<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
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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