<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, 2005 Date of reporting period: July 31, 2004 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 SEMIANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. 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 For the six-month period ended July 31, 2004 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JULY 31, 2004 <Table> <Caption> LIPPER LEHMAN FLEXIBLE U.S. PORTFOLIO S&P 500 AGGREGATE FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3) -3.08% -3.46% -3.46% -2.99% -1.78% 0.34% -1.89% </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 The U.S. economic expansion matured over the six-month period ending July 31, 2004. With the economy growing strongly, payrolls expanding, and inflation beginning to pick up, the FOMC made its first move in four years at the end of June, raising the Fed funds rate by 25 basis points. Soon thereafter, however, mixed economic data and geopolitical uncertainty contributed to weaker investor confidence by the end of the six-month period. In July, equity indexes faltered in an environment of a new Fed tightening cycle, sluggish employment data, and rising oil prices. At the sector level, stock performance was decidedly mixed. Within the S&P 500, technology was the weakest sector during the period, declining 3.3%. The energy sector, in contrast, surged 10.5% as oil prices continued to rise. More broadly, small-cap and mid-cap companies outpaced their larger counterparts for much of the period and value stocks generally outperformed growth securities. The bond market experienced continued volatility over the six months. Bond yields reached a low in March, then rose sharply in anticipation of a new tightening cycle by the Federal Reserve, but then declined again when the flow of economic data turned soft. The contracyclical rally in bonds appeared to stabilize toward the end of the period as the data flow began to improve. PERFORMANCE ANALYSIS Morgan Stanley Allocator Fund underperformed the S&P 500 Index, the Lehman U.S. Aggregate Index and the Lipper Flexible Funds Portfolio Index for the 6-month period ended July 31, 2004. Much of the Fund's performance relative to the Lipper Index was driven by an underweight position in bonds for most of the six-month period. The Fund began to increase its equity allocation relative to fixed income products in March ahead of the spring rally in stocks, and maintained the high equity exposure throughout the rest of the period. As the bond market entered a contracyclical rally through June and July, the Fund preserved its allocations in anticipation of a renewed bull market in stocks. Over the six-month period, the Fund implemented additional investment themes. In a capital spending theme, the Fund increased its exposure to both industrials and materials, creating an overweight position in these sectors relative to the S&P 500. These sectors generally outperformed the index over the period. An underweight position in healthcare provided a boost to the Fund, as the sector suffered over the period from concerns over a weak drug pipeline and regulatory difficulties. The Allocator Fund's most important sector theme, however, was predicated on a topping out of oil prices. In support of the belief that energy prices would decline, the Fund maintained a considerable underweight position in energy producers, and a complementary overweight position in energy consumers. However, oil prices continued to rise and this put a drag on Fund performance. 2 <Page> TOP 10 HOLDINGS <Table> Federal National Mortgage Association 3.3% General Electric Co. 3.1 Microsoft Corp. 2.5 U.S. Treasury Note 2.2 Pfizer, Inc. 2.0 Citigroup Inc. 1.9 Wal Mart Stores Inc. 1.6 American Intl Group 1.6 Bank America Corp 1.5 Johnson & Johnson 1.4 </Table> PORTFOLIO COMPOSITION* <Table> Common Stocks 81.6% Short-Term 6.2 Pass-Through/FNMA 3.2 Foreign Government Bonds 2.5 U.S. Treasuries 2.3 Corporate Notes/Bonds 2.1 Convertible Bonds 1.6 Pass-Through/FHLMC 0.4 Asset-Backed 0.3 </Table> DATA AS OF JULY 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10 HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL 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. * THE FUND HAS OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $2,905,969 WITH UNREALIZED APPRECIATION OF $84,954 AND OUTSTANDING SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $3,078,188 WITH UNREALIZED DEPRECIATION OF $43,664. INVESTMENT STRATEGY THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., 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. THERE IS NO LIMIT AS TO THE PERCENTAGE OF ASSETS THAT MAY BE ALLOCATED TO ANY ONE ASSET CLASS. THE FUND MAY INVEST 100% OF ITS ASSETS IN ANY ONE OF THE THREE MAJOR ASSET CATEGORIES MENTIONED ABOVE AT ANY TIME. IT IS ANTICIPATED THAT THERE WILL BE SIGNIFICANT FLUCTUATIONS IN THE ALLOCATIONS OVER TIME AND THUS, THE FUND MAY EXHIBIT HIGHER VOLATILITY THAN OTHER FUNDS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE 3 <Page> FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 847-2424. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES; AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JULY 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. 4 <Page> PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2004 <Table> <Caption> CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03) SYMBOL ALRAX ALRBX ALRCX ALRDX 1 YEAR 5.82%(4) 5.08%(4) 5.08%(4) 6.10%(4) 0.27(5) 0.08(5) 4.08(5) -- SINCE INCEPTION 9.32(4) 8.49(4) 8.49(4) 9.59(4) 5.26(5) 5.77(5) 8.49(5) -- </Table> PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR 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. * 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 CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (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 LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF ALL U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT-GRADE CORPORATE DEBT SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BASED SECURITIES. 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) 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 PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) 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. 5 <Page> EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/04 - 07/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, 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 line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about 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 cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees. <Table> <Caption> BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 02/01/04 - 02/01/04 07/31/04 07/31/04 ------------- ------------- --------------- CLASS A Actual $ 1,000.00 $ 969.20 $ 5.97 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,018.80 $ 6.12 CLASS B Actual $ 1,000.00 $ 965.40 $ 9.63 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,015.07 $ 9.87 CLASS C Actual $ 1,000.00 $ 965.40 $ 9.63 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,015.07 $ 9.87 CLASS D Actual $ 1,000.00 $ 970.15 $ 4.75 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.04 $ 4.87 </Table> - ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.22%, 1.97%, 1.97% AND 0.97% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). 6 <Page> MORGAN STANLEY ALLOCATOR FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- COMMON STOCKS (84.5%) ADVERTISING/MARKETING SERVICES (0.2%) 5,945 Interpublic Group of Companies, Inc. (The)* $ 76,037 2,758 Omnicom Group, Inc. 198,631 ------------- 274,668 ------------- AEROSPACE & DEFENSE (1.2%) 13,099 Boeing Co. 664,774 3,268 General Dynamics Corp. 322,944 1,948 Goodrich Corp. 62,979 7,339 Lockheed Martin Corp. 388,894 5,954 Northrop Grumman Corp. 313,180 6,902 Raytheon Co. 231,562 2,930 Rockwell Collins, Inc. 100,265 ------------- 2,084,598 ------------- AGRICULTURAL COMMODITIES/MILLING (0.1%) 8,997 Archer-Daniels-Midland Co. 138,824 ------------- AIR FREIGHT/COURIERS (1.6%) 3,773 C.H. Robinson Worldwide, Inc. 164,993 4,111 CNF Inc. 169,620 7,317 EGL, Inc.* 185,925 3,423 Expeditors International of Washington, Inc. 158,861 6,686 FedEx Corp. 547,450 4,910 Forward Air Corp.* 194,976 19,568 United Parcel Service, Inc. (Class B) 1,408,113 ------------- 2,829,938 ------------- AIRLINES (1.7%) 20,123 Alaska Air Group, Inc.* 419,162 38,246 AMR Corp.* 322,414 71,553 Atlantic Coast Airlines Holdings, Inc.* 262,600 31,621 Delta Air Lines, Inc.* 164,113 47,427 Frontier Airlines, Inc.* 373,250 15,497 JetBlue Airways Corp.* 368,984 59,723 Mesa Air Group, Inc.* 372,672 24,456 SkyWest, Inc. 345,563 34,026 Southwest Airlines Co. 492,356 ------------- 3,121,114 ------------- ALTERNATIVE POWER GENERATION (0.0%) 9,219 Calpine Corp.* 35,585 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 7 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- ALUMINUM (0.2%) 12,949 Alcoa, Inc. $ 414,756 ------------- APPAREL/FOOTWEAR (0.3%) 2,513 Cintas Corp. 105,445 1,659 Jones Apparel Group, Inc. 61,964 1,423 Liz Claiborne, Inc. 51,498 3,834 Nike, Inc. (Class B) 278,770 589 Reebok International Ltd. 20,061 1,475 V.F. Corp. 73,765 ------------- 591,503 ------------- APPAREL/FOOTWEAR RETAIL (0.4%) 12,078 Gap, Inc. (The) 274,171 6,301 Limited Brands, Inc. 128,792 1,667 Nordstrom, Inc. 73,181 7,152 TJX Companies, Inc. (The) 167,857 ------------- 644,001 ------------- AUTO PARTS: O.E.M. (0.2%) 1,739 Dana Corp. 33,545 7,804 Delphi Corp. 74,216 2,411 Eaton Corp. 155,847 2,781 Johnson Controls, Inc. 156,987 ------------- 420,595 ------------- AUTOMOTIVE AFTERMARKET (0.0%) 66 Cooper Tire & Rubber Co. 1,548 92 Goodyear Tire & Rubber Co. (The)* 1,007 ------------- 2,555 ------------- BEVERAGES: ALCOHOLIC (0.3%) 9,718 Anheuser-Busch Companies, Inc. 504,364 1,649 Brown-Forman Corp. (Class B) 76,695 611 Coors (Adolph) Co. (Class B) 42,012 ------------- 623,071 ------------- BEVERAGES: NON-ALCOHOLIC (0.8%) 28,421 Coca-Cola Co. (The) 1,246,545 5,268 Coca-Cola Enterprises Inc. 107,467 3,702 Pepsi Bottling Group, Inc. (The) 103,101 ------------- 1,457,113 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 8 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- BIOTECHNOLOGY (1.0%) 19,199 Amgen Inc.* $ 1,092,039 4,944 Biogen Idec Inc.* 296,640 2,860 Chiron Corp.* 131,074 3,450 Genzyme Corp.* 176,916 3,850 MedImmune, Inc.* 88,704 ------------- 1,785,373 ------------- BROADCASTING (0.3%) 9,057 Clear Channel Communications, Inc. 323,335 4,763 Univision Communications Inc. (Class A)* 137,984 ------------- 461,319 ------------- BUILDING PRODUCTS (0.2%) 3,588 American Standard Companies, Inc.* 135,949 7,519 Masco Corp. 227,375 ------------- 363,324 ------------- CABLE/SATELLITE TV (0.5%) 33,274 Comcast Corp. (Class A)* 911,708 ------------- CASINO/GAMING (0.1%) 1,558 Harrah's Entertainment, Inc. 72,431 4,653 International Game Technology 150,478 ------------- 222,909 ------------- CHEMICALS: AGRICULTURAL (0.3%) 13,231 Monsanto Co. 479,756 ------------- CHEMICALS: MAJOR DIVERSIFIED (0.8%) 13,741 Dow Chemical Co. (The) 548,128 15,127 Du Pont (E.I.) de Nemours & Co. 648,494 1,134 Eastman Chemical Co. 50,667 1,831 Engelhard Corp. 53,831 1,643 Hercules Inc.* 19,404 3,291 Rohm & Haas Co. 129,007 ------------- 1,449,531 ------------- CHEMICALS: SPECIALTY (1.1%) 6,700 Air Products & Chemicals, Inc. 346,725 753 Great Lakes Chemical Corp. 18,057 37,500 Praxair, Inc. 1,479,375 1,024 Sigma-Aldrich Corp. 58,819 ------------- 1,902,976 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 9 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- COMMERCIAL PRINTING/FORMS (0.1%) 732 Deluxe Corp. $ 32,245 3,197 Donnelley (R.R.) & Sons Co. 101,473 ------------- 133,718 ------------- COMPUTER COMMUNICATIONS (1.2%) 6,747 Avaya Inc.* 98,844 99,814 Cisco Systems, Inc.* 2,082,120 ------------- 2,180,964 ------------- COMPUTER PERIPHERALS (0.3%) 33,570 EMC Corp.* 368,263 1,889 Lexmark International, Inc.* 167,176 4,618 Network Appliance, Inc.* 89,174 ------------- 624,613 ------------- COMPUTER PROCESSING HARDWARE (1.4%) 4,960 Apple Computer, Inc.* 160,406 37,134 Dell Inc.* 1,317,143 4,363 Gateway, Inc.* 19,633 43,487 Hewlett-Packard Co. 876,263 1,271 NCR Corp.* 59,013 44,162 Sun Microsystems, Inc.* 174,440 ------------- 2,606,898 ------------- CONTAINERS/PACKAGING (0.1%) 830 Ball Corp. 59,909 1,582 Bemis Company, Inc. 41,891 2,252 Pactiv Corp.* 53,102 1,239 Sealed Air Corp.* 58,778 818 Temple-Inland, Inc. 55,828 ------------- 269,508 ------------- CONTRACT DRILLING (0.0%) 555 Nabors Industries, Ltd. (Bermuda)* 25,807 500 Noble Corp.* 19,360 393 Rowan Companies, Inc.* 9,597 1,196 Transocean Inc. (Cayman Islands)* 33,966 ------------- 88,730 ------------- DATA PROCESSING SERVICES (0.9%) 1,963 Affiliated Computer Services, Inc. (Class A)* 101,880 8,876 Automatic Data Processing, Inc. 372,614 2,818 Computer Sciences Corp.* 133,150 </Table> SEE NOTES TO FINANCIAL STATEMENTS 10 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 2,189 Convergys Corp.* $ 28,982 12,740 First Data Corp. 568,331 2,937 Fiserv, Inc.* 100,622 5,603 Paychex, Inc. 172,068 4,347 SunGard Data Systems Inc.* 101,329 ------------- 1,578,976 ------------- DEPARTMENT STORES (0.4%) 2,590 Federated Department Stores, Inc. 124,113 4,562 Kohl's Corp.* 208,757 4,192 May Department Stores Co. 111,214 3,696 Penney (J.C.) Co., Inc. 147,840 2,836 Sears, Roebuck & Co. 104,024 ------------- 695,948 ------------- DISCOUNT STORES (2.1%) 343 Big Lots, Inc.* 4,198 5,780 Costco Wholesale Corp. 235,015 5,043 Dollar General Corp. 97,330 2,574 Family Dollar Stores, Inc. 71,712 12,347 Target Corp. 538,329 55,146 Wal-Mart Stores, Inc. 2,923,289 ------------- 3,869,873 ------------- DRUGSTORE CHAINS (0.4%) 5,453 CVS Corp. 228,317 13,776 Walgreen Co. 501,446 ------------- 729,763 ------------- ELECTRIC UTILITIES (2.1%) 8,515 AES Corp. (The)* 82,170 2,864 Allegheny Energy, Inc.* 42,502 2,473 Ameren Corp. 110,518 5,621 American Electric Power Co., Inc. 174,869 4,468 CenterPoint Energy, Inc. 51,873 2,538 Cinergy Corp. 97,078 3,630 CMS Energy Corp.* 32,779 3,238 Consolidated Edison, Inc. 132,661 2,463 Constellation Energy Group, Inc. 94,949 4,692 Dominion Resources, Inc. 297,754 2,555 DTE Energy Co. 102,634 13,102 Duke Energy Corp. 281,693 5,056 Edison International 135,501 </Table> SEE NOTES TO FINANCIAL STATEMENTS 11 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 3,273 Entergy Corp. $ 188,197 9,402 Exelon Corp. 328,130 4,869 FirstEnergy Corp. 190,378 2,776 FPL Group, Inc. 186,908 5,577 PG&E Corp.* 159,168 1,437 Pinnacle West Capital Corp. 58,198 2,595 PPL Corp. 120,278 3,673 Progress Energy, Inc. 154,780 3,548 Public Service Enterprise Group, Inc. 138,372 10,690 Southern Co. (The) 313,003 2,776 TECO Energy, Inc. 35,810 4,805 TXU Corp. 190,566 5,731 Xcel Energy, Inc. 98,000 ------------- 3,798,769 ------------- ELECTRICAL PRODUCTS (0.4%) 3,317 American Power Conversion Corp. 50,087 1,546 Cooper Industries Ltd. (Class A) (Bermuda)* 87,921 6,495 Emerson Electric Co. 394,247 2,551 Molex Inc. 73,877 959 Thomas & Betts Corp.* 25,222 ------------- 631,354 ------------- ELECTRONIC COMPONENTS (0.1%) 2,658 Jabil Circuit, Inc.* 57,812 1,264 QLogic Corp.* 30,905 6,932 Sanmina-SCI Corp.* 50,881 10,911 Solectron Corp.* 60,011 ------------- 199,609 ------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.4%) 7,145 Agilent Technologies, Inc.* 170,122 19,447 JDS Uniphase Corp.* 67,092 2,893 Rockwell Automation, Inc. 108,227 2,031 Scientific-Atlanta, Inc. 62,453 3,044 Symbol Technologies, Inc. 39,846 1,119 Tektronix, Inc. 34,018 2,196 Thermo Electron Corp.* 56,481 10,708 Xerox Corp.* 148,413 ------------- 686,652 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 12 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- ELECTRONIC PRODUCTION EQUIPMENT (0.4%) 24,781 Applied Materials, Inc.* $ 420,534 2,975 KLA-Tencor Corp.* 122,600 2,316 Novellus Systems, Inc.* 62,532 2,952 Teradyne, Inc.* 50,479 ------------- 656,145 ------------- ELECTRONICS/APPLIANCE STORES (0.2%) 4,383 Best Buy Co., Inc. 211,085 1,375 Circuit City Stores - Circuit City Group 19,388 1,803 RadioShack Corp. 50,394 ------------- 280,867 ------------- ELECTRONICS/APPLIANCES (0.1%) 4,221 Eastman Kodak Co. 111,814 753 Maytag Corp. 15,437 901 Whirlpool Corp. 56,258 ------------- 183,509 ------------- ENGINEERING & CONSTRUCTION (0.0%) 1,332 Fluor Corp. 60,673 ------------- ENVIRONMENTAL SERVICES (0.2%) 4,681 Allied Waste Industries, Inc.* 43,252 8,542 Waste Management, Inc. 240,372 ------------- 283,624 ------------- FINANCE/RENTAL/LEASING (1.8%) 5,010 Countrywide Financial Corp. 361,221 14,639 Fannie Mae 1,038,783 10,336 Freddie Mac 664,708 37,500 MBNA Corp. 925,875 5,018 Ryder System, Inc. 215,272 ------------- 3,205,859 ------------- FINANCIAL CONGLOMERATES (3.4%) 77,742 Citigroup, Inc. 3,427,645 21,988 J.P. Morgan Chase & Co. 820,812 8,038 Prudential Financial, Inc. 374,249 11,900 State Street Corp. 509,439 15,400 UBS AG (ADR) (Switzerland) 1,028,258 ------------- 6,160,403 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 13 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- FINANCIAL PUBLISHING/SERVICES (0.1%) 1,931 Equifax, Inc. $ 46,576 2,739 McGraw-Hill Companies, Inc. (The) 205,589 ------------- 252,165 ------------- FOOD DISTRIBUTORS (0.2%) 8,413 SYSCO Corp. 289,828 ------------- FOOD RETAIL (0.3%) 4,750 Albertson's, Inc. 115,853 9,809 Kroger Co.* 154,982 5,837 Safeway Inc.* 123,336 2,246 Supervalu, Inc. 64,146 2,670 Winn-Dixie Stores, Inc. 16,874 ------------- 475,191 ------------- FOOD: MAJOR DIVERSIFIED (1.1%) 5,803 Campbell Soup Co. 148,499 4,529 General Mills, Inc. 203,352 4,136 Heinz (H.J.) Co. 152,577 4,678 Kellogg Co. 194,885 20,081 PepsiCo, Inc. 1,004,050 9,396 Sara Lee Corp. 206,336 ------------- 1,909,699 ------------- FOOD: MEAT/FISH/DAIRY (0.1%) 6,602 ConAgra Foods Inc. 171,652 ------------- FOOD: SPECIALTY/CANDY (0.2%) 2,994 Hershey Foods Corp. 145,029 1,845 McCormick & Co., Inc. (Non-Voting) 65,996 2,514 Wrigley (Wm.) Jr. Co. (Class A) 151,846 ------------- 362,871 ------------- FOREST PRODUCTS (0.1%) 1,608 Louisiana-Pacific Corp. 38,077 3,347 Weyerhaeuser Co. 207,514 ------------- 245,591 ------------- GAS DISTRIBUTORS (0.2%) 8,476 Dynegy, Inc. (Class A)* 35,599 2,313 KeySpan Corp. 83,245 466 Kinder Morgan, Inc. 27,965 993 Nicor Inc. 32,878 4,135 NiSource, Inc. 85,595 </Table> SEE NOTES TO FINANCIAL STATEMENTS 14 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 836 Peoples Energy Corp. $ 32,604 3,167 Sempra Energy 113,220 ------------- 411,106 ------------- HOME BUILDING (0.1%) 1,801 Centex Corp. 76,398 476 KB Home 30,488 1,786 Pulte Homes, Inc. 97,569 ------------- 204,455 ------------- HOME FURNISHINGS (0.1%) 2,576 Leggett & Platt, Inc. 69,681 3,913 Newell Rubbermaid, Inc. 84,521 ------------- 154,202 ------------- HOME IMPROVEMENT CHAINS (0.9%) 29,921 Home Depot, Inc. (The) 1,008,936 10,391 Lowe's Companies, Inc. 506,250 1,796 Sherwin-Williams Co. 72,522 ------------- 1,587,708 ------------- HOSPITAL/NURSING MANAGEMENT (0.3%) 7,042 HCA, Inc. 272,173 3,313 Health Management Associates, Inc. (Class A) 66,459 1,729 Manor Care, Inc. 54,031 6,738 Tenet Healthcare Corp.* 75,331 ------------- 467,994 ------------- HOTELS/RESORTS/CRUISELINES (0.5%) 12,168 Carnival Corp. (Panama) 567,150 5,188 Hilton Hotels Corp. 92,502 3,469 Marriott International, Inc. (Class A) 169,287 2,760 Starwood Hotels & Resorts Worldwide, Inc. 124,200 ------------- 953,139 ------------- HOUSEHOLD/PERSONAL CARE (1.8%) 1,279 Alberto-Culver Co. (Class B) 59,627 5,817 Avon Products, Inc. 250,189 2,871 Clorox Co. (The) 142,890 6,205 Colgate-Palmolive Co. 330,106 12,117 Gillette Co. (The) 472,321 1,378 International Flavors & Fragrances, Inc. 50,352 5,946 Kimberly-Clark Corp. 380,960 </Table> SEE NOTES TO FINANCIAL STATEMENTS 15 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 30,542 Procter & Gamble Co. (The) $ 1,592,765 ------------- 3,279,210 ------------- INDUSTRIAL CONGLOMERATES (5.2%) 11,585 3M Co. 954,141 3,756 Danaher Corp. 190,241 166,446 General Electric Co. 5,534,330 14,122 Honeywell International, Inc. 531,128 2,676 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 183,814 1,522 ITT Industries, Inc. 121,684 2,272 Textron, Inc. 139,274 30,980 Tyco International Ltd. (Bermuda) 960,380 7,311 United Technologies Corp. 683,579 ------------- 9,298,571 ------------- INDUSTRIAL MACHINERY (0.3%) 4,418 Illinois Tool Works Inc. 399,917 1,924 Parker-Hannifin Corp. 110,399 ------------- 510,316 ------------- INDUSTRIAL SPECIALTIES (0.1%) 3,818 Ecolab Inc. 116,449 2,530 PPG Industries, Inc. 149,144 ------------- 265,593 ------------- INFORMATION TECHNOLOGY SERVICES (1.4%) 2,477 Citrix Systems, Inc.* 43,645 7,219 Electronic Data Systems Corp. 133,407 24,468 International Business Machines Corp. 2,130,429 5,815 PeopleSoft, Inc.* 104,786 5,089 Unisys Corp.* 52,111 ------------- 2,464,378 ------------- INSURANCE BROKERS/SERVICES (0.3%) 4,560 AON Corp. 120,566 8,077 Marsh & McLennan Companies, Inc. 358,457 ------------- 479,023 ------------- INTEGRATED OIL (1.8%) 650 Amerada Hess Corp. 54,178 7,566 ChevronTexaco Corp. 723,688 4,792 ConocoPhillips 377,466 45,953 Exxon Mobil Corp. 2,127,624 ------------- 3,282,956 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 16 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- INTERNET SOFTWARE/SERVICES (0.3%) 7,227 Siebel Systems, Inc.* $ 58,250 17,218 Yahoo! Inc.* 530,314 ------------- 588,564 ------------- INVESTMENT BANKS/BROKERS (2.6%) 16,000 Goldman Sachs Group, Inc. (The) 1,411,040 5,300 Legg Mason, Inc. 416,262 21,000 Lehman Brothers Holdings Inc. 1,472,100 29,000 Merrill Lynch & Co., Inc. 1,441,880 ------------- 4,741,282 ------------- INVESTMENT MANAGERS (0.4%) 8,300 Franklin Resources, Inc. 400,475 7,400 Price (T.) Rowe Group, Inc. 342,028 ------------- 742,503 ------------- LIFE/HEALTH INSURANCE (0.7%) 7,655 AFLAC, Inc. 303,444 2,113 Jefferson-Pilot Corp. 101,804 2,487 Lincoln National Corp. 108,682 5,326 Manulife Financial Corp. (Canada) 213,147 11,374 MetLife, Inc. 405,711 1,644 Torchmark Corp. 85,948 4,418 UnumProvident Corp. 70,467 ------------- 1,289,203 ------------- MAJOR BANKS (4.0%) 30,620 Bank of America Corp. 2,603,006 9,870 BB&T Corp. 382,265 3,101 Comerica, Inc. 181,315 4,059 Huntington Bancshares, Inc. 99,283 7,382 KeyCorp 222,789 10,762 National City Corp. 392,813 5,122 PNC Financial Services Group 259,173 4,873 Regions Financial Corp. 144,679 5,929 SouthTrust Corp. 229,986 5,077 SunTrust Banks, Inc. 334,828 19,847 Wachovia Corp. 879,421 26,073 Wells Fargo & Co. 1,496,851 ------------- 7,226,409 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 17 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS (2.6%) 4,931 ALLTEL Corp. $ 256,412 12,690 AT&T Corp. 191,619 29,372 BellSouth Corp. 795,687 52,799 SBC Communications, Inc. 1,337,927 22,898 Sprint Corp. (FON Group) 427,735 44,217 Verizon Communications Inc. 1,704,123 ------------- 4,713,503 ------------- MANAGED HEALTH CARE (0.7%) 2,300 Aetna, Inc. 197,340 1,999 Anthem, Inc.* 164,858 1,976 CIGNA Corp. 122,532 2,923 Humana, Inc.* 52,936 8,717 UnitedHealth Group Inc. 548,299 2,169 WellPoint Health Networks, Inc.* 219,286 ------------- 1,305,251 ------------- MEDIA CONGLOMERATES (1.5%) 30,204 Disney (Walt) Co. (The) 697,410 66,824 Time Warner Inc.* 1,112,620 25,489 Viacom Inc. (Class B) (Non-Voting) 856,176 ------------- 2,666,206 ------------- MEDICAL DISTRIBUTORS (0.3%) 1,545 AmerisourceBergen Corp. 83,523 6,456 Cardinal Health, Inc. 287,292 4,033 McKesson Corp. 129,742 ------------- 500,557 ------------- MEDICAL SPECIALTIES (1.9%) 3,658 Applera Corp. - Applied Biosystems Group* 75,684 1,416 Bard (C.R.), Inc. 78,163 763 Bausch & Lomb, Inc. 46,993 9,072 Baxter International, Inc.* 272,795 3,585 Becton, Dickinson & Co. 169,320 3,707 Biomet, Inc. 163,071 12,156 Boston Scientific Corp.* 465,089 4,507 Guidant Corp. 249,327 2,329 Hospira, Inc.* 60,344 17,866 Medtronic, Inc. 887,404 834 Millipore Corp.* 43,943 2,074 Pall Corp. 48,055 </Table> SEE NOTES TO FINANCIAL STATEMENTS 18 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 1,666 PerkinElmer, Inc. $ 29,288 2,607 St. Jude Medical, Inc.* 177,615 5,984 Stryker Corp. 285,317 1,595 Waters Corp.* 69,989 3,545 Zimmer Holdings, Inc.* 270,519 ------------- 3,392,916 ------------- MISCELLANEOUS COMMERCIAL SERVICES (0.0%) 2,158 Sabre Holdings Corp. 55,094 ------------- MISCELLANEOUS MANUFACTURING (0.1%) 982 Crane Co. 27,319 3,326 Dover Corp. 131,976 ------------- 159,295 ------------- MOTOR VEHICLES (0.6%) 28,705 Ford Motor Co. 422,538 8,665 General Motors Corp. 373,808 4,408 Harley-Davidson, Inc. 263,907 ------------- 1,060,253 ------------- MULTI-LINE INSURANCE (1.9%) 39,986 American International Group, Inc. 2,825,011 4,371 Hartford Financial Services Group, Inc. (The) 284,552 2,908 Loews Corp. 164,680 2,124 Safeco Corp. 99,955 ------------- 3,374,198 ------------- OFFICE EQUIPMENT/SUPPLIES (0.1%) 1,457 Avery Dennison Corp. 88,250 3,410 Pitney Bowes, Inc. 143,902 ------------- 232,152 ------------- OIL & GAS PIPELINES (0.0%) 4,026 El Paso Corp. 31,765 1,954 Williams Companies, Inc. (The) 23,741 ------------- 55,506 ------------- OIL & GAS PRODUCTION (0.3%) 944 Anadarko Petroleum Corp. 56,442 1,209 Apache Corp. 56,255 1,476 Burlington Resources, Inc. 56,339 896 Devon Energy Corp. 62,263 434 EOG Resources, Inc. 27,581 </Table> SEE NOTES TO FINANCIAL STATEMENTS 19 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 379 Kerr-McGee Corp. $ 19,898 2,727 Occidental Petroleum Corp. 134,359 977 Unocal Corp. 37,869 ------------- 451,006 ------------- OIL REFINING/MARKETING (0.1%) 445 Ashland, Inc. 23,260 2,258 Marathon Oil Corp. 85,059 282 Sunoco, Inc. 19,224 486 Valero Energy Corp. 36,411 ------------- 163,954 ------------- OILFIELD SERVICES/EQUIPMENT (0.2%) 1,239 Baker Hughes Inc. 49,932 600 BJ Services Co.* 29,796 1,633 Halliburton Co. 51,848 2,193 Schlumberger Ltd. (Netherlands; Antilles) 141,054 ------------- 272,630 ------------- OTHER CONSUMER SERVICES (0.8%) 2,591 Apollo Group, Inc. (Class A)* 216,478 2,589 Block (H.&R.), Inc. 127,198 14,792 Cendant Corp. 338,441 9,072 eBay Inc.* 710,610 ------------- 1,392,727 ------------- OTHER CONSUMER SPECIALTIES (0.1%) 2,119 Fortune Brands, Inc. 152,949 ------------- OTHER METALS/MINERALS (0.1%) 1,314 Phelps Dodge Corp.* 102,413 ------------- PACKAGED SOFTWARE (3.5%) 3,592 Adobe Systems, Inc. 151,511 1,689 Autodesk, Inc. 67,898 3,350 BMC Software, Inc.* 52,528 8,719 Computer Associates International, Inc. 220,068 5,832 Compuware Corp.* 28,810 2,929 Intuit Inc.* 109,662 1,220 Mercury Interactive Corp.* 44,603 157,723 Microsoft Corp. 4,488,797 5,758 Novell, Inc.* 39,385 75,365 Oracle Corp.* 792,086 4,030 Parametric Technology Corp.* 18,296 </Table> SEE NOTES TO FINANCIAL STATEMENTS 20 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 5,309 Symantec Corp.* $ 248,249 6,419 VERITAS Software Corp.* 122,346 ------------- 6,384,239 ------------- PERSONNEL SERVICES (0.1%) 1,678 Monster Worldwide Inc.* 37,067 2,521 Robert Half International, Inc. 70,134 ------------- 107,201 ------------- PHARMACEUTICALS: GENERIC DRUGS (0.0%) 1,600 Watson Pharmaceuticals, Inc.* 40,336 ------------- PHARMACEUTICALS: MAJOR (6.3%) 23,296 Abbott Laboratories 916,698 29,145 Bristol-Myers Squibb Co. 667,421 44,273 Johnson & Johnson 2,446,969 16,734 Lilly (Eli) & Co. 1,066,290 32,811 Merck & Co., Inc. 1,487,979 113,577 Pfizer, Inc. 3,629,921 21,011 Schering-Plough Corp. 408,874 20,017 Wyeth 708,602 ------------- 11,332,754 ------------- PHARMACEUTICALS: OTHER (0.3%) 1,902 Allergan, Inc. 143,867 5,484 Forest Laboratories, Inc.* 275,790 3,353 King Pharmaceuticals, Inc.* 37,855 ------------- 457,512 ------------- PRECIOUS METALS (0.2%) 2,683 Freeport-McMoRan Copper & Gold, Inc. (Class B) 93,503 5,809 Newmont Mining Corp. 235,090 ------------- 328,593 ------------- PROPERTY - CASUALTY INSURERS (1.0%) 4,254 ACE Ltd. (Bermuda) 172,670 10,751 Allstate Corp. (The) 506,157 2,857 Chubb Corp. (The) 196,504 2,665 Cincinnati Financial Corp. 106,280 3,290 Progressive Corp. (The) 252,080 9,812 St. Paul Travelers Companies, Inc. 363,731 2,170 XL Capital Ltd. (Class A) (Bermuda) 153,376 ------------- 1,750,798 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 21 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- PUBLISHING: BOOKS/MAGAZINES (0.0%) 506 Meredith Corp. $ 26,757 ------------- PUBLISHING: NEWSPAPERS (0.4%) 1,051 Dow Jones & Co., Inc. 44,541 4,013 Gannett Co., Inc. 333,641 1,103 Knight-Ridder, Inc. 72,566 2,143 New York Times Co. (The) (Class A) 89,149 4,744 Tribune Co. 201,383 ------------- 741,280 ------------- PULP & PAPER (0.4%) 11,000 Georgia-Pacific Corp. 369,600 7,208 International Paper Co. 311,602 2,972 MeadWestvaco Corp. 88,744 ------------- 769,946 ------------- RAILROADS (0.9%) 13,092 Burlington Northern Santa Fe Corp. 464,504 8,027 CSX Corp. 251,245 13,284 Norfolk Southern Corp. 354,550 8,703 Union Pacific Corp. 490,327 ------------- 1,560,626 ------------- REAL ESTATE INVESTMENT TRUSTS (0.4%) 1,408 Apartment Investment & Management Co. (Class A) 45,014 6,030 Equity Office Properties Trust 156,479 4,189 Equity Residential 123,785 2,751 Plum Creek Timber Co., Inc. 86,326 2,711 ProLogis Trust 92,282 3,043 Simon Property Group, Inc. 157,049 ------------- 660,935 ------------- RECREATIONAL PRODUCTS (0.2%) 1,185 Brunswick Corp. 46,251 4,544 Electronic Arts Inc.* 227,791 2,258 Hasbro, Inc. 41,028 6,229 Mattel, Inc. 109,132 ------------- 424,202 ------------- REGIONAL BANKS (1.3%) 6,338 AmSouth Bancorporation 155,471 4,037 Charter One Financial, Inc. 179,283 8,674 Fifth Third Bancorp 428,149 </Table> SEE NOTES TO FINANCIAL STATEMENTS 22 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 2,215 First Horizon National Corp. $ 96,020 2,102 M&T Bank Corp. 195,969 3,984 Marshall & Ilsley Corp. 153,025 2,747 North Fork Bancorporation, Inc. 107,270 5,485 Synovus Financial Corp. 139,703 29,684 U.S. Bancorp 840,057 1,599 Zions Bancorporation 96,740 ------------- 2,391,687 ------------- RESTAURANTS (0.6%) 2,136 Darden Restaurants, Inc. 45,561 19,030 McDonald's Corp. 523,325 6,159 Starbucks Corp.* 289,227 1,576 Wendy's International, Inc. 56,374 4,522 Yum! Brands, Inc. 173,600 ------------- 1,088,087 ------------- SAVINGS BANKS (0.5%) 2,776 Golden West Financial Corp. 296,782 5,529 Sovereign Bancorp, Inc. 120,366 13,268 Washington Mutual, Inc. 514,798 ------------- 931,946 ------------- SEMICONDUCTORS (2.4%) 5,294 Advanced Micro Devices, Inc.* 66,122 5,706 Altera Corp.* 118,799 5,489 Analog Devices, Inc. 217,913 4,644 Applied Micro Circuits Corp.* 16,718 4,585 Broadcom Corp. (Class A)* 162,126 93,739 Intel Corp. 2,285,357 4,650 Linear Technology Corp. 181,815 5,806 LSI Logic Corp.* 29,553 4,777 Maxim Integrated Products, Inc. 229,774 9,271 Micron Technology, Inc.* 125,437 4,728 National Semiconductor Corp.* 81,085 2,500 NVIDIA Corp.* 38,500 2,671 PMC - Sierra, Inc.* 31,731 25,634 Texas Instruments Inc. 546,773 5,069 Xilinx, Inc. 149,181 ------------- 4,280,884 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 23 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- SERVICES TO THE HEALTH INDUSTRY (0.2%) 1,215 Express Scripts, Inc. (Class A)* $ 79,704 3,632 IMS Health Inc. 88,040 4,191 Medco Health Solutions Inc.* 126,987 1,494 Quest Diagnostics Inc. 122,628 ------------- 417,359 ------------- SPECIALTY INSURANCE (0.2%) 1,661 Ambac Financial Group, Inc. 118,114 2,223 MBIA Inc. 119,998 1,791 MGIC Investment Corp. 127,161 ------------- 365,273 ------------- SPECIALTY STORES (0.4%) 3,194 AutoNation, Inc.* 51,487 1,229 AutoZone, Inc.* 94,879 4,320 Bed Bath & Beyond Inc.* 152,885 913 Boise Cascade Corp. 29,444 4,529 Office Depot, Inc.* 74,276 7,128 Staples, Inc. 205,857 1,808 Tiffany & Co. 64,636 2,364 Toys 'R' Us, Inc.* 38,911 ------------- 712,375 ------------- SPECIALTY TELECOMMUNICATIONS (0.1%) 2,227 CenturyTel, Inc. 69,015 4,589 Citizens Communications Co.* 66,082 28,980 Qwest Communications International, Inc.* 112,732 ------------- 247,829 ------------- STEEL (0.5%) 4,774 Allegheny Technologies Inc. 95,719 4,699 Nucor Corp. 393,071 6,196 United States Steel Corp. 236,315 5,160 Worthington Industries, Inc. 105,677 ------------- 830,782 ------------- TELECOMMUNICATION EQUIPMENT (1.1%) 10,647 ADC Telecommunications, Inc.* 25,553 2,134 Andrew Corp.* 23,154 6,422 CIENA Corp.* 18,110 2,586 Comverse Technology, Inc.* 44,117 20,269 Corning Inc.* 250,525 </Table> SEE NOTES TO FINANCIAL STATEMENTS 24 <Page> <Table> <Caption> NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------- 63,299 Lucent Technologies Inc.* $ 193,062 34,419 Motorola, Inc. 548,295 11,824 QUALCOMM Inc. 816,802 5,569 Tellabs, Inc.* 49,620 ------------- 1,969,238 ------------- TOBACCO (0.7%) 24,364 Altria Group, Inc. 1,159,726 1,042 R. J. Reynolds Tobacco Holdings, Inc. 74,972 2,337 UST, Inc. 88,689 ------------- 1,323,387 ------------- TOOLS/HARDWARE (0.1%) 1,074 Black & Decker Corp. 75,083 352 Snap-On, Inc. 11,303 990 Stanley Works (The) 41,976 ------------- 128,362 ------------- TRUCKING (0.1%) 4,787 Hunt (J.B.) Tansport Services, Inc. 183,869 ------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.5%) 4,834 Caterpillar Inc. 355,251 666 Cummins Inc. 46,240 3,144 Deere & Co. 197,475 1,148 Navistar International Corp.* 41,271 2,881 PACCAR, Inc. 172,745 ------------- 812,982 ------------- WHOLESALE DISTRIBUTORS (0.1%) 2,168 Genuine Parts Co. 81,799 1,506 Grainger (W.W.), Inc. 79,743 ------------- 161,542 ------------- WIRELESS TELECOMMUNICATIONS (0.5%) 37,120 AT&T Wireless Services, Inc.* 536,013 17,912 Nextel Communications, Inc. (Class A)* 407,677 ------------- 943,690 ------------- TOTAL COMMON STOCKS (COST $154,770,076) 152,220,362 ------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 25 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- GOVERNMENT & AGENCY OBLIGATIONS (8.6%) FOREIGN GOVERNMENT OBLIGATIONS (2.6%) EUR 1,835 Deutsche Bundesrepublik (Germany) 4.50% 01/04/13 $ 2,269,377 1,025 France (Republic of) (France) 5.25 04/25/08 1,317,352 $ 375 Government of Quebec (Canada) 6.125 01/22/11 407,848 405 Ontario (Provice of) (Canada) 5.125 07/17/12 417,088 15 United Mexican States (Mexico) 8.30 08/15/31 16,237 160 United Mexican States (Mexico) 8.375 01/14/11 183,600 -------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $4,609,398) 4,611,502 -------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS (6.0%) 650 Federal Home Loan Mortgage Corp. (DD) 5.00 09/15/19 652,235 Federal National Mortgage Assoc. (DD) 450 4.50 08/01/19 442,687 2,250 5.50 08/01/19 - 08/01/34 2,284,195 450 6.00 08/01/34 461,672 2,600 6.50 08/01/34 2,713,750 850 U.S. Treasury Bond 0.00 02/15/25 273,423 3,700 U.S. Treasury Note 5.625 05/15/08 3,995,134 -------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $10,913,854) 10,823,096 -------------- TOTAL GOVERNMENT & AGENCY OBLIGATIONS (COST $15,523,252) 15,434,598 -------------- CORPORATE BONDS (2.2%) ADVERTISING/MARKETING SERVICES (0.0%) 35 WPP Finance (UK) Corp. - 144A+ (United Kingdom) 5.875 06/15/14 35,574 -------------- AEROSPACE & DEFENSE (0.0%) 20 Raytheon Co. 4.85 01/15/11 20,057 47 Systems 2001 Asset Trust - 144A+ 6.664 09/15/13 50,615 -------------- 70,672 -------------- AIR FREIGHT/COURIERS (0.0%) 20 FedEx Corp. 7.25 02/15/11 22,630 -------------- BROADCASTING (0.0%) 20 Clear Channel Communications, Inc. 7.65 09/15/10 22,647 -------------- CABLE/SATELLITE TV (0.1%) 80 Comcast Cable Communications Inc. 6.75 01/30/11 87,256 30 Echostar DBS Corp. 6.375 10/01/11 29,925 -------------- 117,181 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 26 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- CASINO/GAMING (0.1%) $ 30 Harrah's Operating Co., Inc. 8.00% 02/01/11 $ 33,827 20 Harrah's Operating Co., Inc. - 144A+ 5.50 07/01/10 20,036 40 MGM Mirage Inc. 8.50 09/15/10 44,400 20 Station Casinos, Inc. 6.00 04/01/12 19,600 -------------- 117,863 -------------- CHEMICALS: MAJOR DIVERSIFIED (0.0%) 15 ICI Wilmington Inc. 4.375 12/01/08 14,842 -------------- CONTAINERS/PACKAGING (0.0%) 20 Packaging Corp. of America 5.75 08/01/13 20,104 30 Sealed Air Corp - 144A+ 5.625 07/15/13 29,936 -------------- 50,040 -------------- DEPARTMENT STORES (0.0%) 30 Federated Department Stores, Inc. 6.90 04/01/29 31,748 -------------- ELECTRIC UTILITIES (0.2%) 30 Arizona Public Service Co. 5.80 06/30/14 30,402 30 Cincinnati Gas & Electric Co. 5.70 09/15/12 30,979 20 Consolidated Natural Gas Co. 6.25 11/01/11 21,437 15 Consumers Energy Co. 4.00 05/15/10 14,358 15 Consumers Energy Co. 5.375 04/15/13 14,951 10 Entergy Gulf States, Inc. 3.60 06/01/08 9,754 20 Exelon Corp. 6.75 05/01/11 21,895 20 Monongahela Power Co. 5.00 10/01/06 20,544 55 Ohio Edison Co. 5.45 05/01/15 53,984 20 Pacific Gas & Electric Co. 4.80 03/01/14 19,283 15 Pacific Gas & Electric Co. 6.05 03/01/34 14,499 25 Reliant Energy Resources Corp. 7.75 02/15/11 28,534 20 Texas-New Mexico Power Co. 6.25 01/15/09 20,892 20 TXU Energy Co. 7.00 03/15/13 22,005 20 Westar Energy Inc. 6.00 07/01/14 20,753 -------------- 344,270 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.0%) 30 Xerox Corp. 7.125 06/15/10 30,900 -------------- ENVIRONMENTAL SERVICES (0.2%) 300 Waste Management, Inc. 6.875 05/15/09 331,331 -------------- FINANCE/RENTAL/LEASING (0.1%) 65 Countrywide Home Loans, Inc. 3.25 05/21/08 63,001 </Table> SEE NOTES TO FINANCIAL STATEMENTS 27 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- $ 70 Ford Motor Credit Co. 7.25% 10/25/11 $ 73,721 50 MBNA Corp. 6.125 03/01/13 52,198 -------------- 188,920 -------------- FINANCIAL CONGLOMERATES (0.2%) 75 Citigroup Inc. 5.625 08/27/12 78,106 15 General Electric Capital Corp. 6.75 03/15/32 16,432 105 General Motors Acceptance Corp. 6.875 09/15/11 107,940 70 General Motors Acceptance Corp. 8.00 11/01/31 71,279 75 J.P. Morgan Chase & Co. 6.625 03/15/12 81,909 -------------- 355,666 -------------- FOOD RETAIL (0.0%) 20 Albertson's, Inc. 7.50 02/15/11 22,680 -------------- FOOD: MAJOR DIVERSIFIED (0.1%) 65 Kraft Foods Inc. 5.625 11/01/11 67,169 -------------- FOOD: MEAT/FISH/DAIRY (0.0%) 45 Smithfield Foods Inc. - 144A+ 7.00 08/01/11 45,956 -------------- FOREST PRODUCTS (0.0%) 60 Weyerhaeuser Co. 6.75 03/15/12 65,698 -------------- GAS DISTRIBUTORS (0.0%) 20 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A+ (Qatar) 8.294 03/15/14 22,800 -------------- HOSPITAL/NURSING MANAGEMENT (0.0%) 50 HCA, Inc. 6.30 10/01/12 50,582 -------------- HOTELS/RESORTS/CRUISELINES (0.1%) 40 Hilton Hotels Corp. 7.625 12/01/12 44,350 20 Hyatt Equities LLC - 144A+ 6.875 06/15/07 21,323 15 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 15,900 20 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 21,650 -------------- 103,223 -------------- INDUSTRIAL CONGLOMERATES (0.1%) 45 General Electric Capital Corp. 5.45 01/15/13 46,301 45 Hutchison Whampoa International Ltd. - 144A+ (Virgin Islands) 6.50 02/13/13 45,538 -------------- 91,839 -------------- INDUSTRIAL MACHINERY (0.0%) 35 Kennametal Inc. 7.20 06/15/12 37,371 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 28 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- INSURANCE BROKERS/SERVICES (0.1%) $ 100 Farmers Exchange Capital - 144A+ 7.05% 07/15/28 $ 98,231 45 Marsh & McLennan Companies, Inc. 5.375 07/15/14 45,067 -------------- 143,298 -------------- INTEGRATED OIL (0.0%) 40 Amerada Hess Corp. 7.875 10/01/29 44,185 -------------- INVESTMENT BANKS/BROKERS (0.1%) 70 Goldman Sachs Group Inc. 6.875 01/15/11 77,560 -------------- MAJOR TELECOMMUNICATIONS (0.1%) 20 AT&T Corp. 8.75 11/15/31 19,959 30 Deutsche Telekom International Finance BV (Netherlands) 8.75 06/15/30 37,375 25 Sprint Capital Corp. 8.75 03/15/32 30,383 75 Verizon Global Funding Corp. 7.75 12/01/30 86,316 -------------- 174,033 -------------- MANAGED HEALTH CARE (0.1%) 55 Aetna, Inc. 7.875 03/01/11 63,984 15 Anthem Insurance - 144A+ 9.125 04/01/10 18,515 20 Health Net, Inc. 8.375 04/15/11 23,579 -------------- 106,078 -------------- MEDIA CONGLOMERATES (0.1%) 60 AOL Time Warner Inc. 7.70 05/01/32 66,851 50 News America Holdings, Inc. 7.28 06/30/28 54,851 -------------- 121,702 -------------- MEDICAL SPECIALTIES (0.0%) 10 Fisher Scientific International Inc. 6.75 08/15/14 10,038 -------------- METAL FABRICATIONS (0.0%) 40 GulfTerra Energy Partners, L.P. 6.25 06/01/10 41,000 -------------- MOTOR VEHICLES (0.1%) 45 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 49,669 20 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 23,549 40 Ford Motor Co. 6.625 10/01/28 35,094 -------------- 108,312 -------------- MULTI-LINE INSURANCE (0.0%) 60 AIG Sun America Global Finance - 144A+ 6.30 05/10/11 65,154 5 AXA Financial Inc. 6.50 04/01/08 5,463 -------------- 70,617 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 29 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- OIL & GAS PIPELINES (0.2%) $ 5 Northwest Pipeline Corp. 8.125% 03/01/10 $ 5,569 10 Transcontinental Gas Pipe Line Corp. (Series B) 8.875 07/15/12 11,700 -------------- 17,269 -------------- OIL & GAS PRODUCTION (0.0%) 40 Kerr-McGee Corp. 7.875 09/15/31 44,829 25 Nexen Inc. (Canada) 5.05 11/20/13 24,274 -------------- 69,103 -------------- OTHER METALS/MINERALS (0.0%) 45 Inco Ltd. (Canada) 7.75 05/15/12 51,446 -------------- PHARMACEUTICALS: MAJOR (0.0%) 10 Schering-Plough Corp. 5.30 12/01/13 10,017 -------------- PULP & PAPER (0.2%) 70 Abitibi-Consolidated, Inc. (Canada) 6.00 06/20/13 63,875 60 Bowater Canada Finance (Canada) 7.95 11/15/11 62,349 255 International Paper Co. 4.25 01/15/09 251,996 -------------- 378,220 -------------- REAL ESTATE INVESTMENT TRUSTS (0.0%) 5 Rouse Co. (The) 5.375 11/26/13 4,906 -------------- RESTAURANTS (0.0%) 25 Tricon Global Restaurants, Inc. 8.875 04/15/11 30,443 -------------- SAVINGS BANKS (0.0%) 35 Washington Mutual Inc. 8.25 04/01/10 41,002 -------------- SPECIALTY STORES (0.0%) 10 Autonation, Inc. 9.00 08/01/08 11,350 35 Toys "R" Us 7.875 04/15/13 35,963 -------------- 47,313 -------------- TOBACCO (0.0%) 45 Altria Group, Inc. 7.00 11/04/13 46,530 -------------- WIRELESS TELECOMMUNICATIONS (0.0%) 20 AT&T Wireless Services, Inc. 8.75 03/01/31 24,967 -------------- TOTAL CORPORATE BONDS (COST $3,845,111) 3,859,641 -------------- CONVERTIBLE BONDS (1.6%) Financial Conglomerates (1.2%) 2,000 American Express - 144A+ 1.85# 12/01/33 2,127,500 -------------- </Table> SEE NOTES TO FINANCIAL STATEMENTS 30 <Page> <Table> <Caption> PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------- INTERNET RETAIL (0.2%) $ 300 Amazon.com, Inc. 4.75% 02/01/09 $ 298,875 -------------- Trucking (0.2%) 320 Yellow Roadway Corp. - 144A+ 5.00 08/08/23 466,400 -------------- TOTAL CONVERTIBLE BONDS (COST $2,808,324) 2,892,775 -------------- ASSET-BACKED SECURITIES (0.3%) FINANCE/RENTAL/LEASING 100 Citibank Credit Card Issuance Trust 2001-A1 A1 6.90 10/15/07 105,184 97 Ford Credit Auto Owner Trust 2003-A A2A 1.62 08/15/05 96,619 100 Harley-Davidson Motocycle Trust 2003-1 A1 1.56 05/15/07 99,831 25 TXU Electric Delivery Transition Bond Company LLC 2004-1 A2 4.81 11/15/12 25,188 100 USAA Auto Owner Trust 2004-2 A2 2.41 02/15/07 100,036 100 World Omni Auto Receivables Trust 2004-A A2 2.58 07/12/07 100,047 -------------- TOTAL ASSET-BACKED SECURITIES (COST $526,346) 526,905 -------------- SHORT-TERM INVESTMENTS (6.4%) U. S. GOVERNMENT OBLIGATIONS (a) (0.1%) 50 U.S. Treasury Bill** 0.98 09/23/04 49,926 200 U.S. Treasury Bill** 1.65 01/13/05 198,497 -------------- TOTAL U. S. GOVERNMENT OBLIGATIONS (COST $248,420) 248,423 -------------- REPURCHASE AGREEMENT (6.3%) 11,279 Joint repurchase agreement account (dated 07/30/04; proceeds $11,280,274) (b) (COST $11,279,000) 1.355 08/02/04 11,279,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $11,527,420) 11,527,423 -------------- TOTAL INVESTMENTS (COST $189,000,529) (c) (d) 103.6% 186,461,704 LIABILITIES IN EXCESS OF OTHER ASSETS (3.6) (6,407,450) ----- -------------- NET ASSETS 100.0% $ 180,054,254 ===== ============== </Table> SEE NOTES TO FINANCIAL STATEMENTS 31 <Page> ADR AMERICAN DEPOSITORY RECEIPT. DD ALL OF THESE SECURITIES WERE PURCHASED ON A DELAYED DELIVERY BASIS. * NON-INCOME PRODUCING SECURITY. ** ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $65,800. + RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. # CURRENTLY A 1.85% COUPON SECURITY; WILL CONVERT TO 0% ON DECEMBER 1, 2006. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS 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 $12,327,337 IN CONNECTION WITH OPEN FUTURES CONTRACTS AND DELAYED DELIVERY SECURITIES. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $5,917,355 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $8,456,180, RESULTING IN NET UNREALIZED DEPRECIATION OF $2,538,825. FUTURES CONTRACTS OPEN AT JULY 31, 2004: <Table> <Caption> UNREALIZED NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE APPRECIATION/ CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - --------------------------------------------------------------------------------------------------- 3 Long U.S. Treasury Notes 2 Year, $ 633,375 $ 1,957 September 2004 18 Short U.S. Treasury Notes 5 Year, (1,971,000) (28,619) September 2004 10 Short U.S. Treasury Notes 10 Year, (1,107,188) (15,045) September 2004 21 Long U.S. Treasury Bonds 30 Year, 2,272,594 82,997 September 2004 ------------- Net unrealized appreciation $ 41,290 ============= </Table> CURRENCY ABBREVIATION: EUR EURO. SEE NOTES TO FINANCIAL STATEMENTS 32 <Page> MORGAN STANLEY ALLOCATOR FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2004 (UNAUDITED) <Table> ASSETS: Investments in securities, at value (cost $189,000,529) $ 186,461,704 Receivable for: Investments sold 2,935,875 Interest 216,478 Dividends 187,497 Shares of beneficial interest sold 45,332 Variation margin 11,672 Prepaid expenses and other assets 35,457 -------------- TOTAL ASSETS 189,894,015 -------------- LIABILITIES: Payable for: Investments purchased 9,262,514 Shares of beneficial interest redeemed 282,662 Distribution fee 136,530 Investment management fee 117,092 Accrued expenses and other payables 40,963 -------------- TOTAL LIABILITIES 9,839,761 -------------- NET ASSETS $ 180,054,254 ============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 170,576,437 Net unrealized depreciation (2,498,845) Accumulated undistributed net investment income 5,372 Accumulated undistributed net realized gain 11,971,290 -------------- NET ASSETS $ 180,054,254 ============== CLASS A SHARES: Net Assets $ 19,001,583 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,750,641 NET ASSET VALUE PER SHARE $ 10.85 ============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.45 ============== CLASS B SHARES: Net Assets $ 134,621,691 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 12,543,137 NET ASSET VALUE PER SHARE $ 10.73 ============== CLASS C SHARES: Net Assets $ 18,524,953 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,726,072 NET ASSET VALUE PER SHARE $ 10.73 ============== CLASS D SHARES: Net Assets $ 7,906,027 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 725,928 NET ASSET VALUE PER SHARE $ 10.89 ============== </Table> SEE NOTES TO FINANCIAL STATEMENTS 33 <Page> STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2004 (UNAUDITED) <Table> NET INVESTMENT LOSS: INCOME Dividends (net of $13,547 foreign withholding tax) $ 1,247,323 Interest 535,614 -------------- TOTAL INCOME 1,782,937 -------------- EXPENSES Investment management fee 746,403 Distribution fee (Class A shares) 27,082 Distribution fee (Class B shares) 734,164 Distribution fee (Class C shares) 102,342 Transfer agent fees and expenses 65,370 Registration fees 58,943 Professional fees 36,775 Shareholder reports and notices 33,528 Custodian fees 13,910 Offering costs 6,686 Trustees' fees and expenses 799 Other 6,003 -------------- TOTAL EXPENSES 1,832,005 -------------- NET INVESTMENT LOSS (49,068) -------------- Net Realized and Unrealized Gain (Loss): Net Realized Gain/Loss on: Investments 13,068,126 Futures contracts 168,458 Foreign exchange transactions (486) -------------- NET REALIZED GAIN 13,236,098 -------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (20,182,069) Futures contracts 161,999 Net translation of other assets and liabilities denominated in foreign currencies (4,375) -------------- NET DEPRECIATION (20,024,445) -------------- NET LOSS (6,788,347) -------------- NET DECREASE $ (6,837,415) ============== </Table> SEE NOTES TO FINANCIAL STATEMENTS 34 <Page> STATEMENT OF CHANGES IN NET ASSETS <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 ------------------ ------------------ (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss $ (49,068) $ (236,111) Net realized gain 13,236,098 8,129,234 Net change in unrealized appreciation/depreciation (20,024,445) 17,525,600 ------------------ ------------------ NET INCREASE (DECREASE) (6,837,415) 25,418,723 ------------------ ------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN: Class A shares (356,618) (619,387) Class B shares (2,359,141) (4,457,377) Class C shares (325,035) (621,766) Class D shares (142,347) (401,474) ------------------ ------------------ TOTAL DISTRIBUTIONS (3,183,141) (6,100,004) ------------------ ------------------ Net increase (decrease) from transactions in shares of beneficial interest (24,174,081) 194,830,172 ------------------ ------------------ NET INCREASE (DECREASE) (34,194,637) 214,148,891 NET ASSETS: Beginning of period 214,248,891 100,000 ------------------ ------------------ END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $5,372 AND $54,440, RESPECTIVELY) $ 180,054,254 $ 214,248,891 ================== ================== </Table> SEE NOTES TO FINANCIAL STATEMENTS 35 <Page> MORGAN STANLEY ALLOCATOR FUND NOTES TO FINANCIAL STATEMENTS -- JULY 31, 2004 (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 diversified, open-end management investment company. The Fund's investment objective is selecting to maximize total investment return through different stage 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 Stock Exchange ("NYSE") 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 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. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Manager using a pricing service and/or procedures approved 36 <Page> by the Trustees of the Fund; (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. 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 37 <Page> 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 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. I. OFFERING COSTS -- The Investment Manager incurred offering costs on behalf of the Fund in the amount of $126,767 which will be reimbursed by the Fund for the full amount thereof. Such expenses were deferred and were fully amortized as of February 26, 2004. 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 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 -- up to 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. 38 <Page> 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 $4,392,137 at July 31, 2004. 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 six months ended July 31, 2004, 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 six months ended July 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $992, $234,931 and $11,402, respectively and received $13,616 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 six months ended July 31, 2004 aggregated $182,530,700 and $209,983,558, respectively. Included in the aforementioned transactions are purchases and sales of U.S Government Securities of $41,692,844 and $64,021,443, respectively. For the six months ended July 31, 2004, the Fund incurred brokerage commissions of $20,361 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. 39 <Page> 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows: <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 -------------------------------- -------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- CLASS A SHARES Sold 291,261 $ 3,277,342 2,369,233 $ 24,626,311 Reinvestment of distributions 28,304 318,142 49,844 555,758 Redeemed (512,481) (5,729,721) (478,020) (5,148,741) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class A (192,916) (2,134,237) 1,941,057 20,033,328 -------------- -------------- -------------- -------------- CLASS B SHARES Sold 845,098 9,502,056 15,276,687 158,933,865 Reinvestment of distributions 194,406 2,163,742 364,961 4,043,765 Redeemed (2,395,222) (26,687,057) (1,745,293) (19,187,102) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class B (1,355,718) (15,021,259) 13,896,355 143,790,528 -------------- -------------- -------------- -------------- CLASS C SHARES Sold 126,741 1,419,114 2,287,596 23,615,433 Reinvestment of distributions 27,099 301,613 52,612 582,936 Redeemed (366,769) (4,077,301) (403,707) (4,388,105) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class C (212,929) (2,356,574) 1,936,501 19,810,264 -------------- -------------- -------------- -------------- CLASS D SHARES Sold 65,052 736,520 1,786,468 18,283,219 Reinvestment of distributions 11,760 132,656 31,724 354,359 Redeemed (490,163) (5,531,187) (681,413) (7,441,526) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class D (413,351) (4,662,011) 1,136,779 11,196,052 -------------- -------------- -------------- -------------- Net increase (decrease) in Fund (2,174,914) $ (24,174,081) 18,910,692 $ 194,830,172 ============== ============== ============== ============== </Table> - ---------- * COMMENCEMENT OF OPERATIONS. 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. The Fund may purchase and sell interest rate and index futures ("futures contracts") to facilitate trading; increase or decrease Fund's market exposure, seek higher investment returns, or to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased. 40 <Page> Forward contracts and futures contracts 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 or in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 7. FEDERAL INCOME TAX STATUS 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 tax purposes are reported as distributions of paid-in-capital. As of January 31, 2004, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year) capital loss deferrals on wash sales and mark-to-market of open futures contracts. 8. LEGAL MATTERS The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 41 <Page> MORGAN STANLEY ALLOCATOR FUND FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period: <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 ------------------ ------------------ (UNAUDITED) CLASS A SHARES++ SELECTED PER SHARE DATA: Net asset value, beginning of period $ 11.39 $ 10.00 ------------------ ------------------ Income (loss) from investment operations: Net investment income 0.03 0.05 Net realized and unrealized gain (loss) (0.38) 1.67 ------------------ ------------------ Total income (loss) from investment operations (0.35) 1.72 ------------------ ------------------ Less distributions from net realized gain (0.19) (0.33) ------------------ ------------------ Net asset value, end of period $ 10.85 $ 11.39 ================== ================== TOTAL RETURN+(1) (3.08)% 17.16% RATIOS TO AVERAGE NET ASSETS(2)(3): Expenses 1.22% 1.23% Net investment income 0.57% 0.47% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 19,001 $ 22,141 Portfolio turnover rate(1) 94% 239% </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 42 <Page> <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 ------------------ ------------------ (UNAUDITED) CLASS B SHARES++ SELECTED PER SHARE DATA: Net asset value, beginning of period $ 11.31 $ 10.00 ------------------ ------------------ Income (loss) from investment operations: Net investment loss (0.01) (0.03) Net realized and unrealized gain (loss) (0.38) 1.67 ------------------ ------------------ Total income (loss) from investment operations (0.39) 1.64 ------------------ ------------------ Less distributions from net realized gain (0.19) (0.33) ------------------ ------------------ Net asset value, end of period $ 10.73 $ 11.31 ================== ================== TOTAL RETURN+(1) (3.46)% 16.36% RATIOS TO AVERAGE NET ASSETS(2)(3): Expenses 1.97% 2.02% Net investment loss (0.18)% (0.32)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 134,622 $ 157,175 Portfolio turnover rate(1) 94% 239% </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 43 <Page> <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 ------------------ ------------------ (UNAUDITED) CLASS C SHARES++ SELECTED PER SHARE DATA: Net asset value, beginning of period $ 11.31 $ 10.00 ------------------ ------------------ Income (loss) from investment operations: Net investment loss (0.01) (0.03) Net realized and unrealized gain (loss) (0.38) 1.67 ------------------ ------------------ Total income (loss) from investment operations (0.39) 1.64 ------------------ ------------------ Less distributions from net realized gain (0.19) (0.33) ------------------ ------------------ Net asset value, end of period $ 10.73 $ 11.31 ================== ================== TOTAL RETURN+(1) (3.46)% 16.36% RATIOS TO AVERAGE NET ASSETS(2)(3): Expenses 1.97% 2.02% Net investment loss (0.18)% (0.32)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 18,525 $ 21,927 Portfolio turnover rate(1) 94% 239% </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 44 <Page> <Table> <Caption> FOR THE PERIOD FOR THE SIX FEBRUARY 26, 2003* MONTHS ENDED THROUGH JULY 31, 2004 JANUARY 31, 2004 ------------------ ------------------ (UNAUDITED) CLASS D SHARES++ SELECTED PER SHARE DATA: Net asset value, beginning of period $ 11.42 $ 10.00 ------------------ ------------------ Income (loss) from investment operations: Net investment income 0.05 0.07 Net realized and unrealized gain (loss) (0.39) 1.68 ------------------ ------------------ Total income (loss) from investment operations (0.34) 1.75 ------------------ ------------------ Less distributions from net realized gain (0.19) (0.33) ------------------ ------------------ Net asset value, end of period $ 10.89 $ 11.42 ================== ================== TOTAL RETURN+(1) (2.99)% 17.46% RATIOS TO AVERAGE NET ASSETS(2)(3): Expenses 0.97% 1.02% Net investment income 0.82% 0.68% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,906 $ 13,006 Portfolio turnover rate(1) 94% 239% </Table> - ---------- * COMMENCEMENT OF OPERATIONS. ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + 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 45 <Page> 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 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 Joseph J. McAlinden VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis J. 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 REGISTERED PUBLIC ACCOUNTING FIRM 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) 2004 Morgan Stanley [MORGAN STANLEY LOGO] 39947RPT-RA04-00547P-Y07/04 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY ALLOCATOR FUND SEMIANNUAL REPORT JULY 31, 2004 [MORGAN STANLEY LOGO] <Page> Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] 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. <Page> (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. Item 10 Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (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. <Page> 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 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2004 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer September 20, 2004