<Page> 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: 811-21248 Morgan Stanley Allocator Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: January 31, 2004 Date of reporting period: : July 31, 2003 Item 1 - Report to Shareholders <Page> WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY ALLOCATOR FUND PERFORMED DURING THE PERIOD ENDED JULY 31, 2003. THE PORTFOLIO MANAGEMENT TEAM WILL PROVIDE AN OVERVIEW OF THE MARKET CLIMATE AND DISCUSS SOME OF THE FACTORS THAT HELPED OR HINDERED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS, AS WELL AS OTHER INFORMATION. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. <Page> Fund Report TOTAL RETURN FROM THE FUND'S INCEPTION THROUGH THE PERIOD ENDED JULY 31, 2003 <Table> <Caption> LIPPER S&P FLEXIBLE 500 PORTFOLIO CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2) 7.30% 6.90% 6.90% 7.40% 20.53% 14.63% </Table> THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS From the Fund's inception on February 26, 2003, through July 31, 2003, the market posted a very strong rally, with the S&P 500 rising 21 percent. The market rose sharply as geopolitical concerns waned and investors grew optimistic about the positive impact of increased fiscal and monetary stimulus. The defensive sectors and securities that had led the market during the bear market period fell behind more cyclical sectors as investors' expectations for the economy improved. The best performing groups were technology, financials, consumer cyclicals and basic materials. Bonds performed strongly through much of the equity rally. In June, however, signs of economic growth led investors to fear that interest rates were unsustainably low. Bond prices (which move in opposition to yields) fell sharply through the end of the period as investors allocated assets out of the debt markets. These shifts were reflected in the yield on the 10-year Treasury bond. After declining sharply from May through mid-June, to 3.11 percent, it backed up to 4.41 percent at the end of July. PERFORMANCE ANALYSIS The Fund's underperformance relative to the S&P 500 during the period was attributable to its generally conservative portfolio construction. The Fund was held back by a low allocation to equities early in the period and by its focus on high-quality companies that were outpaced by more speculative ones. We maintained this defensive posture based on our concerns about structural headwinds facing the global economy, high debt levels, increasing pension and health-care costs and the limited use of fiscal and monetary stimulus by the European authorities. The Fund benefited from strong performance of its health-care and basic materials holdings. Stock selection in health care was advantageous, particularly in biotechnology, HMOs and medical devices. Biotech and medical devices have enjoyed very strong new-product cycles, and HMOs have benefited from pricing that has outpaced their costs. In basic materials, stock selection and overweightings in precious metals and specialty chemicals contributed positively to performance. We believe concerns about dollar weakness led investors to turn to real assets, driving precious metals upward. Specialty chemicals, like all other cyclical sectors, benefited from optimism about an improving economy. We initially took a long duration position, expecting that interest rates would decline given a continued sluggish economy. As rates approached our targets, we shifted to a neutral and then a short duration position. We also reduced the Fund's overall allocation to fixed income, moving toward a minimum weighting in this area. 2 <Page> TOP 10 HOLDINGS <Table> U.S. Treasury Bond 5.3% Citigroup Inc. 2.9 Cisco Systems Inc. 2.0 Newmont Mining Corp. 1.9 Intel Corp. 1.9 Pfizer, Inc. 1.7 Bank of America Corp. 1.7 Wal-Mart Stores Inc. 1.6 Microsoft Corp. 1.4 American Intl Group Inc. 1.4 </Table> PORTFOLIO COMPOSITION <Table> Common Stock 71.9% Short Term 11.6 U.S. Treasuries 5.3 Corp. Debt - Non-convertible. 4.7 Foreign Government Bonds 3.4 </Table> SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF NET ASSETS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS A RECOMMENDATION TO BUY THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY - - THE FUND'S INVESTMENT MANAGER ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE THREE MAJOR ASSET CATEGORIES OF EQUITY SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND MONEY MARKET INSTRUMENTS, THE COMBINATION OF WHICH WILL BE VARIED FROM TIME TO TIME BOTH WITH RESPECT TO INDUSTRY SECTOR WEIGHTINGS AND TYPES OF SECURITIES IN RESPONSE TO CHANGING MARKET AND ECONOMIC TRENDS. - - THE FUND'S INVESTMENT MANAGER INTENDS TO UTILIZE A SECTOR ROTATION PROCESS TO SELECT EQUITIES AND FIXED-INCOME SECURITIES. THE PROCESS IS DESIGNED TO RESPOND TO CHANGING ECONOMIC CYCLES BY UTILIZING A THREE-STEP INVESTMENT PROCESS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. 3 <Page> Performance Summary TOTAL RETURNS--PERIOD ENDED JULY 31, 2003 <Table> <Caption> CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ 02/26/03 02/26/03 02/26/03 02/26/03 SYMBOL ALRAX ALRBX ALRCX ALRDX Since Inception 7.30%(3) 6.90%(3) 6.90%(3) 7.40%(3) 1.67(4) 1.90(4) 5.90(4) </Table> PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE CUMULATIVE, NOT ANNUALIZED. - ---------- Notes on Performance (1) THE STANDARD AND POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER FLEXIBLE FUNDS CLASSIFICATION. THE INDEX IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CDSC FOR CLASS C IS 1.0% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. 4 <Page> MORGAN STANLEY ALLOCATOR FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2003 (UNAUDITED) <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- COMMON STOCKS (72.4%) AIR FREIGHT/COURIERS (0.5%) 13,700 FedEx Corp. $ 882,143 -------------- AIRLINES (0.2%) 8,600 JetBlue Airways Corp.* 391,816 -------------- APPAREL/FOOTWEAR RETAIL (0.9%) 30,600 Chico's FAS, Inc.* 830,790 25,200 Hot Topic, Inc.* 728,280 -------------- 1,559,070 -------------- AUTO PARTS: O.E.M. (0.3%) 6,000 Eaton Corp. 505,020 -------------- BEVERAGES: ALCOHOLIC (0.4%) 12,900 Anheuser-Busch Companies, Inc. 668,478 -------------- BEVERAGES: NON-ALCOHOLIC (0.4%) 14,700 Coca-Cola Co. (The) 661,059 -------------- BIOTECHNOLOGY (3.5%) 15,900 Amgen Inc. * ** 1,106,322 13,200 Amylin Pharmaceuticals, Inc.* 316,404 6,300 CV Therapeutics, Inc.* 224,847 25,300 Genentech, Inc.* 2,042,975 7,900 Genzyme Corp.* 398,476 15,800 Gilead Sciences, Inc.* 1,083,090 8,400 ICOS Corp.* 366,408 10,500 Neurocrine Biosciences, Inc.* 563,640 -------------- 6,102,162 -------------- BROADCASTING (0.5%) 26,600 Univision Communications Inc. (Class A)* 829,920 -------------- CABLE/SATELLITE TV (0.6%) 33,700 Comcast Corp. (Class A)* 1,021,784 -------------- CASINO/GAMING (0.9%) 14,600 GTECH Holdings Corp. 563,122 20,900 International Game Technology 531,905 15,600 MGM Mirage* 535,080 -------------- 1,630,107 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 5 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- CHEMICALS: MAJOR DIVERSIFIED (0.2%) 7,500 Dow Chemical Co. (The) $ 264,750 -------------- CHEMICALS: SPECIALTY (0.9%) 9,700 Air Products & Chemicals, Inc. 450,856 16,400 Praxair, Inc. 1,060,424 -------------- 1,511,280 -------------- COMPUTER COMMUNICATIONS (2.0%) 174,900 Cisco Systems, Inc.* 3,414,048 7,600 NetScreen Technologies, Inc.* 164,388 -------------- 3,578,436 -------------- COMPUTER PERIPHERALS (1.3%) 26,200 EMC Corp.* 278,768 73,000 Maxtor Corp.* 730,000 60,800 Seagate Technology (Cayman Islands) 1,325,440 -------------- 2,334,208 -------------- COMPUTER PROCESSING HARDWARE (2.0%) 56,600 Dell Inc.* 1,906,288 74,600 Hewlett-Packard Co. 1,579,282 -------------- 3,485,570 -------------- CONTRACT DRILLING (0.6%) 10,300 ENSCO International Inc. 258,221 32,100 Pride International, Inc.* 529,008 10,800 Rowan Companies, Inc.* 237,060 -------------- 1,024,289 -------------- DEPARTMENT STORES (0.7%) 6,400 Federated Department Stores, Inc. 256,064 4,400 Kohl's Corp.* 261,140 9,000 Neiman Marcus Group, Inc. (The) (Class A)* 353,700 7,900 Sears, Roebuck & Co. 321,530 -------------- 1,192,434 -------------- DISCOUNT STORES (1.6%) 49,500 Wal-Mart Stores, Inc. ** 2,767,545 -------------- ELECTRIC UTILITIES (1.5%) 14,200 Entergy Corp. 731,442 12,300 Exelon Corp. 706,881 </Table> SEE NOTES TO FINANCIAL STATEMENTS 6 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- 10,800 PPL Corp. $ 427,572 16,900 Public Service Enterprise Group, Inc. 688,675 -------------- 2,554,570 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.4%) 26,500 Rockwell Automation, Inc. 684,760 -------------- ELECTRONIC PRODUCTION EQUIPMENT (0.3%) 25,800 Applied Materials, Inc.* 503,100 -------------- ELECTRONICS/APPLIANCE STORES (0.2%) 9,200 Best Buy Co., Inc.* 401,580 -------------- ELECTRONICS/APPLIANCES (0.1%) 7,300 Sony Corp. (Japan) 225,667 -------------- FINANCE/RENTAL/LEASING (0.5%) 300 Countrywide Financial Corp. 20,043 28,600 MBNA Corp. 637,494 6,000 SLM Corp. 248,760 -------------- 906,297 -------------- FINANCIAL CONGLOMERATES (5.3%) 33,700 American Express Co. 1,488,529 95,700 Citigroup Inc. 4,287,360 53,600 J.P. Morgan Chase & Co. 1,878,680 14,500 State Street Corp. 665,550 18,200 UBS AG (ADR) (Registered Shares) (Switzerland) 1,061,060 -------------- 9,381,179 -------------- FOOD: MEAT/FISH/DAIRY (0.3%) 16,250 Dean Foods Co.* 486,362 -------------- HOME IMPROVEMENT CHAINS (0.7%) 19,900 Home Depot, Inc. (The) 620,880 12,700 Lowe's Companies, Inc. 604,012 -------------- 1,224,892 -------------- HOTELS/RESORTS/CRUISELINES (0.8%) 17,400 Carnival Corp. (Panama) 596,994 29,600 Hilton Hotels Corp. 432,160 12,700 Starwood Hotels & Resorts Worldwide, Inc. 414,020 -------------- 1,443,174 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 7 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- HOUSEHOLD/PERSONAL CARE (1.6%) 25,600 Avon Products, Inc. $ 1,597,184 15,400 Procter & Gamble Co. (The) 1,353,198 -------------- 2,950,382 -------------- INDUSTRIAL CONGLOMERATES (1.3%) 7,800 3M Co. 1,093,560 12,000 Ingersoll Rand Co. (Class A) (Bermuda) 650,880 7,800 United Technologies Corp. 586,794 -------------- 2,331,234 -------------- INDUSTRIAL SPECIALTIES (0.3%) 20,900 Ecolab Inc. 516,439 -------------- INFORMATION TECHNOLOGY SERVICES (1.1%) 42,500 Accenture Ltd. (Class A) (Bermuda)* 825,350 34,000 Citrix Systems, Inc.* 617,100 5,900 International Business Machines Corp. ** 479,375 -------------- 1,921,825 -------------- INSURANCE BROKERS/SERVICES (0.1%) 4,800 Marsh & McLennan Companies, Inc. 238,176 -------------- INTERNET RETAIL (1.1%) 12,700 Amazon.com, Inc.* 529,844 33,400 InterActive Corp.* 1,351,698 -------------- 1,881,542 -------------- INTERNET SOFTWARE/SERVICES (0.7%) 40,300 Yahoo! Inc.* 1,254,539 -------------- INVESTMENT BANKS/BROKERS (2.5%) 15,300 Goldman Sachs Group, Inc. (The) 1,333,242 4,600 Legg Mason, Inc. 322,000 9,700 Lehman Brothers Holdings, Inc. 613,719 37,300 Merrill Lynch & Co., Inc. 2,028,001 -------------- 4,296,962 -------------- INVESTMENT TRUSTS/MUTUAL FUNDS (0.5%) 7,730 iShares GS InvesTop Corp. 829,815 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 8 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- MAJOR BANKS (2.6%) 35,700 Bank of America Corp. $ 2,947,749 31,000 Wachovia Corp. 1,354,390 5,500 Wells Fargo & Co. 277,915 -------------- 4,580,054 -------------- MANAGED HEALTH CARE (2.5%) 28,100 Aetna Inc. 1,731,522 4,000 Anthem, Inc.* 302,040 43,600 UnitedHealth Group Inc. 2,271,124 -------------- 4,304,686 -------------- MEDIA CONGLOMERATES (1.4%) 31,100 AOL Time Warner Inc.* 479,873 30,100 Disney (Walt) Co. (The) 659,792 22,300 News Corporation Ltd. (The) (ADR) (Australia) 678,143 14,500 Viacom, Inc. (Class B) (Non-Voting)* 631,040 -------------- 2,448,848 -------------- MEDICAL SPECIALTIES (3.0%) 9,300 Boston Scientific Corp.* 588,039 32,100 Guidant Corp. 1,515,762 30,500 Medtronic, Inc. 1,570,750 8,400 Millipore Corp.* 373,716 14,350 St. Jude Medical, Inc.* 769,878 7,100 Varian Medical Systems, Inc.* 435,656 -------------- 5,253,801 -------------- METAL FABRICATIONS (0.4%) 29,500 Chicago Bridge & Iron Company N.V. (ADR) (Netherlands) 727,470 -------------- MISCELLANEOUS COMMERCIAL SERVICES (0.2%) 7,000 Fair Isaac Corp. 378,280 -------------- MULTI-LINE INSURANCE (1.4%) 37,600 American International Group, Inc. 2,413,920 -------------- OIL & GAS PRODUCTION (0.8%) 12,635 Apache Corp. 782,864 8,900 Burlington Resources Inc. 410,913 5,500 Devon Energy Corp. 260,535 -------------- 1,454,312 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 9 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- OILFIELD SERVICES/EQUIPMENT (0.5%) 12,500 BJ Services Co.* $ 428,125 5,600 Schlumberger Ltd. 252,392 7,800 Smith International, Inc.* 279,552 -------------- 960,069 -------------- OTHER CONSUMER SERVICES (1.1%) 10,800 Apollo Group, Inc. (Class A)* 699,408 7,300 Corinthian Colleges, Inc.* 398,653 8,000 eBay Inc.* 857,600 -------------- 1,955,661 -------------- OTHER METALS/MINERALS (0.6%) 38,150 BHP Billiton Ltd. 242,156 5,600 Inco Ltd. (Canada)* 130,536 8,200 Phelps Dodge Corp.* 345,958 11,791 Rio Tinto PLC (ADR) (United Kingdom) 244,811 -------------- 963,461 -------------- PACKAGED SOFTWARE (4.2%) 22,600 Cognos, Inc. (ADR) (Canada)* 611,556 38,600 Computer Associates International, Inc. 982,370 22,700 Mercury Interactive Corp.* 893,472 91,700 Microsoft Corp. ** 2,420,880 56,200 Oracle Corp.* 674,400 1,100 SAP AG (Germany) 129,694 13,100 Symantec Corp.* 612,687 33,400 VERITAS Software Corp.* 1,028,720 -------------- 7,353,779 -------------- PERSONNEL SERVICES (0.3%) 16,800 Monster Worldwide Inc.* 446,040 -------------- PHARMACEUTICALS: MAJOR (2.7%) 23,500 Bristol-Myers Squibb Co. 615,700 17,200 Lilly (Eli) & Co. 1,132,448 88,900 Pfizer Inc. ** 2,965,704 -------------- 4,713,852 -------------- PHARMACEUTICALS: OTHER (0.2%) 5,400 Forest Laboratories, Inc.* 258,552 2,800 Teva Pharmaceutical Industries Ltd. (ADR) (Israel) 160,552 -------------- 419,104 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 10 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- PRECIOUS METALS (2.5%) 16,700 Freeport-McMoRan Copper & Gold, Inc. (Class B) $ 447,393 26,800 Glamis Gold Ltd. (ADR) (Canada)* 337,680 23,200 Goldcorp Inc. (ADR) (Canada) 281,184 90,300 Newmont Mining Corp. 3,259,830 -------------- 4,326,087 -------------- PROPERTY - CASUALTY INSURERS (0.5%) 6,400 Everest Re Group, Ltd. (ADR) (Bermuda) 483,648 4,000 XL Capital Ltd. (Class A) (ADR) (Bermuda) 318,000 -------------- 801,648 -------------- RESTAURANTS (0.8%) 2,400 Applebee's International, Inc. 76,560 17,500 McDonald's Corp. 402,675 9,000 Sonic Corp.* 219,960 27,200 Starbucks Corp.* 743,376 -------------- 1,442,571 -------------- SEMICONDUCTORS (5.0%) 8,500 Analog Devices, Inc.* 322,575 31,700 Integrated Circuit Systems, Inc.* 952,585 130,100 Intel Corp. 3,245,995 20,800 Intersil Corp. (Class A)* 512,928 27,100 Linear Technology Corp. 999,448 25,600 Marvell Technology Group Ltd. (Bermuda)* 900,096 18,700 Maxim Integrated Products, Inc. 730,796 11,900 Micron Technology, Inc.* 174,216 3,100 NEC Electronics Corp. (Japan) 147,472 11,652 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan)* 116,520 34,500 Texas Instruments Inc. 651,015 -------------- 8,753,646 -------------- SPECIALTY STORES (0.7%) 35,000 Staples, Inc.* 704,900 12,700 Tiffany & Co. 436,372 -------------- 1,141,272 -------------- TELECOMMUNICATION EQUIPMENT (0.2%) 5,600 ADTRAN, Inc. 273,504 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 11 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- TOBACCO (1.1%) 38,800 Altria Group, Inc. $ 1,552,388 13,700 Loews Corp.- Carolina Group 343,596 -------------- 1,895,984 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.3%) 13,600 Caterpillar Inc. 917,592 5,400 Deere & Co. 274,212 14,900 PACCAR, Inc. 1,150,280 -------------- 2,342,084 -------------- WIRELESS TELECOMMUNICATIONS (1.6%) 78,500 AT&T Wireless Services Inc.* 669,605 22,300 Nextel Communications, Inc. (Class A)* 407,198 91,500 Vodafone Group PLC (ADR) (United Kingdom) 1,736,670 -------------- 2,813,473 -------------- TOTAL COMMON STOCKS (COST $120,465,830) 126,606,172 -------------- <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- GOVERNMENT OBLIGATIONS (8.7%) FOREIGN GOVERNMENT OBLIGATIONS (3.4%) $ 500 Canadian Government (Canada) 5.25% 06/01/12 364,746 1,835 Deutsche Bundesrepublik (Germany) 4.50 01/04/13 2,114,515 1,025 France (Republic of) (France) 5.25 04/25/08 1,241,765 375 Government of Quebec (Canada) 6.125 01/22/11 411,073 405 Ontario (Province of) (Canada) 5.125 07/17/12 417,507 820 United Mexican States Corp. (Mexico) 8.375 01/14/11 930,700 400 United Mexican States Corp. (Mexico) 8.30 08/15/31 417,000 -------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $6,284,521) 5,897,306 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 12 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS (5.3%) $ 3,700 U.S. Treasury Note 5.625% 05/15/08 $ 4,081,851 4,643 U.S. Treasury Note 4.25 01/15/10 5,267,129 -------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $9,664,491) 9,348,980 -------------- TOTAL GOVERNMENT OBLIGATIONS (COST $15,949,012) 15,246,286 -------------- CORPORATE BONDS (4.2%) AEROSPACE & DEFENSE (0.2%) 315 Lockheed Martin Corp. 8.50 12/01/29 386,463 -------------- CABLE/SATELLITE TV (0.2%) 300 Comcast Corp. 6.50 01/15/15 312,831 80 Cox Communications, Inc. 7.125 10/01/12 89,367 -------------- 402,198 -------------- CASINO/GAMING (0.2%) 250 International Game Technology 8.375 05/15/09 295,405 -------------- ELECTRIC UTILITIES (0.1%) 170 Constellation Energy Group, Inc. 7.60 04/01/32 182,740 -------------- FINANCE/RENTAL/LEASING (0.2%) 220 Ford Motor Credit Co. 7.25 10/25/11 217,771 75 MBNA Corp. 6.125 03/01/13 77,587 -------------- 295,358 -------------- FINANCIAL CONGLOMERATES (1.3%) 750 Citigroup Inc. 5.625 08/27/12 765,298 855 General Electric Capital Corp. 5.45 01/15/13 858,386 220 General Motors Acceptance Corp. 6.875 09/15/11 214,933 350 J.P. Morgan Chase & Co. 6.625 03/15/12 378,411 -------------- 2,217,028 -------------- HOME BUILDING (0.0%) 45 Pulte Homes, Inc. 7.875 08/01/11 51,428 -------------- INTEGRATED OIL (0.2%) 320 Conoco Inc. 6.95 04/15/29 345,838 -------------- INVESTMENT BANKS/BROKERS (0.2%) 275 Goldman Sachs Group Inc. 6.875 01/15/11 306,525 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 13 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS (0.4%) $ 180 Deutsche Telekom International Finance Corp. (Netherlands) 8.75% 06/15/30 $ 210,753 430 Verizon Global Funding Corp. 7.75 12/01/30 479,764 -------------- 690,517 -------------- MANAGED HEALTH CARE (0.2%) 325 Aetna, Inc. 7.875 03/01/11 375,082 -------------- MEDIA CONGLOMERATES (0.3%) 170 AOL Time Warner Inc. 7.70 05/01/32 178,311 350 News America Holdings, Inc. 7.28 06/30/28 361,863 -------------- 540,174 -------------- MOTOR VEHICLES (0.0%) 80 General Motor Corp. 7.125 07/15/13 78,021 -------------- OIL & GAS PRODUCTION (0.2%) 290 Devon Financing Corp. 6.875 09/30/11 319,926 -------------- PULP & PAPER (0.1%) 100 International Paper Co. 5.85 10/30/12 102,426 -------------- REAL ESTATE INVESTMENT TRUSTS (0.0%) 65 Simon Property Group L.P. 6.35 08/28/12 67,951 -------------- SERVICES TO THE HEALTH INDUSTRY (0.2%) 330 Anthem Insurance - 144A + 9.125 04/01/10 397,744 -------------- WIRELESS TELECOMMUNICATIONS (0.2%) 275 AT&T Wireless -Services Inc. 8.75 03/01/31 316,932 -------------- TOTAL CORPORATE BONDS (COST $8,561,788) 7,371,756 -------------- <Caption> NUMBER OF SHARES --------- CONVERTIBLE PREFERRED STOCKS (2.6%) AEROSPACE & DEFENSE (0.2%) 3,600 Northrop Grumman Corp. 373,500 -------------- ELECTRIC UTILITIES (0.9%) 14,800 Dominion Resources Inc. 771,080 13,600 FPL Group, Inc. 766,768 -------------- 1,537,848 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 14 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- MANAGED HEALTH CARE (0.2%) 4,100 Anthem Inc. $3.433 $ 374,248 -------------- OIL & GAS PIPELINES (0.2%) 32,200 Williams Cos Inc. $2.25 330,694 -------------- OILFIELD SERVICES/EQUIPMENT (0.4%) 13,500 Weatherford International, Inc. $2.50 691,200 -------------- PROPERTY - CASUALTY INSURERS (0.4%) 30,000 Travelers Property Casualty $1.125 716,700 -------------- RAILROADS (0.1%) 2,337 Union Pacific Capital Trust $3.13 118,311 -------------- SPECIALTY TELECOMMUNICATIONS (0.2%) 14,800 CenturyTel, Inc. 409,664 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,412,442) 4,552,165 -------------- <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- CONVERTIBLE BONDS (2.5%) BIOTECHNOLOGY (0.4%) $ 710 Aviron 5.25% 02/01/08 733,075 -------------- CABLE/SATELLITE TV (0.1%) 150 EchoStar Communications Corp. 4.875 01/01/07 150,937 -------------- COMPUTER COMMUNICATIONS (0.2%) 315 Juniper Networks, Inc. 4.75 03/15/07 299,250 -------------- ELECTRONIC PRODUCTION EQUIPMENT (0.4%) 380 Asm Lithography Holding N.V. - 144A+ (Netherlands) 4.25 11/30/04 378,100 250 Teradyne Inc. 3.75 10/15/06 245,938 -------------- 624,038 -------------- INTERNET RETAIL (0.2%) 440 Amazon.com, Inc. 4.75 02/01/09 409,200 -------------- PACKAGED SOFTWARE (0.2%) 375 Mercury Interactive Corp. 4.75 07/01/07 371,250 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 15 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------- PHARMACEUTICALS: OTHER (0.4%) $ 474 Teva Pharmaceutical Finance LLC 0.75% 08/15/21 $ 650,565 -------------- WIRELESS TELECOMMUNICATIONS (0.6%) 1,000 Nextel Communications, Inc. 6.00 06/01/11 1,066,250 -------------- TOTAL CONVERTIBLE BONDS (COST $4,115,052) 4,304,565 -------------- SHORT-TERM INVESTMENTS (a) (11.7%) U.S. GOVERNMENT OBLIGATIONS (0.2%) 50 U.S. Treasury Bill 0.429 11/15/04 49,924 200 U.S. Treasury Bill 0.493 09/25/03 199,138 -------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $249,057) 249,062 -------------- REPURCHASE AGREEMENT (11.5%) 20,111 Joint repurchase agreement account (dated 07/31/03; proceeds $20,111,620) (b) (Cost $20,111,000) 1.11 08/01/03 20,111,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $20,360,057) 20,360,062 -------------- TOTAL INVESTMENTS (COST $173,864,181) (c) (d) 102.1% 178,441,006 LIABILITIES IN EXCESS OF OTHER ASSETS (2.1) (3,614,937) ----- -------------- NET ASSETS 100.0% $ 174,826,069 ===== ============== </Table> - ---------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS. + RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $12,941,214 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $7,560,663 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $2,983,838, RESULTING IN NET UNREALIZED APPRECIATION OF $4,576,825 SEE NOTES TO FINANCIAL STATEMENTS 16 <Page> FUTURES CONTRACTS OPEN AT JULY 31, 2003: <Table> <Caption> UNDERLYING UNREALIZED NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT APPRECIATION CONTRACTS LONG/SHORT MONTH, AND YEAR AT VALUE (DEPRECIATION) - ----------------------------------------------------------------------------------------------------------------- 35 Short S&P 500 Index E-Mini, September 2003 $ (1,731,276) $ 477 12 Short Nasdaq 100 Index, September 2003 (1,534,600) (29,796) 143 Short Nasdaq 100 Index E-Mini, September 2003 (3,657,940) (36,692) 1 Short U.S. Treasury Note 2 Year, September 2003 (214,641) 1,950 12 Long U.S. Treasury Note 5 Year, September 2003 1,335,938 (46,533) 66 Short U.S. Treasury Note 10 Year, September 2003 (7,301,250) 349,436 3 Short U.S. Treasury Bond 30 Year, September 2003 (315,875) 19,023 --------- Total unrealized appreciation $ 257,865 ========= </Table> FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JULY 31, 2003: <Table> <Caption> CONTRACTS IN EXCHANGE DELIVERY UNREALIZED TO DELIVER FOR DATE DEPRECIATION - ----------------------------------------------------------------------------------------------------------------- $ 9,239 AUD 13,943 08/01/03 $ (208) $ 8,807 GBP 5,411 08/01/03 (98) $ 9,698 JPY 1,158,310 08/01/03 (98) $ 4,983 JPY 595,188 08/01/03 (50) ------ Total unrealized depreciation $ (454) ====== </Table> CURRENCY ABBREVIATIONS: AUD Australian Dollar. GBP British Pound. JPY Japanese Yen. SEE NOTES TO FINANCIAL STATEMENTS 17 <Page> MORGAN STANLEY ALLOCATOR FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2003 (UNAUDITED) <Table> ASSETS: Investments in securities, at value (including a repurchase agreement of $20,111,000) (cost $173,864,181) $ 178,441,006 Cash 55,295 Receivable for: Investments sold 4,552,531 Shares of beneficial interest sold 1,399,887 Interest 320,921 Dividends 111,858 Variation margin receivable 29,045 Deferred offering costs 74,204 Prepaid expenses and other assets 22,611 ------------- TOTAL ASSETS 185,007,358 ------------- LIABILITIES: Payable for: Investments purchased 9,830,605 Distribution fee 119,507 Investment management fee 107,518 Shares of beneficial interest redeemed 45,211 Accrued expenses and other payables 75,685 Offering costs 2,763 ------------- TOTAL LIABILITIES 10,181,289 ------------- NET ASSETS $ 174,826,069 ============= COMPOSITION OF NET ASSETS: Paid-in-capital 166,856,780 Net unrealized appreciation 4,832,202 Undistributed net investment income 27,868 Undistributed net realized gain 3,109,219 ------------- NET ASSETS $ 174,826,069 ============= CLASS A SHARES: Net Assets $ 17,704,981 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,651,575 NET ASSET VALUE PER SHARE $ 10.72 ============= MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.31 ============= CLASS B SHARES: Net Assets $ 122,862,561 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 11,497,427 NET ASSET VALUE PER SHARE $ 10.69 ============= CLASS C SHARES: Net Assets $ 19,049,501 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,782,651 NET ASSET VALUE PER SHARE $ 10.69 ============= CLASS D SHARES: Net Assets $ 15,209,026 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,417,316 NET ASSET VALUE PER SHARE $ 10.73 ============= </Table> SEE NOTES TO FINANCIAL STATEMENTS 18 <Page> STATEMENT OF OPERATIONS FOR THE PERIOD ENDED FEBRUARY 26, 2003* THROUGH JULY 31, 2003 (UNAUDITED) <Table> NET INVESTMENT INCOME: INCOME Interest $ 606,259 Dividends (net of $1,737 foreign withholding tax) 453,493 ------------- TOTAL INCOME 1,059,752 ------------- EXPENSES Investment management fee 405,344 Distribution fee (Class A shares) 14,363 Distribution fee (Class B shares) 367,334 Distribution fee (Class C shares) 61,731 Offering costs 55,326 Transfer agent fees and expenses 54,069 Professional fees 25,765 Shareholder reports and notices 14,127 Custodian fees 13,561 Registration fees 13,383 Trustees' fees and expenses 5,738 Other 1,143 ------------- TOTAL EXPENSES 1,031,884 ------------- NET INVESTMENT INCOME 27,868 ------------- NET REALIZED AND UNREALIZED GAIN: NET REALIZED GAIN/LOSS ON: Investments 2,629,829 Futures contracts 479,466 Foreign exchange transactions (76) ------------- NET REALIZED GAIN 3,109,219 ------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 4,576,825 Futures contracts 257,865 Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies (2,488) ------------- NET APPRECIATION 4,832,202 ------------- NET GAIN 7,941,421 ------------- NET INCREASE $ 7,969,289 ============= </Table> - ---------- * COMMENCEMENT OF OPERATIONS. SEE NOTES TO FINANCIAL STATEMENTS 19 <Page> STATEMENT OF CHANGES IN NET ASSETS <Table> <Caption> FOR THE PERIOD FEBRUARY 26, 2003* THROUGH JULY 31, 2003 ------------------ (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 27,868 Net realized gain 3,109,219 Net change in unrealized appreciation 4,832,202 ------------------ Net Increase 7,969,289 Net increase from transactions in shares of beneficial interest 166,756,780 ------------------ NET INCREASE 174,726,069 NET ASSETS: Beginning of period 100,000 ------------------ END OF PERIOD (Including undistributed net investment income of $27,868, respectively) $ 174,826,069 ================== </Table> - ---------- * COMMENCEMENT OF OPERATIONS. SEE NOTES TO FINANCIAL STATEMENTS 20 <Page> MORGAN STANLEY ALLOCATOR FUND NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Allocator Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is selecting securities with the potential to rise in price and/or pay out income. The Fund seeks to achieve its objective by maximizing total investment return through different stages of an economic cycle. The Fund was organized as a Massachusetts business trust on October 25, 2002 and commenced operations on February 26, 2003. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded on the New York or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other equity portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. 21 <Page> B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. Federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes 22 <Page> in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. I. OFFERING COSTS -- The Investment Manager incurred offering costs on behalf of the Fund in the amount of $129,530 which will be reimbursed by the Fund for the full amount thereof. Such expenses were deferred and are being amortized on the straight-line method over a period of approximately one year or less from the commencement of operations. J. USE OF ESTIMATES -- 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. Actual results could differ from those estimates. 2. INVESTMENT MANAGEMENT AGREEMENT Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.75% to the net assets of the Fund determined as of the close of each business day. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to 23 <Page> Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $4,418,842 at July 31, 2003. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the period ended July 31, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively. The Distributor has informed the Fund that for the period ended July 31, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $64,894 and $6,228, respectively and received $558,292 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the period ended July 31, 2003 aggregated $289,623,750 and $138,621,547, respectively. Included in the aforementioned transactions are purchases and sales of U.S. Government Securities of $32,262,137 and $32,331,652, respectively, and purchases and sales with other Morgan Stanley funds of $452,958 and $27,000, respectively including a net realized loss of $3,450. For the period ended July 31, 2003, the Fund incurred brokerage commissions of $48,854 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. At July 31, 2003, the Fund's payable for investments 24 <Page> purchased and receivable for investments sold included unsettled trades with Morgan Stanley & Co., Inc. of $145,972 and $882,640, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At July 31, 2003, the Fund had transfer agent fees and expenses payable of approximately $21,200. 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows: <Table> <Caption> FOR THE PERIOD FEBRUARY 26, 2003* THROUGH JULY 31, 2003 --------------------------- SHARES AMOUNT ---------- ------------- CLASS A SHARES Sold 1,869,738 $ 19,079,058 Redeemed (220,663) (2,265,526) ---------- ------------- Net increase -- Class A 1,649,075 16,813,532 ---------- ------------- CLASS B SHARES Sold 11,909,582 121,878,289 Redeemed (414,655) (4,372,642) ---------- ------------- Net increase -- Class B 11,494,927 117,505,647 ---------- ------------- CLASS C SHARES Sold 1,900,024 19,352,827 Redeemed (119,873) (1,240,207) ---------- ------------- Net increase -- Class C 1,780,151 18,112,620 ---------- ------------- CLASS D SHARES Sold 1,635,270 16,610,525 Redeemed (220,454) (2,285,544) ---------- ------------- Net increase -- Class D 1,414,816 14,324,981 ---------- ------------- Net increase in Fund 16,338,969 $ 166,756,780 ========== ============= </Table> - ---------- * COMMENCEMENT OF OPERATIONS. 25 <Page> 6. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures ("futures contracts"). Forward contracts and futures involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. At July 31, 2003, the Fund had outstanding futures contracts and outstanding forward contracts. 26 <Page> MORGAN STANLEY ALLOCATOR FUND FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout the period: <Table> <Caption> FOR THE PERIOD FEBRUARY 26, 2003* THROUGH JULY 31, 2003 ----------------------------------------------- CLASS A CLASS B CLASS C CLASS D SHARES SHARES SHARES SHARES -------- --------- -------- -------- SELECTED PER SHARE DATA: Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 -------- --------- -------- -------- Income (loss) from investment operations: Net investment income (loss)++ 0.03 (0.01) (0.01) 0.04 Net realized and unrealized gain 0.69 0.70 0.70 0.69 -------- --------- -------- -------- Total income from investment operations 0.72 0.69 0.69 0.73 -------- --------- -------- -------- Net asset value, end of period $ 10.72 $ 10.69 $ 10.69 $ 10.73 ======== ========= ======== ======== TOTAL RETURN+(1) 7.30% 6.90% 6.90% 7.40% RATIOS TO AVERAGE NET ASSETS(2)(3): Expenses 1.34% 2.09% 2.09% 1.09% Net investment income (loss) 0.62% (0.13)% (0.13)% 0.87% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 17,705 $ 122,862 $ 19,050 $ 15,209 Portfolio turnover rate(1) 151% 151% 151% 151% </Table> - ---------- * COMMENCEMENT OF OPERATIONS. ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 27 <Page> [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY ALLOCATOR FUND SEMIANNUAL REPORT JULY 31, 2003 [MORGAN STANLEY LOGO] TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT and GENERAL COUNSEL Joseph J. McAlinden VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2003 Morgan Stanley [MORGAN STANLEY LOGO] 39947RPT-12119I03-AP-9/03 <Page> Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto (d) The Fund has granted a waiver or an implicit waiver from a provision of its Code of Ethics. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. <Page> Item 9 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. <Page> Item 10 Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. Items 4 - 8 are not applicable 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. Morgan Stanley Allocator Fund Ronald E. Robison Principal Executive Officer September 22, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Ronald E. Robison Principal Executive Officer September 22, 2003 Francis Smith Principal Financial Officer September 22, 2003