER GROWTH COMPANIES. WE SEEK SMALLER COMPANIES THAT WE BELIEVE HAVE THE POTENTIAL FOR LONG-TERM CAPITAL APPRECIATION BASED ON SUPERIOR OR NICHE PRODUCTS OR SERVICES, OPERATING CHARACTERISTICS, MANAGEMENT, OR OTHER FACTORS. THE FUND MAY AT TIMES INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN TECHNOLOGY COMPANIES. INVESTMENT PROCESS Our objective is long-term capital appreciation. We seek to identify small, rapidly growing companies with revenue and/or earnings growth of at least 20% that we believe have the potential to become leaders in emerging industries. We generate ideas for the portfolio using a hands-on, bottom-up research approach. We look for rapidly growing companies with smaller market-capitalizations. Next we conduct fundamental business analysis, focusing on a company's earnings, operating and pretax margins, return on equity, balance sheets, accounting, and management. Management interviews are considered a critical part of our decision-making process. We believe that a small company's success depends largely on its management's ability to execute a logical business plan and remain responsive to changing business fundamentals. Only after a stock passes our criteria will we consider it for purchase. We add positions to the portfolio methodically on a stock-by-stock basis. Additionally, we develop a trading strategy for a new stock, weighing its valuation, trading pattern, and general market conditions. We maintain strict diversification guidelines for the portfolio, and we seek to limit our position in any one holding to 3% of the Fund. We monitor individual holdings, using a proprietary valuation model, and follow the portfolio positions closely, keeping an ongoing dialogue with company management. PERFORMANCE The first half of 2006 has been very volatile for small-cap stocks. The stock market experienced a strong first quarter followed by a weak second quarter, but the index still has a nice gain year to date. The RS Smaller Company Growth Fund did not perform well during this period, rising 0.99% year to date compared with 6.07% for the benchmark, the Russell 2000(R) Growth Index 4. The Fund returned -8.46% in the second quarter compared with the benchmark's return of -7.25% The first quarter was very strong for stocks, with investors focused on continued strong corporate earnings growth and the possibility of a pause in oil prices and interest rates. Uncertainty surrounding inflation, the new Federal Reserve Board chairman's stewardship of the economy, and continuing increases in interest rates and oil prices, however, led to a drubbing of stocks in the second quarter. The Fund lagged the index during the strong first-quarter rally but gained ground as the market sold off for much of the second quarter. Unfortunately, these relative gains evaporated over the last two trading days of the quarter. Overall, I am extremely disappointed 46 | CALL 1-800-766-FUND with this year's performance to date. I am, however, very comfortable with the current portfolio of companies and their prospects for the second half of this year and also 2007 and 2008. I remind investors that I am taking a two- to five-year investment time horizon and am pleased to report that the Fund has strong three- and five-year performance results. PORTFOLIO REVIEW The year began with the Fund underweighted in producer durables and materials and processing. These underweightings contributed to our underperformance for the first half of the year. Health care was slightly underweighted as was the financial sector. We have taken steps since the beginning of the year to reposition ourselves in an overweighted position in financials and have maintained a substantial weighting in health care as we see these sectors as having excellent opportunities in the current market environment. The technology sector has been responsible for more than two-thirds of this year's underperformance. The performance of the technology portion of the Fund's benchmark was 2.27% for the first six months compared with a negative 12.45% return for our technology holdings. Our poor stock selection combined with an overweighting entering the year took its toll. The negative alpha was led by Neoware (down 47% in the first six months) (0.38% of assets as of 6/30/06), Optimal Group (-33%) (1.16%), Openwave Systems (-34%) (0.84%), RADWARE (-29%) (0.63%), and Merge Technologies (-51%) (0.00%). The Fund had a few notable losers in other sectors as well, including Adeza Medical (-33%) (0.00%), Jos. A. Bank Clothiers (-31%) (0.78%), and Barrett Business Services (-27%) (1.02%), but technology certainly led the way. The Fund did have a number of success stories in the first half of the year, which allowed us to remain in positive territory. Strong stock selection came from autos and transportation with American Commercial Lines (+99%) (0.88%) and Old Dominion Freight Line (+39%) (0.90%) contributing positively to the Fund's returns. The producer durables sector also had notable successes with Intevac (+64%) (0.97%) and Gardner Denver (+56%) (1.27%). The best-performing health care stocks were Illumina (+110%) (0.35%) and LifeCell (+62%) (1.21%). The strong performance in consumer discretionary also continued with Ctrip.com International (+78%) (0.87%) and Nutri/System (+72%) (1.17%). I am always on the lookout for companies that have open-ended growth opportunities, recurring revenues, and improving margins. This combination of attributes is typically found in very successful stocks. One producer durable sector stock that we believe has all of these attributes is Flow International (+67%) (0.97%), a maker of ultrahigh-pressured waterjet cutting machines. Flow sells its proprietary cutting machines primarily to the aerospace, industrial, consumer products, and semiconductor industries. These machines help cut everything from diapers and chicken nuggets to aerospace composites for next-generation aircraft. Our long-term objectives or "anchor points" (as we like to call them), for Flow, are $500 million in sales (from roughly $200 million today) and a doubling of operating margins to 15% (from roughly 8% today). Flow has a sizable amount of recurring revenues, in the WWW.RSINVESTMENTS.COM | 47 RS SMALLER COMPANY GROWTH FUND (Continued) form of consumable spare parts (30% to 35% of total revenue) that wear out given the ultrahigh-pressure nature of the process. We believe the combination of the recurring consumables business and the identifiable four- to five-year targets should contribute to Flow's success in the future. OUTLOOK As previously mentioned, the companies we currently own are doing well and are projected to continue to execute on their business plans. We look for undiscovered companies with a competitive advantage in their industry or niche of the economy, recurring revenues, or expanding operating margins and attractive relative valuations. Our anchor points hold us steadfast to our investment philosophy and keep us focused on the long-term opportunity. Anchor points can be unit and/or market share targets, number of customers or new markets and/or margin and earnings-per-share goals. We then track our companies to these objectives over time. Most of our companies have done a wonderful job of hitting or exceeding these anchor points over the past several years and have been rewarded with strong appreciation in their stock price. Many of our Fund's "multi-baggers" have executed on their anchor points and seeing them through aided our long-term returns significantly. If companies fail to hit their anchor points, we will likely sell the stocks and redeploy the proceeds -- but we must identify these failures before they fully manifest themselves and cause stock price damage. Our rigorous research process, fundamental analysis, and "down 20%" rule (we will sell a stock if it is down 20% from our cost and we have no reasonable explanation as to why it is down) have helped us over the past three-plus years. The Fund continues to own fast-growing companies at price-to-earning ratios that are well below their growth rates. Given this profile I believe the opportunity for significant appreciation remains. Looking to the second half of 2006, I am optimistic that the RS Smaller Company Growth Fund is well positioned. We believe our process works over the long-term, and that it is reflected in our long-term results. As a fellow shareholder, I thank you for your continued confidence and support. /s/ Bill Wolfenden Bill Wolfenden Portfolio Manager 48 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) American Commercial Lines, Inc. 0.96% -------------------------------------------------------------------------------- j2 Global Communications, Inc. 0.68% -------------------------------------------------------------------------------- Nutri/System, Inc. 0.57% -------------------------------------------------------------------------------- Superior Energy Services, Inc. 0.55% -------------------------------------------------------------------------------- Intevac, Inc. 0.55% -------------------------------------------------------------------------------- Maverick Tube Corp. 0.52% -------------------------------------------------------------------------------- Ctrip.com International Ltd. 0.51% -------------------------------------------------------------------------------- Five Star Quality Care, Inc. 0.49% -------------------------------------------------------------------------------- Scientific Games Corp. 0.48% -------------------------------------------------------------------------------- LifeCell Corp. 0.47% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Neoware, Inc. -0.70% -------------------------------------------------------------------------------- Optimal Group, Inc. -0.56% -------------------------------------------------------------------------------- Openwave Systems, Inc. -0.42% -------------------------------------------------------------------------------- RADWARE Ltd. -0.40% -------------------------------------------------------------------------------- Barrett Business Services, Inc. -0.38% -------------------------------------------------------------------------------- Jos. A. Bank Clothiers, Inc. -0.38% -------------------------------------------------------------------------------- GSI Group, Inc. -0.36% -------------------------------------------------------------------------------- Adeza Biomedical Corp. -0.36% -------------------------------------------------------------------------------- Build-A-Bear-Workshop, Inc. -0.33% -------------------------------------------------------------------------------- Merge Technologies, Inc. -0.29% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in smaller companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Investments in technology companies may be highly volatile. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 49 RS SMALLER COMPANY GROWTH FUND (Continued) ASSETS UNDER MANAGEMENT: $299.1 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 3.7% Consumer Discretionary 20.9% Consumer Staples 0.0% Financial Services 16.2% Health Care 17.3% Integrated Oils 0.0% Materials and Processing 3.2% Other Energy 5.6% Producer Durables 5.8% Technology 19.1% Utilities 0.0% Other 0.0% Cash 8.2% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Scientific Games Corp. 2.05% -------------------------------------------------------------------------------- j2 Global Communications, Inc. 1.90% -------------------------------------------------------------------------------- FirstService Corp. 1.64% -------------------------------------------------------------------------------- Amerisafe, Inc. 1.55% -------------------------------------------------------------------------------- Cache, Inc. 1.49% -------------------------------------------------------------------------------- The Navigators Group, Inc. 1.49% -------------------------------------------------------------------------------- Online Resources Corp. 1.48% -------------------------------------------------------------------------------- Five Star Quality Care, Inc. 1.45% -------------------------------------------------------------------------------- Central Garden & Pet Co. 1.44% -------------------------------------------------------------------------------- Vital Signs, Inc. 1.42% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Return Since Return Since Return Total Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS Smaller Company Growth Fund 0.99% 8.77% 17.90% 5.23% 12.07% 208.19% ------------------------------------------------------------------------------------------------------------------------------------ Russell 2000(R) Growth Index 4 6.07% 14.58% 16.27% 3.49% 5.08% 63.09% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.51% 124.15% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 8/15/96 RS Smaller Company Growth Fund Russell 2000[R] Growth Index 4 8/15/96 $10,000 $10,000 9/96 $10,570 $10,794 12/96 $11,000 $10,822 3/97 $10,200 $9,687 6/97 $12,570 $11,388 9/97 $15,990 $13,315 12/97 $14,350 $12,223 3/98 $16,570 $13,676 6/98 $15,420 $12,890 9/98 $11,630 $10,008 12/98 $14,260 $12,374 3/99 $14,410 $12,166 6/99 $17,190 $13,960 9/99 $16,560 $13,273 12/99 $22,340 $17,706 3/00 $29,880 $19,349 6/00 $27,540 $17,923 9/00 $28,430 $17,211 12/00 $23,333 $13,735 3/01 $20,299 $11,646 6/01 $23,885 $13,740 9/01 $19,228 $9,882 12/01 $25,273 $12,467 3/02 $23,265 $12,223 6/02 $19,854 $10,304 9/02 $14,481 $8,087 12/02 $15,399 $8,694 3/03 $14,544 $8,357 6/03 $18,807 $10,375 9/03 $22,094 $11,461 12/03 $24,779 $12,915 3/04 $26,464 $13,636 6/04 $25,886 $13,648 9/04 $25,007 $12,828 12/04 $28,589 $14,762 3/05 $26,714 $13,755 6/05 $28,335 $14,233 9/05 $29,931 $15,133 12/05 $30,516 $15,376 3/06 $33,667 $17,584 6/06 $30,819 $16,309 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: August 15, 1996. 4 The Russell 2000(R) Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 50 | CALL 1-800-766-FUND RS GLOBAL NATURAL RESOURCES FUND FOCUSING PRIMARILY ON COMPANIES IN NATURAL RESOURCES INDUSTRIES WORLDWIDE [PHOTOS OMITTED] ANDREW PILARA Portfolio Manager For bio see page 8 MACKENZIE DAVIS Co-Portfolio Manager For bio see page 8 RS GLOBAL NATURAL RESOURCES FUND INVESTMENT STYLE ---------------------------------------- LARGE-CAP MID-CAP SMALL-CAP ---------------------------------------- VALUE BLEND GROWTH ---------------------------------------- FUND PHILOSOPHY THE RS GLOBAL NATURAL RESOURCES FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN COMPANIES PRINCIPALLY ENGAGED IN THE DISCOVERY, DEVELOPMENT, PRODUCTION, OR DISTRIBUTION OF NATURAL RESOURCES; THE DEVELOPMENT OF TECHNOLOGIES FOR THE PRODUCTION OR EFFICIENT USE OF NATURAL RESOURCES; OR THE FURNISHING OF RELATED SUPPLIES OR SERVICES. INVESTMENT PROCESS Cash flow return analysis drives our investment process. We invest in companies that manage capital, not earnings, and we look for businesses that we believe have sustainable, long-term returns in excess of the company's cost of capital. We seek managers who are good capital allocators within a strong corporate culture. We invest when our calculated warranted value substantially exceeds the current market price. Our security analysis is better defined as business analysis in that we concentrate on a company's business model, specifically focused on the evaluation of unit-level economics. We attempt to understand the value drivers and analyze the relationships among the three elements of the capital account: balance sheet, funds flow statement, and income statement. We believe that the stock price will track a company's ability to generate excess return (i.e. economic value) over the long term. Our time horizon is two to three years, and as such we are willing to be patient while the market proves out our thesis. We consciously manage risk -- which we define as a permanent loss of capital -- by continuously assessing the risk/return profile of our investments. All portfolio managers and analysts on the RS Value Team are evaluated according to how much money their investments lose. We believe that if you lose less in down markets, the law of compounding returns will create wealth over the long term. We establish asymmetrical risk/reward parameters when initiating a position, looking for multiples of reward per unit of risk. As value investors the most critical element of our process is the establishment of a "margin of safety," which comes from buying businesses at a significant discount to their intrinsic value. In the natural resources field, we are unwilling to employ the forward price curve to estimate future commodity prices and instead attempt to identify a midcycle price that is sustainable on a long-term basis. As fellow investors in the RS Global Natural Resources Fund, we are aware that the outsized returns of the past few years are likely not sustainable nor are they to be expected. We remain focused on optimizing rather than attempting to maximize returns. PERFORMANCE The RS Global Natural Resources Fund generated a return of 2.12% during the second quarter versus 2.91% for the Fund's benchmark, the Lipper Natural Resources Index 4, 4.48% for the GSSI Natural Resources Index6 and -1.46% for the S&P 500(R) Index 5. The Fund's year-to-date return was 10.54% compared with the Fund's benchmark's return of 13.48%. We 52 | CALL 1-800-766-FUND believe that our ability to generate sustainable long-term returns for our shareholders will be derived largely from the minimization of capital loss, and as such the Fund remains broadly diversified across commodities. In times of increased volatility and/or when valuations appear stretched relative to midcycle commodity prices, we will carry higher cash balances. In the second quarter, cash averaged 17.8% and was the main detractor from relative performance versus the GSSI Natural Resources Index. PORTFOLIO REVIEW Falconbridge (up 51.24% during the quarter; 2.35% of assets as of 6/30/06) was the largest positive contributor to returns. We think Falconbridge clearly benefitted from the increased merger-and-acquisitions activity in the mining space, the emergence of an all-cash bid from Xstrata PLC (0.00%), and a more realistic assessment of the synergy potential in the Sudbury Basin. Our investment thesis in Falconbridge is based on its exposure to both copper and nickel and its significant pipeline of low-cost, high-return growth projects. Although it is difficult to determine the ultimate end state for the mining industry as it relates to further consolidation, we expect that the value of those companies that possess world-class projects will be recognized and crystallized by the market. Another investment that continues to do well is TXU (+34.54%) (2.36%). The company is a quasi-integrated electrical utility with generation as well as transmission and distribution (T&D) assets. Our main attraction to TXU are its low-cost coal and nuclear base load capacity in a market where marginal power prices are set by natural gas and the fact that we believe the management team led by Chairman and CEO John Wilder is entirely focused on long-term value creation. We believe that recent actions by the company -- including its decision to create a joint venture to handle outsourced T&D services, the April announcement to build 11 new coal-fired plants in Texas, and a stated interest in expanding into the mid-Atlantic or Northeast power markets -- are evidence of this fact. Furthermore, with a 10%-plus free cash flow yield and a clear ability to redeploy capital into highly attractive growth projects, we are very comfortable from a valuation perspective. Our energy and energy services investments continue to feel the negative impact of the market's concern regarding the short-term outlook for North American natural gas. As long-term value investors, however, we remain positive about the outlook for a number of our core holdings as we are able to own assets at a substantial discount to what we believe is their intrinsic value, calculated using commodity assumptions below current prompt month and futures prices. Compton Petroleum (-9.05%) (2.43%) was affected, we believe, not only by a decline in the price of natural gas, but also by a stretched balance sheet and an aggressive capital-spending program. Having spent considerable time with both management and the technical staff, we remain confident in the team's ability to continue to successfully develop the companies four core assets. In addition, we believe that management is open to the idea of monetizing its oil assets as a means to fully fund the capital program and deliver the balance sheet while enhancing the company's natural gas focus. WWW.RSINVESTMENTS.COM | 53 RS GLOBAL NATURAL RESOURCES FUND (Continued) Another investment that we remain excited about is Noble (-8.19%) (2.01%), which provides offshore drilling services via its fleet of high-end jack-up and semi-submersible rigs. We believe the company is well positioned to take advantage of the dramatic increase in exploration and development activity by national oil companies, the major oil companies, and large independents. Although the stock was under pressure from concerns regarding industry fundamentals, the disposition of a minority investment in an overseas competitor and changes in senior management positions, we are comfortable knowing that we are able to buy world-class assets operating under two to three year contracts at a mid-single-digit multiple of cash flow with very limited exposure to North American natural gas dynamics. In addition, though we have been and remain tremendous fans of the integrity, foresight, and capital discipline of departing Chairman and CEO Jim Day, we are equally confident in the team he has left behind. After meeting with the current president, Mark Jackson, who will assume command upon Jim's departure, there is little doubt in our minds, that Noble's reputation for operating excellence and capital discipline will remain intact. OUTLOOK We remain constructive on the natural resource space over the next three to five years due to continued positive supply/demand dynamics and increasing marginal costs of production, which should result in commodity prices' plateauing at levels above the historical average. As at the end of 2005, however, we believe that attractive valuations are somewhat more challenging to identify without relying on the commodity to generate excess returns. Our goal is to identify good companies at attractive valuations run by smart and diligent management teams. Warranted value is calculated using mid-cycle commodity prices, and we are not willing to employ more-aggressive, or speculative, forecasts to justify investment. As a result, many of the companies analyzed in this letter will be familiar to long-time shareholders because we continue to believe in their cash flow and return profiles. Regardless of whether they have been significant contributors or detractors in the past, we expect them to be stalwarts going forward. Across the global markets, the second quarter saw money flow into less risky asset classes and a reduction in more-speculative trades, resulting in large declines for emerging markets, commodities, and small-cap stocks. Indications that the Bank of Japan was moving towards a more proactive stance regarding excess liquidity undermined the performance of sectors where funds involved in the "carry trade" had significant investments. Finally, we witnessed the broad repricing of risk across asset classes. Our portfolio strategy at the outset of 2006 was cautious, with an emphasis on lower-risk investments because we did not believe we were being sufficiently compensated by the market (we consider ourselves risk managers as much as we do money managers). We remain cautious with the market in transition, waiting for appropriate entry points. Our outlook is for lower yields and higher stock prices by the end of the second quarter of 2007 while recognizing that it is the interim period that will create anxieties for investors. We are currently in a "World Cup stock market"-- lots 54 | CALL 1-800-766-FUND of back and forth action but not much scoring. Although corporate profits have increased to double-digit levels, we have experienced a compression in valuations due, we believe, to an increase in discount rates. With the Federal Reserve Board leaning on interest rates, weakening consumer spending, and a housing downturn, we appear to be transitioning to a period of slower corporate profit growth and lower inflation. All four of the major central banks are in a tightening mode. With these central banks' trying to prove their prudence and a flat yield curve, we expect that inflation concerns should ease later in the year. We think this should lead to the end of the current valuation compression and, with that, excellent investment opportunities. Our portfolio policy during this transition period is to manage our cash prudently and be vigilant about valuations. If you believe that the market is poised for a significant short-term rally, the Fund may likely disappoint you. We will not assume the risks necessary to maximize profits but instead aim to optimize returns by entering investments with asymmetric risk/reward profiles. We will continue to use these quarterly commentaries as an opportunity to communicate our objectives and principles. Our long-term goal is to be considered one of the top value investment teams, which means striving to achieve superior long-term investment results. Our hope is that our philosophy, work ethic, and commitment to improvement will result in our reaching our goal. For us, being among the best involves not only achieving our investment objectives but also living by our principles: o Alignment with shareholders o Uncompromising integrity o Respect for others o Continuous learning o A disciplined process We appreciate your support and confidence in our work. /s/ Andrew Pilara /s/ MacKenzie Davis Andrew Pilara MacKenzie Davis Portfolio Manager Co-Portfolio Manager WWW.RSINVESTMENTS.COM | 55 RS GLOBAL NATURAL RESOURCES FUND (Continued) GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Falconbridge Ltd. 1.00% -------------------------------------------------------------------------------- Basic Energy Services, Inc. 0.90% -------------------------------------------------------------------------------- Teck Cominco Ltd. 0.78% -------------------------------------------------------------------------------- Goldcorp, Inc. 0.73% -------------------------------------------------------------------------------- Paramount Resources Ltd. 0.69% -------------------------------------------------------------------------------- Allegheny Technologies, Inc. 0.67% -------------------------------------------------------------------------------- Marathon Oil Corp. 0.64% -------------------------------------------------------------------------------- Crosstex Energy, Inc. 0.61% -------------------------------------------------------------------------------- Peabody Energy Corp. 0.61% -------------------------------------------------------------------------------- Century Aluminum Co. 0.57% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Compton Petroleum Corp. -0.67% -------------------------------------------------------------------------------- Trilogy Energy Trust -0.55% -------------------------------------------------------------------------------- Anderson Energy Ltd. -0.49% -------------------------------------------------------------------------------- Ensign Energy Services, Inc. -0.38% -------------------------------------------------------------------------------- Clear Energy, Inc. -0.29% -------------------------------------------------------------------------------- Virginia Mines, Inc. -0.25% -------------------------------------------------------------------------------- Trican Well Service Ltd. -0.24% -------------------------------------------------------------------------------- Complete Production Services, Inc. -0.24% -------------------------------------------------------------------------------- Alcan, Inc. -0.22% -------------------------------------------------------------------------------- Newfield Exploration Co. -0.16% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Funds that concentrate investments in a certain sector may be subject to greater risk than funds that invest more broadly, as companies in that sector may share common characteristics and may react similarly to market developments or other factors affecting their values. Investments in companies in natural resources industries may involve risks including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international political and economic developments. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. 56 | CALL 1-800-766-FUND ASSETS UNDER MANAGEMENT: $2.0 billion SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 0.0% Consumer Discretionary 0.0% Consumer Staples 0.0% Financial Services 3.2% Health Care 0.0% Integrated Oils 9.0% Materials and Processing 23.3% Other Energy 38.4% Producer Durables 0.0% Technology 0.0% Utilities 4.9% Other 0.0% Cash 21.2% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Paramount Resources Ltd. 3.80% -------------------------------------------------------------------------------- Key Energy Services, Inc. 3.63% -------------------------------------------------------------------------------- Nexen, Inc. 3.46% -------------------------------------------------------------------------------- Marathon Oil Corp. 3.21% -------------------------------------------------------------------------------- BHP Billiton Ltd. 2.90% -------------------------------------------------------------------------------- Anadarko Petroleum Corp. 2.88% -------------------------------------------------------------------------------- Talisman Energy, Inc. 2.82% -------------------------------------------------------------------------------- Companhia Vale do Rio Doce 2.81% -------------------------------------------------------------------------------- Brookfield Asset Management, Inc. 2.71% -------------------------------------------------------------------------------- Century Aluminum Co. 2.65% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS Global Natural Resources Fund 10.54% 42.46% 37.80% 26.74% 13.11% 14.53% 322.80% ------------------------------------------------------------------------------------------------------------------------------------ Lipper Natural Resources Index 4 13.48% 39.67% 37.73% 20.05% 14.84% 16.09% 388.29% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 9.17% 154.18% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 11/15/95 RS Global Natural Lipper Natural S&P 500[R] Resources Fund Resources Index 4 Index 5 11/15/95 $10,000 $10,000 $10,000 12/95 $10,120 $10,824 $10,398 3/96 $11,860 $11,706 $10,958 6/96 $12,330 $12,245 $11,442 9/96 $13,140 $12,705 $11,801 12/96 $14,290 $13,949 $12,788 3/97 $13,340 $13,414 $13,130 6/97 $13,720 $14,793 $15,415 9/97 $14,770 $17,274 $16,571 12/97 $11,840 $16,005 $17,053 3/98 $12,459 $16,610 $19,430 6/98 $11,110 $15,528 $20,059 9/98 $8,614 $13,011 $18,069 12/98 $7,761 $12,305 $21,925 3/99 $8,125 $13,434 $23,009 6/99 $10,403 $15,952 $24,626 9/99 $10,528 $16,114 $23,086 12/99 $9,498 $16,430 $26,535 3/00 $9,842 $18,369 $27,132 6/00 $10,736 $19,072 $26,410 9/00 $11,589 $20,438 $26,153 12/00 $11,953 $21,232 $24,107 3/01 $12,130 $20,185 $21,249 6/01 $12,931 $19,590 $22,487 9/01 $10,965 $16,553 $19,178 12/01 $12,026 $18,561 $21,236 3/02 $13,753 $20,418 $21,292 6/02 $14,471 $19,166 $18,430 9/02 $13,566 $16,009 $15,257 12/02 $14,076 $17,218 $16,533 3/03 $14,065 $17,012 $16,021 6/03 $16,156 $18,694 $18,490 9/03 $16,396 $18,670 $18,964 12/03 $20,006 $21,736 $21,264 3/04 $21,202 $23,208 $21,647 6/04 $21,379 $24,383 $22,026 9/04 $24,573 $27,306 $21,594 12/04 $26,893 $29,398 $23,585 3/05 $29,047 $33,448 $23,083 6/05 $29,678 $34,967 $23,400 9/05 $38,207 $43,391 $24,243 12/05 $38,250 $43,029 $24,736 3/06 $41,401 $47,448 $25,795 6/06 $42,280 $48,829 $25,418 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities.(beta) 3 Inception date: November 15, 1995. 4 The Lipper Natural Resources Index is an unmanaged equally weighted index of the largest mutual funds in the Lipper Natural Resources category of funds, adjusted for the reinvestment of capital gains distributions and income dividends. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 6 The Goldman Sachs Natural Resources Sector Index is a modified capitalization-weighted index of companies involved in the following categories: extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and owners of plantations. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. WWW.RSINVESTMENTS.COM | 57 This page left blank intentionally. 58 | CALL 1-800-766-FUND RS INVESTORS FUND A CONCENTRATED ALL-CAP FUND FOCUSING ON UNDERVALUED COMPANIES WORLDWIDE [PHOTOS OMITTED] ANDREW PILARA Portfolio Manager For bio see page 8 DAVID KELLEY Co-Portfolio Manager For bio see page 8 JOE WOLF Co-Portfolio Manager For bio see page 8 RS INVESTORS FUND INVESTMENT STYLE ---------------------------------------------- LARGE-CAP MID-CAP SMALL-CAP ---------------------------------------------- VALUE BLEND GROWTH ---------------------------------------------- FUND PHILOSOPHY THE RS INVESTORS FUND SEEKS TO INCREASE SHAREHOLDER CAPITAL OVER THE LONG TERM BY INVESTING IN COMPANIES THAT RS INVESTMENTS BELIEVES ARE UNDERVALUED. THE FUND INTENDS TO HOLD 20 TO 40 SECURITIES AND INVEST IN VALUE-ORIENTED EQUITIES ACROSS SMALL-, MID-, AND LARGE-MARKET CAPITALIZATIONS. INVESTMENT PROCESS Cash flow return analysis drives our investment process. We invest in companies that manage capital, not earnings, and we look for businesses that we believe have sustainable, long-term returns in excess of the company's cost of capital. We seek managers who are good capital allocators within a strong corporate culture. We invest when our calculated warranted value substantially exceeds the current market price. Our security analysis is better defined as business analysis. We concentrate on a company's business model, specifically focusing on the evaluation of unit-level economics. We attempt to understand the value drivers and analyze the relationships between the balance sheet, the funds flow statement, and the income statement. We believe that the stock price will track a company's ability to generate returns above its cost of capital over the long term. Our time horizon is two to three years, so we are willing to be patient. We manage risk, which we define as a loss of capital, by continuously assessing the risk/return profile of our investments. All portfolio managers and analysts on the RS Value Team are evaluated according to how much money their investments lose. We believe that if you lose less in down markets, the law of compounding positive returns will create wealth over the long term. We try to establish asymmetrical risk/reward parameters when initiating a position, looking for multiples of reward per unit of risk. As value investors we consider the most critical element of our process to be the establishment of a "margin of safety," which comes from buying businesses at a significant discount to their intrinsic value. PERFORMANCE The RS Investors Fund declined 4.32% during the second quarter compared with a loss of 1.98% for the benchmark, the Russell 3000(R) Index 4. For the year-to-date period, the Fund gained 1.72% compared with a gain of 3.23% for the index. PORTFOLIO REVIEW In the financials sector, we remain cautious about spread-based businesses as we feel that valuations fail to reflect the pressure on future earnings and returns. In fact, many banks have reduced the amount of reserves held for credit losses to improve near-term results. In addition, we think a flat yield curve will continue to put pressure on results as the difference between the yield on loans and deposits narrows. We continue to find good opportunities in other areas of the financials arena, however; two such examples are the Hanover Insurance Group (3.42% of assets as of 6/30/06) and Amvescap PLC (4.35%). The Hanover Insurance Group is a regional insurer specializing in property and casualty coverage for individuals and small businesses in 18 states, with a primary focus on the northeastern United States. A majority of the company's revenues and cash flows are generated from personal auto and homeowner's insurance. We 60 | CALL 1-800-766-FUND view these markets as attractive given the relative ease of understanding loss patterns, the short duration of losses, and the positive demographic trends affecting the industry. We believe that over time these dynamics will lead to a business that will generate stable and consistent returns. Our investment in Hanover was led by a change in management and an improved capital allocation philosophy. The prior management team focused on growing the riskier variable annuity portion of the business and de-emphasized the property and casualty side. The downturn in the equity markets beginning in 2000 led to heavy losses on the variable annuity book of business, significant reductions in capital, and rating agency pressures, which led to very real concerns regarding the viability of the organization. In 2003 a new management team, led by Fred Eppinger, was put in place. The company began several initiatives to stabilize the business and improve its returns on invested capital (ROIC). These initiatives included the divestiture of its variable annuity business and a focus on reunderwriting its property and casualty book of business. Although significant investment in the business continues, returns have clearly begun to improve as less profitable business has not been renewed or has been reunderwritten at much higher returns. In addition, we believe that the company has done an exceptional job of improving its capital levels and reserve adequacy and remains very focused on continuing to improve returns on new business. After three years of contraction, we believe that management is now in a position to grow the business but will remain disciplined as to its return requirements. Although Hanover detracted from performance in the second quarter, we remain confident that returns will continue to improve; with shares trading at a modest premium to book value, we are comfortable with our current position. We continue to hold shares of Amvescap, the investment management group operating under the AIM, INVESCO, and Atlantic Trust brand names. The company has more than $400 billion in assets under management, with a diversified asset mix of both international and domestic equities, fixed income, money market funds, and, with its recently announced acquisition of Power Shares, exchange-traded funds. Although shares corrected and detracted from performance during the second quarter, we remain very optimistic with regard to the company's long-term opportunities. Our investment in Amvescap is based on the belief that under a new management team, led by former Franklin Resources Co-CEO Martin Flanagan, the company is in the early stages of a multi-year turnaround in both operating efficiency and fund flows. Under the previous leadership, the company was challenged as effective stewards of capital and struggled with operational execution, and performance suffered. We believe that under the new management, the company has become much more focused on improving ROIC. Although we have already seen some early signs of management's improved focus, we expect returns to continue moving in a positive direction as costs remain rationalized, distribution improves, and asset levels increase -- all of which should allow for a significant improvement in free cash flow generation. A detractor in the software sector during the quarter was Symantec (4.44%), the dominant supplier of both Internet security and enterprise storage management software. The company, historically known for its Norton brand security offering, broadened its product portfolio with the WWW.RSINVESTMENTS.COM | 61 RS INVESTORS FUND (Continued) acquisition of storage management leader Veritas Corporation in the summer of 2005. The acquisition united two companies, each of which possesses a roughly 40% to 50% share of its respective market. The combined company is attractive for a variety of reasons. From a fundamental perspective, Symantec generates high returns on capital, produces tremendous amounts of free cash flow, and has a pristine balance sheet. Its free cash flow profile is both predictable and recurring in nature. These characteristics are most notable in the Veritas and enterprise security businesses, where the cost of switching software providers is very high given that Symantec's products are deeply embedded within its clients' infrastructure. In the consumer business, renewal rates are very high given the relatively low price point and one-click renewal features. Conversations with customers, competitors, and channel partners confirmed our thesis that Symantec is entrenched in what we believe to be information technology managers' two most prioritized areas of future spending: storage and security. In addition, we believe the combination of these two companies offers the potential for enhanced growth and further market share gains as Symantec bundles two products (security and storage) that have historically been sold independently. We believe that this cross-sale strategy will serve as an additional competitive advantage going forward. We continue to find Symantec undervalued based on a sum-of-the-parts analysis as well as traditional discounted cash flow. We have organized Symantec into three business units: storage, consumer security, and enterprise security. The emergence of low-priced consumer security software offerings via the ISP channel has led many to doubt the durability of profits on the consumer side of the business. In our view these doubts have led investors to penalize unnecessarily the remaining, unrelated business segments. As a result of this disconnect, we believe that Symantec trades at a price that offers investors an asymmetrical return profile irrespective of how the consumer side of the business performs in the future. We remain confident in our analysis despite the company's poor performance during the second quarter. It appears that company management agrees with our analysis, as management recently announced its intention to buy back more than $1.5 billion of stock. Our energy investments continue to feel the negative impact of the market's concern over the short-term outlook for North American natural gas. As long-term value investors, however, we remain positive about the outlook for a number of our core holdings as we are able to own assets at a substantial discount to what we believe is their intrinsic value, calculated using commodity assumptions below current prompt month and futures prices. Compton Petroleum (2.99%) was affected, we believe, not only by a decline in the price of natural gas but also by a stretched balance sheet and an aggressive capital-spending program. Having spent considerable time with both management and the technical staff, we remain confident in the team's ability to continue to successfully develop the companies four core assets. In addition, we believe that management is open to the idea of monetizing its oil assets as a means to fully fund the capital program and deliver the balance sheet while enhancing the company's natural gas focus. Another core holding that has been relatively flat but about which we remain excited is Eastman 62 | CALL 1-800-766-FUND Chemical (3.82%). Eastman is a hybrid chemical company with significant exposure to the commodity chemical PET combined with a presence in more-specialty segments such as acetate flake/tow, adhesives, and co-polyesters. We think the PET industry is likely to face a downturn, given a rapid expansion of supply over the next 24 months. Eastman is, however, in the process of commercializing a new technology called Integrex, which, if successful, we believe will provide the company with best quartile PET assets in North America and western Europe, thereby fulfilling the first maxim of successful execution in a commoditized industry: being the low-cost producer. Furthermore, we expect Eastman's co-polyester plants can move down the cost curve by swapping into the existing PET assets, which offer significant scale advantages. The company is also a leader in the world of coal gasification, generating 70% of cash flow from chemicals created via the synthetic gas process. This expertise, honed over 22 years of operations, provides material cost savings in the current environment and, perhaps more importantly, we think it provides significant optionality as it relates to future partners and expansion plans. Eastman is currently reviewing its strategic alternatives across all of its business lines, with the stated goal of optimizing ROIC as a means to create shareholder value - exactly what we think about when making our own capital allocation decisions. President and CEO Brian Ferguson, who assumed the role of chairman and CEO in 2002 after a career at the company, has faced pressure to utilize some of the current levels of free cash flow to repurchase stock in a piece-meal fashion (the dividend is a healthy 3.3%), yet we believe that his team's approach is the correct one. They are evaluating all of their options, analyzing the return characteristics of the projects both individually and in concert with one another as part of a strategy, and will present their findings and inclinations to shareholders in the fall. If the returns are not sufficient or sustainable, the cash and the cash flows will be returned to shareholders, which is precisely what we ask of all of our management teams. In the meantime we own a company at a discount to its peers, receive a nice dividend, and await the findings of a thoughtful, disciplined management team as they contemplate their options. We are happy to be paid to wait. VALUE TEAM ADDITIONS We made two terrific additions to the Value Team: Ernst Schleimer and Andy Henderson. Prior to joining the firm in June, Ernst spent eight years at RCM Global Investors, where he was a senior analyst and sector head in the financial services group. He was also the lead portfolio manager of the RCM Financial Services Fund for almost two years. Prior to that he spent four years as an equity analyst at Franklin Resources, covering the financial services sector. Ernst holds a B.A. in economics and German area studies from Tufts University and an M.B.A. from the Stanford Graduate School of Business. He is also a Chartered Financial Analyst. Prior to joining the firm in 2006, Andy worked at Marin Capital Partners as a credit analyst for three years and as an associate at Brown Simpson Asset Management in their technology group for two years. Andy holds a B.A. in economics from the University of California at Berkeley and is currently a CFA level III candidate. Ernst will work directly with Rob Harris focusing on the financials area of the portfolio and Andy will be a generalist for the team. OUTLOOK Across the global markets, the second quarter saw money flow into less risky asset classes and a reduction in more-speculative trades, resulting in large declines for emerging markets, WWW.RSINVESTMENTS.COM | 63 RS INVESTORS FUND (Continued) commodities, and small-cap stocks. Indications that the Bank of Japan was moving toward a more proactive stance regarding excess liquidity undermined the performance of sectors where funds involved in the "carry trade" had significant investments. Finally, we witnessed the broad repricing of risk across asset classes. Our portfolio strategy at the outset of 2006 was cautious, with an emphasis on lower-risk investments, because we did not believe we were being sufficiently compensated by the market (we consider ourselves risk managers as much as we do money managers). We remain cautious with the market in transition, waiting for appropriate entry points. Our outlook is for lower yields and higher stock prices by the end of the second quarter of 2007 while recognizing that it is the interim period that will create anxieties for investors. We are currently in a "World Cup stock market"-- lots of back and forth action but not much scoring. Although corporate profits have increased to double-digit levels, we have experienced a compression in valuations due to an increase in discount rates. With the Federal Reserve Board leaning on interest rates, weakening consumer spending, and a housing downturn, we appear to be transitioning to a period of slower corporate profit growth and lower inflation. All four of the major central banks are in a tightening mode. With these central banks' trying to prove their prudence and a flat yield curve, we expect that inflation concerns should ease later in the year. We believe this should lead to the end of the current valuation compression, resulting in excellent investment opportunities. Our portfolio policy during this transition period is to manage our cash prudently and be vigilant about valuations. If you believe that the market is poised for a significant short-term rally, the Fund may likely disappoint you. We will not assume the risks necessary to maximize profits but instead aim to optimize returns by entering investments with asymmetric risk/reward profiles. We will continue to use these commentaries as an opportunity to communicate our objectives and principles. Our long-term goal is to be considered one of the top value investment teams, which means striving to achieve superior long-term investment results. Our hope is that our philosophy, work ethic, and commitment to improvement will result in our reaching our goal. For us, being among the best involves not only achieving our investment objectives but also living by our principles: o Alignment with shareholders o Uncompromising integrity o Respect for others o Continuous learning o A disciplined process We appreciate your support and confidence in our work. /s/ Andrew Pilara /s/ David Kelley Andrew Pilara David Kelley Portfolio Manager Co-Portfolio Manager /s/ Joe Wolf Joe Wolf Co-Portfolio Manager 64 | CALL 1-800-766-FUND GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06, inception date 11/15/05) Corrections Corp. of America 0.98% -------------------------------------------------------------------------------- Teck Cominco Ltd. 0.98% -------------------------------------------------------------------------------- Paramount Resources Ltd. 0.93% -------------------------------------------------------------------------------- Hanover Insurance Group, Inc. 0.53% -------------------------------------------------------------------------------- Key Energy Services, Inc. 0.46% -------------------------------------------------------------------------------- PPL Corp. 0.38% -------------------------------------------------------------------------------- Assurant, Inc. 0.35% -------------------------------------------------------------------------------- Torchmark Corp. 0.30% -------------------------------------------------------------------------------- Corinthian Colleges, Inc. 0.23% -------------------------------------------------------------------------------- Magellan Health Services, Inc. 0.21% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06, inception date 11/15/05) eResearch Technology, Inc. -1.69% -------------------------------------------------------------------------------- Compton Petroleum Corp. -0.79% -------------------------------------------------------------------------------- ADVO, Inc. -0.75% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. -0.68% -------------------------------------------------------------------------------- The St. Joe Co. -0.30% -------------------------------------------------------------------------------- Amvescap PLC -0.28% -------------------------------------------------------------------------------- Symantec Corp. -0.27% -------------------------------------------------------------------------------- Discovery Holding Co. -0.18% -------------------------------------------------------------------------------- Conseco, Inc. -0.18% -------------------------------------------------------------------------------- Willis Group Holdings Ltd. -0.10% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Investing in a more limited number of issuers and sectors can be subject to greater market fluctuation. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. Investments in companies in natural resources industries may involve risks including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international political and economic developments. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. WWW.RSINVESTMENTS.COM | 65 RS INVESTORS FUND (Continued) ASSETS UNDER MANAGEMENT: $62.5 million SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 0.0% Consumer Discretionary 31.9% Consumer Staples 0.0% Financial Services 28.0% Health Care 3.6% Integrated Oils 4.3% Materials and Processing 8.9% Other Energy 8.2% Producer Durables 1.2% Technology 4.4% Utilities 4.5% Other 0.0% Cash 5.0% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Corrections Corp. of America 6.65% -------------------------------------------------------------------------------- Liberty Global, Inc. 5.96% -------------------------------------------------------------------------------- Triarc Cos., Inc. 5.27% -------------------------------------------------------------------------------- Key Energy Services, Inc. 5.19% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. 5.15% -------------------------------------------------------------------------------- MI Developments, Inc. 5.10% -------------------------------------------------------------------------------- ADVO, Inc. 4.91% -------------------------------------------------------------------------------- Conseco, Inc. 4.65% -------------------------------------------------------------------------------- Assurant, Inc. 4.48% -------------------------------------------------------------------------------- PPL Corp. 4.45% -------------------------------------------------------------------------------- PERFORMANCE UPDATE Total Year-to-Date Return Since Return Inception 3 -------------------------------------------------------------------------------- RS Investors Fund 1.72% 6.20% -------------------------------------------------------------------------------- Russell 3000(R) Index 4 3.23% 5.32% -------------------------------------------------------------------------------- S&P 500(R) Index 2.76% 4.59% -------------------------------------------------------------------------------- RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 11/15 /05 RS Investors Fund Russell 3000[R] Index 4 11/15/05 $10,000 $10,000 11/05 $10,230 $10,194 12/05 $10,440 $10,203 1/06 $10,980 $10,544 2/06 $10,810 $10,562 3/06 $11,100 $10,745 4/06 $11,190 $10,861 5/06 $10,900 $10,514 6/06 $10,620 $10,532 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 RS INVESTORS FUND'S "since inception" return is not annualized and represents cumulative total return. (Inception date: 11/15/05.) 4 The Russell 3000(R) Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization was approximately $4.8 billion; the median market capitalization was approximately $944.7 million. The index had a total market capitalization range of approximately $182.6 million to $386.9 billion. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees or expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 66 | CALL 1-800-766-FUND RS PARTNERS FUND + A SMALL-CAP FUND USING A CASH FLOW VALUE METHODOLOGY [PHOTOS OMITTED] ANDREW PILARA Portfolio Manager For bio see page 8 DAVID KELLEY Co-Portfolio Manager For bio see page 8 JOE WOLF Co-Portfolio Manager For bio see page 8 + RS PARTNERS FUND is currently offered (by purchase or exchange) only to investors purchasing shares through certain financial intermediaries. See "Other Information About Purchasing Shares" on page 42 of the Prospectus. RS PARTNERS FUND INVESTMENT STYLE ----------------------------------------- LARGE-CAP MID-CAP SMALL-CAP ----------------------------------------- VALUE BLEND GROWTH ----------------------------------------- FUND PHILOSOPHY THE RS PARTNERS FUND SEEKS LONG-TERM GROWTH OF CAPITAL BY INVESTING IN EQUITY SECURITIES -- PRINCIPALLY OF COMPANIES WITH MARKET CAPITALIZATIONS OF UP TO $3 BILLION -- USING A VALUE METHODOLOGY COMBINING BALANCE SHEET ANALYSIS WITH CASH FLOW ANALYSIS. INVESTMENT PROCESS Cash flow return analysis drives our investment process. We invest in companies that manage capital, not earnings, and we look for businesses that we believe have sustainable, long-term returns in excess of the company's cost of capital. We seek managers who are good capital allocators within a strong corporate culture. We invest when our calculated warranted value substantially exceeds the current market price. Our security analysis is better defined as business analysis. We concentrate on a company's business model, specifically focusing on the evaluation of unit-level economics. We attempt to understand the value drivers and analyze the relationship among the balance sheet, the funds flow statement, and the income statement. We believe that the stock price will track a company's ability to generate returns above its cost of capital over the long term. Our time horizon is two to three years, so we are willing to be patient. We manage risk, which we define as a loss of capital, by continuously assessing the risk/return profile of our investments. All portfolio managers and analysts on the RS Value Team are evaluated according to how much money their investments lose. We believe that if you lose less in down markets, the law of compounding positive returns will create wealth over the long term. We try to establish asymmetrical risk/reward parameters when initiating a position, looking for multiples of reward per unit of risk. As value investors we consider the most critical element of our process to be the establishment of a "margin of safety," which comes from buying businesses at a significant discount to their intrinsic value. As fellow investors in the RS Partners Fund, we ask that you not expect returns similar to those achieved over the past few years, which we view to be unsustainable. PERFORMANCE The RS Partners Fund declined 3.21% during the second quarter compared with a loss of 2.70% for the benchmark, the Russell 2000(R) Value Index 4. For the year-to-date period, the Fund gained 4.97% compared with a 10.44% gain for the index. PORTFOLIO REVIEW During the second quarter, we saw the acquisition of another one of our portfolio companies, SSA Global Technologies. In the Value portfolios, we have had upward of 10 companies purchased in the past 12 months by either strategic buyers or private equity. We believe that this trend is a confirmation that we are doing a good job of identifying undervalued businesses in the market. SSA is a provider of enterprise resource planning and strategic extension products such as supply-chain management and corporate performance management. The company focuses on selling to mid-market manufacturers across diverse end markets. In the financials sector, we remain cautious about spread-based businesses as we feel that valuations fail to reflect the pressure on future earnings and 68 | CALL 1-800-766-FUND returns. In fact, many banks have reduced the amount of reserves held for credit losses to improve near-term results. In addition, we think a flat yield curve will continue to put pressure on results as the difference between the yield on loans and on deposits narrows. We continue to find good opportunities in other areas of the financials arena, however; two such examples are the Hanover Insurance Group (3.14% of assets as of 6/30/06) and Hancock Holding (1.31%). The Hanover Insurance Group is a regional insurer specializing in property and casualty coverage for individuals and small businesses in 18 states, with a primary focus on the Northeast. A majority of the company's revenues and cash flows are generated from personal auto and homeowner's insurance. We view these markets as attractive given the relative ease of understanding loss patterns, the short duration of losses, and the positive demographic trends affecting the industry. We believe that over time these dynamics will lead to a business that will generate stable and consistent returns. Our investment in Hanover was led by a change in management and an improved capital allocation philosophy. The prior management team focused on growing the riskier variable annuity portion of the business and de-emphasized the property and casualty side. The downturn in the equity markets beginning in 2000 led to heavy losses on the variable annuity book of business, significant reductions in capital, and rating agency pressures, which led to very real concerns regarding the organization's viability. In 2003 a new management team, led by Fred Eppinger, was put in place. The company began several initiatives to stabilize the business and improve its ROIC. These initiatives included the divestiture of its variable annuity business and a focus on re-underwriting its property and casualty book of business. Although significant investment in the business continues, returns have clearly begun to improve as less profitable business has not been renewed or has been reunderwritten at much higher returns. In addition, we believe that the company has done an exceptional job of improving its capital levels and reserve adequacy and remains very focused on continuing to improve returns on new business. After three years of contraction, we believe that management is now in a position to grow the business but will remain disciplined as to its return requirements. Although Hanover detracted from performance in the second quarter, we remain confident that returns will continue to improve; with shares trading at a modest premium to book value, we are comfortable with our current position. We continue to favor the shares of Hancock Holding Company, a commercial and retail bank with a footprint along the Mississippi Gulf Coast and Louisiana, despite share price appreciation since our initial purchase. The bank has 102 branches and more than $5 billion in assets, and it controls in excess of 50% of the Mississippi Gulf Coast market. Over the next several years, we think Hancock should see a significant improvement in returns as a result of the Hurricane Katrina rebuilding effort and the expansion of the gaming industry in the Gulfport region. Thus far we have seen a significant increase in deposit growth as a result of insurance and Federal Emergency Management Agency money being paid out to individuals and businesses, which has led to an improved net interest margin and an improved returns on assets. We believe that returns will be further enhanced going forward by improved loan growth as rebuilding efforts continue for the next several years and the region's gaming industry begins its expansion to WWW.RSINVESTMENTS.COM | 69 RS PARTNERS FUND (Continued) onshore facilities. Although we expect further credit losses from the hurricane, we believe that management's conservative reserve positioning and capital levels should minimize the impact on returns. Our investment in Hancock is predicated on the belief that this well-capitalized bank with a very conservative balance sheet and a significant market share will see substantial improvement in returns from increased deposit and loan growth and will not feel a significant adverse impact of credit losses. Thus far the deposit portion of our thesis has played out above our expectations. Additionally, we remain confident that credit remains in check and that in time, significant loan growth will emerge. Given the underlying fundamental environment, we believe that the shares remain very reasonably priced. A significant detractor during the second quarter and year to date was close-out retailer Tuesday Morning (1.48%). The company offers 50% to 80% discounts on high-quality gifts, home furnishings, and related items. It holds 10 sales events per year, each of which lasts four to five weeks. Tuesday Morning drives most of the traffic to its stores by leveraging its proprietary 8-million-member database via a direct marketing promotion of its sales events. As a result of this unique marketing strategy, the company is able to minimize real estate costs by locating well off the beaten path. Tuesday Morning operates 750 widely dispersed stores in 43 states. At the time of investment, Tuesday Morning, along with other retailers of home furnishings was facing a very difficult external environment (due to high gas prices, rising interest rates, decreasing benefits from home equity refinancing, and increased competition from the likes of Target [0.00%] and TJ Maxx [0.00%]). Additionally, May (0.00%) and Federated (0.00%) had recently merged and were reducing store count, which created a glut of home-furnishing merchandise. Although we recognized that the external environment was difficult, we found Tuesday Morning's business model to be quite unique. When we calculate unit-level economics for a retail concept, we capitalize the lease payments to be able to measure true economic returns. On a fully capitalized basis, the company had among the best unit-level economics of any retailer we have seen. We also believed that the company had the opportunity to add 40% to 60% to its asset base over a medium-term timeframe. We always appreciate businesses that are able to reinvest in themselves at returns far in excess of their cost of capital. It was our belief that Tuesday Morning had a highly adaptable business model that would prove resilient despite the difficult fundamental backdrop. Furthermore, the company was trading at a very low valuation, had a pristine balance sheet, offered a greater than 3% dividend yield, and was generating significant free cash flow after new stores and the dividend. We believed that the difficult environment was reflected in the valuation of the shares. Needless to say, we greatly underestimated the headwinds facing the company and the industry. In our valuation work, we used what we thought were conservative sales and margin assumptions that were well below the views expressed by management. Even with our conservative estimates, we believed that the company would generate returns well in excess of their cost of capital and would produce significant free cash flow. We also believed that the dividend would help protect our downside. This downside analysis proved to be not nearly conservative enough as 70 | CALL 1-800-766-FUND the company's same-store sales declined almost 10% for the quarter. This weakness was attributable exclusively to a decrease in traffic rather than a decrease in the basket size. The share prices also suffered from the unexpected departure of CFO Loren Jensen. We pride ourselves on buying businesses that are fundamentally improving, which will lead to increased ROIC levels. Our main mistake with the Tuesday Morning investment was our attempt to catch a falling knife, knowing that fundamentals were still deteriorating. Despite these difficulties, we continue to believe that Tuesday Morning will produce returns far in excess of its cost of capital and is worth substantially more than its current enterprise value. Our energy investments continue to feel the negative impact of the market's concern over the short-term outlook for North American natural gas. As long-term value investors, however, we remain positive about the outlook for a number of our core holdings as we are able to own assets at a substantial discount to what we believe is their intrinsic value, calculated using commodity assumptions below current prompt month and futures prices. Compton Petroleum (2.31%) was affected, we believe, not only by a decline in the price of natural gas but also by a stretched balance sheet and an aggressive capital-spending program. Having spent considerable time with both management and the technical staff, we remain confident in the team's ability to continue to prove up the four main development plays. In addition, we believe that management is open to the idea of monetizing its oil assets as a means to fully fund the capital program and deliver the balance sheet while enhancing the company's natural gas focus. A relatively new addition to the Fund is Allegheny Technologies (1.55%). Under the leadership of Pat Hassey, who joined the company in 2003 as president and CEO after a career at Alcoa, Allegheny has evolved from a commodity stainless-steel producer to a leading provider of specialty metals and alloys into secularly strong end markets such as aerospace, electricity distribution, medical devices, and the oil patch. By shifting away from low-end commoditized products, we believe that the company has been able to improve its pricing leverage, pass through raw-material cost increases, and optimize utilization rates of the existing assets, which has been reflected in improved margins and returns -- the two key elements to driving higher ROIC. With volumes sold out and raw materials increasingly difficult to obtain, Allegheny recently announced a self-funded four-stage growth plan to expand its titanium sponge and melt capacity to meet its customers' needs. The plan, which will cost roughly $500 million over three years, is a significant investment; yet even at historical midcycle prices, we think it could generate after-tax returns north of 20%. When we look at investment opportunities, we ask ourselves four key questions: (1) Are the industry fundamentals strong? (2) Can after-tax returns improve and, if so, can the company grow its capital footprint? (3) What is the quality of the management team and how do they think about creating shareholder value? and (4) What is the valuation and do we have a sufficient margin of safety and an asymmetric risk/reward profile to make an investment? For Allegheny Technologies, we believe the answer to questions 1 and 2 is an unequivocal yes.We also have tremendous faith in Pat Hassey and his team; and from a valuation perspective, Allegheny's revenue stream is now roughly 80% specialty and 20% commodity yet it trades at a mid-single-digit multiple of EBITDA WWW.RSINVESTMENTS.COM | 71 RS PARTNERS FUND (Continued) (earnings before interest, taxes, depreciation, and amortization) with double-digit free cash yields, cheaper than many commodity carbon steel producers. VALUE TEAM ADDITIONS We made two terrific additions to the Value Team: Ernst Schleimer and Andy Henderson. Prior to joining the firm in June, Ernst spent eight years at RCM Global Investors, where he was a senior analyst and sector head in the financial services group. He was also the lead portfolio manager of the RCM Financial Services Fund for almost two years. Prior to that he spent four years as an equity analyst at Franklin Resources, covering the financial services sector. Ernst holds a B.A. in economics and German area studies from Tufts University and an M.B.A. from the Stanford Graduate School of Business. He is also a Chartered Financial Analyst. Prior to joining the firm in 2006, Andy worked at Marin Capital Partners as a credit analyst for three years and as an associate at Brown Simpson Asset Management in their technology group for two years. Andy holds a B.A. in economics from the University of California at Berkeley and is currently a CFA level III candidate. Ernst will work directly with Rob Harris focusing on the financials area of the portfolio and Andy will be a generalist for the team. OUTLOOK Across the global markets, the second quarter saw money flow into less risky asset classes and a reduction in more-speculative trades, resulting in large declines for emerging markets, commodities and small-cap stocks. We believe that indications that the Bank of Japan was moving toward a more proactive stance regarding excess liquidity undermined the performance of sectors where funds involved in the "carry trade" had significant investments. Finally, we witnessed the broad re-pricing of risk across asset classes. Our portfolio strategy at the outset of 2006 was cautious with an emphasis on lower-risk investments because we did not believe we were being sufficiently compensated by the market (we consider ourselves risk managers as much as we do money managers). We remain cautious with the market in transition, waiting for appropriate entry points. Our outlook is for lower yields and higher stock prices by the end of the second quarter of 2007 while recognizing that it is the interim period that will create anxieties for investors. We are currently in a "World Cup stock market"-- lots of back and forth action but not much scoring. Although corporate profits have increased to double-digit levels, we have experienced a compression in valuations due to an increase in discount rates. With the Federal Reserve Board leaning on interest rates, weakening consumer spending, and a housing downturn, we appear to be transitioning to a period of slower corporate profit growth and lower inflation. All four of the major central banks are in a tightening mode. With these central banks' trying to prove their prudence and a flat yield curve, we believe inflation concerns should ease later in the year. We expect this to lead to the end of the current valuation compression and, with that, excellent investment opportunities. Our portfolio policy during this transition period is to manage our cash prudently and be vigilant about valuations. If you believe that the market is poised for a significant short-term rally, the Fund may likely disappoint you. We will not assume the risks necessary to maximize profits but instead aim to optimize returns by entering investments with asymmetric risk/reward profiles. We will continue to use these commentaries as an opportunity to communicate our objectives and principles. Our long-term goal is to be considered 72 | CALL 1-800-766-FUND one of the top value investment teams, which means striving to achieve superior long-term investment results. Our hope is that our philosophy, work ethic, and commitment to improvement will result in our reaching our goal. For us, being among the best involves not only achieving our investment objectives but also living by our principles: o Alignment with shareholders o Uncompromising integrity o Respect for others o Continuous learning o A disciplined process We appreciate your support and confidence in our work. /s/ Andrew Pilara /s/ David Kelley Andrew Pilara David Kelley Portfolio Manager Co-Portfolio Manager /s/ Joe Wolf Joe Wolf Co-Portfolio Manager WWW.RSINVESTMENTS.COM | 73 RS PARTNERS FUND (Continued) GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Peabody Energy Corp. 0.87% -------------------------------------------------------------------------------- Magellan Health Services, Inc. 0.85% -------------------------------------------------------------------------------- Goldcorp, Inc. 0.76% -------------------------------------------------------------------------------- Allegheny Technologies, Inc. 0.70% -------------------------------------------------------------------------------- AMERIGROUP Corp. 0.66% -------------------------------------------------------------------------------- Corrections Corp. of America 0.62% -------------------------------------------------------------------------------- Scientific Games Corp. 0.56% -------------------------------------------------------------------------------- Paramount Resources Ltd. 0.53% -------------------------------------------------------------------------------- Hanover Insurance Group, Inc. 0.52% -------------------------------------------------------------------------------- Lazard Ltd. 0.50% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Tuesday Morning Corp. -0.94% -------------------------------------------------------------------------------- eResearch Technology, Inc. -0.92% -------------------------------------------------------------------------------- Compton Petroleum Corp. -0.72% -------------------------------------------------------------------------------- Novell, Inc. -0.44% -------------------------------------------------------------------------------- ADVO, Inc. -0.43% -------------------------------------------------------------------------------- Trilogy Energy Trust -0.43% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. -0.39% -------------------------------------------------------------------------------- Alexander & Baldwin, Inc. -0.35% -------------------------------------------------------------------------------- Spectrum Brands, Inc. -0.31% -------------------------------------------------------------------------------- Playboy Enterprises, Inc. -0.26% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Investing in a more limited number of issuers and sectors can be subject to greater market fluctuation. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. 74 | CALL 1-800-766-FUND ASSETS UNDER MANAGEMENT: $2.4 billion SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 3.5% Consumer Discretionary 26.7% Consumer Staples 0.0% Financial Services 22.5% Health Care 6.8% Integrated Oils 3.0% Materials and Processing 7.7% Other Energy 8.1% Producer Durables 0.9% Technology 1.2% Utilities 0.0% Other 0.0% Cash 19.6% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Corrections Corp. of America 3.99% -------------------------------------------------------------------------------- Triarc Cos., Inc. 3.87% -------------------------------------------------------------------------------- Hanover Insurance Group, Inc 3.14% -------------------------------------------------------------------------------- AP Alternative Assets, L.P. 3.04% -------------------------------------------------------------------------------- ADVO, Inc. 3.03% -------------------------------------------------------------------------------- Key Energy Services, Inc. 3.02% -------------------------------------------------------------------------------- Paramount Resources Ltd. 2.95% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. 2.93% -------------------------------------------------------------------------------- Corinthian Colleges, Inc. 2.80% -------------------------------------------------------------------------------- Peabody Energy Corp. 2.79% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS Partners Fund 4.97% 12.98% 26.02% 20.09% 14.47% 16.35% 427.02% ------------------------------------------------------------------------------------------------------------------------------------ Russell 2000(R) Value Index 4 10.44% 14.61% 21.01% 13.09% 13.26% 13.70% 309.10% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 9.54% 171.74% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 7/12/95 RS Partners Fund Russell 2000[R] Value Index 4 7/12/95 $10,000 $10,000 9/95 $10,190 $10,532 12/95 $10,390 $10,839 3/96 $12,300 $11,314 6/96 $13,640 $11,777 9/96 $14,070 $11,952 12/96 $14,873 $13,155 3/97 $14,975 $13,122 6/97 $16,177 $15,103 9/97 $18,173 $17,049 12/97 $17,561 $17,336 3/98 $18,999 $18,784 6/98 $17,146 $18,105 9/98 $13,140 $14,869 12/98 $12,752 $16,218 3/99 $12,365 $14,646 6/99 $13,803 $17,070 9/99 $13,206 $15,735 12/99 $13,228 $15,976 3/00 $13,704 $16,587 6/00 $14,456 $16,911 9/00 $17,077 $18,152 12/00 $17,387 $19,623 3/01 $18,570 $19,814 6/01 $21,103 $22,119 9/01 $17,962 $19,170 12/01 $20,295 $22,375 3/02 $22,006 $24,518 6/02 $21,742 $23,998 9/02 $19,663 $18,889 12/02 $20,545 $19,818 3/03 $21,075 $18,812 6/03 $26,333 $23,087 9/03 $29,111 $24,870 12/03 $34,028 $28,940 3/04 $37,087 $30,943 6/04 $36,977 $31,205 9/04 $39,593 $31,252 12/04 $44,854 $35,378 3/05 $44,299 $33,971 6/05 $46,647 $35,695 9/05 $50,685 $36,799 12/05 $50,207 $37,044 3/06 $54,451 $42,047 6/06 $52,702 $40,910 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: July 12, 1995. 4 The Russell 2000(R) Value Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000(R) Index with lower price-to-book ratios and lower forecasted growth values. (The Russell 2000(R) Index measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which consists of the 3,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. WWW.RSINVESTMENTS.COM | 75 This page left blank intentionally. 76 | CALL 1-800-766-FUND RS VALUE FUND A MID-CAP FUND USING A CASH FLOW VALUE METHODOLOGY [PHOTOS OMITTED] ANDREW PILARA Portfolio Manager For bio see page 8 DAVID KELLEY Co-Portfolio Manager For bio see page 8 JOE WOLF Co-Portfolio Manager For bio see page 8 RS VALUE FUND INVESTMENT STYLE ------------------------------- LARGE-CAP MID-CAP SMALL-CAP ------------------------------- VALUE BLEND GROWTH ------------------------------- FUND PHILOSOPHY THE RS VALUE FUND SEEKS TO ACHIEVE LONG-TERM GROWTH OF CAPITAL AND INVESTS PRINCIPALLY IN SMALL- AND MID-CAP COMPANIES AS DEFINED IN OUR MOST CURRENT PROSPECTUS. THE FUND INVESTS USING A VALUE METHODOLOGY COMBINING BALANCE SHEET AND CASH FLOW ANALYSIS. INVESTMENT PROCESS Cash flow return analysis drives our investment process. We invest in companies that manage capital, not earnings, and we look for businesses that we believe have sustainable, long-term returns in excess of the company's cost of capital. We seek managers who are good capital allocators within a strong corporate culture. We invest when our calculated warranted value substantially exceeds the current market price. Our security analysis is better defined as business analysis. We concentrate on a company's business model, specifically focusing on the evaluation of unit-level economics. We attempt to understand the value drivers and analyze the relationships among the balance sheet, the funds flow statement, and the income statement. We believe that the stock price will track a company's ability to generate returns above its cost of capital over the long term. Our time horizon is two to three years, so we are willing to be patient. We manage risk, which we define as a loss of capital, by continuously assessing the risk/return profile of our investments. All portfolio managers and analysts on the RS Value Team are evaluated according to how much money their investments lose. We believe that if you lose less in down markets, the law of compounding positive returns will create wealth over the long term. We try to establish asymmetrical risk/reward parameters when initiating a position, looking for multiples of reward per unit of risk. As value investors we consider the most critical element of our process to be the establishment of a "margin of safety," which comes from buying businesses at a significant discount to their intrinsic value. As fellow investors in the RS Value Fund, we ask that you not expect returns similar to those achieved over the past few years, which we view to be unsustainable. PERFORMANCE The RS Value Fund declined 0.39% during the second quarter compared with a loss of 0.56% for the benchmark, the Russell Midcap(R) Value Index 4. For the year-to-date period, the Fund gained 4.11% compared with a gain of 7.02% for the index. PORTFOLIO REVIEW One of the top performers during the second quarter and over the past year was Magellan Health Services (2.02% of assets as of 6/30/06). Magellan is the country's largest manager of behavioral health care benefits with more than a 40% market share, servicing nearly 60 million individuals through a network of more than 60,000 providers and 6,000 facilities. As we have communicated in prior letters, our central health care priority in the Fund is to find companies that are successfully helping control --and reduce out-of-control -- health care cost inflation. Our Magellan investment clearly conforms to this theme. When we initiated the position in late 2004, we were investing, in our opinion, in a terrific management team led by Steve Shulman and in a company that generated high returns on its capital, produced large amounts of free cash flow, had a terrific balance sheet, and was trading at a very low valuation. 78 | CALL 1-800-766-FUND Although the investment did not perform well out of the gates, we were able to significantly increase our position at lower prices when its private equity sponsors chose to exit their positions. We believe Magellan's business model is attractive as its behavioral health business has limited underwriting risk. Furthermore, we think its dominant market share enables the company to produce a highly value-added service with few alternative options to its customers. Behavioral health patients consume a disproportionate share of our system's health care dollars. We believe Magellan is an expert at actively managing these higher-cost patients in a way that ensures better outcomes for the patients and lower costs for their payers. Although a few large commercial managed-care companies have chosen to in-source the behavioral service, we think the vast majority of Magellan's business should prove highly predictable and durable. This has been confirmed through discussions with many of its customers. We also believe Magellan's management team has done a terrific job of extending the benefits platform to other high-cost verticals with recent acquisitions. In the past month, Magellan acquired ICORE Healthcare, a specialty pharmaceutical management company focused on managing the cost and the distribution of specialty drugs used in a number of therapeutic categories such as multiple sclerosis, rheumatoid arthritis, and hemophilia. Earlier this year Magellan acquired NIA, a company focused on managing radiology benefits. Both specialty pharma and radiology are high-cost areas that are growing in excess of 40%, which we believe then drive the demand for specialized cost management by companies like Magellan. Additionally, we believe significant cross-selling opportunities exist as there is very little customer overlap between Magellan's core business and the customers of the acquired businesses. Furthermore, our discussions with current and potential clients suggest that as payers continue to struggle with controlling their cost trends, they will continue to look to companies like Magellan to both administer and assume the risk of managing these high-cost patients and services. As is always the case when our companies make significant capital investments, we ran a detailed return on invested capital (ROIC) analysis of the acquisitions. In the case of both of these transactions, we believe Magellan will be able to comfortably earn returns well in excess of its weighted average cost of capital. With these acquisitions it appears that Magellan has been able to significantly improve its secular growth profile. The company also continues to generate large amounts of free cash flow and remains significantly underlevered, which we expect will allow the team to continue to do value-enhancing acquisitions. One of the detractors during the second quarter was software provider Symantec (2.08%), the dominant supplier of both Internet security and enterprise storage management software. The company, historically known for its Norton brand security offering, broadened its product portfolio with the acquisition of storage management leader, Veritas Corporation, in the summer of 2005. The acquisition united two companies, each of which possesses a roughly 40% to 50% share of its respective market. We believe the combined company is attractive for a variety of reasons. From a fundamental perspective, Symantec generates high ROIC, produces tremendous amounts of free cash flow, and has a pristine balance sheet. Its free cash flow profile is both predictable and recurring in nature. These characteristics are most notable in the Veritas and enterprise security businesses, where the cost of switching software providers is WWW.RSINVESTMENTS.COM | 79 RS VALUE FUND (Continued) very high given that Symantec's products are deeply embedded within its clients' infrastructure. In the consumer business, renewal rates are very high given the relatively low price point and one-click renewal features. Conversations with customers, competitors, and channel partners confirmed our thesis that Symantec is entrenched in what we believe to be information technology managers' two most prioritized areas of future spending: storage and security. In addition, we believe the combination of these two companies offers the potential for enhanced growth and further market share gains as Symantec bundles two products -- security and storage -- that have historically been sold independently. We believe that this cross-sale strategy will serve as an additional competitive advantage going forward. We continue to find Symantec undervalued based on a sum-of-the-parts analysis as well as traditional discounted cash flow. We have organized Symantec into three business units: storage, consumer security, and enterprise security. The emergence of low-priced consumer security software offerings via the ISP channel has led many to doubt the durability of profits on the consumer side of the business. In our view these doubts have led investors to unnecessarily penalize the remaining, unrelated business segments. As a result of this disconnect, we believe that Symantec trades at a price that offers investors an asymmetrical return profile irrespective of how the consumer side of the business performs in the future. We remain confident in our analysis despite the poor performance during the second quarter. It appears that company management agrees with our analysis as management recently announced its intention to buy back more than $1.5 billion of stock. In the financials sector, we remain cautious about spread-based business models as we feel that valuations fail to reflect the pressure on future earnings and returns. In fact, many banks have reduced the amount of reserves held for credit losses to improve near-term results. In addition, we think a flat yield curve will continue to put pressure on results as the difference between the yield on loans and on deposits narrows. We continue to find good opportunities in other areas of the financials arena, however; below we highlight two such examples: Amvescap PLC (2.08%) and Genworth Financial (2.02%). We continue to hold shares of Amvescap, the investment management group operating under the AIM, INVESCO, and Atlantic Trust brand names. The company has more than $400 billion in assets under management, with a diversified asset mix of both international and domestic equities, fixed income, money market funds, and, with its recently announced acquisition of Power Shares exchange-traded funds. Although shares corrected and detracted from performance during the second quarter, we remain very optimistic with regard to the company's long-term opportunities. Our investment in Amvescap is based on the belief that under a new management team, led by former Franklin Resources Co-CEO Martin Flanagan, the company is in the early stages of a multi-year turnaround in both operating efficiency and fund flows. Under the previous leadership, the company was challenged as effective stewards of capital and struggled with operational execution, and performance suffered. We believe that under the new management, the company has become much more focused on improving ROIC. Although we have already seen some early signs of management's improved focus, we expect returns to continue moving in a positive direction as costs remain rationalized, distribution improves, and asset levels increase -- 80 | CALL 1-800-766-FUND all of which should allow for a significant improvement in free cash flow generation. Within the insurance space, we continue to own shares of Genworth Financial, the former life and mortgage insurance operations of General Electric. Shares have performed well of late as a result, we believe, of continued execution on management's ROIC improvement strategy and low valuation. We believe over the next couple of years, returns should improve as its lower return book of business continues to run off, excess capital is redeployed back into the business, and yields on the investment portfolio rise. In our opinion Genworth is a classic asymmetric return story, with minimal downside (stock trades at 1.2 times book value) and material upside from current levels. We think Genworth has a very astute management team, and we expect capital to be reinvested at materially higher returns over time. Additionally, we believe that over time, as the U.S. population continues to age, the demand for Genworth's higher-return products will increase, as the demand for retirement savings products rise. Our investment in Genworth is predicated on the belief that while the company was operating under General Electric, returns were not being fully realized in spite of a strong management team. We believe that, as an independent company, Genworth will now be able to optimize returns as the drag from the parent's actions will no longer persist. Management has taken some initial steps to improve the returns of the business, but we expect the improvements to continue as the company more effectively manages its balance sheet and capital position. A relatively new addition to the Fund is Allegheny Technologies (2.06%). Under the leadership of Pat Hassey, who joined the company in 2003 as president and CEO after a career at Alcoa, Allegheny has evolved from a commodity stainless-steel producer to a leading provider of specialty metals and alloys into secularly strong end markets such as aerospace, electricity distribution, medical devices, and the oil patch. By shifting away from low-end commoditized products, we believe that Allegheny has been able to improve its pricing leverage, pass through raw-material cost increases and optimize utilization rates of the existing assets, which has been reflected in improved margins and returns -- the two key elements to driving higher ROIC. With volumes sold out and raw materials increasingly difficult to obtain, Allegheny recently announced a self-funded four-stage growth plan to expand its titanium sponge and melt capacity to meet its customers' needs. The plan, which will cost roughly $500 million over three years, is a significant investment yet even at historical midcycle prices, we think it could generate after-tax returns north of 20%. When we look at investment opportunities, we ask ourselves four key questions: (1) Are the industry fundamentals strong? (2) Can after-tax returns improve and, if so, can the company grow its capital footprint? (3) What is the quality of the management team and how do they think about creating shareholder value? and (4) What is the valuation and do we have a sufficient margin of safety and an asymmetric risk/reward profile to make an investment? For Allegheny Technologies, we believe the answer to questions 1 and 2 is an unequivocal yes. We also have tremendous faith in Pat Hassey and his team; and from a valuation perspective, Allegheny's revenue stream is now roughly 80% specialty and 20% commodity yet it trades at a mid-single-digit multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) with double-digit free cash yields, cheaper than many commodity carbon steel producers. WWW.RSINVESTMENTS.COM | 81 RS VALUE FUND (Continued) Another core holding which has been relatively flat but about which we remain excited is Eastman Chemical (1.64%). Eastman is a hybrid chemical company with significant exposure to the commodity chemical PET combined with a presence in more-specialty segments such as acetate flake/tow, adhesives and co-polyesters. We think the PET industry is likely to face a downturn, given a rapid expansion of supply over the next 24 months. Eastman is, however, in the process of commercializing a new technology called Integrex, which, if successful, we believe will provide the company with best quartile PET assets in North America and western Europe, thereby fulfilling the first maxim of successful execution in a commoditized industry: being the low-cost producer. Furthermore, we expect Eastman's co-polyester plants can move down the cost curve by swapping into the existing PET assets, which offer significant scale advantages. The company is also a leader in the world of coal gasification, generating 70% of cash flow from chemicals created via the synthetic gas process. This expertise, honed over 22 years of operations, provides material cost savings in the current environment and, perhaps more important, we think it provides significant optionality as it relates to future partners and expansion plans. Eastman is currently reviewing its strategic alternatives across all of its business lines, with the stated goal of optimizing ROIC as a means to create shareholder value - exactly what we think about when making our own capital allocation decisions. President and CEO Brian Ferguson, who assumed the role of Chairman and CEO in 2002 after a career at the company, has faced pressure to utilize some of the current levels of free cash flow to repurchase stock in a piecemeal fashion (the dividend yield is a healthy 3.3%), yet we believe that his team's approach is the correct one. They are evaluating all of their options, analyzing the return characteristics of the projects both individually and in concert with one another as part of a strategy, and will present their findings and inclinations to shareholders in the fall. If the returns are not sufficient or sustainable, the cash and the cash flows will be returned to shareholders, which is precisely what we ask of all of our management teams. In the meantime we own a company at a discount to its peers, receive a nice dividend, and await the findings of a thoughtful, disciplined management team as they contemplate their options. We are happy to be paid to wait. VALUE TEAM ADDITIONS We made two terrific additions to the Value Team: Ernst Schleimer and Andy Henderson. Prior to joining the firm in June, Ernst spent eight years at RCM Global Investors, where he was a senior analyst and sector head in the financial services group. He was also the lead portfolio manager of the RCM Financial Services Fund for almost two years. Prior to that he spent four years as an equity analyst at Franklin Resources, covering the financial services sector. Ernst holds a B.A. in economics and German area studies from Tufts University and an M.B.A. from the Stanford Graduate School of Business. He is also a Chartered Financial Analyst. Prior to joining the firm in 2006, Andy worked at Marin Capital Partners as a credit analyst for three years and as an associate at Brown Simpson Asset Management in their technology group for two years. Andy holds a B.A. in economics from the University of California at Berkeley and is currently a CFA level III candidate. Ernst will work directly with Rob Harris focusing on the financials area of the portfolio and Andy will be a generalist for the team. OUTLOOK Across the global markets, the second quarter saw money flow into less risky asset classes and a reduction in more-speculative trades, resulting in large declines for emerging markets, commodities, and small-cap stocks. We believe that indications that the Bank of Japan was moving toward a more proactive stance regarding excess liquidity undermined the performance of sectors where funds involved in the "carry trade" had significant investments. Finally, we 82 | CALL 1-800-766-FUND witnessed the broad repricing of risk across asset classes. Our portfolio strategy at the outset of 2006 was cautious, with an emphasis on lower-risk investments, because we did not believe we were being sufficiently compensated by the market (we consider ourselves risk managers as much as money managers). We remain cautious with the market in transition, waiting for appropriate entry points. Our outlook is for lower yields and higher stock prices by the end of the second quarter of 2007 while recognizing that it is the interim period that will create anxieties for investors. We are currently in a "World Cup stock market" -- lots of back and forth action but not much scoring. Although corporate profits have increased to double-digit levels, we have experienced a compression in valuations due to an increase in discount rates. With the Federal Reserve Board leaning on interest rates, weakening consumer spending, and a housing downturn, we appear to be transitioning to a period of slower corporate profit growth and lower inflation. All four of the major central banks are in a tightening mode. With these central banks' trying to prove their prudence and a flat yield curve, we believe inflation concerns should ease later in the year. We expect this to lead to the end of the current valuation compression and, with that, excellent investment opportunities. Our portfolio policy during this transition period is to manage our cash prudently and be vigilant about valuations. If you believe that the market is poised for a significant short-term rally, the Fund may likely disappoint you. We will not assume the risks necessary to maximize profits but instead aim to optimize returns by entering investments with asymmetric risk/reward profiles. We will continue to use these commentaries as an opportunity to communicate our objectives and principles. Our long-term goal is to be considered one of the top value investment teams, which means striving to achieve superior long-term investment results. Our hope is that our philosophy, work ethic, and commitment to improvement will result in our reaching our goal. For us, being among the best involves not only achieving our investment objective but also living by our principles: o Alignment with shareholders o Uncompromising integrity o Respect for others o Continuous learning o A disciplined process We appreciate your support and confidence in our work. /s/ Andrew Pilara /s/ David Kelley Andrew Pilara David Kelley Portfolio Manager Co-Portfolio Manager /s/ Joe Wolf Joe Wolf Co-Portfolio Manager WWW.RSINVESTMENTS.COM | 83 RS VALUE FUND (Continued) GOOD IDEAS THAT WORKED + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) Peabody Energy Corp. 0.76% -------------------------------------------------------------------------------- Corrections Corp. of America 0.67% -------------------------------------------------------------------------------- Magellan Health Services, Inc. 0.62% -------------------------------------------------------------------------------- Teck Cominco Ltd. 0.61% -------------------------------------------------------------------------------- Brookfield Asset Management, Inc. 0.57% -------------------------------------------------------------------------------- Comcast Corp. 0.56% -------------------------------------------------------------------------------- Western Oil Sands, Inc. 0.31% -------------------------------------------------------------------------------- Penn West Energy Trust 0.29% -------------------------------------------------------------------------------- Goldcorp, Inc. 0.29% -------------------------------------------------------------------------------- Scientific Games Corp. 0.27% -------------------------------------------------------------------------------- GOOD IDEAS AT THE TIME + Percent Contribution to Total Fund Return (for the six-month period ended 6/30/06) The St. Joe Co. -0.55% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. -0.51% -------------------------------------------------------------------------------- Novell, Inc. -0.44% -------------------------------------------------------------------------------- Federated Investors, Inc. -0.37% -------------------------------------------------------------------------------- Alexander & Baldwin, Inc. -0.27% -------------------------------------------------------------------------------- Thomson -0.22% -------------------------------------------------------------------------------- Regis Corp. -0.20% -------------------------------------------------------------------------------- Barr Pharmaceuticals, Inc. -0.18% -------------------------------------------------------------------------------- Amvescap PLC -0.17% -------------------------------------------------------------------------------- Symantec Corp. -0.15% -------------------------------------------------------------------------------- + Percent contribution to total Fund return is estimated by dividing each security's combined realized and unrealized gains and/or losses by the Fund's average daily net assets over the six-month period. Realized and unrealized gains and losses represent the change in the Fund's total net assets attributable to the appreciation or depreciation in market value of each security. The Fund may have held the position for the entire six-month period or some portion thereof. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, is as of June 30, 2006. 84 | CALL 1-800-766-FUND ASSETS UNDER MANAGEMENT: $1.7 billion SECTOR ALLOCATION 1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Autos and Transportation 3.1% Consumer Discretionary 16.8% Consumer Staples 0.0% Financial Services 29.0% Health Care 5.4% Integrated Oils 0.0% Materials and Processing 8.9% Other Energy 5.8% Producer Durables 0.8% Technology 6.3% Utilities 5.3% Other 0.0% Cash 18.6% DATA AS OF JUNE 30, 2006 TOP TEN HOLDINGS 2 Corrections Corp. of America 4.15% -------------------------------------------------------------------------------- Liberty Global, Inc. 3.81% -------------------------------------------------------------------------------- KKR Private Equity Investors, L.P. 3.60% -------------------------------------------------------------------------------- AP Alternative Assets, L.P. 2.99% -------------------------------------------------------------------------------- Peabody Energy Corp. 2.90% -------------------------------------------------------------------------------- Brookfield Asset Management, Inc. 2.79% -------------------------------------------------------------------------------- Comcast Corp. 2.72% -------------------------------------------------------------------------------- MI Developments, Inc. 2.64% -------------------------------------------------------------------------------- PPL Corp. 2.61% -------------------------------------------------------------------------------- Conseco, Inc. 2.53% -------------------------------------------------------------------------------- PERFORMANCE UPDATE
3-Year 5-Year 10-Year Annualized Total Year-to-Date 1-Year Annualized Annualized Annualized Return Since Return Since Return Total Return Return Return Return Inception 3 Inception 3 ------------------------------------------------------------------------------------------------------------------------------------ RS Value Fund 4.11% 10.68% 25.93% 17.59% 5.83% 8.32% 182.73% ------------------------------------------------------------------------------------------------------------------------------------ Russell Midcap(R) Value Index 4 7.02% 14.25% 22.10% 13.01% 13.59% 13.66% 428.71% ------------------------------------------------------------------------------------------------------------------------------------ S&P 500(R) Index 5 2.76% 8.62% 11.19% 2.48% 8.31% 10.29% 257.74% ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF A HYPOTHETICAL $10,000 INVESTMENT If invested on 6/30/93 RS Value Fund Russell Midcap[R] Value Index 4 6/93 $10,000 $10,000 9/93 $9,559 $10,427 12/93 $11,186 $10,403 3/94 $12,098 $10,109 6/94 $11,618 $10,082 9/94 $11,078 $10,534 12/94 $10,568 $10,182 3/95 $10,739 $11,204 6/95 $12,626 $12,176 9/95 $13,308 $13,142 12/95 $13,830 $13,739 3/96 $16,731 $14,506 6/96 $16,038 $14,785 9/96 $16,440 $15,211 12/96 $16,828 $16,522 3/97 $17,062 $16,803 6/97 $16,036 $18,920 9/97 $15,244 $21,333 12/97 $11,862 $22,200 3/98 $12,127 $24,419 6/98 $10,769 $23,791 9/98 $7,520 $20,542 12/98 $7,984 $23,329 3/99 $8,392 $22,602 6/99 $10,214 $25,130 9/99 $10,623 $22,457 12/99 $11,042 $23,303 3/00 $10,700 $23,538 6/00 $11,793 $23,143 9/00 $12,533 $25,376 12/00 $12,180 $27,773 3/01 $12,080 $26,792 6/01 $12,577 $28,680 9/01 $10,192 $25,367 12/01 $11,175 $28,418 3/02 $11,429 $30,663 6/02 $12,058 $29,231 9/02 $11,009 $23,983 12/02 $11,330 $25,678 3/03 $12,102 $24,636 6/03 $14,156 $29,044 9/03 $16,056 $30,770 12/03 $18,805 $35,452 3/04 $19,987 $37,348 6/04 $19,766 $37,994 9/04 $20,716 $38,653 12/04 $24,317 $43,856 3/05 $24,516 $44,197 6/05 $25,545 $46,275 9/05 $26,949 $48,752 12/05 $27,156 $49,403 3/06 $28,383 $53,167 6/06 $28,273 $52,871 PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Please keep in mind that high double-digit returns are highly unusual and cannot be sustained. Numbers assume reinvestment of dividends and capital gains. Current and month-end performance information, which may be lower or higher than that cited, is available by contacting RS Investments at 1-800-766-FUND or visiting www.RSinvestments.com. 1 The sector allocation represents the entire Russell universe. The Fund's holdings are allocated to each sector based on their Russell classification. Cash includes short-term investments and net other assets and liabilities. 2 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 3 Inception date: June 30, 1993. 4 The Russell Midcap(R) Value Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell Midcap(R) Index with lower price-to-book ratios and lower forecasted growth values. (The Russell Midcap(R) Index measures the performance of the 800 smallest companies in the Russell 1000(R) Index, which consists of the 1,000 largest U.S. companies based on total market capitalization.) Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. 5 The S&P 500(R) Index is an unmanaged market-capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, the index does not incur fees and expenses. WWW.RSINVESTMENTS.COM | 85 UNDERSTANDING YOUR FUND'S EXPENSES - UNAUDITED As a shareholder of the Funds, you incur ongoing costs, including investment advisory fees, distribution (12b-1) fees, and other Fund expenses. The examples below are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated. The table below shows the Funds' expenses in two ways: EXPENSES BASED ON ACTUAL RETURN This section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled "Expenses Paid During Period" for your Fund to estimate the expenses you paid on your account during this period. A maintenance fee of $12.00 that is charged once a year may apply for IRAs. This fee is not included in the table below. If it was, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount. EXPENSES BASED ON HYPOTHETICAL 5% RETURN FOR COMPARISON PURPOSES This section of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds with the costs of investing in other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. A maintenance fee of $12.00 that is charged once a year may apply for IRAs. This fee is not included in the table below. If it was, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount. Note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as bank wire redemption fees. Therefore the second section is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher.
Beginning Ending Expenses Paid Expense Ratio Account Value Account Value During Period* During Period* 01/01/06 06/30/06 01/01/06-06/30/06 01/01/06-06/30/06 -------------------------------------------------------------------------------------------------------------------------- BASED ON ACTUAL RETURN RS Diversified Growth Fund $1,000.00 $1,004.90 $8.25 1.66% -------------------------------------------------------------------------------------------------------------------------- RS Emerging Growth Fund 1,000.00 1,030.40 7.60 1.51% -------------------------------------------------------------------------------------------------------------------------- RS Growth Fund 1,000.00 1,007.60 6.72 1.35% -------------------------------------------------------------------------------------------------------------------------- The Information Age Fund(R) 1,000.00 955.40 7.90 1.63% -------------------------------------------------------------------------------------------------------------------------- RS Internet Age Fund(R) 1,000.00 916.20 7.93 1.67% -------------------------------------------------------------------------------------------------------------------------- RS MidCap Opportunities Fund 1,000.00 1,048.70 6.60 1.30% -------------------------------------------------------------------------------------------------------------------------- RS Smaller Company Growth Fund 1,000.00 1,009.90 7.48 1.50% -------------------------------------------------------------------------------------------------------------------------- RS Global Natural Resources Fund 1,000.00 1,105.40 7.78 1.49% -------------------------------------------------------------------------------------------------------------------------- RS Investors Fund 1,000.00 1,017.20 7.95 1.59% -------------------------------------------------------------------------------------------------------------------------- RS Partners Fund 1,000.00 1,049.70 7.57 1.49% -------------------------------------------------------------------------------------------------------------------------- RS Value Fund 1,000.00 1,041.10 6.88 1.36% BASED ON HYPOTHETICAL RETURN (5% RETURN BEFORE EXPENSES) RS Diversified Growth Fund 1,000.00 1,016.56 8.30 1.66% -------------------------------------------------------------------------------------------------------------------------- RS Emerging Growth Fund 1,000.00 1,017.31 7.55 1.51% -------------------------------------------------------------------------------------------------------------------------- RS Growth Fund 1,000.00 1,018.10 6.76 1.35% -------------------------------------------------------------------------------------------------------------------------- The Information Age Fund(R) 1,000.00 1,016.71 8.15 1.63% -------------------------------------------------------------------------------------------------------------------------- RS Internet Age Fund(R) 1,000.00 1,016.51 8.35 1.67% -------------------------------------------------------------------------------------------------------------------------- RS MidCap Opportunities Fund 1,000.00 1,018.35 6.51 1.30% -------------------------------------------------------------------------------------------------------------------------- RS Smaller Company Growth Fund 1,000.00 1,017.36 7.50 1.50% -------------------------------------------------------------------------------------------------------------------------- RS Global Natural Resources Fund 1,000.00 1,017.41 7.45 1.49% -------------------------------------------------------------------------------------------------------------------------- RS Investors Fund 1,000.00 1,016.91 7.95 1.59% -------------------------------------------------------------------------------------------------------------------------- RS Partners Fund 1,000.00 1,017.41 7.45 1.49% -------------------------------------------------------------------------------------------------------------------------- RS Value Fund 1,000.00 1,018.05 6.80 1.36% * Expenses are equal to the Fund's annualized expense ratio as indicated, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).
86 | CALL 1-800-766-FUND FINANCIAL INFORMATION -------------------------------------------------------------------------------- PERIOD ENDED JUNE 30, 2006 SCHEDULE OF INVESTMENTS - RS DIVERSIFIED GROWTH FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 98.8% ADVERTISING AGENCIES -- 1.3% Marchex, Inc., Class B 1 223,500 $ 3,672,105 ------------------------------------------------------------------------------- 3,672,105 ------------------------------------------------------------------------------- AIR TRANSPORT -- 1.0% Alaska Air Group, Inc. 1 77,000 3,035,340 ------------------------------------------------------------------------------- 3,035,340 ALUMINUM -- 0.9% Century Aluminum Co. 1 78,100 2,787,389 ------------------------------------------------------------------------------- 2,787,389 BANKS -- OUTSIDE NEW YORK CITY -- 1.6% PrivateBancorp, Inc. 62,150 2,573,632 Virginia Commerce Bancorp, Inc. 1 89,300 2,134,270 ------------------------------------------------------------------------------- 4,707,902 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 2.9% Array BioPharma, Inc. 1 295,769 2,543,613 Cubist Pharmaceuticals, Inc. 1 110,500 2,782,390 Solexa, Inc. 1 367,200 3,121,200 ------------------------------------------------------------------------------- 8,447,203 CASINOS & GAMBLING -- 3.0% Pinnacle Entertainment, Inc. 1 74,700 2,289,555 Scientific Games Corp., Class A 1 94,660 3,371,789 The9 Ltd., ADR 1,3 138,700 3,216,453 ------------------------------------------------------------------------------- 8,877,797 COMMUNICATIONS & MEDIA -- 0.9% Linktone Ltd., ADR 1,3 419,716 2,497,310 ------------------------------------------------------------------------------- 2,497,310 COMMUNICATIONS TECHNOLOGY -- 3.9% AudioCodes Ltd. 1 257,300 2,804,570 Carrier Access Corp. 1 312,700 2,586,029 Cogent Communications Group, Inc. 1 366,163 3,430,947 InPhonic, Inc. 1 403,740 2,543,562 ------------------------------------------------------------------------------- 11,365,108 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 8.4% Aladdin Knowledge Systems 1 127,900 2,602,765 Digital River, Inc. 1 64,700 2,613,233 Digitas, Inc. 1 194,420 2,259,160 eCollege.com, Inc. 1 113,800 2,405,732 Equinix, Inc. 1 46,400 2,545,504 Informatica Corp. 1 185,400 2,439,864 Macrovision Corp. 1 16,457 354,155 Omniture, Inc. 1 88,100 642,249 Openwave Systems, Inc. 1 202,070 2,331,888 The TriZetto Group, Inc. 1 242,000 3,579,180 TRX, Inc. 1 333,130 3,001,501 ------------------------------------------------------------------------------- 24,775,231 COMPUTER TECHNOLOGY -- 4.0% M-Systems Flash Disk Pioneers Ltd. 1 116,030 3,437,969 Neoware, Inc. 1 76,835 944,302 Rackable Systems, Inc. 1 68,700 2,712,963 Radiant Systems, Inc. 1 205,432 2,171,416 Trident Microsystems, Inc. 1 127,154 2,413,383 ------------------------------------------------------------------------------- 11,680,033 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- CONSUMER ELECTRONICS -- 2.2% Dolby Laboratories, Inc., Class A 1 139,400 $ 3,248,020 Netflix, Inc. 1 118,750 3,231,188 ------------------------------------------------------------------------------- 6,479,208 DIVERSIFIED MATERIALS & PROCESSING -- 0.7% Hexcel Corp. 1 128,800 2,023,448 ------------------------------------------------------------------------------- 2,023,448 DRUGS & PHARMACEUTICALS -- 1.2% Amylin Pharmaceuticals, Inc. 1 73,300 3,618,821 ------------------------------------------------------------------------------- 3,618,821 ELECTRONICS -- MEDICAL SYSTEMS -- 1.3% Haemonetics Corp. 1 55,450 2,578,980 Illumina, Inc. 1 42,000 1,245,720 ------------------------------------------------------------------------------- 3,824,700 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 5.8% Chartered Semiconductor Manufacturing Ltd., ADR 1,3 324,900 2,826,630 FormFactor, Inc. 1 68,050 3,037,072 O2Micro International Ltd., ADR 1,3 376,757 2,897,261 PMC-Sierra, Inc. 1 329,290 3,095,326 Silicon Motion Technology Corp., ADR 1,3 211,865 3,038,144 SiRF Technology Holdings, Inc. 1 70,350 2,266,677 ------------------------------------------------------------------------------- 17,161,110 ENERGY -- MISCELLANEOUS -- 1.0% TETRA Technologies, Inc. 1 95,500 2,892,695 ------------------------------------------------------------------------------- 2,892,695 FINANCIAL -- MISCELLANEOUS -- 1.3% Portfolio Recovery Associates, Inc. 1 84,206 3,848,214 ------------------------------------------------------------------------------- 3,848,214 FINANCIAL DATA PROCESSING SERVICES & SYSTEMS -- 4.4% Cybersource Corp. 1 214,800 2,513,160 Digital Insight Corp. 1 82,700 2,835,783 Heartland Payment Systems, Inc. 1 137,100 3,822,348 Online Resources Corp. 1 370,383 3,829,760 ------------------------------------------------------------------------------- 13,001,051 FINANCIAL INFORMATION SERVICES -- 1.1% FactSet Research Systems, Inc. 69,700 3,296,810 ------------------------------------------------------------------------------- 3,296,810 HEALTH CARE FACILITIES -- 1.9% Five Star Quality Care, Inc. 1 285,940 3,165,356 ICON PLC, ADR 1,3 1,000 55,300 LCA-Vision, Inc. 45,240 2,393,648 ------------------------------------------------------------------------------- 5,614,304 HEALTH CARE MANAGEMENT SERVICES -- 3.1% Eclipsys Corp. 1 170,000 3,087,200 Omnicell, Inc. 1 272,550 3,766,641 Vital Images, Inc. 1 88,400 2,183,480 ------------------------------------------------------------------------------- 9,037,321 HEALTH CARE SERVICES -- 1.2% Hythiam, Inc. 1 207,340 1,445,160 Matria Healthcare, Inc. 1 100,200 2,146,284 ------------------------------------------------------------------------------- 3,591,444 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 88 | Call 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- HOUSEHOLD FURNISHINGS -- 1.1% Select Comfort Corp. 1 136,380 $ 3,132,649 ------------------------------------------------------------------------------- 3,132,649 INSURANCE -- MULTI-LINE -- 1.3% Amerisafe, Inc. 1 316,020 3,931,289 ------------------------------------------------------------------------------- 3,931,289 INSURANCE -- PROPERTY & CASUALTY -- 1.2% The Navigators Group, Inc. 1 77,240 3,384,657 ------------------------------------------------------------------------------- 3,384,657 INVESTMENT MANAGEMENT COMPANIES -- 1.4% Affiliated Managers Group, Inc. 1 48,160 4,184,622 ------------------------------------------------------------------------------- 4,184,622 MACHINERY -- INDUSTRIAL/SPECIALTY -- 1.0% EnPro Industries, Inc. 1 85,500 2,872,800 ------------------------------------------------------------------------------- 2,872,800 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 7.1% Dril-Quip, Inc. 1 28,800 2,374,272 Hornbeck Offshore Services, Inc. 1 77,350 2,747,472 Oil States International, Inc. 1 119,600 4,099,888 Superior Energy Services, Inc. 1 109,800 3,722,220 Trico Marine Services, Inc. 1 76,674 2,606,916 W-H Energy Services, Inc. 1 48,000 2,439,840 Warrior Energy Service Corp. 1 113,550 2,762,672 ------------------------------------------------------------------------------- 20,753,280 MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 5.1% AngioDynamics, Inc. 1 60,090 1,625,435 LifeCell Corp. 1 84,150 2,601,918 Meridian Bioscience, Inc. 105,400 2,629,730 PolyMedica Corp. 93,600 3,365,856 The Spectranetics Corp. 1 163,621 1,754,017 Viasys Healthcare, Inc. 1 117,520 3,008,512 ------------------------------------------------------------------------------- 14,985,468 METAL FABRICATING -- 0.8% Dynamic Materials Corp. 71,910 2,425,524 ------------------------------------------------------------------------------- 2,425,524 MISCELLANEOUS CONSUMER STAPLES -- 1.0% Herbalife Ltd. 1 77,000 3,072,300 ------------------------------------------------------------------------------- 3,072,300 MISCELLANOUS PRODUCER DURABLES -- 0.8% Houston Wire & Cable Co. 1 134,600 2,315,120 ------------------------------------------------------------------------------- 2,315,120 PRODUCTION TECHNOLOGY EQUIPMENT -- 3.6% Cymer, Inc. 1 96,910 4,502,439 Entegris, Inc. 1 326,950 3,115,833 GSI Group, Inc. 1 336,100 2,887,099 ------------------------------------------------------------------------------- 10,505,371 RAILROAD EQUIPMENT -- 1.0% American Railcar Industries, Inc. 90,000 2,979,900 ------------------------------------------------------------------------------- 2,979,900 RESTAURANTS -- 1.3% California Pizza Kitchen, Inc. 1 137,550 3,779,874 ------------------------------------------------------------------------------- 3,779,874 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- RETAIL -- 3.1% Build-A-Bear-Workshop, Inc. 1 168,400 $ 3,622,284 Cache, Inc. 1 321,029 5,566,643 ------------------------------------------------------------------------------- 9,188,927 SECURITIES BROKERAGE & SERVICES -- 2.9% Investment Technology Group, Inc. 1 59,850 3,043,971 MarketAxess Holdings, Inc. 1 229,350 2,525,143 optionsXpress Holdings, Inc. 129,150 3,010,487 ------------------------------------------------------------------------------- 8,579,601 SERVICES -- COMMERCIAL -- 6.1% AMN Healthcare Services, Inc. 1 158,350 3,214,505 FTI Consulting, Inc. 1 143,030 3,828,913 Labor Ready, Inc. 1 165,810 3,755,596 Nutri/System, Inc. 1 67,800 4,212,414 PeopleSupport, Inc. 1 216,171 2,909,662 ------------------------------------------------------------------------------- 17,921,090 SHOES -- 1.3% Iconix Brand Group, Inc. 1 231,100 3,776,174 ------------------------------------------------------------------------------- 3,776,174 STEEL -- 1.2% Oregon Steel Mills, Inc. 1 71,400 3,617,124 ------------------------------------------------------------------------------- 3,617,124 TELECOMMUNICATIONS EQUIPMENT -- 2.5% InterDigital Communications Corp. 1 85,100 2,970,841 MasTec, Inc. 1 326,930 4,318,745 ------------------------------------------------------------------------------- 7,289,586 TRANSPORTATION -- MISCELLANEOUS -- 0.9% Hub Group, Inc., Class A 1 104,400 2,560,932 ------------------------------------------------------------------------------- 2,560,932 TRUCKERS -- 1.0% Old Dominion Freight Line, Inc. 1 79,900 3,003,441 ------------------------------------------------------------------------------- 3,003,441 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $275,422,908) 290,494,273 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.1% RS Mutual Funds 8 198,575 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $166,257) 198,575 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.6% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 4,669,982 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $4,669,982) 4,669,982 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.5% (Cost $280,259,147) 295,362,830 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (0.5)% (1,516,621) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 293,846,209 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 89 SCHEDULE OF INVESTMENTS - RS EMERGING GROWTH FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 96.7% ADVERTISING AGENCIES -- 2.3% aQuantive, Inc. 1 470,379 $ 11,914,700 Marchex, Inc., Class B 1 188,890 3,103,463 ValueClick, Inc. 1 238,321 3,658,227 ------------------------------------------------------------------------------- 18,676,390 BANKS -- OUTSIDE NEW YORK CITY -- 2.3% Boston Private Financial Holdings, Inc. 277,815 7,751,039 PrivateBancorp, Inc. 205,574 8,512,819 SVB Financial Group 1 54,619 2,482,980 ------------------------------------------------------------------------------- 18,746,838 BEVERAGE -- SOFT DRINKS -- 0.4% Peet's Coffee & Tea, Inc. 1 97,000 2,928,430 ------------------------------------------------------------------------------- 2,928,430 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 2.8% Altus Pharmaceuticals, Inc. 1 246,918 4,555,637 Array BioPharma, Inc. 1 121,541 1,045,253 Keryx Biopharmaceuticals, Inc. 1 528,600 7,506,120 PDL BioPharma, Inc. 1 250,430 4,610,416 Solexa, Inc. 1 556,310 4,728,635 ------------------------------------------------------------------------------- 22,446,061 CASINOS & GAMBLING -- 2.6% Pinnacle Entertainment, Inc. 1 173,230 5,309,500 Scientific Games Corp., Class A 1 253,110 9,015,778 The9 Ltd., ADR 1,3 292,700 6,787,713 ------------------------------------------------------------------------------- 21,112,991 COMMUNICATIONS TECHNOLOGY -- 6.1% Atheros Communications 1 570,370 10,814,215 AudioCodes Ltd. 1 753,148 8,209,313 Ixia 1 221,380 1,992,420 j2 Global Communications, Inc. 1 414,712 12,947,309 NETGEAR, Inc. 1 112,520 2,436,058 Redback Networks, Inc. 1 269,500 4,942,630 WebEx Communications, Inc. 1 212,910 7,566,821 ------------------------------------------------------------------------------- 48,908,766 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 8.1% Akamai Technologies, Inc. 1 268,730 9,725,339 Altiris, Inc. 1 245,590 4,430,444 Digital River, Inc. 1 291,490 11,773,281 Equinix, Inc. 1 158,990 8,722,191 Informatica Corp. 1 516,770 6,800,693 MicroStrategy, Inc., Class A 1 80,083 7,809,694 Omniture, Inc. 1 241,820 1,762,868 Openwave Systems, Inc. 1 131,673 1,519,507 Quest Software, Inc. 1 256,480 3,600,979 SPSS, Inc. 1 67,960 2,184,234 The TriZetto Group, Inc. 1 443,620 6,561,140 The Ultimate Software Group, Inc. 1 48,595 931,080 ------------------------------------------------------------------------------- 65,821,450 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMPUTER TECHNOLOGY -- 3.7% M-Systems Flash Disk Pioneers Ltd. 1 425,464 $ 12,606,498 Neoware, Inc. 1 119,990 1,474,677 Rackable Systems, Inc. 1 149,900 5,919,551 Trident Microsystems, Inc. 1 137,880 2,616,963 Vimicro International Corp., ADR 1,3 266,700 3,363,087 Xyratex Ltd. 1 137,650 3,640,842 ------------------------------------------------------------------------------- 29,621,618 CONSUMER ELECTRONICS -- 1.6% Dolby Laboratories, Inc., Class A 1 244,840 5,704,772 Netflix, Inc. 1 179,060 4,872,223 THQ, Inc. 1 111,050 2,398,680 ------------------------------------------------------------------------------- 12,975,675 DIVERSIFIED FINANCIAL SERVICES -- 1.5% Greenhill & Co., Inc. 69,080 4,197,301 Huron Consulting Group, Inc. 1 223,984 7,859,598 ------------------------------------------------------------------------------- 12,056,899 DIVERSIFIED MATERIALS & PROCESSING -- 0.6% Armor Holdings, Inc. 1 89,460 4,905,092 ------------------------------------------------------------------------------- 4,905,092 DRUGS & PHARMACEUTICALS -- 1.0% Adolor Corp. 1 327,730 8,196,527 ------------------------------------------------------------------------------- 8,196,527 ELECTRONICS -- INSTRUMENTS, GAUGES & METERS -- 0.4% Itron, Inc. 1 50,820 3,011,593 ------------------------------------------------------------------------------- 3,011,593 ELECTRONICS -- MEDICAL SYSTEMS -- 2.8% Illumina, Inc. 1 356,766 10,581,680 IntraLase Corp. 1 248,340 4,157,212 Intuitive Surgical, Inc. 1 65,820 7,764,785 ------------------------------------------------------------------------------- 22,503,677 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 6.7% FormFactor, Inc. 1 266,141 11,877,873 Hittite Microwave Corp. 1 178,970 6,471,555 Netlogic Microsystems, Inc. 1 256,568 8,274,318 O2Micro International Ltd., ADR 1,3 317,390 2,440,729 OmniVision Technologies, Inc. 1 139,290 2,941,805 Silicon Image, Inc. 1 625,840 6,746,555 Silicon Motion Technology Corp., ADR 1,3 187,142 2,683,616 SiRF Technology Holdings, Inc. 1 162,620 5,239,617 Tessera Technologies, Inc. 1 194,480 5,348,200 Volterra Semiconductor Corp. 1 113,800 1,736,588 ------------------------------------------------------------------------------- 53,760,856 ELECTRONICS -- TECHNOLOGY -- 1.2% American Science and Engineering, Inc. 1 116,570 6,751,734 Eagle Test Systems, Inc. 1 186,260 2,611,365 ------------------------------------------------------------------------------- 9,363,099 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 90 | CALL 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- ENERGY -- MISCELLANEOUS -- 1.3% Aventine Renewable Energy Holdings, Inc. 1 7,340 $ 285,526 TETRA Technologies, Inc. 1 329,820 9,990,248 ------------------------------------------------------------------------------- 10,275,774 FINANCE COMPANIES -- 0.7% International Securities Exchange, Inc. 158,520 6,034,856 ------------------------------------------------------------------------------- 6,034,856 FINANCIAL -- MISCELLANEOUS -- 2.5% Portfolio Recovery Associates, Inc. 1 284,650 13,008,505 Sotheby's 1 278,730 7,316,662 ------------------------------------------------------------------------------- 20,325,167 FINANCIAL DATA PROCESSING SERVICES & SYSTEMS -- 0.9% Heartland Payment Systems, Inc. 1 269,260 7,506,969 ------------------------------------------------------------------------------- 7,506,969 FINANCIAL INFORMATION SERVICES -- 1.0% FactSet Research Systems, Inc. 177,810 8,410,413 ------------------------------------------------------------------------------- 8,410,413 HEALTH CARE FACILITIES -- 2.6% ICON PLC, ADR 1,3 4,211 232,868 LCA-Vision, Inc. 136,330 7,213,220 Radiation Therapy Services, Inc. 1 231,829 6,238,519 United Surgical Partners International, Inc. 1 252,580 7,595,081 ------------------------------------------------------------------------------- 21,279,688 HEALTH CARE MANAGEMENT SERVICES -- 2.5% Allscripts Healthcare Solutions, Inc. 1 148,600 2,607,930 Centene Corp. 1 177,290 4,171,634 Eclipsys Corp. 1 293,090 5,322,514 Vital Images, Inc. 1 326,154 8,056,004 ------------------------------------------------------------------------------- 20,158,082 HEALTH CARE SERVICES -- 1.7% Healthways, Inc. 1 155,474 8,184,151 Matria Healthcare, Inc. 1 130,693 2,799,444 Nighthawk Radiology Holdings, Inc. 1 172,940 3,102,544 ------------------------------------------------------------------------------- 14,086,139 HOTEL/MOTEL -- 0.8% Four Seasons Hotels, Inc. 102,930 6,324,019 ------------------------------------------------------------------------------- 6,324,019 HOUSEHOLD FURNISHINGS -- 1.2% Select Comfort Corp. 1 413,960 9,508,661 ------------------------------------------------------------------------------- 9,508,661 INSURANCE -- PROPERTY & CASUALTY -- 1.1% The Navigators Group, Inc. 1 193,710 8,488,372 ------------------------------------------------------------------------------- 8,488,372 INVESTMENT MANAGEMENT COMPANIES -- 1.2% Affiliated Managers Group, Inc. 1 114,840 9,978,448 ------------------------------------------------------------------------------- 9,978,448 MACHINERY -- INDUSTRIAL/SPECIALTY -- 0.8% Gardner Denver, Inc. 1 167,290 6,440,665 ------------------------------------------------------------------------------- 6,440,665 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 5.4% Dril-Quip, Inc. 1 179,190 $ 14,772,424 Hornbeck Offshore Services, Inc. 1 244,940 8,700,269 Lufkin Industries, Inc. 141,160 8,389,139 Oceaneering International, Inc. 1 125,550 5,756,467 W-H Energy Services, Inc. 1 124,940 6,350,700 ------------------------------------------------------------------------------- 43,968,999 MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 8.2% AngioDynamics, Inc. 1 166,245 4,496,927 I-Flow Corp. 1 338,532 3,662,916 IRIS International, Inc. 1 217,641 2,864,155 Kyphon, Inc. 1 339,080 13,007,109 LifeCell Corp. 1 550,890 17,033,519 NuVasive, Inc. 1 352,020 6,417,325 PolyMedica Corp. 241,957 8,700,774 ResMed, Inc. 1 121,870 5,721,796 SonoSite, Inc. 1 121,694 4,750,934 ------------------------------------------------------------------------------- 66,655,455 METAL FABRICATING -- 0.7% Dynamic Materials Corp. 177,120 5,974,258 ------------------------------------------------------------------------------- 5,974,258 OIL -- CRUDE PRODUCERS -- 1.2% Parallel Petroleum Corp. 1 388,130 9,590,692 ------------------------------------------------------------------------------- 9,590,692 POLLUTION CONTROL & ENVIRONMENTAL SERVICES -- 0.9% Team, Inc. 1 285,640 7,155,282 ------------------------------------------------------------------------------- 7,155,282 PRINTING & COPYING SERVICES -- 0.8% VistaPrint Ltd. 1 231,370 6,186,834 ------------------------------------------------------------------------------- 6,186,834 RESTAURANTS -- 1.2% California Pizza Kitchen, Inc. 1 309,640 8,508,907 Chipotle Mexican Grill, Inc., Class A 1 16,700 1,017,865 ------------------------------------------------------------------------------- 9,526,772 RETAIL -- 4.5% Coldwater Creek, Inc. 1 334,285 8,945,467 Gmarket, Inc., ADR 1,3 19,430 298,639 GSI Commerce, Inc. 1 351,001 4,749,044 J. Crew Group, Inc. 1 4,840 132,858 Stamps.com, Inc. 1 142,687 3,969,552 United Natural Foods, Inc. 1 175,549 5,796,628 Volcom, Inc. 1 188,997 6,046,014 Zumiez, Inc. 1 170,434 6,403,205 ------------------------------------------------------------------------------- 36,341,407 SECURITIES BROKERAGE & SERVICES -- 3.7% GFI Group, Inc. 1 133,390 7,196,391 IntercontinentalExchange, Inc. 1 70,750 4,099,255 Investment Technology Group, Inc. 1 212,550 10,810,293 optionsXpress Holdings, Inc. 324,910 7,573,652 ------------------------------------------------------------------------------- 29,679,591 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 91 SCHEDULE OF INVESTMENTS - RS EMERGING GROWTH FUND (Continued) June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- SERVICES -- COMMERCIAL -- 4.6% AMN Healthcare Services, Inc. 1 330,410 $ 6,707,323 Ctrip.com International Ltd., ADR 3 173,480 8,856,154 FTI Consulting, Inc. 1 381,670 10,217,306 Kenexa Corp. 1 183,144 5,833,137 Liquidity Services, Inc. 1 186,121 2,897,904 Nutri/System, Inc. 1 40,680 2,527,448 ------------------------------------------------------------------------------- 37,039,272 SHIPPING -- 0.6% American Commercial Lines, Inc. 1 81,860 4,932,065 ------------------------------------------------------------------------------- 4,932,065 SHOES -- 1.8% Iconix Brand Group, Inc. 1 389,450 6,363,613 Steven Madden Ltd. 275,500 8,160,310 ------------------------------------------------------------------------------- 14,523,923 UTILITIES -- TELECOMMUNICATIONS -- 0.7% Time Warner Telecom, Inc., Class A 1 379,600 5,637,060 ------------------------------------------------------------------------------- 5,637,060 WHOLESALERS -- 0.0% MWI Veterinary Supply, Inc. 1 2,900 105,647 ------------------------------------------------------------------------------- 105,647 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $665,889,755) 781,170,472 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 384,205 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $309,257) 384,205 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 2.9% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 23,505,328 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $23,505,328) 23,505,328 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 99.6% (Cost $689,704,340) 805,060,005 ------------------------------------------------------------------------------- OTHER ASSETS, NET -- 0.4% 3,206,038 ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 808,266,043 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 92 | CALL 1-800-766-FUND SCHEDULE OF INVESTMENTS - RS GROWTH FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 96.3% AEROSPACE -- 2.7% Lockheed Martin Corp. 40,000 $ 2,869,600 United Technologies Corp. 40,000 2,536,800 ------------------------------------------------------------------------------- 5,406,400 AIR TRANSPORT -- 1.5% Southwest Airlines Co. 175,000 2,864,750 ------------------------------------------------------------------------------- 2,864,750 BEVERAGE -- SOFT DRINKS -- 1.3% PepsiCo, Inc. 42,500 2,551,700 ------------------------------------------------------------------------------- 2,551,700 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 3.0% Biogen Idec, Inc. 1 55,000 2,548,150 Cephalon, Inc. 1 55,000 3,305,500 ------------------------------------------------------------------------------- 5,853,650 CASINOS & GAMBLING -- 2.7% Harrah's Entertainment, Inc. 40,000 2,847,200 International Game Technology 65,000 2,466,100 ------------------------------------------------------------------------------- 5,313,300 COMMUNICATIONS TECHNOLOGY -- 4.3% Cisco Systems, Inc. 1 155,000 3,027,150 Corning, Inc. 1 135,000 3,265,650 QUALCOMM, Inc. 57,000 2,283,990 ------------------------------------------------------------------------------- 8,576,790 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 5.4% Adobe Systems, Inc. 1 120,000 3,643,200 Amdocs Ltd. 1 85,000 3,111,000 Microsoft Corp. 170,000 3,961,000 ------------------------------------------------------------------------------- 10,715,200 COMPUTER TECHNOLOGY -- 3.8% Apple Computer, Inc. 1 40,000 2,284,800 Hewlett-Packard Co. 70,000 2,217,600 Palm, Inc. 1 180,200 2,901,220 ------------------------------------------------------------------------------- 7,403,620 CONSUMER ELECTRONICS -- 1.3% Yahoo! Inc. 1 77,000 2,541,000 ------------------------------------------------------------------------------- 2,541,000 DIVERSIFIED FINANCIAL SERVICES -- 3.7% Chicago Mercantile Exchange Holdings, Inc. 5,500 2,701,325 Merrill Lynch & Co., Inc. 32,500 2,260,700 The Goldman Sachs Group, Inc. 16,000 2,406,880 ------------------------------------------------------------------------------- 7,368,905 DRUGS & PHARMACEUTICALS -- 6.2% AstraZeneca PLC, ADR 3 42,000 2,512,440 Cardinal Health, Inc. 35,000 2,251,550 Eli Lilly & Co. 45,000 2,487,150 Johnson & Johnson 43,000 2,576,560 Shire PLC, ADR 3 55,000 2,432,650 ------------------------------------------------------------------------------- 12,260,350 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- ELECTRONICS -- MEDICAL SYSTEMS -- 1.1% Medtronic, Inc. 47,500 $ 2,228,700 ------------------------------------------------------------------------------- 2,228,700 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 6.2% Altera Corp. 1 120,000 2,106,000 Intel Corp. 130,000 2,463,500 Marvell Technology Group Ltd. 1 70,000 3,103,100 Micron Technology, Inc. 1 165,000 2,484,900 Texas Instruments, Inc. 70,000 2,120,300 ------------------------------------------------------------------------------- 12,277,800 FINANCIAL DATA PROCESSING SERVICES & SYSTEMS -- 3.3% Alliance Data Systems Corp. 1 72,000 4,235,040 First Data Corp. 50,000 2,252,000 ------------------------------------------------------------------------------- 6,487,040 FOODS -- 1.1% Campbell Soup Co. 60,000 2,226,600 ------------------------------------------------------------------------------- 2,226,600 HEALTH CARE MANAGEMENT SERVICES -- 2.5% Caremark Rx, Inc. 53,000 2,643,110 UnitedHealth Group, Inc. 52,000 2,328,560 ------------------------------------------------------------------------------- 4,971,670 HOTEL/MOTEL -- 1.5% Starwood Hotels & Resorts Worldwide, Inc. 48,400 2,920,456 ------------------------------------------------------------------------------- 2,920,456 IDENTIFICATION CONTROL & FILTER DEVICES -- 1.4% Agilent Technologies, Inc. 1 87,500 2,761,500 ------------------------------------------------------------------------------- 2,761,500 INSURANCE -- MULTI-LINE -- 1.6% Assurant, Inc. 65,000 3,146,000 ------------------------------------------------------------------------------- 3,146,000 INSURANCE -- PROPERTY & CASUALTY -- 1.2% The Chubb Corp. 48,000 2,395,200 ------------------------------------------------------------------------------- 2,395,200 LEISURE TIME -- 1.4% Penn National Gaming, Inc. 1 70,000 2,714,600 ------------------------------------------------------------------------------- 2,714,600 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 3.1% Cameron International Corp. 1 62,500 2,985,625 Nabors Industries Ltd. 1 90,000 3,041,100 ------------------------------------------------------------------------------- 6,026,725 MULTI-SECTOR COMPANIES -- 4.4% ABB Ltd., ADR 3 235,000 3,045,600 General Electric Co. 95,000 3,131,200 Honeywell International Inc. 60,000 2,418,000 ------------------------------------------------------------------------------- 8,594,800 OIL -- CRUDE PRODUCERS -- 5.3% EnCana Corp. 71,250 3,750,600 Noble Energy, Inc. 14,200 665,412 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 93 SCHEDULE OF INVESTMENTS - RS GROWTH FUND (Continued) June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- OIL -- CRUDE PRODUCERS (continued) Southwestern Energy Co. 1 100,000 $ 3,116,000 XTO Energy, Inc. 65,000 2,877,550 ------------------------------------------------------------------------------- 10,409,562 OIL -- INTEGRATED INTERNATIONAL -- 1.8% Marathon Oil Corp. 27,000 2,249,100 Suncor Energy, Inc. 15,000 1,215,150 ------------------------------------------------------------------------------- 3,464,250 PRODUCTION TECHNOLOGY EQUIPMENT -- 1.4% Novellus Systems, Inc. 1 115,000 2,840,500 ------------------------------------------------------------------------------- 2,840,500 PUBLISHING -- NEWSPAPERS -- 1.2% News Corp., Class B 121,000 2,441,780 ------------------------------------------------------------------------------- 2,441,780 RAILROADS -- 1.2% Norfolk Southern Corp. 45,000 2,394,900 ------------------------------------------------------------------------------- 2,394,900 RESTAURANTS -- 1.5% Starbucks Corp. 1 80,000 3,020,800 ------------------------------------------------------------------------------- 3,020,800 RETAIL -- 4.6% American Eagle Outfitters, Inc. 100,000 3,404,000 Costco Wholesale Corp. 60,000 3,427,800 J.C. Penney Co., Inc. 34,000 2,295,340 ------------------------------------------------------------------------------- 9,127,140 SECURITIES BROKERAGE & SERVICES -- 1.7% Countrywide Financial Corp. 90,000 3,427,200 ------------------------------------------------------------------------------- 3,427,200 STEEL -- 1.8% Nucor Corp. 66,400 3,602,200 ------------------------------------------------------------------------------- 3,602,200 TELECOMMUNICATIONS EQUIPMENT -- 1.3% Nokia Oyj, ADR 3 130,000 2,633,800 ------------------------------------------------------------------------------- 2,633,800 TEXTILE -- APPAREL MANUFACTURERS -- 1.3% Coach, Inc. 1 85,000 2,541,500 ------------------------------------------------------------------------------- 2,541,500 TOBACCO -- 1.4% Altria Group, Inc. 38,000 2,790,340 ------------------------------------------------------------------------------- 2,790,340 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- UTILITIES -- CABLE TV & RADIO -- 1.9% Comcast Corp., Special Class A 1 115,000 $ 3,769,700 ------------------------------------------------------------------------------- 3,769,700 UTILITIES -- TELECOMMUNICATIONS -- 5.2% America Movil S.A. de C.V., ADR 3 64,000 2,128,640 AT&T, Inc. 100,000 2,789,000 Verizon Communications, Inc. 90,000 3,014,100 Vodafone Group PLC, ADR 3 110,000 2,343,000 ------------------------------------------------------------------------------- 10,274,740 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $173,603,896) 190,345,168 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 55,077 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $45,382) 55,077 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.2% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 8,314,388 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $8,314,388) 8,314,388 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.5% (Cost $181,963,666) 198,714,633 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (0.5)% (941,415) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 197,773,218 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 94 | CALL 1-800-766-FUND SCHEDULE OF INVESTMENTS - THE INFORMATION AGE FUND(R) June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 90.3% ADVERTISING AGENCIES -- 5.7% aQuantive, Inc. 1 113,100 $ 2,864,823 Marchex, Inc., Class B 1 101,390 1,665,838 ------------------------------------------------------------------------------- 4,530,661 CASINOS & GAMBLING -- 1.1% The9 Ltd., ADR 1,3 36,700 851,073 ------------------------------------------------------------------------------- 851,073 COMMUNICATIONS TECHNOLOGY -- 11.0% AudioCodes Ltd. 1 123,670 1,348,003 Ixia 1 156,640 1,409,760 McAfee, Inc. 1 49,360 1,197,967 QUALCOMM, Inc. 22,060 883,944 Redback Networks, Inc. 1 35,100 643,734 Sonus Networks, Inc. 1 127,610 631,670 Tellabs, Inc. 1 65,450 871,140 WebEx Communications, Inc. 1 49,430 1,756,742 ------------------------------------------------------------------------------- 8,742,960 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 23.2% Adobe Systems, Inc. 1 12,980 394,073 Akamai Technologies, Inc. 1 68,330 2,472,863 Altiris, Inc. 1 34,178 616,571 Blackbaud, Inc. 45,150 1,024,905 Citrix Systems, Inc. 1 21,410 859,398 Digital River, Inc. 1 41,510 1,676,589 Digitas, Inc. 1 161,060 1,871,517 eCollege.com, Inc. 1 30,250 639,485 F5 Networks, Inc. 1 19,930 1,065,856 Informatica Corp. 1 76,320 1,004,371 LoopNet, Inc. 1 6,610 123,012 Microsoft Corp. 64,840 1,510,772 Omniture, Inc. 1 89,380 651,580 Openwave Systems, Inc. 1 122,080 1,408,803 PDF Solutions, Inc. 1 61,611 764,593 Quest Software, Inc. 1 40,960 575,078 RADWARE Ltd. 1 51,070 655,739 Red Hat, Inc. 1 22,320 522,288 Sigma Designs, Inc. 1 63,410 597,956 ------------------------------------------------------------------------------- 18,435,449 COMPUTER TECHNOLOGY -- 5.4% M-Systems Flash Disk Pioneers Ltd. 1 107,810 3,194,410 Neoware, Inc. 1 22,570 277,385 Rackable Systems, Inc. 1 7,810 308,417 Xyratex Ltd. 1 20,050 530,322 ------------------------------------------------------------------------------- 4,310,534 CONSUMER ELECTRONICS -- 12.2% Google, Inc., Class A 1 8,880 3,723,650 Netflix, Inc. 1 52,380 1,425,260 THQ, Inc. 1 48,210 1,041,336 Yahoo! Inc. 1 106,718 3,521,694 ------------------------------------------------------------------------------- 9,711,940 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- CONSUMER PRODUCTS -- 1.0% Nintendo Co. Ltd., ADR 3 38,700 $ 808,443 ------------------------------------------------------------------------------- 808,443 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 23.8% ANADIGICS, Inc. 1 101,060 679,123 CSR PLC 1 GBP 23,700 552,213 FormFactor, Inc. 1 24,430 1,090,311 Integrated Device Technology, Inc. 1 54,980 779,616 Marvell Technology Group Ltd. 1 55,950 2,480,264 Netlogic Microsystems, Inc. 1 28,220 910,095 Nextest Systems Corp. 1 24,700 400,387 O2Micro International Ltd., ADR 1,3 450,390 3,463,499 PLX Technology, Inc. 1 186,362 2,277,344 Silicon Image, Inc. 1 52,190 562,608 Silicon Laboratories, Inc. 1 25,820 907,573 Silicon Motion Technology Corp., ADR 1,3 115,460 1,655,696 SiRF Technology Holdings, Inc. 1 23,510 757,492 Tessera Technologies, Inc. 1 24,100 662,750 Virage Logic Corp. 1 70,814 664,944 Volterra Semiconductor Corp. 1 67,670 1,032,644 ------------------------------------------------------------------------------- 18,876,559 ELECTRONICS -- TECHNOLOGY -- 1.2% Eagle Test Systems, Inc. 1 69,960 980,839 ------------------------------------------------------------------------------- 980,839 PRODUCTION TECHNOLOGY EQUIPMENT -- 1.1% KLA-Tencor Corp. 21,030 874,217 ------------------------------------------------------------------------------- 874,217 RETAIL -- 1.0% GSI Commerce, Inc. 1 56,939 770,385 ------------------------------------------------------------------------------- 770,385 SERVICES -- COMMERCIAL -- 3.3% Ctrip.com International Ltd., ADR 3 30,080 1,535,584 Monster Worldwide, Inc. 1 25,910 1,105,321 ------------------------------------------------------------------------------- 2,640,905 TELECOMMUNICATIONS EQUIPMENT -- 0.3% WiderThan Co. Ltd., ADR 1,3 18,990 195,407 ------------------------------------------------------------------------------- 195,407 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $63,978,902) 71,729,372 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 32,408 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $27,964) 32,408 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 95 SCHEDULE OF INVESTMENTS - THE INFORMATION AGE FUND(R) (Continued) June 30, 2006 (unaudited) Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 10.0% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 $ 3,991,317 BlackRock Liquidity Funds TempFund Portfolio-Institutional Shares 9 3,958,317 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $7,949,634) 7,949,634 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.3% (Cost $71,956,500) 79,711,414 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (0.3)% (234,998) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 79,476,416 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 96 | CALL 1-800-766-FUND SCHEDULE OF INVESTMENTS - RS INTERNET AGE FUND(R) June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 96.6% ADVERTISING AGENCIES -- 9.9% aQuantive, Inc. 1 161,010 $ 4,078,383 Marchex, Inc., Class B 1 167,440 2,751,039 ------------------------------------------------------------------------------- 6,829,422 CASINOS & GAMBLING -- 1.1% The9 Ltd., ADR 1,3 33,100 767,589 ------------------------------------------------------------------------------- 767,589 COMMUNICATIONS & MEDIA -- 1.5% Linktone Ltd., ADR 1,3 178,790 1,063,801 ------------------------------------------------------------------------------- 1,063,801 COMMUNICATIONS TECHNOLOGY -- 5.6% AudioCodes Ltd. 1 120,540 1,313,886 China GrenTech Corp. Ltd., ADR 1,3 37,800 402,986 Sonus Networks, Inc. 1 115,080 569,646 WebEx Communications, Inc. 1 44,574 1,584,160 ------------------------------------------------------------------------------- 3,870,678 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 24.2% Adobe Systems, Inc. 1 11,210 340,335 Akamai Technologies, Inc. 1 50,470 1,826,509 Altiris, Inc. 1 29,550 533,082 Citrix Systems, Inc. 1 16,060 644,648 Digital River, Inc. 1 64,110 2,589,403 Digitas, Inc. 1 224,060 2,603,577 eCollege.com, Inc. 1 40,240 850,674 F5 Networks, Inc. 1 17,350 927,878 Informatica Corp. 1 37,150 488,894 LoopNet, Inc. 1 5,820 108,310 Omniture, Inc. 1 77,690 566,360 Openwave Systems, Inc. 1 108,100 1,247,474 PDF Solutions, Inc. 1 55,170 684,660 RADWARE Ltd. 1 32,840 421,666 Sigma Designs, Inc. 1 54,820 516,953 Smith Micro Software, Inc. 1 44,880 718,978 Submarino SA, GDR 144A 3,7 30,000 1,205,961 Symantec Corp. 1 30,310 471,017 ------------------------------------------------------------------------------- 16,746,379 COMPUTER TECHNOLOGY -- 5.1% M-Systems Flash Disk Pioneers Ltd. 1 86,100 2,551,143 Rackable Systems, Inc. 1 6,960 274,850 Trident Microsystems, Inc. 1 12,620 239,528 Xyratex Ltd. 1 17,640 466,578 ------------------------------------------------------------------------------- 3,532,099 CONSUMER ELECTRONICS -- 17.2% Google, Inc., Class A 1 8,860 3,715,264 Netflix, Inc. 1 99,040 2,694,878 THQ, Inc. 1 42,080 908,928 Yahoo! Inc. 1 139,850 4,615,050 ------------------------------------------------------------------------------- 11,934,120 CONSUMER PRODUCTS -- 1.0% Nintendo Co. Ltd., ADR 3 33,400 697,726 ------------------------------------------------------------------------------- 697,726 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- ELECTRICAL EQUIPMENT & COMPONENTS -- 0.9% Color Kinetics, Inc. 1 34,550 $ 653,341 ------------------------------------------------------------------------------- 653,341 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 13.8% CSR PLC 1 GBP 21,300 496,292 Netlogic Microsystems, Inc. 1 47,780 1,540,905 Nextest Systems Corp. 1 22,000 356,620 O2Micro International Ltd., ADR 1,3 449,950 3,460,116 PLX Technology, Inc. 1 168,070 2,053,815 Silicon Motion Technology Corp., ADR 1,3 78,260 1,122,248 SiRF Technology Holdings, Inc. 1 15,410 496,510 ------------------------------------------------------------------------------- 9,526,506 ELECTRONICS -- TECHNOLOGY -- 1.3% Eagle Test Systems, Inc. 1 63,230 886,485 ------------------------------------------------------------------------------- 886,485 PRINTING & COPYING SERVICES -- 1.5% VistaPrint Ltd. 1 39,010 1,043,127 ------------------------------------------------------------------------------- 1,043,127 RETAIL -- 5.5% Amazon.com, Inc. 1 37,690 1,457,849 Blue Nile, Inc. 1 15,880 510,701 GSI Commerce, Inc. 1 133,360 1,804,361 ------------------------------------------------------------------------------- 3,772,911 SECURITIES BROKERAGE & SERVICES -- 1.7% ZipRealty, Inc. 1 138,480 1,174,310 ------------------------------------------------------------------------------- 1,174,310 SERVICES -- COMMERCIAL -- 6.0% Ctrip.com International Ltd., ADR 3 45,460 2,320,733 Monster Worldwide, Inc. 1 43,180 1,842,059 ------------------------------------------------------------------------------- 4,162,792 TELECOMMUNICATIONS EQUIPMENT -- 0.3% WiderThan Co. Ltd., ADR 1,3 19,140 196,951 ------------------------------------------------------------------------------- 196,951 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $57,908,173) 66,858,237 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 21,116 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $18,416) 21,116 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.3% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 2,939,518 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $2,939,518) 2,939,518 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.9% (Cost $60,866,107) 69,818,871 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (0.9)% (599,553) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 69,219,318 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 97 SCHEDULE OF INVESTMENTS - RS MIDCAP OPPORTUNITIES FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 98.5% AIR TRANSPORT -- 1.3% AMR Corp. 1 135,000 $ 3,431,700 ------------------------------------------------------------------------------- 3,431,700 BANKS -- OUTSIDE NEW YORK CITY -- 4.1% AmericanWest Bancorp. 126,000 2,853,900 Commerce Bancshares, Inc. 54,000 2,702,700 SVB Financial Group 1 58,000 2,636,680 Zions Bancorp. 31,500 2,455,110 ------------------------------------------------------------------------------- 10,648,390 BEVERAGE -- BREWERS & WINERIES -- 0.8% Quilmes Industrial S.A., ADR 3 42,000 2,063,040 ------------------------------------------------------------------------------- 2,063,040 BEVERAGE - SOFT DRINKS -- 1.0% Hansen Natural Corp. 1 14,000 2,665,180 ------------------------------------------------------------------------------- 2,665,180 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 1.5% Cephalon, Inc. 1 67,000 4,026,700 ------------------------------------------------------------------------------- 4,026,700 BUILDING MATERIALS -- 2.5% Simpson Manufacturing Co., Inc. 82,000 2,956,100 Vulcan Materials Co. 45,000 3,510,000 ------------------------------------------------------------------------------- 6,466,100 CASINOS & GAMBLING -- 4.3% Boyd Gaming Corp. 75,600 3,051,216 International Game Technology 75,000 2,845,500 Pinnacle Entertainment, Inc. 1 65,000 1,992,250 Scientific Games Corp., Class A 1 90,000 3,205,800 ------------------------------------------------------------------------------- 11,094,766 COMMUNICATIONS & MEDIA -- 1.6% Gemstar-TV Guide International, Inc. 1 1,200,000 4,224,000 ------------------------------------------------------------------------------- 4,224,000 COMMUNICATIONS TECHNOLOGY -- 4.4% 3Com Corp. 1 625,000 3,200,000 Ciena Corp. 1 780,000 3,751,800 Tellabs, Inc. 1 327,600 4,360,356 ------------------------------------------------------------------------------- 11,312,156 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 3.2% Citrix Systems, Inc. 1 60,000 2,408,400 Digital River, Inc. 1 67,100 2,710,169 Openwave Systems, Inc. 1 267,000 3,081,180 ------------------------------------------------------------------------------- 8,199,749 COMPUTER TECHNOLOGY -- 4.1% M-Systems Flash Disk Pioneers Ltd. 1 113,400 3,360,042 Palm, Inc. 1 280,000 4,508,000 Trident Microsystems, Inc. 1 150,000 2,847,000 ------------------------------------------------------------------------------- 10,715,042 CONSTRUCTION -- 1.2% Chicago Bridge & Iron Co. N. V., ADR 3 127,000 3,067,050 ------------------------------------------------------------------------------- 3,067,050 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- CONSUMER ELECTRONICS -- 4.1% Harman International Industries, Inc. 34,000 $ 2,902,580 Netflix, Inc. 1 140,000 3,809,400 THQ, Inc. 1 180,000 3,888,000 ------------------------------------------------------------------------------- 10,599,980 DIVERSIFIED FINANCIAL SERVICES -- 1.1% Chicago Mercantile Exchange Holdings, Inc. 6,000 2,946,900 ------------------------------------------------------------------------------- 2,946,900 DRUGS & PHARMACEUTICALS -- 3.8% Amylin Pharmaceuticals, Inc. 1 82,000 4,048,340 Forest Laboratories, Inc. 1 88,000 3,404,720 Shire PLC, ADR 3 55,000 2,432,650 ------------------------------------------------------------------------------- 9,885,710 ELECTRICAL EQUIPMENT & COMPONENTS -- 0.9% AMETEK, Inc. 52,100 2,468,498 ------------------------------------------------------------------------------- 2,468,498 ELECTRONICS -- 1.5% Avid Technology, Inc. 1 114,000 3,799,620 ------------------------------------------------------------------------------- 3,799,620 ELECTRONICS -- INSTRUMENTS, GAUGES & METERS -- 1.0% Thermo Electron Corp. 1 75,000 2,718,000 ------------------------------------------------------------------------------- 2,718,000 ELECTRONICS -- MEDICAL SYSTEMS -- 1.1% Advanced Medical Optics, Inc. 1 57,000 2,889,900 ------------------------------------------------------------------------------- 2,889,900 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 7.4% Agere Systems, Inc. 1 200,000 2,940,000 Chartered Semiconductor Manufacturing Ltd., ADR 1,3 365,000 3,175,500 Cypress Semiconductor Corp. 1 165,000 2,399,100 Marvell Technology Group Ltd. 1 75,000 3,324,750 Micron Technology, Inc. 1 165,000 2,484,900 PMC-Sierra, Inc. 1 250,000 2,350,000 STATS ChipPAC Ltd., ADR 1,3 400,000 2,504,000 ------------------------------------------------------------------------------- 19,178,250 FINANCE -- SMALL LOANS -- 1.4% The First Marblehead Corp. 65,000 3,701,100 ------------------------------------------------------------------------------- 3,701,100 FINANCIAL INFORMATION SERVICES -- 1.0% FactSet Research Systems, Inc. 54,000 2,554,200 ------------------------------------------------------------------------------- 2,554,200 HEALTH CARE FACILITIES -- 1.3% Sunrise Senior Living, Inc. 1 120,000 3,318,000 ------------------------------------------------------------------------------- 3,318,000 HEALTH CARE SERVICES -- 1.2% Medco Health Solutions, Inc. 1 52,500 3,007,200 ------------------------------------------------------------------------------- 3,007,200 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 98 | CALL 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- HOTEL/MOTEL -- 1.4% Hilton Hotels Corp. 127,000 $ 3,591,560 ------------------------------------------------------------------------------- 3,591,560 IDENTIFICATION CONTROL & FILTER DEVICES -- 1.2% Agilent Technologies, Inc. 1 95,000 2,998,200 ------------------------------------------------------------------------------- 2,998,200 INSURANCE -- MULTI-LINE -- 1.0% Genworth Financial, Inc., Class A 77,000 2,682,680 ------------------------------------------------------------------------------- 2,682,680 INSURANCE -- PROPERTY & CASUALTY -- 1.2% Covanta Holdings Corp. 1 180,000 3,177,000 ------------------------------------------------------------------------------- 3,177,000 INVESTMENT MANAGEMENT COMPANIES -- 1.8% Affiliated Managers Group, Inc. 1 28,000 2,432,920 T. Rowe Price Group, Inc. 60,000 2,268,600 ------------------------------------------------------------------------------- 4,701,520 LEISURE TIME -- 1.2% Penn National Gaming, Inc. 1 80,000 3,102,400 ------------------------------------------------------------------------------- 3,102,400 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 2.8% BJ Services Co. 85,000 3,167,100 Grant Prideco, Inc. 1 90,000 4,027,500 ------------------------------------------------------------------------------- 7,194,600 MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 3.3% Cytyc Corp. 1 103,000 2,612,080 DENTSPLY International, Inc. 49,400 2,993,640 ResMed, Inc. 1 64,200 3,014,190 ------------------------------------------------------------------------------- 8,619,910 METAL FABRICATING -- 1.8% Mueller Water Products, Inc. 1 265,000 4,613,650 ------------------------------------------------------------------------------- 4,613,650 MISCELLANEOUS CONSUMER STAPLES -- 1.3% Herbalife Ltd. 1 82,000 3,271,800 ------------------------------------------------------------------------------- 3,271,800 MULTI-SECTOR COMPANIES -- 1.2% McDermott International, Inc. 1 67,500 3,069,225 ------------------------------------------------------------------------------- 3,069,225 OIL -- CRUDE PRODUCERS -- 3.8% EOG Resources, Inc. 50,000 3,467,000 Southwestern Energy Co. 1 102,000 3,178,320 XTO Energy, Inc. 70,000 3,098,900 ------------------------------------------------------------------------------- 9,744,220 PRODUCTION TECHNOLOGY EQUIPMENT -- 3.3% Cymer, Inc. 1 65,000 3,019,900 Lam Research Corp. 1 47,000 2,191,140 Novellus Systems, Inc. 1 135,000 3,334,500 ------------------------------------------------------------------------------- 8,545,540 RADIO & TV BROADCASTERS -- 1.2% Univision Communications, Inc., Class A 1 90,000 3,015,000 ------------------------------------------------------------------------------- 3,015,000 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- RETAIL -- 4.8% Bebe Stores, Inc. 185,000 $ 2,852,700 Limited Brands, Inc. 125,000 3,198,750 The TJX Cos., Inc. 145,000 3,314,700 Urban Outfitters, Inc. 1 180,000 3,148,200 ------------------------------------------------------------------------------- 12,514,350 SECURITIES BROKERAGE & SERVICES -- 3.9% E*TRADE Financial Corp. 1 136,000 3,103,520 Investment Technology Group, Inc. 1 72,000 3,661,920 Legg Mason, Inc. 34,000 3,383,680 ------------------------------------------------------------------------------- 10,149,120 STEEL -- 1.8% Oregon Steel Mills, Inc. 1 92,000 4,660,720 ------------------------------------------------------------------------------- 4,660,720 TELECOMMUNICATIONS EQUIPMENT -- 1.5% InterDigital Communications Corp. 1 110,000 3,840,100 ------------------------------------------------------------------------------- 3,840,100 TOBACCO -- 1.2% Loews Corp.- Carolina Group 62,000 3,184,940 ------------------------------------------------------------------------------- 3,184,940 TRUCKERS -- 1.8% Landstar System, Inc. 100,000 4,723,000 ------------------------------------------------------------------------------- 4,723,000 ------------------------------------------------------------------------------- UTILITIES -- ELECTRICAL -- 1.2% Mirant Corp. 1 120,000 3,216,000 ------------------------------------------------------------------------------- 3,216,000 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $238,987,976) 255,596,766 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 37,539 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $32,425) 37,539 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.8% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 4,700,240 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $4,700,240) 4,700,240 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.3% (Cost $243,720,641) 260,334,545 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (0.3)% (698,514) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 259,636,031 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 99 SCHEDULE OF INVESTMENTS - RS SMALLER COMPANY GROWTH FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 91.8% ADVERTISING AGENCIES -- 0.8% Marchex, Inc., Class B 1 135,620 $ 2,228,236 ------------------------------------------------------------------------------- 2,228,236 BANKS -- OUTSIDE NEW YORK CITY -- 3.6% Boston Private Financial Holdings, Inc. 130,320 3,635,928 PrivateBancorp, Inc. 101,126 4,187,628 Virginia Commerce Bancorp, Inc. 1 126,275 3,017,972 ------------------------------------------------------------------------------- 10,841,528 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 0.8% Solexa, Inc. 1 291,830 2,480,555 ------------------------------------------------------------------------------- 2,480,555 CASINOS & GAMBLING -- 3.8% Century Casinos, Inc. 1 303,000 3,245,130 Scientific Games Corp., Class A 1 171,790 6,119,160 The9 Ltd., ADR 1,3 92,100 2,135,799 ------------------------------------------------------------------------------- 11,500,089 COMMUNICATIONS TECHNOLOGY -- 3.6% j2 Global Communications, Inc. 1 182,020 5,682,665 RADVision Ltd. 1 240,310 3,830,541 Redback Networks, Inc. 1 73,900 1,355,326 ------------------------------------------------------------------------------- 10,868,532 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 8.8% Concur Technologies, Inc. 1 206,620 3,196,412 Digitas, Inc. 1 345,350 4,012,967 Equinix, Inc. 1 63,070 3,460,020 Omniture, Inc. 1 215,322 1,569,697 Openwave Systems, Inc. 1 216,680 2,500,487 Optimal Group, Inc., Class A 1 256,440 3,464,504 PDF Solutions, Inc. 1 189,590 2,352,812 RADWARE Ltd. 1 146,564 1,881,882 Retalix Ltd. 1 123,060 2,745,469 Synplicity, Inc. 1 199,276 1,169,750 ------------------------------------------------------------------------------- 26,354,000 COMPUTER TECHNOLOGY -- 2.7% M-Systems Flash Disk Pioneers Ltd. 1 105,690 3,131,595 Neoware, Inc. 1 91,365 1,122,876 Rackable Systems, Inc. 1 58,740 2,319,642 Radiant Systems, Inc. 1 147,948 1,563,810 ------------------------------------------------------------------------------- 8,137,923 CONSUMER ELECTRONICS -- 1.1% Netflix, Inc. 1 117,490 3,196,903 ------------------------------------------------------------------------------- 3,196,903 DIVERSIFIED FINANCIAL SERVICES -- 0.9% Greenhill & Co., Inc. 45,130 2,742,099 ------------------------------------------------------------------------------- 2,742,099 DIVERSIFIED MATERIALS & PROCESSING -- 0.9% Hexcel Corp. 1 169,790 2,667,401 ------------------------------------------------------------------------------- 2,667,401 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- EDUCATION SERVICES -- 0.5% Laureate Education, Inc. 1 33,390 $ 1,423,416 ------------------------------------------------------------------------------- 1,423,416 ELECTRONICS -- 0.8% SRS Labs, Inc. 1 483,215 2,411,243 ------------------------------------------------------------------------------- 2,411,243 ELECTRONICS -- MEDICAL SYSTEMS -- 0.4% Illumina, Inc. 1 34,950 1,036,617 ------------------------------------------------------------------------------- 1,036,617 ELECTRONICS -- SEMICONDUCTORS & COMPONENTS -- 3.2% ANADIGICS, Inc. 1 282,820 1,900,550 Microsemi Corp. 1 123,280 3,005,566 Netlogic Microsystems, Inc. 1 68,420 2,206,545 Volterra Semiconductor Corp. 1 164,160 2,505,082 ------------------------------------------------------------------------------- 9,617,743 FINANCIAL -- MISCELLANEOUS -- 1.4% Portfolio Recovery Associates, Inc. 1 92,030 4,205,771 ------------------------------------------------------------------------------- 4,205,771 FINANCIAL DATA PROCESSING SERVICES & SYSTEMS -- 1.5% Online Resources Corp. 1 428,590 4,431,620 ------------------------------------------------------------------------------- 4,431,620 HEALTH CARE FACILITIES -- 2.2% Five Star Quality Care, Inc. 1 393,050 4,351,064 LCA-Vision, Inc. 42,310 2,238,622 ------------------------------------------------------------------------------- 6,589,686 INSURANCE -- MULTI-LINE -- 1.6% Amerisafe, Inc. 1 372,629 4,635,505 ------------------------------------------------------------------------------- 4,635,505 INSURANCE -- PROPERTY & CASUALTY -- 1.5% The Navigators Group, Inc. 1 101,730 4,457,809 ------------------------------------------------------------------------------- 4,457,809 MACHINERY -- INDUSTRIAL/SPECIALTY -- 1.3% Gardner Denver, Inc. 1 98,850 3,805,725 ------------------------------------------------------------------------------- 3,805,725 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 4.6% Hydril 1 38,680 3,037,154 Oil States International, Inc. 1 112,040 3,840,731 Superior Energy Services, Inc. 1 114,600 3,884,940 Warrior Energy Service Corp. 1 126,830 3,085,774 ------------------------------------------------------------------------------- 13,848,599 MACHINERY -- SPECIALTY -- 1.0% Flow International Corp. 1 205,281 2,888,304 ------------------------------------------------------------------------------- 2,888,304 MEDICAL & DENTAL INSTRUMENTS & SUPPLIES -- 13.9% American Medical Systems Holdings, Inc. 1 218,070 3,630,866 AngioDynamics, Inc. 1 136,060 3,680,423 I-Flow Corp. 1 86,764 938,787 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 100 | CALL 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (continued) Immucor, Inc. 1 126,275 $ 2,428,268 Kyphon, Inc. 1 73,810 2,831,352 LifeCell Corp. 1 116,610 3,605,581 NuVasive, Inc. 1 181,970 3,317,313 Orthovita, Inc. 1 587,940 2,481,107 PolyMedica Corp. 106,513 3,830,207 ResMed, Inc. 1 82,160 3,857,412 SonoSite, Inc. 1 78,910 3,080,646 The Spectranetics Corp. 1 330,460 3,542,531 Vital Signs, Inc. 86,030 4,261,066 ------------------------------------------------------------------------------- 41,485,559 METAL FABRICATING -- 2.3% Dynamic Materials Corp. 84,780 2,859,630 Maverick Tube Corp. 1 64,270 4,061,221 ------------------------------------------------------------------------------- 6,920,851 OIL -- CRUDE PRODUCERS -- 1.0% Unit Corp. 1 53,260 3,029,961 ------------------------------------------------------------------------------- 3,029,961 POLLUTION CONTROL & ENVIRONMENTAL SERVICES -- 1.0% Team, Inc. 1 116,490 2,918,074 ------------------------------------------------------------------------------- 2,918,074 POWER TRANSMISSION EQUIPMENT -- 1.1% Regal-Beloit Corp. 75,700 3,342,155 ------------------------------------------------------------------------------- 3,342,155 PRODUCTION TECHNOLOGY EQUIPMENT -- 1.4% GSI Group, Inc. 1 162,926 1,399,534 Intevac, Inc. 1 134,050 2,906,204 ------------------------------------------------------------------------------- 4,305,738 RAILROAD EQUIPMENT -- 0.9% American Railcar Industries, Inc. 81,560 2,700,452 ------------------------------------------------------------------------------- 2,700,452 REAL ESTATE INVESTMENT TRUSTS -- 1.1% KKR Financial Corp. 154,360 3,212,232 ------------------------------------------------------------------------------- 3,212,232 RENTAL & LEASING SERVICES -- COMMERCIAL -- 1.1% McGrath Rentcorp 114,880 3,194,813 ------------------------------------------------------------------------------- 3,194,813 RETAIL -- 3.7% Cache, Inc. 1 257,107 4,458,235 Central Garden & Pet Co. 1 100,110 4,309,736 Jos. A. Bank Clothiers, Inc. 1 97,471 2,335,405 ------------------------------------------------------------------------------- 11,103,376 SECURITIES BROKERAGE & SERVICES -- 3.5% GFI Group, Inc. 1 69,010 3,723,089 Investment Technology Group, Inc. 1 83,430 4,243,250 optionsXpress Holdings, Inc. 109,390 2,549,881 ------------------------------------------------------------------------------- 10,516,220 June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- SERVICES -- COMMERCIAL -- 9.4% AMN Healthcare Services, Inc. 1 205,680 $ 4,175,304 Barrett Business Services, Inc. 1 165,940 3,044,999 Ctrip.com International Ltd., ADR 3 51,080 2,607,634 FirstService Corp. 1 183,859 4,898,004 Nutri/System, Inc. 1 56,560 3,514,073 Providence Service Corp. 1 101,120 2,753,497 Rollins, Inc. 196,120 3,851,797 Steiner Leisure Ltd. 1 85,610 3,384,163 ------------------------------------------------------------------------------- 28,229,471 SHIPPING -- 0.9% American Commercial Lines, Inc. 1 43,530 2,622,682 ------------------------------------------------------------------------------- 2,622,682 SHOES -- 1.0% Iconix Brand Group, Inc. 1 178,900 2,923,226 ------------------------------------------------------------------------------- 2,923,226 TEXTILE -- APPAREL MANUFACTURERS -- 0.6% Carter's, Inc. 1 68,630 1,813,891 ------------------------------------------------------------------------------- 1,813,891 TRANSPORTATION -- MISCELLANEOUS -- 1.0% Vitran Corp., Inc. 1 133,430 3,134,271 ------------------------------------------------------------------------------- 3,134,271 TRUCKERS -- 0.9% Old Dominion Freight Line, Inc. 1 71,490 2,687,309 ------------------------------------------------------------------------------- 2,687,309 TOTAL COMMON STOCKS (Cost $238,680,020) 274,509,585 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 44,346 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $38,585) 44,346 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 9.7% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 15,049,031 BlackRock Liquidity Funds TempFund Portfolio-Institutional Shares 9 14,158,110 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $29,207,141) 29,207,141 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 101.5% (Cost $267,925,746) 303,761,072 ------------------------------------------------------------------------------- OTHER LIABILITIES, NET -- (1.5)% (4,634,779) ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 299,126,293 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 101 SCHEDULE OF INVESTMENTS - RS GLOBAL NATURAL RESOURCES FUND June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 78.8% ALUMINUM -- 5.0% Alcan, Inc. 1,038,200 $ 48,733,108 Century Aluminum Co. 1 1,514,200 54,041,798 ------------------------------------------------------------------------------- 102,774,906 CHEMICALS -- 1.7% Eastman Chemical Co. 628,700 33,949,800 ------------------------------------------------------------------------------- 33,949,800 COAL -- 6.5% Arch Coal, Inc. 881,620 37,354,239 Foundation Coal Holdings, Inc. 921,200 43,231,916 Peabody Energy Corp. 839,820 46,819,965 Western Canadian Coal Corp. 1 CAD 2,616,200 5,976,270 ------------------------------------------------------------------------------- 133,382,390 ENERGY -- MISCELLANEOUS -- 1.2% Crosstex Energy, Inc. 258,320 24,561,066 ------------------------------------------------------------------------------- 24,561,066 FINANCIAL -- MISCELLANEOUS -- 2.7% Brookfield Asset Management, Inc., Class A CAD 1,375,050 55,258,213 ------------------------------------------------------------------------------- 55,258,213 GOLD -- 3.1% Goldcorp, Inc. CAD 1,362,180 41,061,862 Kinross Gold Corp. 1 CAD 2,046,100 22,306,761 ------------------------------------------------------------------------------- 63,368,623 INSURANCE -- MULTI-LINE -- 0.5% PICO Holdings, Inc. 1 286,778 9,248,591 ------------------------------------------------------------------------------- 9,248,591 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 11.6% Basic Energy Services, Inc. 1,6 1,712,590 52,353,876 BJ Services Co. 638,200 23,779,332 Complete Production Services, Inc. 1 1,911,010 45,176,276 Key Energy Services, Inc. 1 4,848,600 73,941,150 Noble Corp. 549,150 40,867,743 ------------------------------------------------------------------------------- 236,118,377 METALS & MINERALS -- MISCELLANEOUS -- 11.0% BHP Billiton Ltd., ADR 3 1,372,900 59,130,803 Companhia Vale do Rio Doce, ADR 3 2,385,000 57,335,400 Falconbridge Ltd. CAD 908,200 47,838,538 Ivanhoe Nickel & Platinum Ltd. 1,4,5 203,624 1,018,120 Labrador Iron Ore Royalty Income Fund CAD 351,300 7,499,310 Sherritt International Corp. CAD 5,080,000 50,831,855 ------------------------------------------------------------------------------- 223,654,026 OFFSHORE DRILLING -- 0.8% Hercules Offshore, Inc. 1 488,920 17,112,200 ------------------------------------------------------------------------------- 17,112,200 OIL -- CRUDE PRODUCERS -- 18.3% Anadarko Petroleum Corp. 1,229,900 58,653,931 Anderson Energy Ltd. 1,6 CAD 4,613,000 21,075,249 Clear Energy, Inc. 1 CAD 1,582,100 5,045,486 Compton Petroleum Corp. 1 CAD 4,290,800 49,623,065 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- OIL -- CRUDE PRODUCERS (continued) Denbury Resources, Inc. 1 1,432,000 $ 45,351,440 EnCana Corp. CAD 358,800 18,893,007 Newfield Exploration Co. 1 341,300 16,703,222 Nexen, Inc. CAD 1,251,700 70,529,365 Noble Energy, Inc. 269,800 12,642,828 Southwestern Energy Co. 1 547,200 17,050,752 Talisman Energy, Inc. CAD 3,294,000 57,481,967 ------------------------------------------------------------------------------- 373,050,312 OIL -- INTEGRATED INTERNATIONAL -- 9.0% Exxon Mobil Corp. 336,500 20,644,275 Marathon Oil Corp. 785,900 65,465,470 Paramount Resources Ltd., Class A 1 CAD 2,403,300 77,504,972 Petrobank Energy & Resources Ltd. 1 CAD 1,478,400 20,156,990 Trilogy Energy Trust CAD 100 1,693 ------------------------------------------------------------------------------- 183,773,400 STEEL -- 2.5% Allegheny Technologies, Inc. 740,260 51,255,602 ------------------------------------------------------------------------------- 51,255,602 UTILITIES -- ELECTRICAL -- 4.9% PPL Corp. 1,571,700 50,765,910 TXU Corp. 802,900 48,005,391 ------------------------------------------------------------------------------- 98,771,301 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $1,257,318,922) 1,606,278,807 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 100,649 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $98,879) 100,649 Value ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 10.0% BlackRock Liquidity Funds TempCash Portfolio-Institutional Shares 9 101,883,166 BlackRock Liquidity Funds TempFund Portfolio-Institutional Shares 9 101,758,166 ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $203,641,332) 203,641,332 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 88.8% (Cost $1,461,059,133) 1,810,020,788 ------------------------------------------------------------------------------- OTHER ASSETS, NET -- 11.2% 228,196,810 ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $2,038,217,598 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 102 | CALL 1-800-766-FUND SCHEDULE OF INVESTMENTS - RS INVESTORS FUND June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 89.9% ADVERTISING AGENCIES -- 4.9% ADVO, Inc. 124,660 $ 3,067,883 ------------------------------------------------------------------------------- 3,067,883 CABLE TELEVISION SERVICES -- 6.0% Liberty Global, Inc., Class A 1 82,806 1,780,329 Liberty Global, Inc., Series C 1 94,550 1,944,894 ------------------------------------------------------------------------------- 3,725,223 CHEMICALS -- 3.8% Eastman Chemical Co. 44,150 2,384,100 ------------------------------------------------------------------------------- 2,384,100 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 4.4% Symantec Corp. 1 178,400 2,772,336 ------------------------------------------------------------------------------- 2,772,336 DIVERSIFIED FINANCIAL SERVICES -- 2.5% Merrill Lynch & Co., Inc. 22,400 1,558,144 ------------------------------------------------------------------------------- 1,558,144 EDUCATION SERVICES -- 2.8% Corinthian Colleges, Inc. 1 120,100 1,724,636 ------------------------------------------------------------------------------- 1,724,636 ELECTRONICS -- MEDICAL SYSTEMS -- 3.6% eResearch Technology, Inc. 1 248,110 2,257,801 ------------------------------------------------------------------------------- 2,257,801 FINANCIAL -- MISCELLANEOUS -- 3.5% Ambac Financial Group, Inc. 27,110 2,198,621 ------------------------------------------------------------------------------- 2,198,621 INSURANCE -- LIFE -- 4.7% Conseco, Inc. 1 125,690 2,903,439 ------------------------------------------------------------------------------- 2,903,439 INSURANCE -- MULTI-LINE -- 7.9% Assurant, Inc. 57,820 2,798,488 Hanover Insurance Group, Inc. 45,010 2,136,175 ------------------------------------------------------------------------------- 4,934,663 INVESTMENT MANAGEMENT COMPANIES -- 4.3% Amvescap PLC, ADR 3 146,800 2,714,332 ------------------------------------------------------------------------------- 2,714,332 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 5.2% Key Energy Services, Inc. 1 212,400 3,239,100 ------------------------------------------------------------------------------- 3,239,100 OFFICE FURNITURE & BUSINESS EQUIPMENT -- 1.2% Diebold, Inc. 19,000 771,780 ------------------------------------------------------------------------------- 771,780 OIL -- CRUDE PRODUCERS -- 3.0% Compton Petroleum Corp. 1 CAD 161,500 1,867,746 ------------------------------------------------------------------------------- 1,867,746 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- OIL -- INTEGRATED INTERNATIONAL -- 4.3% Paramount Resources Ltd., Class A 1 CAD 84,000 $ 2,708,949 ------------------------------------------------------------------------------- 2,708,949 REAL ESTATE -- 5.1% MI Developments, Inc., Class A 93,900 3,184,149 ------------------------------------------------------------------------------- 3,184,149 RESTAURANTS -- 5.3% Triarc Cos., Inc., Class B 210,500 3,290,115 ------------------------------------------------------------------------------- 3,290,115 RETAIL -- 0.0% J. Crew Group, Inc. 1 380 10,431 ------------------------------------------------------------------------------- 10,431 SERVICES -- COMMERCIAL -- 12.9% Coinmach Service Corp. 69,700 1,145,868 Coinmach Service Corp., Class A 12,600 129,150 Coinstar, Inc. 1 109,200 2,614,248 Corrections Corp. of America 1 78,460 4,153,672 ------------------------------------------------------------------------------- 8,042,938 UTILITIES -- ELECTRICAL -- 4.5% PPL Corp. 86,000 2,777,800 ------------------------------------------------------------------------------- 2,777,800 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $55,639,436) 56,134,186 DEPOSITORY SECURITIES -- 5.1% DIVERSIFIED FINANCIAL SERVICES -- 5.1% KKR Private Equity Investors, L.P. 144A 1,7 147,000 3,219,300 ------------------------------------------------------------------------------- 3,219,300 ------------------------------------------------------------------------------- TOTAL DEPOSITORY SECURITIES (Cost $3,675,000) 3,219,300 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 1,186 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $1,197) 1,186 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 95.0% (Cost $59,315,633) 59,354,672 ------------------------------------------------------------------------------- OTHER ASSETS, NET -- 5.0% 3,103,130 ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $ 62,457,802 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 103 SCHEDULE OF INVESTMENTS -- RS PARTNERS FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 74.4% ADVERTISING AGENCIES -- 3.0% ADVO, Inc. 6 2,983,950 $ 73,435,009 ------------------------------------------------------------------------------- 73,435,009 AIR TRANSPORT -- 0.3% Grupo Aeroportuario del Pacifico SA de CV, ADR 3 217,910 6,940,433 ------------------------------------------------------------------------------- 6,940,433 AUTO PARTS -- AFTER MARKET -- 1.7% Commercial Vehicle Group, Inc. 1,6 2,047,101 42,334,049 ------------------------------------------------------------------------------- 42,334,049 BANKS -- OUTSIDE NEW YORK CITY -- 3.8% Greater Bay Bancorp 884,978 25,443,117 Hancock Holding Co. 568,920 31,859,520 Whitney Holding Corp. 985,026 34,840,370 ------------------------------------------------------------------------------- 92,143,007 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 0.8% Angiotech Pharmaceuticals, Inc. 1 1,676,662 19,700,778 ------------------------------------------------------------------------------- 19,700,778 CABLE TELEVISION SERVICES -- 2.2% Liberty Global, Inc., Class A 1 1,241,878 26,700,377 Liberty Global, Inc., Series C 1 1,259,441 25,906,701 ------------------------------------------------------------------------------- 52,607,078 CASINOS & GAMBLING -- 2.1% Scientific Games Corp., Class A 1 1,427,190 50,836,508 ------------------------------------------------------------------------------- 50,836,508 COAL -- 2.8% Peabody Energy Corp. 1,214,300 67,697,225 ------------------------------------------------------------------------------- 67,697,225 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 1.2% Novell, Inc. 1 4,558,544 30,223,147 ------------------------------------------------------------------------------- 30,223,147 CONSUMER PRODUCTS -- 1.4% Spectrum Brands, Inc. 1,6 2,622,430 33,881,796 ------------------------------------------------------------------------------- 33,881,796 EDUCATION SERVICES -- 2.8% Corinthian Colleges, Inc. 1,6 4,723,424 67,828,369 ------------------------------------------------------------------------------- 67,828,369 ELECTRONICS -- MEDICAL SYSTEMS -- 1.9% eResearch Technology, Inc. 1,6 5,002,730 45,524,843 ------------------------------------------------------------------------------- 45,524,843 FINANCE COMPANIES -- 3.2% Assured Guaranty Ltd. 1,759,740 44,644,604 Lazard Ltd., Class A 786,560 31,777,024 ------------------------------------------------------------------------------- 76,421,628 FINANCIAL DATA PROCESSING SERVICES & SYSTEMS -- 2.0% John H. Harland Co. 1,132,930 49,282,455 ------------------------------------------------------------------------------- 49,282,455 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- GOLD -- 1.8% Goldcorp, Inc. CAD 1,462,430 $ 44,083,821 ------------------------------------------------------------------------------- 44,083,821 HEALTH CARE MANAGEMENT SERVICES -- 1.4% Centene Corp. 1 1,417,260 33,348,128 ------------------------------------------------------------------------------- 33,348,128 IDENTIFICATION CONTROL & FILTER DEVICES -- 0.9% Paxar Corp. 1 1,068,470 21,978,428 ------------------------------------------------------------------------------- 21,978,428 INSURANCE -- MULTI-LINE -- 3.1% Hanover Insurance Group, Inc. 1,601,570 76,010,512 ------------------------------------------------------------------------------- 76,010,512 INVESTMENT MANAGEMENT COMPANIES -- 1.4% Affiliated Managers Group, Inc. 1 391,780 34,041,764 ------------------------------------------------------------------------------- 34,041,764 MACHINERY -- OIL/WELL EQUIPMENT & SERVICES -- 3.0% Key Energy Services, Inc. 1 4,797,100 73,155,775 ------------------------------------------------------------------------------- 73,155,775 MEDICAL SERVICES -- 2.7% Magellan Health Services, Inc. 1 1,468,421 66,534,155 ------------------------------------------------------------------------------- 66,534,155 METALS & MINERALS -- MISCELLANEOUS -- 1.8% Sherritt International Corp. CAD 4,256,050 42,587,188 ------------------------------------------------------------------------------- 42,587,188 OIL -- CRUDE PRODUCERS -- 2.3% Compton Petroleum Corp. 1 CAD 4,847,100 56,056,670 ------------------------------------------------------------------------------- 56,056,670 OIL -- INTEGRATED INTERNATIONAL -- 3.0% Paramount Resources Ltd., Class A 1 CAD 2,219,800 71,587,208 ------------------------------------------------------------------------------- 71,587,208 PUBLISHING -- MISCELLANEOUS -- 0.1% Playboy Enterprises, Inc., Class B 1 297,690 2,970,946 ------------------------------------------------------------------------------- 2,970,946 REAL ESTATE -- 2.6% MI Developments, Inc., Class A 1,826,900 61,950,179 ------------------------------------------------------------------------------- 61,950,179 REAL ESTATE INVESTMENT TRUSTS -- 3.0% BioMed Realty Trust, Inc. 1,330,000 39,820,200 Deerfield Triarc Capital Corp. 905,314 11,750,976 KKR Financial Corp. 1,015,090 21,124,023 ------------------------------------------------------------------------------- 72,695,199 RENTAL & LEASING SERVICES -- CONSUMER -- 1.8% Aaron Rents, Inc. 1,579,070 42,445,402 ------------------------------------------------------------------------------- 42,445,402 RESTAURANTS -- 3.9% Triarc Cos., Inc., Class B 6 6,003,100 93,828,453 ------------------------------------------------------------------------------- 93,828,453 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 104 | CALL 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- RETAIL -- 1.5% J. Crew Group, Inc. 1 14,630 $ 401,594 Tuesday Morning Corp. 6 2,734,096 35,953,362 ------------------------------------------------------------------------------- 36,354,956 SERVICES -- COMMERCIAL -- 7.9% Coinmach Service Corp. 1,666,400 27,395,616 Coinmach Service Corp., Class A 815,350 8,357,338 Coinstar, Inc. 1,6 2,425,100 58,056,894 Corrections Corp. of America 1 1,828,080 96,778,555 ------------------------------------------------------------------------------- 190,588,403 SHIPPING -- 1.5% Alexander & Baldwin, Inc. 845,236 37,418,598 ------------------------------------------------------------------------------- 37,418,598 STEEL -- 1.5% Allegheny Technologies, Inc. 541,850 37,517,694 ------------------------------------------------------------------------------- 37,517,694 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $1,437,436,033) 1,804,009,804 DEPOSITORY SECURITIES -- 6.0% DIVERSIFIED FINANCIAL SERVICES -- 2.9% KKR Private Equity Investors, L.P. 144A 1,7 3,243,465 71,031,884 ------------------------------------------------------------------------------- 71,031,884 INVESTMENT MANAGEMENT COMPANIES -- 3.1% AP Alternative Assets, L.P. 144A 1,4,7 3,684,600 73,692,000 ------------------------------------------------------------------------------- 73,692,000 ------------------------------------------------------------------------------- TOTAL DEPOSITORY SECURITIES (Cost $154,111,444) 144,723,884 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 233,034 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $221,666) 233,034 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 80.4% (Cost $1,591,769,143) 1,948,966,722 ------------------------------------------------------------------------------- OTHER ASSETS, NET -- 19.6% 474,575,858 ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $2,423,542,580 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 105 SCHEDULE OF INVESTMENTS -- RS VALUE FUND June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- COMMON STOCKS -- 74.8% ADVERTISING AGENCIES -- 1.2% ADVO, Inc. 361,480 $ 8,896,023 Clear Channel Outdoor Holdings, Inc., Class A 1 542,450 11,369,752 ------------------------------------------------------------------------------- 20,265,775 BANKS -- OUTSIDE NEW YORK CITY -- 2.6% Synovus Financial Corp. 653,700 17,506,086 The Shizuoka Bank Ltd. JPY 2,452,600 26,489,109 ------------------------------------------------------------------------------- 43,995,195 BIOTECHNOLOGY RESEARCH & PRODUCTION -- 0.4% Angiotech Pharmaceuticals, Inc. 1 530,730 6,236,078 ------------------------------------------------------------------------------- 6,236,078 CABLE TELEVISION SERVICES -- 5.8% Liberty Global, Inc., Class A 1 1,267,965 27,261,248 Liberty Global, Inc., Series C 1 1,851,179 38,078,752 Liberty Media Holding Corp., Common Series A 1 408,320 34,204,966 ------------------------------------------------------------------------------- 99,544,966 CASINOS & GAMBLING -- 1.0% Scientific Games Corp., Class A 1 499,380 17,787,916 ------------------------------------------------------------------------------- 17,787,916 CHEMICALS -- 1.6% Eastman Chemical Co. 519,200 28,036,800 ------------------------------------------------------------------------------- 28,036,800 COAL -- 2.9% Peabody Energy Corp. 891,360 49,693,320 ------------------------------------------------------------------------------- 49,693,320 COMMUNICATIONS & MEDIA -- 1.4% Discovery Holding Co., Class A 1 1,645,630 24,075,567 ------------------------------------------------------------------------------- 24,075,567 COMMUNICATIONS TECHNOLOGY -- 0.1% NCR Corp. 1 51,900 1,901,616 ------------------------------------------------------------------------------- 1,901,616 COMPUTER SERVICES, SOFTWARE & SYSTEMS -- 6.2% Acxiom Corp. 1,411,070 35,276,750 Mercury Interactive Corp. 1 478,700 16,740,139 Novell, Inc. 1 2,814,670 18,661,262 Symantec Corp. 1 2,293,300 35,637,882 ------------------------------------------------------------------------------- 106,316,033 DIVERSIFIED FINANCIAL SERVICES -- 3.9% Ameriprise Financial, Inc. 786,260 35,122,234 Merrill Lynch & Co., Inc. 458,550 31,896,738 ------------------------------------------------------------------------------- 67,018,972 DRUGS & PHARMACEUTICALS -- 1.0% Barr Pharmaceuticals, Inc. 1 371,800 17,731,142 ------------------------------------------------------------------------------- 17,731,142 ENTERTAINMENT -- 1.0% Viacom, Inc., Class B 1 486,985 17,453,542 ------------------------------------------------------------------------------- 17,453,542 June 30, 2006 (unaudited) Foreign Currency 2 Shares Value ------------------------------------------------------------------------------- FINANCIAL -- MISCELLANEOUS -- 4.8% Ambac Financial Group, Inc. 433,690 $ 35,172,259 Brookfield Asset Management, Inc., Class A CAD 1,188,550 47,763,462 ------------------------------------------------------------------------------- 82,935,721 GOLD -- 1.1% Goldcorp, Inc. CAD 618,700 18,650,233 ------------------------------------------------------------------------------- 18,650,233 HEALTH CARE FACILITIES -- 2.0% Triad Hospitals, Inc. 1 852,200 33,730,076 ------------------------------------------------------------------------------- 33,730,076 INSURANCE -- LIFE -- 2.5% Conseco, Inc. 1 1,881,590 43,464,729 ------------------------------------------------------------------------------- 43,464,729 INSURANCE -- MULTI-LINE -- 4.5% Assurant, Inc. 885,400 42,853,360 Genworth Financial, Inc., Class A 993,180 34,602,391 ------------------------------------------------------------------------------- 77,455,751 INVESTMENT MANAGEMENT COMPANIES -- 4.1% Amvescap PLC, ADR 3 1,926,700 35,624,683 Federated Investors, Inc., Class B 1,089,340 34,314,210 ------------------------------------------------------------------------------- 69,938,893 MEDICAL SERVICES -- 2.0% Magellan Health Services, Inc. 1 763,070 34,574,702 ------------------------------------------------------------------------------- 34,574,702 METALS & MINERALS -- MISCELLANEOUS -- 0.2% Ivanhoe Nickel & Platinum Ltd. 1,4,5 698,422 3,492,110 ------------------------------------------------------------------------------- 3,492,110 OFFICE FURNITURE & BUSINESS EQUIPMENT -- 0.8% Diebold, Inc. 312,320 12,686,438 ------------------------------------------------------------------------------- 12,686,438 OIL -- CRUDE PRODUCERS -- 2.9% Nexen, Inc. CAD 296,700 16,718,113 Talisman Energy, Inc. CAD 1,900,800 33,169,922 ------------------------------------------------------------------------------- 49,888,035 PUBLISHING -- NEWSPAPERS -- 1.3% News Corp., Class B 1,118,340 22,568,101 ------------------------------------------------------------------------------- 22,568,101 REAL ESTATE -- 3.9% MI Developments, Inc., Class A 1,334,220 45,243,400 The St. Joe Co. 449,380 20,914,145 ------------------------------------------------------------------------------- 66,157,545 RETAIL -- 0.0% J. Crew Group, Inc. 1 10,380 284,931 ------------------------------------------------------------------------------- 284,931 SERVICES -- COMMERCIAL -- 5.1% Cendant Corp. 1,036,200 16,879,698 Corrections Corp. of America 1 1,342,580 71,076,185 ------------------------------------------------------------------------------- 87,955,883 See notes to Schedule of Investments on page 107. The accompanying notes are an integral part of these financial statements. 106 | CALL 1-800-766-FUND June 30, 2006 (unaudited) Shares Value ------------------------------------------------------------------------------- SHIPPING -- 1.2% Alexander & Baldwin, Inc. 451,817 $ 20,001,939 ------------------------------------------------------------------------------- 20,001,939 STEEL -- 2.1% Allegheny Technologies, Inc. 509,700 35,291,628 ------------------------------------------------------------------------------- 35,291,628 TRANSPORTATION - MISCELLANEOUS -- 1.9% Laidlaw International, Inc. 1,269,610 31,994,172 ------------------------------------------------------------------------------- 31,994,172 UTILITIES - CABLE TV & RADIO -- 2.7% Comcast Corp. 1 1,424,070 46,624,052 ------------------------------------------------------------------------------- 46,624,052 UTILITIES - ELECTRICAL -- 2.6% PPL Corp. 1,384,800 44,729,040 ------------------------------------------------------------------------------- 44,729,040 ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $1,106,208,108) 1,282,480,901 DEPOSITORY SECURITIES -- 6.6% DIVERSIFIED FINANCIAL SERVICES -- 3.6% KKR Private Equity Investors, L.P. 144A 1,7 2,816,400 61,679,160 ------------------------------------------------------------------------------- 61,679,160 INVESTMENT MANAGEMENT COMPANIES -- 3.0% AP Alternative Assets, L.P. 144A 1,4,7 2,565,400 51,308,000 ------------------------------------------------------------------------------- 51,308,000 ------------------------------------------------------------------------------- TOTAL DEPOSITORY SECURITIES (Cost $121,718,000) 112,987,160 Value ------------------------------------------------------------------------------- OTHER INVESTMENTS -- 0.0% RS Mutual Funds 8 107,514 ------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS (Cost $103,343) 107,514 ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 81.4% (Cost $1,228,029,451) 1,395,575,575 ------------------------------------------------------------------------------- OTHER ASSETS, NET -- 18.6% 319,009,709 ------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $1,714,585,284 1 Non Income-producing security. 2 Foreign-denominated security: CAD -- Canadian Dollar, GBP -- British Pound, JPY -- Japanese Yen. 3 ADR -- American Depository Receipt. GDR -- Global Depository Receipt. 4 Fair value security. See 1a in Notes to Financial Statements. 5 Restricted security. See 5c in Notes to Financial Statements. 6 Affiliated issuer. See 3d in Notes to Financial Statements. 7 These securities may be resold in transactions under rule 144A of the Securities Act of 1933, normally to qualified institutional buyers. 8 Investments in designated RS Mutual Funds under a deferred compensation plan adopted May 6, 2002 for disinterested Trustees. See 3b in Notes to Financial Statements. 9 Money Market Fund registered under the Investment Company Act of 1940. The accompanying notes are an integral part of these financial statements. WWW.RSINVESTMENTS.COM | 107 FINANCIAL INFORMATION STATEMENT OF ASSETS AND LIABILITIES As of June 30, 2006 (unaudited) All numbers in thousands except for Pricing of Shares section
RS RS THE DIVERSIFIED EMERGING RS INFORMATION GROWTH GROWTH GROWTH AGE FUND (R) ASSETS Investments, at value $ 295,363 $ 805,060 $ 198,715 $ 79,711 Investments in affiliated issuers, at value -- -- -- -- Cash and cash equivalents -- -- -- 591 Receivable for investments sold 2,071 19,894 1,739 483 Receivable for fund shares subscribed 257 604 72 430 Dividends/interest receivable 26 114 261 35 Prepaid expenses 21 52 12 5 Other receivables 2 3 1 -- ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 297,740 825,727 200,800 81,255 ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES Payable for investments purchased 2,304 6,885 2,603 1,508 Payable for fund shares redeemed 787 9,017 95 98 Payable to adviser 241 622 129 65 Payable to distributor 61 164 40 16 Deferred trustees' compensation 199 384 55 32 Accrued expenses/other liabilities 302 389 105 60 ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,894 17,461 3,027 1,779 ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- TOTAL NET ASSETS $ 293,846 $ 808,266 $ 197,773 $ 79,476 ---------------------------------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Paid-in capital 420,034 2,095,914 159,142 64,396 Accumulated undistributed net investment income/(loss) (2,529) (5,578) (115) (615) Accumulated net realized gain/(loss) from investments and from foreign currency transactions (138,763) (1,397,426) 21,995 7,940 Net unrealized appreciation/(depreciation) on investments and translation of assets and liabilities in foreign currencies 15,104 115,356 16,751 7,755 ---------------------------------------------------------------------------------------------------------------------------- TOTAL NET ASSETS $ 293,846 $ 808,266 $ 197,773 $ 79,476 ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- INVESTMENTS, AT COST $ 280,259 $ 689,704 $ 181,964 $ 71,956 ---------------------------------------------------------------------------------------------------------------------------- PRICING OF SHARES Net Asset Value, offering, and redemption price per share $ 22.44 $ 33.57 $ 15.97 $ 15.62 Net Assets $ 293,846,209 $ 808,266,043 $ 197,773,218 $ 79,476,416 Shares of beneficial interest outstanding with no par value 13,094,557 24,074,005 12,383,896 5,087,948 ---------------------------------------------------------------------------------------------------------------------------- RS RS RS SMALLER GLOBAL RS INTERNET MIDCAP COMPANY NATURAL RS RS RS AGE FUND(R) OPPORTUNITIES GROWTH RESOURCES INVESTORS PARTNERS VALUE ASSETS Investments, at value $ 69,819 $ 260,335 $ 303,761 $ 1,736,592 $ 59,355 $ 1,498,124 $ 1,395,576 Investments in affiliated issuers, at value -- -- -- 73,429 -- 450,843 -- Cash and cash equivalents -- -- -- 267,767 1,861 470,558 334,113 Receivable for investments sold 268 1,561 4,686 9,408 1,367 11,352 3,663 Receivable for fund shares subscribed 29 1,364 1,739 9,973 46 7,965 7,026 Dividends/interest receivable 23 70 113 3,385 88 3,342 1,914 Prepaid expenses 5 14 17 112 13 135 93 Other receivables -- 1 1 7 -- 9 6 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS 70,144 263,345 310,317 2,100,673 62,730 2,442,328 1,742,391 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Payable for investments purchased 498 3,161 8,192 58,480 8 12,794 23,889 Payable for fund shares redeemed 281 190 2,569 1,261 134 2,541 1,748 Payable to adviser 57 165 239 1,563 52 1,964 1,181 Payable to distributor 14 51 60 409 13 494 347 Deferred trustees' compensation 21 38 44 101 1 233 108 Accrued expenses/other liabilities 54 104 87 641 64 759 533 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 925 3,709 11,191 62,455 272 18,785 27,806 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET ASSETS $ 69,219 $ 259,636 $ 299,126 $ 2,038,218 $ 62,458 $ 2,423,543 $ 1,714,585 ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Paid-in capital 182,951 233,734 255,164 1,467,342 60,866 1,945,939 1,482,844 Accumulated undistributed net investment income/ (loss) (589) (877) (1,423) (20,694) (68) 4,437 (4,117) Accumulated net realized gain/(loss) from investments and from foreign currency transactions (122,096) 10,165 9,550 242,597 1,620 115,968 68,307 Net unrealized appreciation/ (depreciation) on investments and translation of assets and liabilities in foreign currencies 8,953 16,614 35,835 348,973 40 357,199 167,551 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET ASSETS $ 69,219 $ 259,636 $ 299,126 $ 2,038,218 $ 62,458 $ 2,423,543 $ 1,714,585 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENTS, AT COST $ 60,866 $ 243,721 $ 267,926 $ 1,461,059 $ 59,316 $ 1,591,769 $ 1,228,029 ------------------------------------------------------------------------------------------------------------------------------------ PRICING OF SHARES Net Asset Value, offering, and redemption price per share $ 7.11 $ 13.99 $ 21.32 $ 36.09 $ 10.62 $ 34.65 $ 25.56 Net Assets $69,219,318 $ 259,636,031 $299,126,293 $2,038,217,598 $62,457,802 $2,423,542,580 $1,714,585,284 Shares of beneficial interest outstanding with no par value 9,736,287 18,554,444 14,033,299 56,468,442 5,880,314 69,936,795 67,086,506 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 108 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 109 FINANCIAL INFORMATION STATEMENT OF OPERATIONS For the Period Ended June 30, 2006 (unaudited) All numbers in thousands
RS RS THE DIVERSIFIED EMERGING RS INFORMATION GROWTH GROWTH GROWTH AGE FUND(R) Interest $ 242 $ 905 $ 109 $ 113 Dividends 172 328 1,193 16 Dividends - affiliated issuers -- -- -- -- Withholding taxes on foreign dividends -- (1) (16) -- ----------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 414 1,232 1,286 129 ----------------------------------------------------------------------------------------------------------------- EXPENSES Investment advisory fees 1,776 4,276 829 456 Distribution fees 444 1,125 259 114 Transfer agent fees 320 520 107 56 Custodian fees 38 58 19 15 Accounting/administrative service fees 129 321 77 36 Shareholder reports 126 279 56 27 Professional fees 27 65 18 10 Registration fees 29 22 17 15 Interest expense 4 -- -- -- Trustees' fees and expenses 19 40 8 4 Other expense 58 123 15 13 ----------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 2,970 6,829 1,405 746 ----------------------------------------------------------------------------------------------------------------- Less: Expense waiver by adviser (27) (19) (4) (2) Expense offsets and other waivers -- -- -- -- ----------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES, NET 2,943 6,810 1,401 744 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME/(LOSS) (2,529) (5,578) (115) (615) ----------------------------------------------------------------------------------------------------------------- REALIZED GAIN/(LOSS) AND CHANGE IN UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS Net realized gain/(loss) from investments and foreign currency transactions 34,856 112,516 15,082 7,988 Net realized gain/(loss) from investments in affiliated issuers -- -- -- -- Net change in unrealized appreciation/depreciation on investments and on translation of assets and liabilities in foreign currencies (25,318) (73,966) (13,195) (10,750) ----------------------------------------------------------------------------------------------------------------- NET GAIN/(LOSS) ON INVESTMENTS 9,538 38,550 1,887 (2,762) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,009 32,972 1,772 (3,377) ----------------------------------------------------------------------------------------------------------------- RS RS RS RS SMALLER GLOBAL INTERNET MIDCAP COMPANY NATURAL AGE FUND(R) OPPORTUNITIES GROWTH RESOURCES Interest $ 99 $ 138 $ 401 $ 7,165 Dividends 11 597 304 13,288 Dividends - affiliated issuers -- -- -- -- Withholding taxes on foreign dividends -- (6) -- (1,253) ------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT INCOME 110 729 705 19,200 ------------------------------------------------------------------------------------------------------------------ EXPENSES Investment advisory fees 418 1,052 1,416 9,986 Distribution fees 104 310 354 2,496 Transfer agent fees 65 63 50 811 Custodian fees 11 26 35 248 Accounting/administrative service fees 32 91 104 632 Shareholder reports 25 63 105 505 Professional fees 8 21 22 140 Registration fees 23 22 20 109 Interest expense -- -- -- -- Trustees' fees and expenses 3 8 10 60 Other expense 12 16 31 128 ------------------------------------------------------------------------------------------------------------------ TOTAL EXPENSES 701 1,672 2,147 15,115 ------------------------------------------------------------------------------------------------------------------ Less: Expense waiver by adviser (2) (66) (19) (236) Expense offsets and other waivers -- -- -- -- ------------------------------------------------------------------------------------------------------------------ TOTAL EXPENSES, NET 699 1,606 2,128 14,879 ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME/(LOSS) (589) (877) (1,423) 4,321 ------------------------------------------------------------------------------------------------------------------ REALIZED GAIN/(LOSS) AND CHANGE IN UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS Net realized gain/(loss) from investments and foreign currency transactions 5,771 21,863 7,589 218,357 Net realized gain/(loss) from investments in affiliated issuers -- -- -- (3,311) Net change in unrealized appreciation/depreciation on investments and on translation of assets and liabilities in foreign currencies (11,646) (11,264) (6,565) (44,201) ------------------------------------------------------------------------------------------------------------------ NET GAIN/(LOSS) ON INVESTMENTS (5,875) 10,599 1,024 170,845 ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (6,464) 9,722 (399) 175,166 ------------------------------------------------------------------------------------------------------------------ RS RS RS INVESTORS PARTNERS VALUE Interest $ 105 $ 9,199 $ 4,024 Dividends 376 8,344 8,718 Dividends - affiliated issuers -- 4,960 -- Withholding taxes on foreign dividends (4) (363) (509) ------------------------------------------------------------------------------------------------ TOTAL INVESTMENT INCOME 477 22,140 12,233 ------------------------------------------------------------------------------------------------ EXPENSES Investment advisory fees 334 11,811 7,162 Distribution fees 84 2,953 2,106 Transfer agent fees 34 1,001 684 Custodian fees 18 162 149 Accounting/administrative service fees 17 686 582 Shareholder reports 15 623 447 Professional fees 6 160 123 Registration fees 34 59 84 Interest expense 1 -- -- Trustees' fees and expenses 2 78 52 Other expense 6 191 124 ------------------------------------------------------------------------------------------------ TOTAL EXPENSES 551 17,724 11,513 ------------------------------------------------------------------------------------------------ Less: Expense waiver by adviser (1) (131) (30) Expense offsets and other waivers (17) -- -- ------------------------------------------------------------------------------------------------ TOTAL EXPENSES, NET 533 17,593 11,483 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME/(LOSS) (56) 4,547 750 ------------------------------------------------------------------------------------------------ REALIZED GAIN/(LOSS) AND CHANGE IN UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS Net realized gain/(loss) from investments and foreign currency transactions 1,620 148,597 101,833 Net realized gain/(loss) from investments in affiliated issuers -- 129 -- Net change in unrealized appreciation/depreciation on investments and on translation of assets and liabilities in foreign currencies (1,026) (50,790) (37,286) ------------------------------------------------------------------------------------------------ NET GAIN/(LOSS) ON INVESTMENTS 594 97,936 64,547 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 538 102,483 65,297 ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 110 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 111 FINANCIAL INFORMATION STATEMENT OF CHANGES IN NET ASSETS All numbers in thousands, six-month-ended numbers are unaudited
RS DIVERSIFIED GROWTH RS EMERGING GROWTH ----------------------------- ------------------------------ For the Six For the For the Six For the Months Ended Year Ended Months Ended Year Ended June 30, 2006 Dec. 31, 2005 June 30, 2006 Dec. 31, 2005 OPERATIONS Net investment income/(loss) $ (2,529) $ (8,183) $ (5,578) $ (14,182) Net realized gain/(loss) from investments and foreign currency transactions 34,856 102,939 112,516 161,480 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (25,318) (125,166) (73,966) (163,813) ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,009 (30,410) 32,972 (16,515) ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- -- -- -- Realized gain on investments -- -- -- -- ---------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- -- -- -- ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 27,816 143,700 50,612 106,509 Reinvestment of distributions -- -- -- -- Cost of shares redeemed (126,857) (681,223) (205,614) (559,476) ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (99,041) (537,523) (155,002) (452,967) ---------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS (92,032) (567,933) (122,030) (469,482) ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 385,878 953,811 930,296 1,399,778 End of Period $ 293,846 $ 385,878 $ 808,266 $ 930,296 ---------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ (2,529) $ -- $ (5,578) $ -- ---------------------------------------------------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 1,180 6,697 1,449 3,473 Reinvested -- -- -- -- Redeemed (5,366) (31,447) (5,930) (18,175) ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) (4,186) (24,750) (4,481) (14,702) ---------------------------------------------------------------------------------------------------------------------------------- RS GROWTH THE INFORMATION AGE FUND(R) ----------------------------- ------------------------------ For the Six For the For the Six For the Months Ended Year Ended Months Ended Year Ended June 30, 2006 Dec. 31, 2005 June 30, 2006 Dec. 31, 2005 OPERATIONS Net investment income/(loss) $ (115) $ (381) $ (615) $ (1,468) Net realized gain/(loss) from investments and foreign currency transactions 15,082 30,524 7,988 20,546 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (13,195) (8,500) (10,750) (20,877) ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,772 21,643 (3,377) (1,799) ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- -- -- -- Realized gain on investments -- (30,785) -- -- ------------------------------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- (30,785) -- -- ------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 8,289 9,797 10,757 11,564 Reinvestment of distributions 3 30,108 -- -- Cost of shares redeemed (19,028) (41,531) (17,889) (52,231) ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (10,736) (1,626) (7,132) (40,667) ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS (8,964) (10,768) (10,509) (42,466) ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 206,737 217,505 89,985 132,451 End of Period $ 197,773 $ 206,737 $ 79,476 $ 89,985 ------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ (115) $ -- $ (615) $ -- ------------------------------------------------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 506 574 624 768 Reinvested -- 1,896 -- -- Redeemed (1,165) (2,479) (1,040) (3,533) ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) (659) (9) (416) (2,765) ------------------------------------------------------------------------------------------------------------------------------- RS INTERNET AGE FUND(R) ------------------------------ For the Six For the Months Ended Year Ended June 30, 2006 Dec. 31, 2005 OPERATIONS Net investment income/(loss) $ (589) $ (1,290) Net realized gain/(loss) from investments and foreign currency transactions 5,771 17,552 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (11,646) (12,635) --------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (6,464) 3,627 --------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- -- Realized gain on investments -- -- --------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- -- --------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 8,999 13,916 Reinvestment of distributions -- -- Cost of shares redeemed (18,522) (38,704) --------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (9,523) (24,788) --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS (15,987) (21,161) --------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 85,206 106,367 End of Period $ 69,219 $ 85,206 --------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ (589) $ -- --------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 1,119 1,962 Reinvested -- -- Redeemed (2,366) (5,762) --------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) (1,247) (3,800) ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 112 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 113 FINANCIAL INFORMATION STATEMENT OF CHANGES IN NET ASSETS (Continued) All numbers in thousands, six-month-ended numbers are unaudited
RS MIDCAP OPPORTUNITIES RS SMALLER COMPANY GROWTH ---------------------------- ----------------------------- For the Six For the For the Six For the Months Ended Year Ended Months Ended Year Ended June 30, 2006 Dec. 31, 2005 June 30, 2006 Dec. 31, 2005 OPERATIONS Net investment income/(loss) $ (877) $ (1,553) $ (1,423) $ (2,567) Net realized gain/(loss) from investments and foreign currency transactions 21,863 23,686 7,589 21,889 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (11,264) (3,526) (6,565) (5,157) ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 9,722 18,607 (399) 14,165 ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- -- -- -- Realized gain on investments -- -- -- (29,687) ---------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- -- -- (29,687) ---------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 49,300 29,764 101,374 115,300 Reinvestment of distributions -- -- 1 28,031 Cost of shares redeemed (18,157) (38,154) (43,979) (99,447) ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS 31,143 (8,390) 57,396 43,884 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS 40,865 10,217 56,997 28,362 ---------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 218,771 208,554 242,129 213,767 End of Period $ 259,636 $ 218,771 $ 299,126 $ 242,129 ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME INCLUDED IN NET ASSETS $ -- $ -- $ -- $ -- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ (877) $ -- $ (1,423) $ -- ---------------------------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 3,433 2,400 4,531 5,207 Reinvested -- -- -- 1,312 Redeemed (1,272) (3,135) (1,969) (4,520) ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) 2,161 (735) 2,562 1,999 ---------------------------------------------------------------------------------------------------------- RS GLOBAL NATURAL RESOURCES RS INVESTORS ---------------------------- ------------------------------ For the Six For the For the Six For the Months Ended Year Ended Months Ended Period Ended June 30, 2006 Dec. 31, 2005 June 30, 2006 Dec. 31, 2005* OPERATIONS Net investment income/(loss) $ 4,321 $ 11,345 $ (56) $ (70) Net realized gain/(loss) from investments and foreign currency transactions 215,046 107,495 1,620 5 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (44,201) 297,986 (1,026) 1,066 -------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 175,166 416,826 538 1,001 -------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- (33,165) -- -- Realized gain on investments -- (89,208) -- -- -------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- (122,373) -- -- -------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 547,552 1,101,253 41,909 48,571 Reinvestment of distributions 2 113,926 -- -- Cost of shares redeemed (399,684) (422,962) (29,452) (109) -------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS 147,870 792,217 12,457 48,462 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS 323,036 1,086,670 12,995 49,463 -------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 1,715,182 628,512 49,463 -- End of Period $ 2,038,218 $ 1,715,182 $ 62,458 $ 49,463 -------------------------------------------------------------------------------------------------------- DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME INCLUDED IN NET ASSETS $ -- $ (25,015) $ -- $ -- -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ (20,694) $ -- $ (68) $ (12) -------------------------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 15,230 38,196 3,839 4,749 Reinvested -- 3,462 -- -- Redeemed (11,292) (14,554) (2,697) (10) -------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) 3,938 27,104 1,142 4,739 -------------------------------------------------------------------------------------------------------- RS PARTNERS RS VALUE ---------------------------- ----------------------------- For the Six For the For the Six For the Months Ended Year Ended Months Ended Year Ended June 30, 2006 Dec. 31, 2005 June 30, 2006 Dec. 31, 2005 OPERATIONS Net investment income/(loss) $ 4,547 $ 8 $ 750 $ (1,664) Net realized gain/(loss) from investments and foreign currency transactions 148,726 203,558 101,833 19,886 Net change in unrealized appreciation/(depreciation) on investments and on translation of assets and liabilities in foreign currencies (50,790) 7,178 (37,286) 113,963 ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 102,483 210,744 65,297 132,185 ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- -- -- (422) Realized gain on investments -- (334,320) -- -- ---------------------------------------------------------------------------------------------------------- TOTAL DISTRIBUTIONS -- (334,320) -- (422) ---------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales of shares 562,623 558,957 582,954 1,176,672 Reinvestment of distributions 3 317,496 -- 396 Cost of shares redeemed (405,973) (632,927) (529,983) (341,100) ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS 156,653 243,526 52,971 835,968 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN NET ASSETS 259,136 119,950 118,268 967,731 ---------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 2,164,407 2,044,457 1,596,317 628,586 End of Period $ 2,423,543 $ 2,164,407 $ 1,714,585 $ 1,596,317 ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME INCLUDED IN NET ASSETS $ -- $ (110) $ -- $ (4,867) ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME/(LOSS) INCLUDED IN NET ASSETS $ 4,437 $ -- $ (4,117) $ -- ---------------------------------------------------------------------------------------------------------- OTHER INFORMATION: SHARES Sold 16,041 15,258 22,791 51,143 Reinvested -- 9,583 -- 16 Redeemed (11,673) (18,073) (20,722) (14,720) ---------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) 4,368 6,768 2,069 36,439 ----------------------------------------------------------------------------------------------------------
* For the period November 15, 2005 (commencement of operations) through December 31, 2005. The accompanying notes are an integral part of these financial statements. 114 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 115 FINANCIAL INFORMATION The financial highlights table is intended to help you understand each Fund's financial performance for the six-month period ended June 30, 2006 and the past five years (or, if shorter, the period of each Fund's operations). Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in each Fund (assuming reinvestment of all dividends and distributions). FINANCIAL HIGHLIGHTS Six-month-ended numbers are unaudited
Net Asset Distributions Distributions Value, Net Net Realized From Net From Net Beginning Investment and Unrealized Total Investment Realized Total of Period Income/(Loss) Gain/(Loss) Operations Income Capital Gains Distributions RS DIVERSIFIED GROWTH Six Months Ended 6/30/06 $ 22.33 $ (0.19) $ 0.30 $ 0.11 $ -- $ -- $ -- Year Ended 12/31/05 22.69 (0.47) 0.11 (0.36) -- -- -- Year Ended 12/31/04 22.36 (0.29) 0.62 0.33 -- -- -- Year Ended 12/31/03 14.16 (0.14) 8.34 8.20 -- -- -- Year Ended 12/31/02 23.26 (0.19) (8.91) (9.10) -- -- -- Year Ended 12/31/01 22.83 (0.18) 0.61 0.43 -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ RS EMERGING GROWTH Six Months Ended 6/30/06 $ 32.58 $ (0.23) $ 1.22 $ 0.99 $ -- $ -- $ -- Year Ended 12/31/05 32.36 (0.50) 0.72 0.22 -- -- -- Year Ended 12/31/04 28.10 (0.50) 4.76 4.26 -- -- -- Year Ended 12/31/03 19.15 (0.35) 9.30 8.95 -- -- -- Year Ended 12/31/02 32.00 (0.34) (12.51) (12.85) -- -- -- Year Ended 12/31/01 44.02 (0.29) (11.73) (12.02) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ RS GROWTH Six Months Ended 6/30/06 $ 15.85 $ (0.01) $ 0.13 $ 0.12 $ -- $ -- $ -- Year Ended 12/31/05 16.66 (0.03) 1.92 1.89 -- (2.70) (2.70) Year Ended 12/31/04 17.32 (0.09) 2.07 1.98 -- (2.64) (2.64) Year Ended 12/31/03 12.37 (0.12) 5.57 5.45 -- (0.50) (0.50) Year Ended 12/31/02 17.07 (0.15) (4.55) (4.70) -- -- -- Year Ended 12/31/01 24.62 (0.21) (4.80) (5.01) -- (2.54) (2.54) ------------------------------------------------------------------------------------------------------------------------------------ THE INFORMATION AGE FUND(R) Six Months Ended 6/30/06 $ 16.35 $ (0.12) $ (0.61) $ (0.73) $ -- $ -- $ -- Year Ended 12/31/05 16.02 (0.27) 0.60 0.33 -- -- -- Year Ended 12/31/04 14.93 (0.30) 1.39 1.09 -- -- -- Year Ended 12/31/03 7.55 (0.14) 7.52 7.38 -- -- -- Year Ended 12/31/02 14.53 (0.18) (6.80) (6.98) -- -- -- Year Ended 12/31/01 19.01 (0.14) (4.05) (4.19) -- (0.29) (0.29) ------------------------------------------------------------------------------------------------------------------------------------ RS INTERNET AGE FUND(R) Six Months Ended 6/30/06 $ 7.76 $ (0.06) $ (0.59) $ (0.65) $ -- $ -- $ -- Year Ended 12/31/05 7.19 (0.12) 0.69 0.57 -- -- -- Year Ended 12/31/04 6.58 (0.13) 0.74 0.61 -- -- -- Year Ended 12/31/03 3.27 (0.07) 3.38 3.31 -- -- -- Year Ended 12/31/02 5.76 (0.08) (2.41) (2.49) -- -- -- Year Ended 12/31/01 6.53 (0.05) (0.72) (0.77) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Net Ratio Net Asset Net Assets, of Expenses Value, End Total End of to Average of Period Return 1 Period (000s) Net Assets 1,2 RS DIVERSIFIED GROWTH Six Months Ended 6/30/06 $ 22.44 0.49% $ 293,846 1.66% Year Ended 12/31/05 22.33 (1.59)% 385,878 1.63% Year Ended 12/31/04 22.69 1.48% 953,811 1.58% Year Ended 12/31/03 22.36 57.91% 1,089,598 1.48% Year Ended 12/31/02 14.16 (39.12)% 570,814 1.50% Year Ended 12/31/01 23.26 1.88% 853,309 1.52% ----------------------------------------------------------------------------------------------------------- RS EMERGING GROWTH Six Months Ended 6/30/06 $ 33.57 3.04% $ 808,266 1.51% Year Ended 12/31/05 32.58 0.68% 930,296 1.54% Year Ended 12/31/04 32.36 15.16% 1,399,778 1.59% Year Ended 12/31/03 28.10 46.74% 1,613,299 1.49% Year Ended 12/31/02 19.15 (40.16)% 1,307,774 1.53% Year Ended 12/31/01 32.00 (27.31)% 2,473,783 1.37% ----------------------------------------------------------------------------------------------------------- RS GROWTH Six Months Ended 6/30/06 $ 15.97 0.76% $ 197,773 1.35% Year Ended 12/31/05 15.85 11.32% 206,737 1.37% Year Ended 12/31/04 16.66 11.95% 217,505 1.49% Year Ended 12/31/03 17.32 44.24% 223,726 1.58% Year Ended 12/31/02 12.37 (27.53)% 170,431 1.62% Year Ended 12/31/01 17.07 (20.43)% 297,613 1.60% ----------------------------------------------------------------------------------------------------------- THE INFORMATION AGE FUND(R) Six Months Ended 6/30/06 $ 15.62 (4.46)% $ 79,476 1.63% Year Ended 12/31/05 16.35 2.06% 89,985 1.62% Year Ended 12/31/04 16.02 7.30% 132,451 1.62% Year Ended 12/31/03 14.93 97.75% 241,956 1.57% Year Ended 12/31/02 7.55 (48.04)% 50,354 1.74% Year Ended 12/31/01 14.53 (22.11)% 125,099 1.67% ----------------------------------------------------------------------------------------------------------- RS INTERNET AGE FUND(R) Six Months Ended 6/30/06 $ 7.11 (8.38)% $ 69,219 1.67% Year Ended 12/31/05 7.76 7.93% 85,206 1.69% Year Ended 12/31/04 7.19 9.27% 106,367 1.70% Year Ended 12/31/03 6.58 101.22% 125,968 1.82% Year Ended 12/31/02 3.27 (43.23)% 35,059 2.08% Year Ended 12/31/01 5.76 (11.79)% 69,069 1.85% Net Ratio of Gross Ratio of Gross Ratio Net Investment Net Investment of Expenses Income/(Loss) to Income/(Loss) to Portfolio to Average Average Net Average Net Turnover Net Assets 1 Assets 1,2 Assets 1 Rate 1 RS DIVERSIFIED GROWTH Six Months Ended 6/30/06 1.67% (1.43)% (1.44)% 102% Year Ended 12/31/05 1.64% (1.25)% (1.26)% 184% Year Ended 12/31/04 1.62% (1.23)% (1.27)% 230% Year Ended 12/31/03 1.63% (0.92)% (1.07)% 305% Year Ended 12/31/02 1.69% (1.11)% (1.30)% 223% Year Ended 12/31/01 1.71% (1.03)% (1.22)% 255% ----------------------------------------------------------------------------------------------------------- RS EMERGING GROWTH Six Months Ended 6/30/06 1.52% (1.24)% (1.25)% 74% Year Ended 12/31/05 1.54% (1.32)% (1.32)% 95% Year Ended 12/31/04 1.61% (1.47)% (1.49)% 156% Year Ended 12/31/03 1.61% (1.39)% (1.51)% 190% Year Ended 12/31/02 1.68% (1.35)% (1.50)% 166% Year Ended 12/31/01 1.59% (0.79)% (1.01)% 148% ----------------------------------------------------------------------------------------------------------- RS GROWTH Six Months Ended 6/30/06 1.36% (0.11)% (0.12)% 97% Year Ended 12/31/05 1.37% (0.19)% (0.19)% 159% Year Ended 12/31/04 1.69% (0.55)% (0.75)% 163% Year Ended 12/31/03 1.65% (0.81)% (0.88)% 262% Year Ended 12/31/02 1.67% (0.87)% (0.92)% 346% Year Ended 12/31/01 1.61% (0.96)% (0.97)% 172% ----------------------------------------------------------------------------------------------------------- THE INFORMATION AGE FUND(R) Six Months Ended 6/30/06 1.63% (1.35)% (1.35)% 99% Year Ended 12/31/05 1.62% (1.54)% (1.54)% 141% Year Ended 12/31/04 1.64% (1.47)% (1.49)% 143% Year Ended 12/31/03 1.67% (1.52)% (1.62)% 194% Year Ended 12/31/02 1.80% (1.59)% (1.65)% 219% Year Ended 12/31/01 1.70% (0.87)% (0.90)% 318% ----------------------------------------------------------------------------------------------------------- RS INTERNET AGE FUND(R) Six Months Ended 6/30/06 1.68% (1.41)% (1.42)% 65% Year Ended 12/31/05 1.69% (1.60)% (1.60)% 129% Year Ended 12/31/04 1.72% (1.67)% (1.69)% 139% Year Ended 12/31/03 1.95% (1.77)% (1.90)% 208% Year Ended 12/31/02 2.31% (1.96)% (2.19)% 203% Year Ended 12/31/01 2.16% (0.81)% (1.12)% 315% -----------------------------------------------------------------------------------------------------------
See notes to Financial Highlights on page 119. The accompanying notes are an integral part of these financial statements. 116 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 117 FINANCIAL INFORMATION FINANCIAL HIGHLIGHTS (Continued) Six-month-ended numbers are unaudited
Net Asset Distributions Distributions Value, Net Net Realized From Net From Net Beginning Investment and Unrealized Total Investment Realized Total of Period Income/(loss) Gain/(loss) Operations Income Capital Gains Distributions RS MIDCAP OPPORTUNITIES Six Months Ended 6/30/06 $ 13.34 $ (0.05) $ 0.70 $ 0.65 $ -- $ -- $ -- Year Ended 12/31/05 12.18 (0.09) 1.25 1.16 -- -- -- Year Ended 12/31/04 10.84 (0.08) 1.42 1.34 -- -- -- Year Ended 12/31/03 7.30 (0.06) 3.60 3.54 -- -- -- Year Ended 12/31/02 9.92 (0.06) (2.56) (2.62) -- -- -- Year Ended 12/31/01 11.65 0.10 (1.73) (1.63) (0.10) -- (0.10) ------------------------------------------------------------------------------------------------------------------------------------ RS SMALLER COMPANY GROWTH Six Months Ended 6/30/06 $ 21.11 $ (0.10) $ 0.31 $ 0.21 $ -- $ -- $ -- Year Ended 12/31/05 22.57 (0.22) 1.78 1.56 -- (3.02) (3.02) Year Ended 12/31/04 20.58 (0.28) 3.39 3.11 -- (1.12) (1.12) Year Ended 12/31/03 12.79 (0.23) 8.02 7.79 -- -- -- Year Ended 12/31/02 21.78 (0.20) (8.30) (8.50) -- (0.49) (0.49) Year Ended 12/31/01 20.69 (0.21) 1.90 1.69 -- (0.60) (0.60) ------------------------------------------------------------------------------------------------------------------------------------ RS GLOBAL NATURAL RESOURCES Six Months Ended 6/30/06 $ 32.65 $ 0.11 $ 3.33 $ 3.44 $ -- $ -- $ -- Year Ended 12/31/05 24.72 0.32 10.14 10.46 (0.69) (1.84) (2.53) Year Ended 12/31/04 19.23 (0.02) 6.58 6.56 (0.04) (1.03) (1.07) Year Ended 12/31/03 13.53 (0.01) 5.71 5.70 -- -- -- Year Ended 12/31/02 11.56 (0.06) 2.03 1.97 -- -- -- Year Ended 12/31/01 11.49 (0.09) 0.16 0.07 -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ RS INVESTORS Six Months Ended 6/30/06 $ 10.44 $ (0.01) $ 0.19 $ 0.18 $ -- $ -- $ -- Period Ended 12/31/05 3 10.00 (0.01) 0.45 0.44 -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ RS PARTNERS Six Months Ended 6/30/06 $ 33.01 $ 0.07 $ 1.57 $ 1.64 $ -- $ -- $ -- Year Ended 12/31/05 34.77 -- 4.17 4.17 -- (5.93) (5.93) Year Ended 12/31/04 27.70 (0.14) 8.89 8.75 -- (1.68) (1.68) Year Ended 12/31/03 17.82 0.06 11.54 11.60 (0.02) (1.70) (1.72) Year Ended 12/31/02 17.67 (0.11) 0.33 0.22 -- (0.07) (0.07) Year Ended 12/31/01 15.72 0.04 2.57 2.61 -- (0.66) (0.66) ------------------------------------------------------------------------------------------------------------------------------------ RS VALUE Six Months Ended 6/30/06 $ 24.55 $ 0.01 $ 1.00 $ 1.01 $ -- $ -- $ -- Year Ended 12/31/05 21.99 0.03 2.54 2.57 (0.01) -- (0.01) Year Ended 12/31/04 17.03 (0.09) 5.08 4.99 (0.03) -- (0.03) Year Ended 12/31/03 10.26 0.04 6.73 6.77 -- -- -- Year Ended 12/31/02 10.12 (0.05) 0.19 0.14 -- -- -- Year Ended 12/31/01 11.03 (0.07) (0.84) (0.91) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Net Ratio Net Asset Net Assets, of Expenses Value, End Total End of to Average of Period Return 1 Period (000S) Net Assets 1,2 RS MIDCAP OPPORTUNITIES Six Months Ended 6/30/06 $ 13.99 4.87% $ 259,636 1.30% Year Ended 12/31/05 13.34 9.52% 218,771 1.34% Year Ended 12/31/04 12.18 12.36% 208,554 1.49% Year Ended 12/31/03 10.84 48.49% 141,147 1.53% Year Ended 12/31/02 7.30 (26.41)% 88,507 1.53% Year Ended 12/31/01 9.92 (14.01)% 156,326 1.47% ---------------------------------------------------------------------------------------------------- RS SMALLER COMPANY GROWTH Six Months Ended 6/30/06 $ 21.32 0.99% $ 299,126 1.50% Year Ended 12/31/05 21.11 6.74% 242,129 1.55% Year Ended 12/31/04 22.57 15.38% 213,767 1.59% Year Ended 12/31/03 20.58 60.91% 200,147 1.73% Year Ended 12/31/02 12.79 (39.07)% 109,341 1.81% Year Ended 12/31/01 21.78 8.31% 116,490 1.66% ---------------------------------------------------------------------------------------------------- RS GLOBAL NATURAL RESOURCES Six Months Ended 6/30/06 $ 36.09 10.54% $ 2,038,218 1.49% Year Ended 12/31/05 32.65 42.23% 1,715,182 1.49% Year Ended 12/31/04 24.72 34.43% 628,512 1.50% Year Ended 12/31/03 19.23 42.13% 142,476 1.69% Year Ended 12/31/02 13.53 17.04% 38,763 1.77% Year Ended 12/31/01 11.56 0.61% 21,777 1.86% ---------------------------------------------------------------------------------------------------- RS INVESTORS Six Months Ended 6/30/06 $ 10.62 1.72% $ 62,458 1.59% Period Ended 12/31/05 3 10.44 4.40% 49,463 3.74% ---------------------------------------------------------------------------------------------------- RS PARTNERS Six Months Ended 6/30/06 $ 34.65 4.97% $ 2,423,543 1.49% Year Ended 12/31/05 33.01 11.94% 2,164,407 1.48% Year Ended 12/31/04 34.77 31.81% 2,044,457 1.49% Year Ended 12/31/03 27.70 65.63% 852,615 1.54% Year Ended 12/31/02 17.82 1.23% 113,467 1.88% Year Ended 12/31/01 17.67 16.72% 71,567 1.88% ---------------------------------------------------------------------------------------------------- RS VALUE Six Months Ended 6/30/06 $ 25.56 4.11% $ 1,714,585 1.36% Year Ended 12/31/05 24.55 11.67% 1,596,317 1.39% Year Ended 12/31/04 21.99 29.31% 628,586 1.49% Year Ended 12/31/03 17.03 65.98% 373,791 1.54% Year Ended 12/31/02 10.26 1.38% 57,916 1.67% Year Ended 12/31/01 10.12 (8.25)% 66,934 2.22% ---------------------------------------------------------------------------------------------------- Gross Ratio Net Ratio of Gross Ratio of of Expenses Net Investment Net Investment Portfolio to Average Income/(loss) to Income/(loss) to Turnover Net Assets 1 Average Net Assets 1,2 Average Net Assets 1 Rate 1 RS MIDCAP OPPORTUNITIES Six Months Ended 6/30/06 1.35% (0.71)% (0.76)% 103% Year Ended 12/31/05 1.39% (0.77)% (0.82)% 207% Year Ended 12/31/04 1.64% (0.88)% (1.03)% 184% Year Ended 12/31/03 1.63% (0.76)% (0.86)% 253% Year Ended 12/31/02 1.67% (0.60)% (0.74)% 401% Year Ended 12/31/01 1.67% 0.87% 0.67% 409% ------------------------------------------------------------------------------------------------------------------------ RS SMALLER COMPANY GROWTH Six Months Ended 6/30/06 1.52% (1.00)% (1.02)% 70% Year Ended 12/31/05 1.56% (1.20)% (1.21)% 122% Year Ended 12/31/04 1.60% (1.31)% (1.32)% 163% Year Ended 12/31/03 1.83% (1.57)% (1.67)% 220% Year Ended 12/31/02 1.95% (1.52)% (1.66)% 128% Year Ended 12/31/01 1.97% (1.10)% (1.41)% 167% ------------------------------------------------------------------------------------------------------------------------ RS GLOBAL NATURAL RESOURCES Six Months Ended 6/30/06 1.51% 0.43% 0.41% 42% Year Ended 12/31/05 1.56% 0.95% 0.88% 62% Year Ended 12/31/04 1.59% (0.18)% (0.27)% 97% Year Ended 12/31/03 1.76% (0.13)% (0.20)% 117% Year Ended 12/31/02 1.86% (0.55)% (0.64)% 159% Year Ended 12/31/01 1.97% (0.58)% (0.69)% 167% ------------------------------------------------------------------------------------------------------------------------ RS INVESTORS Six Months Ended 6/30/06 1.65% (0.17)% (0.23)% 53% Period Ended 12/31/05 3 3.77% (1.66)% (1.69)% 5% ------------------------------------------------------------------------------------------------------------------------ RS PARTNERS Six Months Ended 6/30/06 1.50% 0.38% 0.37% 32% Year Ended 12/31/05 1.52% --% (0.04)% 77% Year Ended 12/31/04 1.64% (0.59)% (0.74)% 108% Year Ended 12/31/03 1.60% 0.27% 0.21% 97% Year Ended 12/31/02 1.97% (0.90)% (0.99)% 166% Year Ended 12/31/01 2.04% (0.07)% (0.23)% 198% ------------------------------------------------------------------------------------------------------------------------ RS VALUE Six Months Ended 6/30/06 1.37% 0.09% 0.08% 36% Year Ended 12/31/05 1.39% (0.15)% (0.15)% 83% Year Ended 12/31/04 1.63% (0.65)% (0.79)% 147% Year Ended 12/31/03 1.69% 0.54% 0.39% 129% Year Ended 12/31/02 1.74% (0.40)% (0.47)% 125% Year Ended 12/31/01 2.26% (0.59)% (0.63)% 131% ------------------------------------------------------------------------------------------------------------------------ Distributions reflect actual per-share amounts distributed for the period. 1 Ratios for periods less than one year have been annualized, except for total return and portfolio turnover rate. 2 Net Ratio of Expenses to Average Net Assets and Net Ratio of Net Investment Income/(Loss) to Average Net Assets include the effect of fee waivers, expense limitations, and offsets for securities lending fees. 3 RS Investors Fund shares were first issued on November 15, 2005.
See notes to Financial Highlights on page 119. The accompanying notes are an integral part of these financial statements. 118 | CALL 1-800-766-FUND WWW.RSINVESTMENTS.COM | 119 NOTES TO FINANCIAL STATEMENTS The RS Mutual Funds (each a "Fund," collectively the "Funds") are series of RS Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Funds are registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as open-end management investment companies. The Trust currently offers 11 portfolios. All of the Funds are registered as diversified funds, other than RS Investors Fund and RS Partners Fund, which are registered as nondiversified funds. Each Fund consists of a single class of shares. NOTE 1 SIGNIFICANT ACCOUNTING POLICIES The following policies are in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. INVESTMENT VALUATIONS Marketable securities are valued at the last reported sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. Securities traded on the Nasdaq Stock Market, Inc. ("Nasdaq") are valued at the Nasdaq official closing price, which may not be the last sale price. If the Nasdaq official closing price is not available for a security, that security will generally be valued using the last reported sale price, or, if no sales are reported, at the mean between the closing bid and asked prices. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. Foreign securities are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of the New York Stock Exchange prior to when each Fund's net asset value is next determined. Securities whose values have been materially affected by events occurring before the Funds' valuation time but after the close of the securities' principal exchange or market, may be fair valued using methods approved by the Board of Trustees. Examples of such events may include, but are not limited to, (i) EVENTS RELATING TO A PARTICULAR ISSUER, such as announcements of significant corporate actions; corporate announcements with respect to earnings; corporate announcements relating to new product offerings, product recalls, and other product-related news; regulatory news such as government approvals; news regarding allegations or announcements of governmental or regulatory investigations or sanctions against the issuer; news regarding principal officers or the issuer's labor resources; news relating to natural disasters affecting the issuer's operations; and events relating to significant litigation involving the issuer, as well as (ii) EVENTS RELATING TO MULTIPLE ISSUERS OR A PARTICULAR SECURITIES MARKET OR SECTOR, such as governmental actions that affect securities in a particular sector, country or region in a particular way; natural disasters, armed conflicts or terrorist events that affect a particular country or region; and evidence of significant fluctuations in a particular securities market between the close of the securities' principal exchange or market and the Funds' valuation time. In addition, if there has been a movement in the U.S. markets that exceeds a specified threshold or there is a foreign market holiday, the values of a Fund's investments in foreign securities will be determined by a pricing service using pricing models designed to estimate likely changes in the values of those securities. Securities for which market quotations are not readily available are valued at their fair values as determined in accordance with the guidelines and procedures adopted by the Funds' Board of Trustees. Certain securities held by a Fund may be restricted as to resale. In cases where securities of the same class are publicly traded, the restricted securities are valued based on the market value of the publicly traded securities, subject to discounts at levels approved by the Trustees. Other restricted securities are initially valued at cost. The securities may be revalued periodically based on, among other things, the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, prices at which the issuer subsequently issues the same or comparable securities, prices at which the same or comparable securities are sold, and any other event that could have a significant impact on the value 120 | CALL 1-800-766-FUND of the security. The approximate percentages of the Funds' investments valued using these guidelines and procedures at June 30, 2006, were as follows: -------------------------------------------------------------------------------- Fund Percentage Fund Percentage RS Diversified Growth -- RS Smaller Company Growth -- -------------------------------------------------------------------------------- RS Emerging Growth -- RS Global Natural Resources .05% -------------------------------------------------------------------------------- RS Growth -- RS Investors -- -------------------------------------------------------------------------------- The Information Age Fund(R) -- RS Partners 3.1% -------------------------------------------------------------------------------- RS Internet Age Fund(R) -- RS Value 3.2% -------------------------------------------------------------------------------- RS MidCap Opportunities -- -------------------------------------------------------------------------------- In their normal course of business, some of the Funds may invest a significant portion of their assets in companies concentrated within a number of industries. Accordingly, the performance of these Funds may be subject to a greater risk of market fluctuation than that of a fund invested in a wider spectrum of market or industrial sectors. B. FEDERAL INCOME TAXES The Funds intend to continue complying with the requirements of the Internal Revenue Code to qualify as regulated investment companies, and to distribute all net investment income and realized net capital gains, if any, to shareholders. Therefore, the Funds do not expect to be subject to income tax, and no provision for such tax has been made. From time to time, however, a Fund may choose to pay an excise tax where the cost of making the required distribution exceeds the amount of the tax. C. SECURITIES TRANSACTIONS Securities transactions are accounted for on the date securities are purchased, sold, or sold short (trade date). Realized gains or losses on securities transactions are determined on the basis of specific identification. D. FOREIGN CURRENCY TRANSLATION The accounting records of the Funds are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Funds denominated in a foreign currency are translated into U.S. dollars at the exchange rates quoted at the close of the New York Stock Exchange on each business day. Purchases and sales of securities, income receipts, and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions. The Funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. E. INVESTMENT INCOME Dividend income is recorded on the ex-dividend date, except certain cash dividends from foreign securities, which are recorded as soon as the Funds are informed of the ex-dividend date. Interest income, which includes accretion/discount, is accrued and recorded daily. F. EXPENSES Many expenses of the Trust can be directly attributed to a specific Fund. Expenses that cannot be directly attributed to a specific Fund are apportioned among all the Funds in the Trust, based on relative net assets. G. ORGANIZATIONAL EXPENSES Organizational expenses are accounted for on an accrual basis and expensed in the period incurred. These organizational expenses include offering, administration and legal costs. H. DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income and net realized capital gains, if any, will be declared and paid at least annually. Dividends to shareholders are recorded on the ex-dividend date. I. CAPITAL ACCOUNTS Due to the timing of dividend distributions and the differences in accounting for income and realized gains/(losses) for financial statement and federal income tax purposes, the fiscal year in which amounts are distributed may differ from the year in which the income and realized gains/(losses) were recorded by the Funds. J. TEMPORARY BORROWINGS All Funds within the Trust share in a $50 million committed revolving credit/overdraft protection facility from PNC Bank for temporary purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. Interest is calculated based on the market rates at the time of borrowing. Each Fund may borrow up to the lesser of one-third of its total assets (including amounts borrowed) or any lower limit defined in the Fund's Statement of Additional Information or the Prospectus. -------------------------------------------------------------------------------- Amount Average Outstanding Average Interest Fund at 6/30/06 Borrowing* Rate (%) -------------------------------------------------------------------------------- RS Diversified Growth $ -- $ 85,921 5.72 -------------------------------------------------------------------------------- RS Emerging Growth -- -- -- -------------------------------------------------------------------------------- RS Growth -- 1,321 5.63 -------------------------------------------------------------------------------- The Information Age Fund(R) -- -- -- -------------------------------------------------------------------------------- RS Internet Age Fund(R) -- -- -- -------------------------------------------------------------------------------- RS MidCap Opportunities -- -- -- -------------------------------------------------------------------------------- RS Smaller Company Growth -- -- -- -------------------------------------------------------------------------------- RS Global Natural Resources -- -- -- -------------------------------------------------------------------------------- RS Investors -- 37,430 5.76 -------------------------------------------------------------------------------- RS Partners -- -- -- -------------------------------------------------------------------------------- RS Value -- -- -- -------------------------------------------------------------------------------- * For the six months ended June 30, 2006. WWW.RSINVESTMENTS.COM | 121 NOTES TO FINANCIAL STATEMENTS NOTE 2 CAPITAL SHARES A. TRANSACTIONS The Funds have authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the Funds are shown in detail in the STATEMENT OF CHANGES IN NET ASSETS (see pages 112-115). NOTE 3 TRANSACTIONS WITH AFFILIATES A. ADVISORY FEES AND EXPENSE LIMITATION Under the terms of the advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Funds pay RS Investment Management, L.P. ("RS Investments"), an investment advisory fee calculated at an annual rate of the average daily net assets of the Funds as disclosed below: -------------------------------------------------------------------------------- Investment Fund Advisory Fees RS Diversified Growth 1.00% -------------------------------------------------------------------------------- RS Emerging Growth 0.95% -------------------------------------------------------------------------------- RS Growth 0.80% -------------------------------------------------------------------------------- The Information Age Fund(R) 1.00% -------------------------------------------------------------------------------- RS Internet Age Fund(R) 1.00% -------------------------------------------------------------------------------- RS MidCap Opportunities 0.85% -------------------------------------------------------------------------------- RS Smaller Company Growth 1.00% -------------------------------------------------------------------------------- RS Global Natural Resources 1.00% -------------------------------------------------------------------------------- RS Investors 1.00% -------------------------------------------------------------------------------- RS Partners 1.00% -------------------------------------------------------------------------------- RS Value 0.85% -------------------------------------------------------------------------------- RS Investments has agreed that, through December 31, 2009, it will not receive annual investment advisory fees from certain Funds in excess of the rate set forth below. -------------------------------------------------------------------------------- Fund Rate RS Diversified Growth 0.99% -------------------------------------------------------------------------------- RS MidCap Opportunities 0.80% -------------------------------------------------------------------------------- RS Smaller Company Growth 0.99% -------------------------------------------------------------------------------- In addition, expense limitations have been imposed pursuant to a written agreement between RS Investments and the Trust in effect through April 30, 2007, which provides that RS Investments will waive advisory fees to the extent necessary to prevent certain Funds' total annual fund operating expenses (excluding interest, taxes, and deferred organizational and extraordinary expenses) from exceeding the following rates: -------------------------------------------------------------------------------- Expense Fund Limitation RS Growth 1.49% -------------------------------------------------------------------------------- RS MidCap Opportunities 1.49% -------------------------------------------------------------------------------- RS Global Natural Resources 1.49% -------------------------------------------------------------------------------- RS Partners 1.49% -------------------------------------------------------------------------------- RS Value 1.49% -------------------------------------------------------------------------------- RS Investments does not intend to recoup any waived advisory fees from a prior year under expense limitations then in effect for certain Funds. B. COMPENSATION OF TRUSTEES AND OFFICERS Trustees and officers of the Funds who are interested persons of RS Investments, as defined in the 1940 Act, receive no compensation from the Funds. Trustees of the Funds who are not interested persons of RS Investments, as defined in the 1940 Act, received compensation and reimbursement of expenses for the period ended June 30, 2006. Collectively the disinterested Trustees received compensation in the amount of $255,398 for the period ended June 30, 2006. During the period ended June 30, 2006, RS Investments reimbursed the Trust for certain additional compensation paid and expenses reimbursed to the Trustees in the amount of $123,750 and $1,790, respectively. Such amounts are included as an expense waiver by adviser in the STATEMENT OF OPERATIONS (see pages 110-111). Under a Deferred Compensation Plan (the "Plan") adopted May 6, 2002, a disinterested Trustee may elect to defer receipt of all, or a portion, of his annual compensation. The amount of a Fund's deferred compensation obligation to a Trustee is determined by adjusting the amount of the deferred compensation to reflect the investment return of one or more RS Funds designated for the purpose by the Trustee. A Fund may cover its deferred compensation obligation to a Trustee by investing in one or more of such designated Funds. Each Fund's liability for deferred compensation to a Trustee is adjusted periodically to reflect the investment performance of the Funds designated by the Trustee. Deferred amounts remain in a Fund until distributed in accordance with the Plan. Trustees' fees in the accompanying financial statements include the current fees, either paid in cash or deferred, and the net increase or decrease in the value of the deferred amounts. 122 | CALL 1-800-766-FUND C. DISTRIBUTION FEES PFPC Distributors, Inc. ("PFPC"), a nonaffiliate of RS Investments, is the Funds' distributor. The Funds have entered into an agreement with PFPC for distribution services with respect to their shares and have adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, whose continuance is reviewed annually by the Funds' Board of Trustees. Under the Plan, PFPC is compensated for services in such capacity, including its expenses in connection with the promotion and distribution of shares of each Fund, at an annual rate of 0.25% of the Fund's average daily net assets. RS Investments or its affiliates provide certain services in respect of the promotion of the Funds' shares and are compensated by PFPC for those services. In addition to payments under the Distribution Plan, the Funds reimburse PFPC Distributors for payments PFPC Distributors makes to financial intermediaries that provide certain administrative and account maintenance shareholder services. The amount of the reimbursement is calculated in a manner approved by the Trustees and is reviewed by the Trustees periodically. D. AFFILIATED ISSUERS If a Fund owns 5% or more of the outstanding voting securities of an issuer, the Fund's investment represents an investment in an affiliate as defined by the 1940 Act. A summary of the Funds with transactions in the securities of affiliated issuers for the period ended June 30, 2006, is listed below. AFFILIATED ISSUERS (see Note 3d)
Number of Number of Shares Shares Held Held at Beginning Gross Gross at End Fund Issuer of Period Additions Reductions of Period Income Value Global Natural Resources Anderson Energy Ltd. 3,194,400 1,418,600 -- 4,613,000 $ -- $ 21,075,249 Basic Energy Services, Inc. 1,712,590 -- -- 1,712,590 -- 52,353,876 Clear Energy, Inc. 3,736,000 964,990 3,118,890 1,582,100 -- * ----------------------------------------------------------------------------------------------------------------------------------- -- 73,429,125 ----------------------------------------------------------------------------------------------------------------------------------- Partners ADVO, Inc. 1,859,150 1,124,800 -- 2,983,950 446,457 73,435,009 Coinstar, Inc. 1,716,861 708,239 -- 2,425,100 -- 58,056,894 Commercial Vehicle Group, Inc. 1,934,600 112,501 -- 2,047,101 -- 42,334,049 Corinthian Colleges, Inc. 4,073,339 650,085 -- 4,723,424 -- 67,828,369 eResearch Technology, Inc. 1,604,973 3,397,757 -- 5,002,730 -- 45,524,843 John H. Harland Co. 1,334,530 43,200 244,800 1,132,930 376,599 * Spectrum Brands, Inc. -- 3,068,930 446,500 2,622,430 -- 33,881,796 Triarc Cos., Inc., Class B 6,000,000 3,100 -- 6,003,100 2,880,744 93,828,453 Tuesday Morning Corp. 653,925 2,080,171 -- 2,734,096 1,256,660 35,953,362 ----------------------------------------------------------------------------------------------------------------------------------- 4,960,460 450,842,775 ----------------------------------------------------------------------------------------------------------------------------------- * Issuer is not an affiliated issuer at June 30, 2006.
WWW.RSINVESTMENTS.COM | 123 NOTES TO FINANCIAL STATEMENTS NOTE 4 FEDERAL INCOME TAXES A. DISTRIBUTIONS TO SHAREHOLDERS The tax character of distributions paid during the year ended December 31, 2005, was as follows: -------------------------------------------------------------------------------- Ordinary Long-Term Income Capital Gain Fund Total Total RS Diversified Growth $ -- $ -- -------------------------------------------------------------------------------- RS Emerging Growth -- -- -------------------------------------------------------------------------------- RS Growth 9,920,697 20,864,016 -------------------------------------------------------------------------------- The Information Age Fund(R) -- -- -------------------------------------------------------------------------------- RS Internet Age Fund(R) -- -- -------------------------------------------------------------------------------- RS MidCap Opportunities -- -- -------------------------------------------------------------------------------- RS Smaller Company Growth 7,283,307 22,403,743 -------------------------------------------------------------------------------- RS Global Natural Resources 103,654,670 18,718,315 -------------------------------------------------------------------------------- RS Investors -- -- -------------------------------------------------------------------------------- RS Partners 175,064,592 159,255,714 -------------------------------------------------------------------------------- RS Value 421,935 -- -------------------------------------------------------------------------------- Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Funds, timing differences, and differing characterizations of distributions made by the Funds. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid-in capital. Undistributed net investment income and accumulated undistributed net realized gain/(loss) on investments and foreign currency transactions may include temporary book and tax differences, which will reverse in a subsequent period. See the chart below for the tax basis of distributable earnings as of December 31, 2005, which is the most recently completed tax year. -------------------------------------------------------------------------------- Undistributed Undistributed Ordinary Long-Term Fund Income Gains RS Diversified Growth $ -- $ -- -------------------------------------------------------------------------------- RS Emerging Growth -- -- -------------------------------------------------------------------------------- RS Growth 6,038,410 1,727,155 -------------------------------------------------------------------------------- The Information Age Fund(R) -- 413,315 -------------------------------------------------------------------------------- RS Internet Age Fund(R) -- -- -------------------------------------------------------------------------------- RS MidCap Opportunities -- -- -------------------------------------------------------------------------------- RS Smaller Company Growth 184,776 2,881,302 -------------------------------------------------------------------------------- RS Global Natural Resources 21,913,504 11,405,236 -------------------------------------------------------------------------------- RS Investors -- -- -------------------------------------------------------------------------------- RS Partners 2,154,220 -- -------------------------------------------------------------------------------- RS Value 13,152,942 -- -------------------------------------------------------------------------------- During any particular year, net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Funds if not distributed and, therefore, are normally distributed to shareholders annually. See the chart below for capital loss carryovers available to the Funds at December 31, 2005, which is the most recently completed tax year.
------------------------------------------------------------------------------------------------ CAPITAL LOSS CARRYOVERS (see Note 4a) Expiring ------------------------------------------------------------------- Fund 2007 2008 2009 2010 Total RS Diversified Growth $ -- $ -- $ -- $169,986,552 $ 169,986,552 ------------------------------------------------------------------------------------------------ RS Emerging Growth -- -- 780,754,572 722,212,997 1,502,967,569 ------------------------------------------------------------------------------------------------ RS Growth -- -- -- -- -- ------------------------------------------------------------------------------------------------ The Information Age Fund(R) -- -- -- -- -- ------------------------------------------------------------------------------------------------ RS Internet Age Fund(R) -- -- 109,836,334 17,305,520 127,141,854 ------------------------------------------------------------------------------------------------ RS MidCap Opportunities -- -- -- 10,245,770 10,245,770 ------------------------------------------------------------------------------------------------ RS Smaller Company Growth -- -- -- -- -- ------------------------------------------------------------------------------------------------ RS Global Natural Resources -- -- -- -- -- ------------------------------------------------------------------------------------------------ RS Investors -- -- -- -- -- ------------------------------------------------------------------------------------------------ RS Partners -- -- -- -- -- ------------------------------------------------------------------------------------------------ RS Value 11,137,662 9,344,761 7,190,816 -- 27,673,239 ------------------------------------------------------------------------------------------------
124 | CALL 1-800-766-FUND During the year ended December 31, 2005, the Funds utilized capital loss carryovers as follows: -------------------------------------------------------------------------------- Fund RS Diversified Growth $ 96,272,181 -------------------------------------------------------------------------------- RS Emerging Growth 152,193,356 -------------------------------------------------------------------------------- RS Growth -- -------------------------------------------------------------------------------- The Information Age Fund(R) 19,586,003 -------------------------------------------------------------------------------- RS Internet Age Fund(R) 17,292,338 -------------------------------------------------------------------------------- RS MidCap Opportunities 24,308,306 -------------------------------------------------------------------------------- RS Smaller Company Growth -- -------------------------------------------------------------------------------- RS Global Natural Resources -- -------------------------------------------------------------------------------- RS Investors -- -------------------------------------------------------------------------------- RS Partners 239,252 -------------------------------------------------------------------------------- RS Value 25,878,290 -------------------------------------------------------------------------------- Under the current income tax law, net capital and currency losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2005, the Funds elected to defer net capital and currency losses as follows: -------------------------------------------------------------------------------- Fund RS Diversified Growth $ -- -------------------------------------------------------------------------------- RS Emerging Growth -- -------------------------------------------------------------------------------- RS Growth -- -------------------------------------------------------------------------------- The Information Age Fund(R) -- -------------------------------------------------------------------------------- RS Internet Age Fund(R) -- -------------------------------------------------------------------------------- RS MidCap Opportunities -- -------------------------------------------------------------------------------- RS Smaller Company Growth -- -------------------------------------------------------------------------------- RS Global Natural Resources -- -------------------------------------------------------------------------------- RS Investors 11,844 -------------------------------------------------------------------------------- RS Partners 30,905,504 -------------------------------------------------------------------------------- RS Value 4,683,456 -------------------------------------------------------------------------------- B. TAX BASIS OF INVESTMENTS The cost of investments for federal income tax purposes at June 30, 2006, for each Fund is listed in the chart below. The net unrealized appreciation on investments, which consists of gross unrealized appreciation and depreciation, is also disclosed in the chart. NOTE 5 INVESTMENTS A. INVESTMENT PURCHASES AND SALES The cost of investments purchased and the proceeds from investments sold (excluding short-term investments) for the six-month period ended June 30, 2006, were as follows: -------------------------------------------------------------------------------- Cost of Investments Proceeds from Fund Purchased Investments Sold RS Diversified Growth $ 354,610,217 $ 457,673,166 -------------------------------------------------------------------------------- RS Emerging Growth 634,855,714 793,434,539 -------------------------------------------------------------------------------- RS Growth 195,640,459 207,760,715 -------------------------------------------------------------------------------- The Information Age Fund(R) 84,998,316 97,843,255 -------------------------------------------------------------------------------- RS Internet Age Fund(R) 51,745,712 57,624,716 -------------------------------------------------------------------------------- RS Midcap Opportunities 284,608,717 248,991,191 -------------------------------------------------------------------------------- RS Smaller Company 230,854,008 185,551,224 -------------------------------------------------------------------------------- RS Global Natural 713,052,522 848,601,526 -------------------------------------------------------------------------------- RS Investors 48,653,855 31,993,592 -------------------------------------------------------------------------------- RS Partners 657,820,465 620,532,623 -------------------------------------------------------------------------------- RS Value 531,897,391 697,319,150 -------------------------------------------------------------------------------- B. FOREIGN SECURITIES Foreign securities investments involve special risks and considerations not typically associated with those of U.S. origin. These risks include, but are not limited to, revaluation of currencies; adverse political, social, and economic developments; and less reliable information about issuers. Moreover, securities of many foreign companies and markets may be less liquid and their prices more volatile than those of U.S. companies and markets. TAX COST OF INVESTMENTS (see Note 4b)
Net Unrealized Appreciation/(Depreciation) Gross Unrealized Gross Unrealized Fund Cost of Investments on Investments Appreciation Depreciation RS Diversified Growth $ 282,781,468 $ 12,581,362 $ 32,775,300 $ 20,193,938 --------------------------------------------------------------------------------------------------------------------- RS Emerging Growth 694,061,378 110,998,627 143,178,448 32,179,821 --------------------------------------------------------------------------------------------------------------------- RS Growth 183,723,602 14,991,031 20,796,343 5,805,312 --------------------------------------------------------------------------------------------------------------------- The Information Age Fund(R) 73,372,821 6,338,593 11,297,165 4,958,572 --------------------------------------------------------------------------------------------------------------------- RS Internet Age Fund(R) 61,792,888 8,025,983 12,644,940 4,618,957 --------------------------------------------------------------------------------------------------------------------- RS MidCap Opportunities 245,331,104 15,003,441 23,825,049 8,821,608 --------------------------------------------------------------------------------------------------------------------- RS Smaller Company Growth 269,357,561 34,403,511 46,795,545 12,392,034 --------------------------------------------------------------------------------------------------------------------- RS Global Natural Resources 1,728,826,272 348,961,655 375,248,635 26,286,980 --------------------------------------------------------------------------------------------------------------------- RS Investors 59,367,402 (12,730) 2,798,045 2,810,775 --------------------------------------------------------------------------------------------------------------------- RS Partners 2,062,327,034 357,197,579 447,059,679 89,862,100 --------------------------------------------------------------------------------------------------------------------- RS Value 1,228,719,351 166,856,224 193,518,939 26,662,715 ---------------------------------------------------------------------------------------------------------------------
WWW.RSINVESTMENTS.COM | 125 NOTES TO FINANCIAL STATEMENTS RESTRICTED SECURITIES (see Note 5c)
Acquisition % of Funds' Fund Security Shares Cost Value Date Net Assets ------------------------------------------------------------------------------------------------------ RS Global Natural Ivanhoe Nickel 4/27/97- Resources & Platinum Ltd. 203,624 $ 784,007 $ 1,018,120 5/7/98 ------------------------------------------------------------------------------------------------------ 784,997 1,018,120 0.05% ------------------------------------------------------------------------------------------------------ RS Value Ivanhoe Nickel 4/25/97- & Platinum Ltd. 698,422 2,837,501 3,492,110 5/7/98 ------------------------------------------------------------------------------------------------------ 2,837,501 3,492,110 0.20% ------------------------------------------------------------------------------------------------------
C. RESTRICTED SECURITIES A restricted security cannot be resold to the general public without prior registration under the Securities Act of 1933. If the security is subsequently registered and resold, the issuer would typically bear the expense of all registrations at no cost to the Fund. Restricted securities are valued according to the guidelines and procedures adopted by the Funds' Board of Trustees as outlined in Note 1a, paragraph 2. See table above for restricted securities held at June 30, 2006. NOTE 6 INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Funds enter into contracts with their vendors and others that provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds. However, based on experience, the Funds expect the risk of loss to be remote. NOTE 7 LEGAL MATTERS On October 6, 2004, RS Investments entered into settlement agreements with the Securities and Exchange Commission (the "SEC") and the Office of the New York State Attorney General (the "NYAG"). The settlement agreements relate to certain investors' frequent trading of shares of RS Emerging Growth Fund during 2000 through 2003. In its settlement with the SEC, RS Investments consented to the entry of an order by the SEC (the "SEC Order") instituting and settling administrative and cease-and-desist proceedings against it. A copy of the SEC Order is available on the SEC's Web site at www.sec.gov, and a copy of the settlement agreement with the NYAG is available on the NYAG's Web site at www.oag.state.ny.us. RS Investments, and not the RS Funds, will bear all the costs of complying with the settlements, including payments of disgorgement and civil penalties (except those paid by individuals) and associated legal fees relating to these regulatory proceedings. After the announcement of those settlements, three related civil lawsuits were commenced. These lawsuits were consolidated into one proceeding in the United States District Court for the District of Maryland on April 19, 2005 (In re Mutual Fund Investment Litigation, Case No. MD-15863-JFM). The district court has appointed a lead plaintiff, and a consolidated complaint has been filed. The consolidated complaint includes RS Investments, the Trust, and certain current or former Trustees, sub-advisers, employees, and officers of the Trust or RS Investments as defendants. It generally tracks the factual allegations made in the SEC and NYAG settlements, including the allegations that Fund prospectuses were false and misleading, and alleges a variety of theories for recovery, including, among others, that defendants violated sections 34(b), 36(a), 36(b), and 48(a) of the Investment Company Act of 1940 and breached fiduciary duties to investors. The consolidated lawsuit further alleges that defendants violated, or caused to be violated, sections 11 and 12(a)(2) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934.The consolidated action purports to be brought on behalf of a specified class of investors in the Funds and does not quantify any relief requested. 126 | CALL 1-800-766-FUND On May 27, 2005, the defendants moved to dismiss the consolidated action. On November 3, 2005, the Court issued a ruling dismissing all claims against the Trust. As for the claims against the other RS defendants, the Court dismissed the claims arising under: sections 34(b) and 36(a) of the Investment Company Act of 1940; sections 11, 12(a)(2), and 15 of the Securities Act of 1933; and state law. The Court allowed plaintiffs to proceed against some of the RS defendants with their claims arising under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and sections 36(b) and 48(a) of the Investment Company Act of 1940. While initially the Court deferred any ruling on the claims against the named independent trustees, on July 24, 2006, the Court dismissed all remaining claims against the former and current independent trustees of the Trust. Additional lawsuits arising out of the same circumstances and presenting similar or different or additional allegations may be filed against the Funds, RS Investments, or their affiliates in the future. RS Investments does not believe that the pending consolidated action will materially affect its ability to continue to provide to the Funds the services it has agreed to provide. It is not possible at this time to predict whether the litigation will have any material adverse effect on any of the Funds. NOTE 8 SALES TRANSACTION A. TRANSACTION WITH GUARDIAN INVESTOR SERVICES LLC On May 17, 2006, Guardian Investor Services LLC, an indirect wholly owned subsidiary of The Guardian Life Insurance Company of America ("Guardian"), announced that it had agreed to acquire approximately 65% of the ownership interest in RS Investments. RS Investments does not anticipate that Guardian's acquisition of that interest in RS Investments will result in any change in the personnel engaged in the management of any of the Funds or in the investment objective or policies of any of the Funds. RS Investments' continued service as the investment adviser to the RS Funds after the acquisition is subject to the approval by the Funds' Board of Trustees and the shareholders of the Funds. In June 2006,proxy materials were mailed to shareholders of record as of May 24, 2006. All fees and expenses, including accounting expenses, legal expenses, proxy expenses, additional trustee fees and expenses or other similar expenses incurred in connection with the completion of the transaction, will be paid by RS Investments and Guardian Investor Services LLC. B. MEETING OF SHAREHOLDERS A meeting of the shareholders of the Funds was held on August 1, 2006. At the meeting, shareholders of each of RS Growth Fund, The Information Age Fund(R), RS Internet Age Fund(R), RS Investors Fund, and RS Partners Fund approved a new advisory agreement (the "New Agreement") between RS Investment Management Co. LLC ("RSIM LLC") and the Trust, on behalf of each of those Funds, which will take effect upon Guardian Investor Services LLC's acquisition of a majority interest in RSIM LLC. The meeting was adjourned through August 21, 2006, for purposes of election of new trustees of the Trust and consideration of the approval of the New Agreement on behalf of each of RS Diversified Growth Fund, RS Emerging Growth Fund, RS MidCap Opportunities Fund, RS Smaller Company Growth Fund, RS Global Natural Resources Fund, and RS Value Fund. WWW.RSINVESTMENTS.COM | 127 SUPPLEMENTAL INFORMATION - UNAUDITED RENEWAL OF THE FUNDS' INVESTMENT ADVISORY AGREEMENT The investment advisory agreement between the RS Funds and RS Investments (the "Advisory Agreement") is subject to annual approval by (i) the vote of the Trustees or of a majority of the outstanding voting securities (as defined in the Investment Company Act of 1940) of each affected Fund, and (ii) the vote of a majority of the Trustees who are not "interested persons" (as defined in the Investment Company Act) of the Trust or RS Investments. The Advisory Agreement is terminable with respect to a Fund by RS Investments, the Trust, or a vote of a majority of the outstanding voting securities of the affected Fund, without penalty, on 60 days' written notice and will terminate automatically in the event of its assignment. The Advisory Agreement also provides that RS Investments may, at its own expense, delegate certain of its responsibilities under the Agreement to sub-advisors for the Funds, who would be required to furnish an investment program and make investment decisions for the Funds. The New Advisory Agreement (as defined on page 131) clarifies that unless the Board of Trustees specifies otherwise in connection with its approval of any such delegation or unless any agreement pursuant to which such delegation is effected specifies otherwise, (i) the obligation of RS Investments in respect of the activities of any such sub-adviser shall be to provide the Board of Trustees its recommendation as to the initial selection of the sub-adviser and as to the periodic renewal of the sub-advisory agreement, and to oversee generally the performance by such sub-adviser of its obligations to the Fund in question over time and to report to the Board of Trustees periodically as to its evaluation of the performance of such sub-adviser and as to the nature and scope of such general oversight, and (ii) assuming compliance by RS Investments with its obligation set out in clause (i) of this sentence in accordance with the standard of care set out in the New Advisory Agreement (which is the same as the standard of care in the current Advisory Agreement) RS Investments shall not be responsible or have any liability for any investment decision or any other act or omission on the part of any sub-adviser, including without limitation any error or mistake of judgment on the part or the sub-adviser or failure by the sub-adviser to comply with any policies, procedures, guidelines, or objectives of any Fund, RS Investments, or the sub-adviser. It is not expected that RS Investments will retain a sub-adviser for any of the existing Funds. It is expected that that the proposed provisions of the New Advisory Agreement will be effective exclusively with respect to any new mutual funds organized in the future as series of the Trust. The Trustees meet over the course of the year with investment advisory personnel from RS Investments and regularly review detailed information regarding the investment program and performance of each Fund. 2006 ANNUAL CONTINUATION The Trustees met in early February 2006 to consider the continuation of the Funds' Advisory Agreement for an interim period in order to permit the Trustees to complete the full review process in late February and early March 2006. At their meeting in early February 2006, the Trustees noted that they had received information regarding the Funds' performance during the quarter ended December 31, 2005, and discussed generally the investment performance of each of the Funds during the past year, developments at RS Investments, the expenses of the Funds, and other related matters. The Trustees who are not "interested persons" of the Funds noted that they had had the opportunity to speak with their independent counsel prior to the meeting, and to review with him the matters to be considered at the meeting. After considering the information described above, the Trustees unanimously voted to approve the continuation of the Advisory Agreement and the advisory fees proposed in connection with that continuation for the proposed interim period. The Trustees noted that, to the extent that the full review process resulted in any changes in those arrangements for the coming year, they would make any such changes effective as of the date of the early February 2006 meeting. The Trustees met again on February 28, 2006, and March 1, 2006, to consider the continuation of the Funds' Advisory Agreement for the following year. At that meeting, the Trustees considered a number of factors 128 | CALL 1-800-766-FUND in determining to approve the continuation of the Advisory Agreement. In all of their deliberations regarding the Advisory Agreement, the Trustees who are not interested persons of the Funds were advised by their independent counsel, with whom they had separate discussions on a number of occasions. In addition, the Trustees were assisted in their review by the Chief Compliance Officer of the Trust, who reviewed all of the information presented to the Trustees and, with the assistance of independent counsel to the disinterested Trustees, prepared a written report on the key factors for the Trustees. That written report discussed a number of the factors described below and concluded that the information that RS Investments had provided to the Trustees provided a reasonable basis for the Trustees to conclude that the advisory fees proposed in connection with the continuation of the Advisory Agreement were reasonable with respect to each Fund. The Trustees considered the fees charged by RS Investments to the Funds under the Advisory Agreement. In this connection, representatives of RS Investments noted to the Trustees that the fees charged by RS Investments to the Funds reflect a number of factors. For example, RS Investments believes its investment professionals are among the most talented managers in their respective asset classes. A relatively high level of compensation is required to attract and to retain those investment professionals, especially in light of other employment opportunities (for example, within the hedge fund industry) available to those professionals. RS Investments makes the services of those investment professionals available to the Funds for fees that are generally lower than investors would pay for comparable services provided through a hedge fund vehicle. RS Investments noted that it does not attempt to be a low-cost provider of investment services to the Funds; rather it makes available to the Funds what it believes to be a very highly qualified and successful group of investment managers in the small- and mid-cap equity strategies in exchange for fees that provide attractive compensation to the firm's investment management personnel, through salary and bonus and, in many cases, through increases in the value of indirect ownership interests in RS Investments. RS Investments furnished information to the Trustees compiled by the independent Lipper organization showing a comparison of RS Investments' fee rate for each Fund compared to peer mutual funds having similar objectives, strategies, and asset sizes (as selected by Lipper). The Trustees also reviewed information from that compilation showing total expenses for the Funds in comparison to the peer funds. The data showed RS Investments' fees to be within the range of comparable mutual funds, with more than half the Funds at or below the median for their respective peer groups, after giving effect to expense limitations currently in effect and expected to be in effect for the coming year. Most of the Funds with advisory fees above the median were not within the top quintile after giving effect to the most recently agreed and scheduled advisory fee reductions, with only one Fund (RS Global Natural Resources Fund) within the top quintile, but still below the top decile. RS Investments stated that the current expense limitations would be renewed through April 30, 2007. The Trustees considered that the total expense ratios of all but two of the Funds were higher than their peer medians. Representatives of RS Investments reviewed with the Trustees the reasons for the Funds' relatively high expense ratios. The Trustees considered information provided by RS Investments as to the fees charged by RS Investments to clients other than the Funds, including institutional separate accounts and mutual funds for which RS Investments serves as sub-adviser. RS Investments generally charges lower fees to those accounts. In many cases, such an account pays fees at the same rate as the comparable Fund on assets up to a specified level, and then at lower rates on additional assets. In some cases, an account's fee rate will be lower at all levels than that of the comparable Fund. Representatives of RS Investments reviewed with the Trustees the reasons for the differences between the fees charged to the Funds and to those accounts. They explained that compliance, reporting, and other legal burdens of providing investment advice to mutual funds exceed those required to provide advisory WWW.RSINVESTMENTS.COM | 129 SUPPLEMENTAL INFORMATION - UNAUDITED (Continued) services to non-mutual fund clients such as retirement or pension plans. In addition, they pointed out that there is substantially greater legal and other risk to RS Investments in managing public mutual funds than in managing private accounts. They also explained that the services and resources required of RS Investments where it sub-advises mutual funds sponsored by others are substantially less than in the case of the Funds, since many of the compliance and regulatory responsibilities related to the management function are retained by the primary adviser. RS Investments furnished detailed financial information, in the form of a consolidated profit and loss statement, showing the revenues and expenses related to the management of the Funds as a whole and each of RS Investments' other categories of advisory clients, respectively. That information showed the substantial costs of providing services to the Funds. RS Investments also furnished a detailed profitability analysis with respect to each Fund for the year ended December 31, 2005, and an estimate for the year ending December 31, 2006. The Trustees noted that the profitability range for the Growth Funds as a whole was lower than the profitability of the separate account advisory business, but the separate account business for the Value Fund strategies had gross margins from five to ten percent points lower than the corresponding Funds. RS Investments' subadvisory business has a lower profit margin due to the reduced fees it receives in respect of that business. The Chief Compliance Officer's report concluded that a higher profit margin relating to RS Investments' services to the Funds is justified by the higher risk and responsibilities associated with that business. The Trustees considered whether economies of scale would likely be realized as the Funds grow and whether a reduction in the advisory fees paid by the Funds by means of breakpoints would be appropriate. RS Investments noted that the increased profit realized by the firm as the Funds grow enables it to devote greater resources to the management of the Funds, as well as to provide financial incentives for the portfolio managers, analysts, and other personnel who in many cases have alternative employment and business opportunities available to them. RS investments noted that investment professionals at RS Investments would likely expect increases in their compensation over time as the Funds grow, and that implementation of breakpoints under current conditions would have the effect of reducing those increases and potentially making management of the Funds a less attractive opportunity to those professionals than managing other types of investment vehicles. RS Investments also noted that certain investment styles, such as small-cap and some mid-cap strategies, do not necessarily readily benefit from economies of scale at certain asset levels because of the limited ability to increase the size of a Fund's investments in certain portfolio holdings. Instead, larger Funds in those styles must often generate and monitor a greater number of potential and actual investments, requiring RS Investments to increase investment resources dedicated to those Funds. The Trustees reviewed performance information for each Fund for various periods. That review included an examination of comparisons of the performance of the Funds to relevant securities indexes and various peer groups of mutual funds prepared by the independent Lipper and Morningstar organizations with respect to various periods, and relative rankings of the Funds compared to peer Funds during various periods. The Trustees noted that the Chief Compliance Officer's report had found that none of the Funds were shown in that data to have substantially lagged all peer mutual funds and indexes for all relevant periods, and many of the Funds enjoyed favorable absolute and comparative performance for various periods. The Chief Compliance Officer's report noted that performance of the Funds overall for 2005 was generally favorable, especially for the Value Funds, and that the performance information presented to the Trustees showed that most of the Funds were in the top quartile among their peers for the three- and five-year periods believed to be most relevant. In the case of RS Diversified Growth Fund, the Trustees noted that the Fund had performed below the Trustees' 130 | CALL 1-800-766-FUND expectations. They discussed with RS Investments a number of steps being implemented by RS Investments in order to enhance performance of that Fund. The Trustees considered the nature, extent, and quality of the services provided by RS Investments. In this regard, the Trustees took into account the experience of the Funds' portfolio management teams and of RS Investments' senior management, and the time and attention devoted by each to the Funds. The Trustees considered the performance of each Fund over the life of the Fund and in recent periods, while also considering its applicable investment objective and strategy and its overall expense ratio. The Trustees also considered the research and other similar services RS Investments receives from many of the broker-dealers with which it places the Funds' (as well as other RS Investments clients') portfolio transactions and from third parties with which these broker-dealers have arrangements. The Trustees receive information on those arrangements quarterly throughout the year and have the opportunity to discuss that information with representatives of RS Investments at the meetings. The Trustees considered the benefit to RS Investments and its affiliates from such services including that (1) the services are of value to RS Investments and its affiliates in advising RS Investments' clients (including the Funds) and (2) RS Investments might otherwise be required to purchase some of these services for cash. The Trustees concluded that these "soft dollar" relationships' benefit to RS Investments was reasonable and that the Funds also benefited from them. The Trustees noted a number of specific recent enhancements to the services provided by RS Investments, including, among others, the following: -- the firm's hiring of two new analysts in 2005 and one in 2006; -- the fact that the firm's legal and compliance department (including the Chief Compliance Officer and the General Counsel) now numbers 10 individuals; -- that one compliance professional is dedicated to the review of the firm's trading activities; -- that the Chief Compliance Officer concluded that RS Investments' trading system is "state-of-the-art"; and -- that the Chief Compliance Officer had completed his first annual compliance review with favorable results. After considering all of the information described above, including the Chief Compliance Officer's written report, the Trustees unanimously voted to approve the continuation of the Advisory Agreement, including the advisory fees proposed in connection with that continuation, for the one year period commencing April 1, 2006. NEW ADVISORY AGREEMENT The board of Trustees of the Trust, including all of the Trustees who are not interested persons of the Trust or of RS Investments, met in person on April 30, May1, and May 24, 2006, to consider approval of a new investment advisory agreement (the "New Advisory Agreement") between the Funds and RS Investment Management Co. LLC ("RSIM Co."), the ultimate parent of RS Investment Management, L.P., the Funds' investment adviser ("RSIM L.P."). The existing investment advisory agreement between the Funds and RSIM, L.P. (the "Existing Advisory Agreement"), will terminate automatically as a result of its "assignment" (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) upon the consummation of the transaction between RSIM Co. and Guardian Investor Services LLC ("GIS"). (For ease of reference, each of RSIM L.P. and RSIM Co. is referred to as "RS Investments" herein unless the context otherwise requires.) In determining to approve the New Advisory Agreement between the RS Funds and RS Investments, the Trustees considered that they had approved the continuation of the Existing Advisory Agreement, the terms of which are substantially similar to the New Advisory Agreement, for a one-year period commencing April 1, 2006, at their meeting on February 28 WWW.RSINVESTMENTS.COM | 131 SUPPLEMENTAL INFORMATION - UNAUDITED (Continued) and March 1, 2006; a summary of the factors considered by the Trustees at that time is provided above. In all of their deliberations, the disinterested Trustees were advised by independent counsel for the disinterested Trustees. The Trustees met with representatives of RS Investments and of GIS, who discussed with the Trustees the capabilities of both firms, and what they saw as the complementary capabilities of the two firms in the areas of investment management and distribution/promotion of mutual fund shares. Those representatives also discussed with the Trustees their expectations as to the management and operations of RS Investments after the transaction and the continuing roles of the current portfolio management teams in the management of each of the Funds. The Trustees considered that it is not anticipated that there will be any change in the personnel who are engaged in the porfolio management of any Fund as a result of the transaction, and that there will be no increase in the advisory fees or the total expenses for current shareholders of any of the existing Funds as a result of the transaction. The Trustees considered the proposed changes in the governanace of RSIM Co., but noted that it is not expected that the new Board of Directors will have any substantial role in the day-to-day portfolio management of the Funds. The Trustees also considered that the combination of the two advisory firms could benefit shareholders of the Funds because RS Investments will, as a result, likely have a larger and more diverse investment management staff to support the Funds' portfolio management teams. The Trustees also recognized the potential benefits to RS Investments of an additional owner of the firm with greater financial resources than currently are available from its current owners. In addition, they recognized that it is possible the Funds over time could experience reduced expenses both because the combined firms may be in a position to purchase services from third parties for their clients at improved rates and because enhanced distribution capabilities resulting from the combination may result in increases in the size of the Funds and possible reduced expenses through economies of scale. The Trustees discussed with management and certain portfolio management professionals of RS Investments the expected effect of the transaction of the firm, including the extent to which the transaction is supported by portfolio management personnel. The Trustees considered the likely effect on RS Investments of potential alternative transactions and of maintaining the current ownership. The Trustees believe that the transaction offers the best prospects for continued stability of RS Investments in the face of current and expected transitional and generational changes at the firm. The Trustees also took in to consideration the various other arrangements beetween RSIM Co. and GIS in respect of the transaction, including RSIM Co.'s additional responsibilities relating to the GIS mutual funds, and concluded that it was unlikely that RSIM Co.'s performance of those responsibilities would limit substantially its ability to perform its obligations to the Funds under the New Advisory Agreement. On the basis of these factors, the Trustees concluded that it would be in the best interests of each of the Funds to be advised by RSIM Co., employing the Funds' current portfolio management teams, and voted unanimously, including the unanimous vote of the Trustees who are not interested persons of the Funds or of RS Invetments or GIS, to approve the New Advisory Agreement in respect of each of the Funds and to recommend to shareholders of each Fund that they approve the Agreement, as well. 132 | CALL 1-800-766-FUND This page left blank intentionally. WWW.RSINVESTMENTS.COM | 133 SUPPLEMENTAL INFORMATION - UNAUDITED TRUSTEES AND OFFICERS INFORMATION TABLE
Number of Portfolios Term of Office** in Fund complex Name, Address,* Position(s) Held and Length of Principal Occupation(s) Overseen by Other Directorships and Age with Trust Time Served During Past 5 Years Trustee Held by Trustee ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES & PRINCIPAL OFFICERS: Terry R. Otton+ President, President and CEO and CFO (prior to N/A N/A 52 years old Principal Principal Executive September 2005, co-CEO, Executive Officer, Officer since COO, and CFO), RS Treasurer, September 2005; Investments; formerly, Principal Financial Co-President Managing Director, and Accounting and Co-Principal Putnam Lovell NBF Group Officer Executive Inc., an investment Officer, banking firm. November 2004- September 2005; Treasurer and Principal Financial and Accounting Officer since May 2004 Michael G. McCaffery+ Trustee Since May 2002 Managing Director and 11 Director, KBHome; 53 years old CEO, Makena Capital Director, Thomas Management, an Weisel Partners investment Group, Inc. management firm; (a broker-dealer formerly through which the President and CEO, Funds effect Stanford Management transactions) Company, an investment management firm. Benjamin L. Douglas+ Vice President, Vice President and General Counsel, RS N/A N/A 39 years old Secretary, and Secretary since Investments; formerly, Chief Legal February 2004; Vice President and Officer Chief Legal Senior Counsel, Charles Officer since Schwab Investment August 2004 Management, Inc., an investment management firm. John J. Sanders, Jr.+ Senior Vice Senior Vice Chief Compliance N/A N/A 61 years old President, Chief President since Officer, RS Investments; Compliance Officer, November 2004; formerly, Chief and Anti-Money Chief Compliance Compliance Officer Laundering Officer since and co-COO, Husic Compliance August 2004; Capital Management, Officer Anti-Money an investment management Laundering firm. Compliance Officer since May 2004
134 | CALL 1-800-766-FUND TRUSTEES AND OFFICERS INFORMATION TABLE (Continued)
Number of Portfolios Term of Office** in Fund complex Name, Address,* Position(s) Held and Length of Principal Occupations Overseen by Other Directorships and Age with Trust Time Served During Past 5 Years Trustee Held by Trustee ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES: Leonard B. Auerbach Trustee; Since June 1987 Chairman and CEO, L, B, 11 Director, Luminent 59 years old Chairman of A&C, Inc., a consulting Mortgage Capital, the Board; Co- firm; formerly, Managing Inc. Chairman of the Director and CEO, AIG- Board, August CentreCapital Group, Inc., 2004-February 2006 a financial services firm. Judson Bergman++ Trustee Since May 2006 Founder and CEO, 11 N/A 49 years old Envestnet Asset Management, a provider of back-office solutions for financial advisors and the wealth management industry. Jerome S. Contro Trustee; Since June 2001 Partner, Tango Group, 11 Director, Janus 49 years old Co-Chairman a private investment Capital Group of the Board, firm. August 2004- February 2006 John W. Glynn, Jr. Trustee Since July 1997 President, Glynn Capital 11 N/A 66 years old Management, an investment management firm.
* Unless otherwise indicated, the business address of the persons listed is c/o RS Investments, 388 Market Street, Suite 1700, San Francisco, CA 94111. ** Under the Trust's Amended and Restated Agreement and Declaration of Trust, a Trustee serves until his successor is elected or qualified, or until he sooner dies, resigns, is removed, or becomes disqualified. Under the Trust's Bylaws, officers hold office at the pleasure of the Trustees. In addition, the Trustees have designated a mandatory retirement age of 72, which can be deferred annually by unanimous vote of all members of the Board, excluding the member who has reached the retirement age. + Interested persons as defined by the 1940 Act. Mr. McCaffery is an interested person because he is an affiliated person of a broker-dealer through which the Funds effect transactions. ++ Mr. Bergman was elected to the Board of Trustees on May 9, 2006. The Statement of Additional Information relating to the Funds includes additional information about Trustees and is available, without charge, upon request, by writing to the Funds, calling 1-800-766-FUND [3863], or on our Web site at http://www.RSinvestments.com. The Funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Funds' Form N-Q is available on the Securities and Exchange Commission's website at http://www.sec.gov. The Funds' Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. This information is also available, without charge, upon request, by calling toll-free 1-800-766-FUND [3863]. A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities, and information regarding how the Funds voted proxies relating to portfolio securities during the 12-month period ended June 30, 2006, are available (i) without charge, upon request, by calling toll-free 1-800-766-FUND [3863]; (ii) on RS Investments' website at http://www.RSinvestments.com; and (iii) on the Securities and Exchange Commission's website at http://www.sec.gov. WWW.RSINVESTMENTS.COM | 135 ADMINISTRATION OFFICERS AND TRUSTEES TERRY R. OTTON, PRESIDENT, PRINCIPAL EXECUTIVE OFFICER, TREASURER, AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER LEONARD B. AUERBACH, TRUSTEE AND CHAIRMAN Chairman and CEO, L, B, A&C, Inc. JUDSON BERGMAN, TRUSTEE Founder and CEO, Envestnet Asset Management JEROME S. CONTRO, TRUSTEE Partner, Tango Group JOHN W. GLYNN JR., TRUSTEE President, Glynn Capital Management MICHAEL G. MCCAFFERY, TRUSTEE Managing Director and CEO, Makena Capital Management BENJAMIN L. DOUGLAS, SECRETARY, CHIEF LEGAL OFFICER, AND VICE PRESIDENT JOHN J. SANDERS, JR., CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT INVESTMENT ADVISER RS INVESTMENT MANAGEMENT, L.P. 388 Market Street San Francisco, CA 94111 DISTRIBUTOR PFPC DISTRIBUTORS, INC. 760 Moore Road King of Prussia, PA 19406 TRANSFER AGENT AND DISBURSING AGENT BOSTON FINANCIAL DATA SERVICES Kansas City, MO 1-800-624-8025 CUSTODIAN PFPC TRUST COMPANY Philadelphia, PA INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PRICEWATERHOUSECOOPERS LLP San Francisco, CA LEGAL COUNSEL ROPES & GRAY LLP Boston, MA 136 | CALL 1-800-766-FUND RS INVESTMENTS' SENIOR MANAGEMENT BIOGRAPHIES [PHOTOS OMITTED] FROM LEFT TO RIGHT: G. RANDALL HECHT TERRY R. OTTON BENJAMIN L. DOUGLAS JOHN J. SANDERS, JR. G. RANDALL HECHT is chairman of RS Investments. He joined Robertson, Stephens & Company (RS&Co.) in June 1984 as the firm's chief financial officer and became a managing director in 1985. From 1993 to 1997, Mr. Hecht was executive vice president and chief operating officer of RS&Co. He co-founded Robertson Stephens Investment Management in 1986 and was the group head until he led an employee buyout from Bank of America in 1999. From 1997 to 1999, he was the head of investment management for Bank of America. Mr. Hecht received a B.S. in finance from the University of California at Berkeley and is a Certified Public Accountant. TERRY R. OTTON is chief executive officer of RS Investments. He joined RS Investments in 2004 as co-chief executive officer, chief operating officer, and chief financial officer. He has more than 22 years of experience in the investment management industry, having previously served since 2001 as a managing director of the mergers-and-acquisitions practice at Putnam Lovell NBF Group, Inc., an investment banking firm focused on the investment management industry. Previously, Mr. Otton spent more than 10 years as the CFO of Robertson, Stephens & Company and Robertson Stephens Investment Management, the predecessor of RS Investments. He was one of the original principals who established RS's mutual fund business in 1986, and he served as its CFO until it became an independent, employee-owned firm in 1999. Mr. Otton holds a B.S. in business administration from the University of California at Berkeley and is a Certified Public Accountant. BENJAMIN L. DOUGLAS joined RS Investments in 2003 as general counsel after nearly a decade specializing in investment management law. He joined the firm from Charles Schwab Investment Management, where he served as vice president and senior counsel. Previously, he was an associate at Shartsis, Friese & Ginsburg LLP, a leading law firm in the investment management industry. Mr. Douglas holds a J.D. and an M.P.P., along with a B.A. in history, from the University of California at Berkeley. JOHN J. SANDERS, JR. joined RS Investments in 2004 as chief compliance officer. He has more than 35 years of operations and compliance experience. Prior to joining RS, Mr. Sanders was the director of compliance and the co-COO for Husic Capital Management in San Francisco, beginning in April 2000. Prior to that, he was the equity compliance director at Fleet Robertson Stephens. Mr. Sanders began his career in the securities industry with Kidder, Peabody & Co. in New York. In 1976, he moved to San Francisco and joined Robertson, Colman, Siebel and Weisel (which became Robertson Stephens in 1983) as the director of compliance and operations. He also serves as chief compliance officer and senior vice president of RS Investment Trust, reporting directly to the Fund's Board of Trustees. WWW.RSINVESTMENTS.COM | 137 This page left blank intentionally. 138 | CALL 1-800-766-FUND This page left blank intentionally. WWW.RSINVESTMENTS.COM | 139 INVESTING WITH RS There are several ways to invest with RS Funds. Please read the prospectus carefully before investing or sending money. Then, review the chart below for the investing option that you prefer:
METHOD TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT ------ ------------------ -------------------- MINIMUM INVESTMENT AMOUNT: MINIMUM INVESTMENT AMOUNT: $5,000 (regular account) $1,000 (regular account) $1,000 (IRAs and gift/transfer-to- $250 (IRAs and gift/transfer-to-minor minor accounts) accounts) $100 (automatic investment plans) ---------------------------------------------------------------------------------------------------------------------- New and current investors may invest up Current investors may add to their WEB [LOGO] to $50,000 online. Click the ESTABLISH investment by logging into their WWW.RSINVESTMENTS.COM NEW ACCOUNT button on the MY ACCOUNT account and clicking the BUY SHARES page. button. ---------------------------------------------------------------------------------------------------------------------- You may not use telephone transactions Once you have established banking PHONE [LOGO] for initial purchases of a Fund's information on your account, you can 1-800-766-FUND [3863] shares. call this number and SPEAK WITH A SHAREHOLDER SERVICES REPRESENTATIVE live OR go through OUR AUTOMATED PHONE SYSTEM and proceed with purchasing shares in the amount you wish to invest. ---------------------------------------------------------------------------------------------------------------------- Send a COMPLETED APPLICATION and CHECK Mail your check with an INVESTMENT STUB MAIL [LOGO] MADE PAYABLE TO RS INVESTMENT TRUST. FORM detached from your confirmation or REGULAR: quarterly statement. BOSTON FINANCIAL DATA SERVICES P.O. BOX 219717 KANSAS CITY, MO 64121-9717 OVERNIGHT: BOSTON FINANCIAL DATA SERVICES 330 WEST NINTH STREET, FIRST FLOOR KANSAS CITY, MO 64105-1514 ---------------------------------------------------------------------------------------------------------------------- FIRST (new shareholders only), provide SECOND, instruct your bank to wire the WIRE [LOGO] Boston Financial Data Services with specified amount, along with your 1-800-766-FUND [3863] details of your wire (name, mailing and account name and number to the bank street address, Social Security Number, specified on page 41 of the Prospectus. SEE PAGE 41 OF THE PROSPECTUS FOR birthdate, amount being wired, name DETAILED INSTRUCTIONS of your wiring bank, and the name and telephone number of a contact person at the wiring bank) by completing an account application and sending via regular mail. No purchase of shares by wire will be effected until the Funds' Transfer Agent has received your completed and signed application. ----------------------------------------------------------------------------------------------------------------------
Please see pages 40-42 of the Prospectus for more detailed information. 140 | CALL 1-800-766-FUND RS FUND INVESTMENT STYLES SMALL-CAP GROWTH ---------------- RS DIVERSIFIED GROWTH FUND Focusing on small-cap growth companies. Managed by John Seabern. RSDGX RS EMERGING GROWTH FUND Seeking to invest in America's most dynamic, growth-oriented companies. Managed by Jim Callinan. RSEGX RS SMALLER COMPANY GROWTH FUND Focusing on smaller market-cap companies. Managed by Bill Wolfenden. RSSGX SMALL-CAP VALUE --------------- RS PARTNERS FUND+ A small-cap fund using a cash flow value methodology. Managed by Andy Pilara, David Kelley, and Joe Wolf. RSPFX MID-CAP GROWTH -------------- RS MIDCAP OPPORTUNITIES FUND Seeking growth in mid-cap companies while attempting to moderate risk. Managed by John Wallace. RSMOX MID-CAP VALUE ------------- RS VALUE FUND A mid-cap fund using a cash flow value methodology. Managed by Andy Pilara, David Kelley, and Joe Wolf. RSVAX MULTI-CAP GROWTH ---------------- RS GROWTH FUND Seeking capital appreciation for the long-term investor. Managed by John Wallace. RSGRX MULTI-CAP VALUE --------------- RS INVESTORS FUND A concentrated all-cap fund focusing on undervalued companies worldwide. Managed by Andy Pilara, David Kelley, and Joe Wolf. RSINX SECTOR ------ THE INFORMATION AGE FUND(R) Targeting investments in the information technology sector. Managed by Steve Bishop and Allison Thacker. RSIFX RS INTERNET AGE FUND(R) Investing in companies likely to benefit from the development of the Internet. Managed by Steve Bishop and Allison Thacker. RIAFX RS GLOBAL NATURAL RESOURCES FUND Focusing primarily on companies in natural resources industries worldwide. Managed by Andy Pilara and MacKenzie Davis. RSNRX FUND LISTINGS Our Funds are listed in THE WALL STREET JOURNAL, USA TODAY, INVESTOR'S BUSINESS DAILY, and most local newspapers under the heading RS Funds. THIS REPORT MAY BE USED ONLY WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS.YOU SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE RS FUNDS BEFORE MAKING AN INVESTMENT DECISION. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION -- PLEASE READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY.SR621 + RS PARTNERS FUND is currently offered (by purchase or exchange) only to investors purchasing shares through certain financial intermediaries. See "Other Information About Purchasing Shares" on page 42 of the Prospectus. (THE INFORMATION ON THIS PAGE IS NOT PART OF THE SEMIANNUAL REPORT) [GRAPHIC OMITTED] 388 MARKET STREET SAN FRANCISCO CA 94111 | WWW.RSINVESTMENTS.COM | CALL 1-800-766-FUND
RS | INVESTMENTS ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of this item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officer has concluded, as of a date within 90 days of the filing date of this report, based on his evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))), required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)), that the design and operation of such procedures are effective to provide reasonable assurance that the information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) RS Investment Trust ----------------------------------------------------------- By (Signature and Title)* /s/ Terry R. Otton ---------------------------------------------- Terry R. Otton, President (principal executive officer) Date August 30, 2006 ------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ Terry R. Otton ---------------------------------------------- Terry R. Otton, President (principal executive officer) Date August 30, 2006 ------------------------------------------------------------------- By (Signature and Title)* /s/ Terry R. Otton ---------------------------------------------- Terry R. Otton, Treasurer (principal financial officer) Date August 30, 2006 ------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.